Let Risk-Taking Financial Institutions Fail

[rebeccajo 14]

Let Risk-Taking Financial Institutions Fail

By Ari J. Officer and Lawrence H. Officer Monday, Sep. 29, 2008

The Administration and Congress have felt compelled to do something about the "financial meltdown," so an inefficient and inequitable "bailout plan" has been rushed through the legislature despite harsh criticism from the right and left. That's unfortunate. Both presidential candidates were stalling by qualifying the plan. Whichever candidate had had the courage to reject outright this proposal would have had the better claim to be President.

Do not be fooled. The $700 billion (ultimately $1 trillion or more) bailout is not predominantly for mortgages and homeowners. Instead, the bailout is for mortgage-backed securities. In fact, some versions of these instruments are imaginary derivatives. These claims overlap on the same types of mortgages. Many financial institutions wrote claims over the same mortgages, and these are the majority of claims that have "gone bad."

At this point, such claims have no bearing on the mortgage or housing crisis; they have bearing only on the holders of these securities themselves. These are ridiculously risky claims with little value for society. It is as if many financial institutions sold "earthquake insurance" on the same house: when the quake hits, all these claims become close to worthless — but the claims are simply bets disconnected from reality.

Follow the money. Average Joes and Janes are not the holders of the other side of complicated, over-the-counter derivatives contracts. Rather, hedge funds are the main holders. The bailout will involve a transfer of wealth — from the American people to financial institutions engaging in reckless speculation — that will be the greatest in history.

Rescuing financial institutions is not the best solution. Yes, banks are needed to provide capital to businesses. But it is not necessary to spend $1 trillion to maintain liquidity. If the government is to intervene, it should pick and choose which claims to purchase; claims that are directly tied to mortgages would be a good start.

Let financial institutions fail, merge or be bought out. The faltering institutions will see their shares devalued and will be likely to be taken over by stronger institutions — as has already started happening. This consolidation of the financial sector is both efficient and inevitable; government action can only delay the adjustment.

The government should not intervene. It should leave overleveraged financial institutions to default on their derivatives obligations and, if necessary, file for bankruptcy. Much of the crisis has arisen from miscalculating the risks involved in a large book of positions in these derivatives. It is only logical that these institutions pay for their poor management.

Rather than bailing out Wall Street, we propose that the government should buy up the actual mortgages in question and do nothing else. The government should not touch any derivatives; that is, claims that do not directly tie into the actual mortgages. If money becomes too tight, then the Fed can certainly increase its loans to financial institutions.

Let the poorly managed, overly risk-taking financial institutions fail! Always remember that Wall Street and the real economy are not the same thing.

— Ari J. Officer has completed his master of science degree in financial mathematics at Stanford University. Lawrence H. Officer is a professor of economics at the University of Illinois at Chicago.

http://www.time.com/time/business/article/...00.html?cnn=yes

[w¡n9Nµ7 §£@¥€r 123]

Ari J. Officer has completed his master of science degree in financial mathematics at Stanford University.

I was wondering when we'd start hearing from the quants.........

[rebeccajo 14]

Ari J. Officer has completed his master of science degree in financial mathematics at Stanford University.

I was wondering when we'd start hearing from the quants.........

Ooooooooooh. Do tell.

You got his credentials?

And who he's been working for?

Edited September 30, 2008 by rebeccajo

[HAL 9000 96]

Officer & Officer.

If they were Police Officers...

I heard the same idea this morning on the news. But it went from the wacky POV to let people suffer the brunt of foreclosures in the process to let the market "cleanse" itself.

[w¡n9Nµ7 §£@¥€r 123]

Ari J. Officer has completed his master of science degree in financial mathematics at Stanford University.

I was wondering when we'd start hearing from the quants.........

Ooooooooooh. Do tell.

You got his credentials?

And who he's been working for?

"Degree in financial math from Stanford" - I am guessing he's a quant. One of the guys responsible for developing the ratings models that resulted in the erroneous ratings of so many MBS's...

[Dan J 277]

Officer & Officer.

If they were Police Officers...

I heard the same idea this morning on the news. But it went from the wacky POV to let people suffer the brunt of foreclosures in the process to let the market "cleanse" itself.

Its not a bad idea. It would probably be more effective in the long run. Banks would at least get some of the bad debt off their books, even if they are not fully compensated for it. Consumers would hopefully get better mortgage terms, be able to stay in their houses and see their discretionary income rise. Keeping consumer spending up, even if its not a good as it should be.

[HAL 9000 96]

Officer & Officer.

If they were Police Officers...

I heard the same idea this morning on the news. But it went from the wacky POV to let people suffer the brunt of foreclosures in the process to let the market "cleanse" itself.

