World economy talk

[tidus1203]

Hehehehe welcome naman kayo dito eh and you can also post your views regarding the US economy and the world economy for that matter. While I might not always agree with you I always welcome healthy debates.

[Galactus]

si ULS and si Tidus na lang ang naguusap...bakit hinde na lang kayo mag PM or magpalitan ng emails? hehehe

pwede rin text or para magkausap kayong mabuti tawagan na lang kayo sa landline...hehehe

Hehehe...oo nga naman. On othe other hand, baka naman nabuhay muli si OB....

[uls]

wala naman po pumipigil mag post ang iba dito

pag tumigil na po mag post dito sa Tidus, Monseratto, and others, titigil na din ako

as long as the sun sets (US market opens) and rises (Asia market opens), there will always be something new to post

hehehe

[emanzano]

If the Fed didn't mess with the interest rates then maybe those sub-prime securities might not have been created as traditional securities like bonds might have delivered sufficient returns. But no they made the bonds lose its ROE power and the bankers being so innovative in financial engineering created the ticking time bombs just to please their clients thirst for returns.

Bonds are based on the same interest rates as those derivatives you mentioned. When a company floats bonds, it is always based on the prevailing Treasury rates. The only difference between the return on bonds and the return on derivatives is their spread vs. the Fed's interest rates. All financial instruments are computed based on these US Fed interest rates and/or LIBOR.

My point is, no matter what the interest rates are, banks will always come up with new financial instruments to make money off the greed of people.

Make no mistake, the government is not all to blame even the investment bankers are also to blame for their greed and shortsightedness for quick profit

100% agree.

but it was the government that ultimately created the environment and not the bankers. In other words it was their intervention from preventing the market to self-correcting itself.

you lost me here. I understand what you've been saying til now, i.e., the govt should NOT intervene and let the US consumer reap the shi*tstorm they created because of their greed (let me know if i got it wrong). But how did the govt create this environment you speak of? By lowering interest rates? Please walk me through this as if i were a kid.

Uls, please throw in your thoughts as well.

[uls]

those asset backed securities (residential mortgage backed bonds, commercial real estate mortgage backed bonds, credit card backed bonds, auto loans backed bonds, student loan backed bonds, etc) yielded higher than US govt bonds, that's why they were quickly bought up by institutional investors around the world...

Pension funds, insurance companies are only allowed to invest in triple A rate securities

the geniuses on Wall Street sliced and diced and packaged debt and came out with securities which were later rated by AAA by ratings agencies...

and sold to investors

not all were rated AAA

there were lower quality securities that yielded higher (higher risk)

[tidus1203]

*emanzano No sir you got me right the government created the environment that encouraged this mess and bad behavior from both banks and consumers. By cutting rates you are making the value of assets decrease in the whole economy (aka inflating the economy, more specifically the value of paper money). Eventually LIBOR followed Funds rate and consumer loans became so low and return on money became so low that the incentives to save are gone, inflation is killing savers due to low return on money, so tendency is to spend and borrow rather to save. Banks also want higher returns so they created their high yielding (supposedly AAA safe) time bomb. Incidentally it was based on mortgage thus the mania of easy borrowing began and the rest is history.

Also, another government creature known as Fannie Mae and Freddie Mac was instrumental in creating a market for sub-prime by buying up the mortgage securities and accepting them as collateral and even thinking that these sub-prime garbage they buy are AAA quality and buying them as if they are indeed AAA. So Fannie Mae being a government entity and thus the government by virtue created a vibrant market for sub-prime securities at least they were the buyers of this stuff. And since Fannie is a government entity it had tremendous access to liquidity thus their purchasing power is so great (some say they were using 40:1 leverage). We all now know that Fannie Mae just like AIG is in life support and is basically just a zombie company.

[emanzano]

*emanzano No sir you got me right the government created the environment that encouraged this mess and bad behavior from both banks and consumers. By cutting rates you are making the value of assets decrease in the whole economy (aka inflating the economy, more specifically the value of paper money). Eventually LIBOR followed Funds rate and consumer loans became so low and return on money became so low that the incentives to save are gone, inflation is killing savers due to low return on money, so tendency is to spend and borrow rather to save. Banks also want higher returns so they created their high yielding (supposedly AAA safe) time bomb. Incidentally it was based on mortgage thus the mania of easy borrowing began and the rest is history.

