US gets poor grades for credit crisis

Katrina Again? US Gets Poor Grades For Credit Crisis
CRISIS MANAGEMENT, FINANCIAL CRISIS, HENRY PAULSON, BEN BERNANKE, NANCY PELOSI, S&L CRISIS, PRES. BUSH, COMMUNICATIONS
Posted By: Albert Bozzo | Senior Features Editor
CNBC.com
| 16 Oct 2008 | 08:30 PM ET

The US government’s handling of the financial crisis is looking a lot like its reponse to Hurricane Katrina three years ago, say crisis management experts and former government officials.

In this case, it’s the economy that’s under water—and people are losing their houses due to foreclosures, not flood waters.

The government was behind the curve from the start, these experts say. Communication was poor and organizational efforts were slow and often ineffective.

“The government acted as if it was initially was on top of it and knew it was doing the right thing,” says Jonathan Bernstein of Los Angeles-based Bernstein Crisis Management. “It came out later that they clearly didn’t.”

No one escapes blame either. Congress, President Bush, Fed Chairman Ben Bernanke, Treasury Secretary Henry Paulson and even House Leader Nancy Pelosi—all made key mistakes, the pros say.

“As a result,” Bernstein says, “far more damage occurred than if they had been honest, organized, compassionate and understood the threat and didn’t get into a position to respond to it before it was too late.”

First and foremost, the government was unprepared, even if the crisis was unprecedented and snowballed in ways no one could ever imagine.

“The administration didn’t seem to have a plan prior to this,” says Neil C. Livingstone, Chairman and CEO of ExecutiveAction, which represents CIS countries, large companies and sports and entertainment figures. “Surely someone should have been tasked with some contingency planning.”

He says Exxon was heavily criticized for its handling of the Valdez oil spill in the early going because it executives “did not seem engaged.”

The government has been paying for that critical misstep at the start and has since compounded the problem.

“When you are slow to respond to a crisis, you get deeper in the hole, and the longer it takes to dig yourself out,” says Larry Smith, a former press secretary for Sen. Dan Quayle who runs the Institute for Crisis Management, a consulting firm representing religious and educational groups, as well as companies.

That slippery slope is partly illustrated by the number of measures being used and apparent shifts in strategy, which have sometimes failed to manage market expectations, causing stock market selloffs.

“When it’s absolutely predictable that there is going to be an emotional reaction that is damaging, the best thing you can do is be proactive,” says Bernstein, who clients include Fortune 100 companies.

He says effective communication must be prompt, honest, compassionate, informative and interactive.

“You need to deal with feelings before you address the facts,” says Bernstein. “You need to give enough information for people to work with.”

More broadly, Smith cites three elements to managing a crisis: operations, communications and recovery. “They’re still stumbling around with the operational part.”

Lawrence White, a former White House economist and savings and loan regulator, doesn’t fault the administration on the organizational side, saying, “you can’t create an organization overnight,” but calls the communications effort “close to abysmal.”

He cites Treasury Secretary Paulson’s inability to successfully explain the purpose of the $700 billion reverse auction and generally articulate clearly what the government’s strategy and why it had ruled out the alternatives.

“What hurt them dearly was saying, ‘Write me a $700 billion blank check and trust me,’” says White, now a professor at New York University’s Stern School of Business.

Livingstone says Paulson’s call for quick approval “smacked of panic”, a definite no-no in crisis management.

Paulson and company then lost more credibility by suddenly pushing a banking recapitalization plan. “It now feels like a plan de jour, It doesn’t feel comprehensive and coherent,” says White.

“If I was advising anyone involved in this, I would not be premature in asserting the total solution,” says legendary public relations executive Howard Rubenstein. “I would have made it clear we’re in a volatile situation.”

Experts say communication most also accentuate the positive, even as it acknowledges the negative.

Some of the talk—whether on the floor of Congress or at news conferences—is hurting confidence.

‘I don’t think it helps to go out and say over and over again and say, ‘This is a big problem,’” says former FDIC Chairman William Isaac. “That’s very scary to people.”

All those interviewed also say officials need to do a better job talking to Main Street and taxpayers, not Wall Street and big investors. But like most top executives, they can’t easily identify with those groups.

“They may be doing some of the right things but they are not doing a good job of communicating,” says Smith.

That said, there’s also such a thing as too much communication.

Isaac, who ran the FDIC in the 1980s when the so-called Latin American debt crisis threatened major US banks, says, “there has been too much talk by everyone involved in the crisis, including the president. I think we need to just chill out a bit. We’re no going to talk out way out of this crisis.”

Or, as Rubenstein says of government officials. “Sometimes they get into a pickle and they don’t know how to get out of it, so they keep having news conferences. I’m not in favor of over-stating your position.”