Its not a bad idea. It would probably be more effective in the long run. Banks would at least get some of the bad debt off their books, even if they are not fully compensated for it. Consumers would hopefully get better mortgage terms, be able to stay in their houses and see their discretionary income rise. Keeping consumer spending up, even if its not a good as it should be.

Dunno... I don't think 'punitively' foreclosing on millions of Americans is the best way to purge the system although in theory it could work. Aw heck- its gonna happen anyway.

Officer & Officer.

If they were Police Officers...

I heard the same idea this morning on the news. But it went from the wacky POV to let people suffer the brunt of foreclosures in the process to let the market "cleanse" itself.

Its not a bad idea. It would probably be more effective in the long run. Banks would at least get some of the bad debt off their books, even if they are not fully compensated for it. Consumers would hopefully get better mortgage terms, be able to stay in their houses and see their discretionary income rise. Keeping consumer spending up, even if its not a good as it should be.

Dunno... I don't think 'punitively' foreclosing on millions of Americans is the best way to purge the system although in theory it could work. Aw heck- its gonna happen anyway.

[one...two...tree 2,762]

Rather than bailing out Wall Street, we propose that the government should buy up the actual mortgages in question and do nothing else. The government should not touch any derivatives; that is, claims that do not directly tie into the actual mortgages. If money becomes too tight, then the Fed can certainly increase its loans to financial institutions.

That makes the most sense.

When Roosevelt took the oath of office on March 4, 1933, America lay in the depths of the Depression. Between 12 million and 15 million Americans, about 25 percent of the work force, were unemployed. Millions of people had lost their life's savings. Many had lost their homes and lived in makeshift shacks. Many more stood in long lines for free soup and bread. Eleven thousand of America's 25,000 banks had failed. Herbert Hoover, Roosevelt's predecessor, had steered a mostly idle course through the crisis, waiting for the economy to correct itself, but the correction had not come.

Franklin Roosevelt was not the type of man who waited for events to happen. In his inaugural address, he swore to bring the nation a New Deal, and backed by a soundly Democratic Congress, he took Washington by storm. Within days of taking office, he closed the remaining banks, avoiding a run on deposits that would have finished them all. He set up a system for judging the soundness of banks and reopened the ones that were solid. He moved to put the government itself on a budget, freeing up federal dollars for relief and reform measures.

http://www.pbs.org/wgbh/amex/presidents/32_f_roosevelt /...

[rebeccajo 14]

Well, whatever is the BEST solution is going to be a tough call.

I posted the article because IMO it illustrates a point - that even those 'experts' who think the government should do as little as possible are not saying the government should do NOTHING. A lot of Americans are saying 'let it sort itself out'. I really don't think our leaders would be responsible if they took the advice of those voters.

Some sort of a measure is necessary. And not everybody's gonna like it.

[Dan J 277]

Well, whatever is the BEST solution is going to be a tough call.

I posted the article because IMO it illustrates a point - that even those 'experts' who think the government should do as little as possible are not saying the government should do NOTHING. A lot of Americans are saying 'let it sort itself out'. I really don't think our leaders would be responsible if they took the advice of those voters.

Some sort of a measure is necessary. And not everybody's gonna like it.

You can find experts on all sides of the issue. The economy is a complex, one persons advice will be limited to their perspective or vested interest in a certain course of action.

Bailout or not, we are definitely in for tough times. How and what it will affect depends on the actions or inaction of the government and markets

I personally think any bailout action should be more focused on the "bystanders" of this "crisis" instead of those who bear much of the responsibility for the situation in the first place.

[mawilson 2,133]

Ari J. Officer has completed his master of science degree in financial mathematics at Stanford University.

I was wondering when we'd start hearing from the quants.........

Ooooooooooh. Do tell.

You got his credentials?

And who he's been working for?

"Degree in financial math from Stanford" - I am guessing he's a quant. One of the guys responsible for developing the ratings models that resulted in the erroneous ratings of so many MBS's...

The models were fine. Blame the Indian programmers who were hired to code them

[Ban Hammer 12,897]

Ari J. Officer has completed his master of science degree in financial mathematics at Stanford University.

I was wondering when we'd start hearing from the quants.........

Ooooooooooh. Do tell.

You got his credentials?

And who he's been working for?

"Degree in financial math from Stanford" - I am guessing he's a quant. One of the guys responsible for developing the ratings models that resulted in the erroneous ratings of so many MBS's...

The models were fine. Blame the Indian programmers who were hired to code them

aj, time for you to get called onto the carpet!

[SpiritAlight 1]

I have a question:

Is there talk about bailing out high pollution makers (car manufacturers) as well?!

Oh yes, they did it.

They changed the words.

It is now known as "the rescue package".

Give me patience....