Also, another government creature known as Fannie Mae and Freddie Mac was instrumental in creating a market for sub-prime by buying up the mortgage securities and accepting them as collateral and even thinking that these sub-prime garbage they buy are AAA quality and buying them as if they are indeed AAA. So Fannie Mae being a government entity and thus the government by virtue created a vibrant market for sub-prime securities at least they were the buyers of this stuff. And since Fannie is a government entity it had tremendous access to liquidity thus their purchasing power is so great (some say they were using 40:1 leverage). We all now know that Fannie Mae just like AIG is in life support and is basically just a zombie company.

Good stuff, tidus. I must say, you're a lot sharper than most brokers i've come across.

Just lose the pessimism and you're right in-the-money.

[tidus1203]

Again sir I am not pessimistic because I want to be I am pessimistic because the conditions of the economy make me one. And you guys well know that I don't like the way those guys are running the economy so it makes me even more pessimistic. While free market is not perfect IMO its still the best system out there. These socialistic bailouts that they are doing right now will create what I fear will be the mother of all MORAL HAZZARDS. Now that banks have been bailout, the car makers also want one. So who's next? Maybe airlines or maybe retailers will ask for a bailout themselves and always use the same excuse of job losses to make the government bail them out. Its crazy!

[Galactus]

I think I posted before that Fannie Mae and Freddie Mac are NOT government entities or agencies, but government-sponsored enterprises (GSE's). There is a difference. Both used to be public agencies, but were in essence privatized a long time ago.

This is what I've been saying, the tendency of some to shoot from the hip and not do any basic research.

I've attended several seminars on the sub-prime/economic crisis, including one held by Dr. Cayetano Paderanga, Jr. (former NEDA Director-General, PSE President, UP Prof, etc.), and he and his team from IDEA (Institute of Development Econometrics and Analysis) attribute the roots of the mortgage crisis to the 1991 Gulf War. After the war, demand basically for essential goods and services dropped, since there was simply no market for it (oil, war materials, defense projects, allied industries based in the US supporting the war effort). In short, the root causes of inflation.

If there's something that needs to get the boot, IMO, it would be the credit rating agencies (S&P, Fitch, Moody's). They failed to scrutinize the underlying assets behind mortgage-backed securities and/or collateralized debt obligations (CDO's), and classified it as investment-grade, not junk. Others who would share the blame include the financial whiz kids of certain banks, who invented ABS's and other structured credit products, whose complex structure rival that of derivatives. (I challenge anybody here who could tell me they understand the structure of mortgage-backed securities completely). Some economists are even saying that certain financial products are approaching the complexity of mathematical proofs, which even some of them cannot comprehend. Nadaan sa layering, or in short, laundered na yung securities, so it's hard to peel away the layers.

And lowering interest rates per se are not inimical to progress. Japan has one of the lowest interest rates in the world (at least the last time I checked). Kanya-kanyang setting lang yan eh, depending on prevailing economic and fiscal policy.

[tidus1203]

But because of their association with government and/or perceived association with government they had tremendous access to liquidity and thus use high amounts of leverage that lead to their downfall. And because of this association and that alone gives it unsurpassed power for risk taking.

Japan is a different animal and is not the same as the one in the US. Remember Japan is a creditor nation with budget surplus and high savings rate among the populace the US is a consumer nation a total opposite. Lowering interest rate on a consuming nation would of course create a consumption bubble while lowering interest rate in savers nation would make the locals sell their local currency (thus the JPY carry trade is born) and buy higher yielding currencies like AUD or EUR and invest abroad that's why Japan suffered a deflation money went out of the country.

[emanzano]

I think I posted before that Fannie Mae and Freddie Mac are NOT government entities or agencies, but government-sponsored enterprises (GSE's). There is a difference. Both used to be public agencies, but were in essence privatized a long time ago.

This is what I've been saying, the tendency of some to shoot from the hip and not do any basic research.

I've attended several seminars on the sub-prime/economic crisis, including one held by Dr. Cayetano Paderanga, Jr. (former NEDA Director-General, PSE President, UP Prof, etc.), and he and his team from IDEA (Institute of Development Econometrics and Analysis) attribute the roots of the mortgage crisis to the 1991 Gulf War. After the war, demand basically for essential goods and services dropped, since there was simply no market for it (oil, war materials, defense projects, allied industries based in the US supporting the war effort). In short, the root causes of inflation.