Rubenstein says the current government now has a better grasp of the facts, has learned some important lessons along the way and is becoming better at managing the crisis.

But he and others say it will be the next government and president—which will have a popular mandate to fix the problem, as was partly the case with the S&L crisis of the late 1980s—that will have an impact.

“No matter what happens in the next 19 days, it isn’t going to do much,” says Smith.
© 2008 CNBC.com

URL: http://www.cnbc.com/id/27217731/

A shock and awe bear market rally?

A bull trap? It’s certainly a possibility since we are certainly heading into a recession.

http://www.cnbc.com/id/27159882

Nationalize banks

Here is my post roughly 2 weeks ago where I thought about the idea of nationalizing banks. What do you know, it took a global financial meltdown for the western countries to take the idea seriously. Hey all you Treasure Sectaries and Federal Reserve Chairs, next time please take us common people more seriously. Woud ya?

Credit crunch creeps into consumer credit sector

Credit card loan delinquencies and defaults are soaring. Banks start hurting. Although banks can’t close the credit card accounts by law, they raise the interest rates and lower credit limit to prevent any additional purchases.

From the Red Tape Chronicles.

“Delinquencies and defaults are soaring,” said Robert Manning, author of the book “Credit Card Nation.” He said believes some major credit card issuers might not survive the current crisis. “They suspended the financial laws of gravity and put individual households on steroids,” he said. “… Now (banks) don’t really know what to do.”

…

Because of card agreements, credit card issuers cannot simply close accounts and demand full payment. But they can do the next best thing: Raise the cardholder’s interest rate. They can also lower credit limits repeatedly to prevent a consumer from making any new purchases. That’s effectively the same thing as closing the account.

…

Card issuers also used the same tricks as mortgage issuers to expand their empires, rolling their loans together and selling them off as asset-backed securities on Wall Street. Moving debt off their balance sheets allowed major issuers like Capital One to operate aggressive customer-acquisition campaigns. Meanwhile, investments in “credit card receivables” were a cash cow for investors.

…

And they can’t turn to Wall Street for help, either. The market for credit card securities is drying up, caught in the same swirl that is dragging down mortgage-backed securities, Manning said.

Things that caused the current financial crisis and the timeline

The potent toxic mix of greed, bubble economy and ill-conceived policies.

Source: Barrons Online

THIS MEMO PROVIDES A BRIEF HISTORY OF your actions that helped create this crisis.

1997: Federal Reserve Chairman Alan Greenspan’s famous “irrational exuberance” speech in 1996 was somehow ignored by, um, Fed Chairman Greenspan. The Fed missed the opportunity to change margin requirements. Had the Fed acted, the bubble would not have inflated as much, and the subsequent crash would not have been as severe.

1998: Long Term Capital Management was undercapitalized, used enormous amounts of leverage to purchase all manner of thinly traded, hard-to-value paper. It failed, and under the authority of the Federal Reserve a “private-sector” rescue plan was cobbled together. Had these bankers suffered big losses from LTCM, they might have thought twice before jumping into the exact same business model of undercapitalized, overleveraged, thinly traded, hard-to-value paper. Instead, they reaffirmed Benjamin Disraeli’s famous aphorism: “What we learn from history is that we do not learn from history.”

1999: The Financial Services Modernization Act repealed Glass-Steagall, a law that had separated the commercial-banking industry from Wall Street, and the two industries, plus insurance, came together again. Banks became bigger, clumsier, and hard to manage. Apparently, risk-management became all but impossible, even as banks had greater access to larger pools of capital.

2000: The Commodities Futures Modernization Act defined financial commodities such as “interest rates, currency prices, and stock indexes” as “excluded commodities.” They could trade off the futures exchanges, with minimal oversight by the Commodity Futures Trading Commission. Neither the Securities and Exchange Commission, nor the Federal Reserve, nor any state insurance regulators had the ability to supervise or regulate the writing of credit-default swaps by hedge funds, investment banks or insurance companies.

2001-’03: Alan Greenspan’s Fed dropped federal-fund rates to 1%. Lulled into a false belief that inflation was not a problem, the Fed then kept rates at 1% for more than a year. This set off an inflationary spiral in housing, and a desperate hunt for yield by fixed-income managers.

2003-’07: The Federal Reserve failed to use its supervisory and regulatory authority over banks, mortgage underwriters and other lenders, who abandoned such standards as employment history, income, down payments, credit rating, assets, property loan-to-value ratio and debt-servicing ability. The borrower’s ability to repay these mortgages was replaced with the lender’s ability to securitize and repackage them.

