Wall Street is Dead
Wall Street as we know it, exists no longer. This is not to say that all the firms are gone. However, Bear Stearns, Lehman Brothers, Morgan Stanley, Merrill Lynch, and Goldman Sachs are no longer in their same capacity (to varying degrees). There are still plenty of smaller firms that one day may take there place in size and scope.
Nothing that happens in the market these days is small. The Dow Jones is down 777 points one day and up 450 the next. It seems there are more 100+pt moves in the DJIA these days then anything else. One day a bet you made makes you look like a genius and then the next day it makes you look like a fool.
I am against bailouts and believe that the market should allow firms to fail so that moral hazard is prevented. At least I believe in the theory. In practice, I'm not sure if this is the best. The government (including The Fed and Treasury) has been directly or indirectly bailing out practically every big financial firm their is. Now they claim that the systematic risk is too great to allow these to fail. I believe their right. The financial world these days is so intertwined that the collapse of one means other firms will start to struggle.
A bank takes a mortgage and sells them to another institution. That institution will pool all the mortgages together and form a Mortgage Backed Security (MBS). These pools of mortgages can be divided up into Tranches with different degrees of risk and return that suits somebodies unique needs. Then you can create many different types of derivatives off these pools as well. Keep in mind that each one of these assets has a buyer and a seller (so 2 parties). When you think about it, a small pool of mortgages can have many different institutions with their hands in the "cookie jar". If one of them were go bankrupt that would mean that another party may lose out on the deal they had with them which could put them in a tough spot. If they were to go under as well then somebody else would be effected. Take that small example and expand it out to the entire financial world and you can see how one firm failure could mean a lot of systematic risk to the global economy. The government did let Lehman Brothers fail which hurt a lot of people. I was glad they did let them fail and I hope that for many years we can look back at this point in time and see what happened in the market. Lehman Brothers was involved in many financial instruments and it would beneficial to all to learn how their failure impacted each one and the rest of the market. I think that knowledge would go a long way to see how interconnected everything really is and how future financial crises should be treated.
I would like to think (and maybe I'm wrong) that there can be some happy middle ground here. In most cases, these bailouts have basically caused the equity holders to be wiped out and in some cases the debt holders. The management of the firm is usually replaced as well. I would like to think that since the owners and operators (equity holders and managers) got wiped out that it will illustrate the importance of risk management. Companies will know that if they take too much risk in search of higher profits, then the government might have to step in and when that occurs....they lose.
That being said, I don't like my tax dollars going to help people that did things wrong. I'm relatively young but I write the following though as if I was near retirement and had "played by the rules" my entire life. All these years I have saved way more than is recommend for retirement. I have lived well within my means and never bought anything that I could not easily afford. Now somebody else goes out and lives well beyond their means for years and never saves anything. Eventually it all comes back to that person and then the government has give some of my money (i.e. tax dollars) to him. Where is my incentive to save? Why not live high on the hog for years knowing that my excesses will be paid for by somebody else. I've talked to mortgage brokers that first hand saw people purchase houses they could not afford. They knew that going in but thought that the real estate bubble would go on forever and they could use that equity go buy things they "earned" and "deserved". We hear on the news a lot about how banks made loans to people that could not afford it and now those people are in foreclosure and have no roof to put over their families heads. That is sad to hear. What you don't hear in the news is the people who knew they could not afford the house but were planning on flipping it in a few months to make a quick profit. Things go south on them and now its "poor me".
I work on the retail side of a bank. Some might call a retail bank a place where "the rubber meets the road". We are the face of banking that everybody see's and one of the first places that many will go in times of panic. I have seen some concerned people but they are fine as long as they are within their FDIC insured limits. Even FDIC insurance won't stop a lot of people from withdrawing their money if they sense trouble. Just ask Wamu.
Nothing that happens in the market these days is small. The Dow Jones is down 777 points one day and up 450 the next. It seems there are more 100+pt moves in the DJIA these days then anything else. One day a bet you made makes you look like a genius and then the next day it makes you look like a fool.
I am against bailouts and believe that the market should allow firms to fail so that moral hazard is prevented. At least I believe in the theory. In practice, I'm not sure if this is the best. The government (including The Fed and Treasury) has been directly or indirectly bailing out practically every big financial firm their is. Now they claim that the systematic risk is too great to allow these to fail. I believe their right. The financial world these days is so intertwined that the collapse of one means other firms will start to struggle.
A bank takes a mortgage and sells them to another institution. That institution will pool all the mortgages together and form a Mortgage Backed Security (MBS). These pools of mortgages can be divided up into Tranches with different degrees of risk and return that suits somebodies unique needs. Then you can create many different types of derivatives off these pools as well. Keep in mind that each one of these assets has a buyer and a seller (so 2 parties). When you think about it, a small pool of mortgages can have many different institutions with their hands in the "cookie jar". If one of them were go bankrupt that would mean that another party may lose out on the deal they had with them which could put them in a tough spot. If they were to go under as well then somebody else would be effected. Take that small example and expand it out to the entire financial world and you can see how one firm failure could mean a lot of systematic risk to the global economy. The government did let Lehman Brothers fail which hurt a lot of people. I was glad they did let them fail and I hope that for many years we can look back at this point in time and see what happened in the market. Lehman Brothers was involved in many financial instruments and it would beneficial to all to learn how their failure impacted each one and the rest of the market. I think that knowledge would go a long way to see how interconnected everything really is and how future financial crises should be treated.
I would like to think (and maybe I'm wrong) that there can be some happy middle ground here. In most cases, these bailouts have basically caused the equity holders to be wiped out and in some cases the debt holders. The management of the firm is usually replaced as well. I would like to think that since the owners and operators (equity holders and managers) got wiped out that it will illustrate the importance of risk management. Companies will know that if they take too much risk in search of higher profits, then the government might have to step in and when that occurs....they lose.
That being said, I don't like my tax dollars going to help people that did things wrong. I'm relatively young but I write the following though as if I was near retirement and had "played by the rules" my entire life. All these years I have saved way more than is recommend for retirement. I have lived well within my means and never bought anything that I could not easily afford. Now somebody else goes out and lives well beyond their means for years and never saves anything. Eventually it all comes back to that person and then the government has give some of my money (i.e. tax dollars) to him. Where is my incentive to save? Why not live high on the hog for years knowing that my excesses will be paid for by somebody else. I've talked to mortgage brokers that first hand saw people purchase houses they could not afford. They knew that going in but thought that the real estate bubble would go on forever and they could use that equity go buy things they "earned" and "deserved". We hear on the news a lot about how banks made loans to people that could not afford it and now those people are in foreclosure and have no roof to put over their families heads. That is sad to hear. What you don't hear in the news is the people who knew they could not afford the house but were planning on flipping it in a few months to make a quick profit. Things go south on them and now its "poor me".
I work on the retail side of a bank. Some might call a retail bank a place where "the rubber meets the road". We are the face of banking that everybody see's and one of the first places that many will go in times of panic. I have seen some concerned people but they are fine as long as they are within their FDIC insured limits. Even FDIC insurance won't stop a lot of people from withdrawing their money if they sense trouble. Just ask Wamu.
posted by Vitamin Funk @ 10:22 PM
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