If there's something that needs to get the boot, IMO, it would be the credit rating agencies (S&P, Fitch, Moody's). They failed to scrutinize the underlying assets behind mortgage-backed securities and/or collateralized debt obligations (CDO's), and classified it as investment-grade, not junk. Others who would share the blame include the financial whiz kids of certain banks, who invented ABS's and other structured credit products, whose complex structure rival that of derivatives. (I challenge anybody here who could tell me they understand the structure of mortgage-backed securities completely). Some economists are even saying that certain financial products are approaching the complexity of mathematical proofs, which even some of them cannot comprehend. Nadaan sa layering, or in short, laundered na yung securities, so it's hard to peel away the layers.

And lowering interest rates per se are not inimical to progress. Japan has one of the lowest interest rates in the world (at least the last time I checked). Kanya-kanyang setting lang yan eh, depending on prevailing economic and fiscal policy.

Nice to learn something new everyday....

Excellent stuff, Galactus!

[Galactus]

^^^ Again, re: Japan, you are mistaken.

In the late 80's, Japan suffered from a real estate and stockmarket collapse.

http://en.wikipedia.org/wiki/Japanes...t_price_bubble

It has little to do with a country being a consumer nation with a budget surpplus or a nation deep in debt, like the US. It had a lot to do with easily obtainable credit, and sleeping government regulators which invariably leads to a credit binge, which leads to speculation, which leads to stock market/real estate crashes, which leads to a major economic problem.

Which leads me to think na malabong mangyari sa Pinas yung mga nangyayari ngayon. Taas ng spread kasi. Masyado pang conservative ang mga banko, mahirap mangutang (at least for the major UB's and KB's). Dadaan ka pa sa butas ng karayom. Just dunno with the rural banks and no-name banks.

[emanzano]

Which leads me to think na malabong mangyari sa Pinas yung mga nangyayari ngayon. Taas ng spread kasi. Masyado pang conservative ang mga banko, mahirap mangutang (at least for the major UB's and KB's). Dadaan ka pa sa butas ng karayom. Just dunno with the rural banks and no-name banks.

Agree. It's still quite difficult to obtain a loan here. And there's no way you can get a loan of any kind without a thorough credit check and a substantial equity (well, 20%-30% is far more significant that no downpayment). And yes, this applies only to "named" banks.

I guess our learnings from the '97 crisis made us better-prepared for this current downturn, in a way. Good for the Phil!

And if there's one thing i can take out from this economic downturn, it's that there is no better portfolio manager for your money than yourself. Relying on credit-rating agencies, mutual fund managers, etc to tell you what to do would be as risky, if not even more risky, than investing your money yourself. It really pays to understand these things before investing. If if an instrument is too complicated for you to understand, then better stay away from it.

[emanzano]

OT: Galactus, what's the story behind your sig? Just curious.

[Galactus]

^^^ I love reading and watching about military history, most especially the OKW/Schutzstaffel during World War II. The slogan is a slight variation of the Nazi Party's slogan (One State, One Empire, One People, One Leader). But don't get me wrong, I'm no Hitler fanatic.

Sorry mods for the OT.

[uls]

Mortgage backed securities:

housing loans were piled together and become 1 piece of paper

thousands of similar pieces of paper piled together and become 1 piece of paper

then thousands of similar pieces of paper piled together again and become 1 piece of paper

and thousands of those bonds sold to investors

Somewhere in the process... they were sorted according to quality

senior tranche, mezzanine tranche, equity tranche

the good, the not-so-good, the ugly

---

As a side bet, people bought credit default swaps (bond insurance) to bet that those bonds would default

---

housing loans were just 1 kind of loan they securitized

They securitized commercial real estate loans, auto loans, credit card loans, student loans, etc

Now the securitization industry is virtually dead.

---

[tidus1203]

^^^ Again, re: Japan, you are mistaken.

In the late 80's, Japan suffered from a real estate and stockmarket collapse.

http://en.wikipedia.org/wiki/Japanes...t_price_bubble

It has little to do with a country being a consumer nation with a budget surpplus or a nation deep in debt, like the US. It had a lot to do with easily obtainable credit, and sleeping government regulators which invariably leads to a credit binge, which leads to speculation, which leads to stock market/real estate crashes, which leads to a major economic problem.