2004: The SEC waived its leverage rules. Previously, broker/dealer net-capital rules limited firms to a maximum debt-to-net-capital ratio of 12 to 1. This 2004 exemption allowed them to exceed this leverage rule. Only five firms — Goldman Sachs, Merrill Lynch, Lehman Brothers, Bear Stearns and Morgan Stanley — were granted this exemption; they promptly levered up 20, 30 and even 40 to 1.

2005-’07: Unscrupulous home appraisers found that they could attract more business by inflating appraisals. Intrinsic value was ignored, so referrals kept coming in. This helped borrowers obtain financing at prices that were increasingly unsupportable. When honest appraisers petitioned both Congress and the bureaucracy to intervene in the widespread fraud, neither branch of government acted.

THERE’S ACTUALLY A LOT MORE we could add to these items

=====================================================================

Housing Two Steps: The fall of Fannie Mae/Freddie Mac and the Sub-prime meltdown

These two crises are both intertwined yet separated. Fannie/Freddie pushed as much envelop as they could getting the low quality loans during the boom years. Yet regulations forbid them taking on the outright toxic, fraudulent loans. As matter of fact, they steadily lost their market share during the sub-prime boom. So why did they collapse? Fannie and Freddie took on too many loans with very little cash reserve. There are increase of delinquency even among healthier loans during the housing market collapse. With the reduced income along with the reduce stock price it really hits the companies bottom line. Their income isn’t enough to make the payment anymore, nor could they raise enough money due to the drop of their credit rating. Then when the sub-prime crisis started, Fannie and Freddie was required to convert all the toxic loans into “safe” convention loans. That finally broke the camel’s back. This blog digs into the unfolding of the housing market fiasco, how Fannie Mae and Freddie Mac played a big part yet were never the real cause.

=====================================================================

The Deregulation Fervor of the Republicans and the Happy-to-go-along Democrats

From this NYT article:

“The company is also likely to lobby against the efforts that give regulators too much authority to approve its products.

Freddie Mac, whose accounting is under investigation by the Securities and Exchange Commission and a United States attorney in Virginia, issued a statement calling the administration plan a ‘responsible proposal.’“

It should set your BS detectors off when the very people responsible for this mess were lauding this “oversight” measure.

More than anything else, it was yet another Executive power grab. Now, this[Bush] administration has a well-documented history of twisting its regulatory mandates to have the opposite effect of their stated intentions; of de-funding regulatory bodies “unfriendly” to big business and replacing those in charge of oversight with cronies and industry insiders actively hostile to their regulatory missions.

He did it over and over and over and again in places like the FDA, FCC, EPA, SEC, OSHA, and plenty of others that didn’t make the headlines. It was understood that this was yet another effort by the administration to co-opt and cripple government oversight, which is why the industry and the anti-regulatory right wing applauded it with a wink and a nod.

It was understood because this had been the primary thrust of Bush’s domestic economic policies from the very beginning.

And now you guys just want to pretend it never happened; to try to erase six years of DOCUMENTED history from the public consciousness because the ascendant tenets of your economic philosophy have proven disastrous in practice, and you’re desperate to shift the blame any way you can so those who facilitated this mess can be somehow justified in continuing to do the exact same disastrous waltz.

It’s revisionist history at its very, very worst.

The Republicans certainly don’t hold ALL of the blame. Far too many Democrats went along with this greedy game. Congress (under Republican leadership for twelve out of fourteen years of this trend) certainly dropped the regulatory ball, and they should also be held to account. In addition, both Clintons, Greenspan, and even Biden were players in their own rights and had heavy hands in facilitating the consumer debt crunch this situation is indicative of.

But to deny that the Republicans, the corporatist right behind them, and their ideological champions in Bush/Cheney were the prime movers in this pattern of regulatory dismantlement is either willfully ignorant or incredibly dishonest.

Update on the financial situation

http://forums.fark.com/cgi/fark/comments.pl?IDLink=3916161

I think you’re the one only reading headlines. I trade this stuff. Do you know the money markets shrunk another 95 billion this week? (new window) The second week after Lehman wasn’t as bad as the first — that’s because people thought the House would pass the plan and the Senate would follow the next day. Now that we’re looking at tomorrow things are worse. God help us if Congress tries to extract another weekend out of it (though I admit that they might get away with it without armageddon as the quarter-end and payday crises have passed — they’ll merely tack on another couple of hundred billion or so to the ultimate cost).

We’re there. There was wholesale selling of leveraged term loans in the markets this afternoon starting at about 1:00. Unleveraged term loans will follow in the next couple of days not because the loans themselves are bad but because the holders of those loans are leveraged and facing redemptions and credit tightening simultaneously. Great, solvent companies are pulling down their revolvers when they don’t need to because they fear the money won’t be there if they do need it. That amounts to basically a reverse run on the banks. Panic is causing a simultaneous massive increase in demand for short-term credit and a massive decrease in supply for it.

