Posted on 08/17/2007 7:33:37 AM PDT by Hydroshock
NEW YORK (Fortune) -- Wall Street loves to talk about letting financial markets weed out the weak. But when the Street itself gets in trouble, it sticks out its little tin cup, asking for help. And gets it.
The subprime-mortgage-market meltdown is a classic example of the way small fry get devoured, but the whales of Wall Street get rescued. Here's the deal: People with crummy credit who took out mortgages are being allowed to fail in record numbers. The mortgage companies that made those loans are being allowed to fail.
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The Street itself? It's bailout city. Even before the Fed made a symbolic half-point cut in the discount rate, it and other central banks from Switzerland to Singapore were trying to rescue the Street by injecting hundreds of billions of dollars into the financial markets and announcing they will put up more, if needed.
Latest casualty on Wall Street: Summer getaways Hello? If you believe in markets - which I do - this rescue is especially galling, because Wall Street enabled this mess in the first place. How so? By happily sucking up hundreds of billions of dollars' worth of suspect mortgages from marginal U.S. borrowers-and begging mortgage makers to create more of them. The Street sliced and diced this financial toxic waste into a variety of esoteric securities, making a nice markup when it sold them and generating a continuing stream of profits when it made markets in them.
(Excerpt) Read more at money.cnn.com ...
I guess the author doesn't see inverted yield curves as market manipulation.
Today’s half-point bailout got stocks up for pricing for option expiration, almost certainly the goal, and it’s been pretty much down ever since.
Nasdaq is already down nearly 2% in an hour, which for at least the past year has been something that has happened very rarely over a number of *days*.
The wheels are coming off the wagon, and making more money available for more dodgy loans ain’t a fix.
This cut is meanginless, which is why the Nasdaq has already given up 50 points of its initial 75 pt “rally” this morning. Anything but a Fed Funds cut has no lasting effect on anything.
They cut the discount rate not the fed rate, and investors fell for it. I am amazed how many don’t know the difference. I have to say it a interesting choice by the Feds.
The markets were looking for an excuse to rally. I think we’ll be back to regularly scheduled programming shortly.
We haven’t even seen the subprime crisis play out yet, but I can’t help but wonder what’s to prevent a similar crisis from happening all over again.
The cycle seems to be:
1) Wall Street gurus invent novel new financial instrument.
2) Wall Street makes a ton of money on said instrument.
3) In search of higher returns, Wall Street takes higher risks and employs more leverage.
4) Eventually, Wall Street gets in over its head. Stock markets, 401ks and pension funds crash.
5) The Fed, and possibly the American taxpayer, rush to the rescue because the global financial system is “too big to fail.”
It’s moral hazard on an unprecedented scale, and I think it’ll all happen again.
Relief Rally in my opinion. The Fed gave the signal they will cover the “high risk” of others and it not something the Fed like to broadcast. Expect the dive to continue beginning in October.
When the little guy misses the train, he has to wait for the next one. When the big guys miss the train, they back up the train.
The closest thing we've had to a "crash" since 1929 is the Black Monday in October 1987. Lots of people took a major hit then, but those who didn't panic did just fine in the long run. The market had a serious setback in 2000 and 2001 (for what should be obvious reasons) but it has recovered nicely. People that had to cash out for whatever reason while the market was down lost some of the gains they had accumulated in the 90's, but those who were able to continue dollar averaging throughout the subsequent recovery have recouped those temporarily evaporated gains and have even achieved additional gains from dollar averaging than they would have seen if the market had not declined during that period.
what IS the differance?.....(cowering)
bump
The Discount rate is the rate that a federal chartered banking institution can borrow from the Fed itself, while the Fed Funds rate is the rate that a federal bank can borrow from another federal bank. Interbank lending is the basis for all bank lending... banks borrow short-term and lend long-term.
I may be in the minority here, but I think the Fed made the right decision with the Discount rate. They are acknowledging that some institutions are under great stress right now, but they did not increase the appetite for risk by lowering the FF rate.
Still, the rally kicked off today will fade in a month or so. JMHO.
This was posted by a “Freeper” yesterday...it makes so much sense.
“uh huh, Americans spend more then they make, Buy houses on ARM’s they wont be able to afford, and import far more than they export and you think the fed can fix this?”
Wall Street enabled this mess in the first place. How so? By happily sucking up hundreds of billions of dollars' worth of suspect mortgages from marginal U.S. borrowers-and begging mortgage makers to create more of them. The Street sliced and diced this financial toxic waste into a variety of esoteric securities, making a nice markup when it sold them and generating a continuing stream of profits when it made markets in them.
OK, I knew that . . .
Somehow analysts at credit-rating agencies, looking at computerized scenarios rather than at the real world, decided that the bulk of the securities backed by these trashy loans could be rated triple-A.
It's really amazing: Most of the loans to substandard creditors borrowing 100% of the purchase price of homes they couldn't afford were rated the same as GE and the federal government. That makes no sense.
OK, *that* I didn't know. Does this mean that all our 401Ks and government retirement funds that only invest in "safe" (ie Triple A) investments could be at risk??
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