Which leads me to think na malabong mangyari sa Pinas yung mga nangyayari ngayon. Taas ng spread kasi. Masyado pang conservative ang mga banko, mahirap mangutang (at least for the major UB's and KB's). Dadaan ka pa sa butas ng karayom. Just dunno with the rural banks and no-name banks.

I know they have a bubble too back in the late 80's but they the Japanese have the tendency to save due more to culture rather than economics. I am sure you know what the Yen carry trade is. I think that is the part that you still don't understand and that is why you can't tell the difference between the Japan's situation and the US situation. Kaya I am correct in saying due to the people's attitude (the Japanese being a saver the American being the spender) it had an effect if a bubble will happen after massive rate cuts or not.

[Monseratto]

Plastic users find their credit limit cut in half...

Customers getting squeezed as credit card companies clamp down

WASHINGTON — Cecil Bello has stumbled into a new corner of the credit squeeze. The 32-year-old management consultant has had the limits reduced on three of her credit cards.

In September, U.S. Bank notified the Fairfax, Va., resident that she no longer had a $14,500 limit on a card that had a balance of about $5,000. Her new limit left her $500 shy of being maxed out, she said.

Then came an Oct. 26 letter from American Express that said she now had a limit of $14,000, down from $22,000. That letter said her "total debt is too high relative to your payment history with us and other creditors."

Then this month, she received an e-mail from American Express notifying her that another card with a $5,000 limit had been reduced to $3,000 and that her cash advance limit was down to $200.

Bello said she had made more than the minimum payments on time each month. "I am taking responsibility for paying off my debt," she said. "But when credit card companies trap people this way, it's almost impossible to dig yourself out of the hole."

Like many other card users, Bello has learned the hard way that credit card companies are increasingly putting the clamps on their customers. Lenders are taking a wide range of steps to mitigate their risk as unemployment rates tick up and the number of delinquent borrowers grows. Besides cutting credit limits, card companies are raising rates and fees, and suspending offers such as zero percent balance transfers. They are also making rewards programs less rewarding and shutting down inactive accounts, industry analysts and watchdogs said.

The retrenchment, which follows years of lavishing Americans with offers and ever-increasing limits, is squeezing consumers at a time when they have already lost other avenues for borrowing, such as home equity lines of credit.

"We've been hearing about the liquidity crisis affecting banks for quite a while. Now we're seeing it transform into a crisis affecting people's personal finances as well," said Joe Ridout, a spokesman for Consumer Action, an advocacy group. "The next wave of the financial crisis may well be a credit-card-related crisis."

The signs of the squeeze on consumers are accumulating. Last spring, Capital One notified customers who had made no transactions in three years or more that their accounts would be closed. On Nov. 1, Discover removed its cap on balance-transfer fees. Average late fees on all cards have gone up about 10 percent in the past year, according to a review by CardRatings.com.

"What's happening is that everyone is looking at the jobless rate, and there's every indication that joblessness is going to increase well into next year," said David Robertson, publisher of the Nilson Report, a newsletter that monitors the industry. To credit card companies, that means a sharp increase in loans that have to be written off as uncollectable, which are known as charge-offs, he said.

Already, there are signs that consumers are having trouble keeping up with payments. According to Moody's Investors Service, credit card charge-off rates rose 48 percent in August from the same time last year. It was the 20th consecutive year-over-year increase in charge-offs. The ratings agency said it expects the numbers to increase throughout 2009, surpassing levels reached during past recessions.

Delinquency rates are also up. Capital One, for instance, reported that delinquencies jumped to 4.2 percent in the third quarter from 3.85 percent the previous quarter and from 3.8 percent a year ago.

http://www.statesman.com/news/conten...xsvc=7&cxcat=3

[tidus1203]

Yes tama lang yan let the free markets work. Cut their credit lines. Cut their spending and borrowing that is what needs to happen. I am fearful though Paulson is doing everything he can to make these people spend again.

[uls]

Securitization of credit card debt has also dried up

the credit card companies have no more incentive to make more CC loans coz no one is buying those loans from them to securitize