In the long run, this is a panic, not a depression. But that is good news for buyers like Buffett and JP Morgan, not the people whose paychecks won’t clear.

A good summary on how we got into this crisis

http://www.npr.org/templates/story/story.php?storyId=95149054

The problem with the banks started with deregulation, specifically the Financial Modernization Act of 1999 and the Commodities Futures Act of 2000. The first allowed bank mergers and unregulated banking business in stock markets, insurance etc. The second allowed over-the-counter derivatives freedom from the regulatory scrutiny of the Commodities Exchange Act of 1939. Both were Republican sponsored bills passed under a Democratic Administration, the FNMA of 1999 specifically supported by the Democratic US Treasury Secretary. Similiar deregulation was passed in 1982, Garn-St. Germain Depository Institutions Act, which deregulated Savings and Loans. Most remember the resulting disaster from bad mortgage loans. The current sub-prime loan debacle is similiar. Fueled by artifical stimulation in the form of post 9/11 liquidity from the Fed and an administration that encouraged fiscal irresponsibility, the housing asset bubble produced exotic loan originations that were securitized in the secondary market. These securities were tranched into billion dollar collateralized debt obligations and stamped AAA by the rating agencies (who incidentally were paid to rate them by the same people selling them), then sold as Mortgaged Backed Securites(MBS) with high yields to both a domestic and international market. What they were actually worth was difficult for both seller and buyer to determine due to their complexity, but they were AAA with high yield and, you could buy insurance. One of the over-the-counter derivatives deregulated in 2000 was the Credit Default Swap in which companies like AIG guaranteed the buyer of a MBS that for a premium AIG would gaurantee against any potential losses in the case of default. These securties themselves were bought and sold at increasing profit margins. This became the fastest growing market and today amount to almost 60 trillion dollars of global debt. In August of 2007 the housing bubble burst, as all asset bubbles eventually do, sending the initial shock waves through the financial markets. Investment banks, GSE like Frannie and Freddie, Commercial Banks, everyone literally had exposure to the Credit Default Swap market. Foreclosures set off the chain reaction in the credit markets as everyone realized no one could possibly pay out the Credit Default Swap securities. So credit started shrinking and it hasn’t stopped and it won’t until the housing market hits bottom, ergo the current legislation Congress is debating.

Just thinking out loud

What’s the chance that the Congress would vote down the bailout plan again on Thursday?

Much has been said that banks are not lending to each other. However, banks are still lending to the consumers. Hmmm…

Given the amount of money involved in bailout, won’t government be better off just function as a bank? After all, the current trouble is due to the lack of confidence among the bankers, and that they won’t lend to each other. Since the bailout is pretty much just nationalize the losses, we might as well just nationalize the whole banking industry.

That woosh sound you hear

It’s just DJIA dropped 777 points in one day. It’s not the end of the world. Not even a great depression means the end of the world. It just mean lots of hurting could coming towards your way, if this financial crisis beast is not steered away properly. The market casted its vote, let’s wait and see what comes next.

What are you going to do if you’re elected and things get tough? Suspend being president? We’ve got a guy like that now!

This election keeps on getting weirder, all thanks to John McCain. First he unilaterally suspends his campaign, claiming he has to go Washington to help resolve the ongoing financial crisis. Fair enough, we are on the brink of a great depression. Then he cancelled his appearance on the Tonight Show, because he “had” to fly to Washington. Only to have an interview with Katie Couric a few blocks away, at the time of the taping of the Tonight Show. You can understand how pissed off David Letterman was. Then McCain wanted to postpone the Friday debate. After Obama said no, McCain insisted that until the bailout deal is done, there would be no debate. And he was not done yet. McCain campaign told ABC News later in the evening that they want to postpone the VP debate as well, after they already watered down the VP debate.

As David Letterman said in the Tonight Show, “What are you going to do if you’re elected and things get tough? Suspend being president? We’ve got a guy like that now!”. Seriously, Bush looks good compared to McCain right now. Sure Bush was prone to gaffes, and he looks like an idiot. But he never ran away from a Presidential debate. And his VP’s nickname is “Darth Vader” and acts like one, too. Dick Cheney would eat McPalin for breakfast, lunch and dinner.

What’s next? Would McCain ask to postpone the election due to the ongoing crisis? After all, the nation needs him.

Someone please help my history here. Wasn’t Carter the last debate dodger? Then when he finally got to debate with Regan, Regan destroyed him despite Carter quoting impressive data and facts one after another, and all Regan got was some dramatic sighs. Let’s see if history repeats itself.

Update: Here is an article that says McCain is pulling a Jimmy Carter.