LeFrak thinks the end of the world is coming

Things seem totally unfair and unethical when you hear about people @ government-rescued banks getting huge bonuses, poicies on the rescue processes and targets, etc.

At the same time, we know what happened to Japan after its bubble burst in the early 1990s--with the Japanese government taking no drastic measures to save the economy. They have yet to recover from the burst over 15 years later!

In other words, considering the limited means our government has, perhaps these unfair rescue efforts may be a necessary evil for a greater good? At least this is how I am trying to make sense of the ostensibly unfair practices...

this is a repost, but it really belongs here, not where i originally put it.

about 2 hours ago
ignore this person
report abuse http://www.bloomberg.com/apps/news?pid=20601087&sid=a_XpcU5pY0f4

“I am surprised by how quickly the market has become receptive to leverage again,” said Bob Franz, the co-head of syndicated loans in New York at Credit Suisse. The Swiss bank has seen increasing investor demand for financing to buy loans in the past two months, he said.

Federal Reserve data show the 18 primary dealers required to bid at Treasury auctions held $27.6 billion of securities as collateral for financings lasting more than one day as of Aug. 12, up 75 percent from May 6.

The increase suggests money is being used for riskier home- loan, corporate and asset-backed securities because it excludes Treasuries, agency debt and mortgage bonds guaranteed by Washington-based Fannie Mae and Freddie Mac of McLean, Virginia or Ginnie Mae in Washington. Broader data on loans for investments isn’t available.

...

The risk now is that new credit leads to more losses at a time when consumer and corporate default rates are rising. Company defaults may increase to 12.2 percent worldwide in the fourth quarter, from 10.7 percent in July, according to new York-based Moody’s.

U.S. financial institutions probably will report more credit losses as commercial real estate falters through next year, James Wells III, the chief executive officer at SunTrust, Georgia’s biggest lender, said in an Aug. 24 speech to the Rotary Club of Atlanta.

“If you lever up an asset at these already elevated prices, and the underlying fundamentals, like termites, start to chew through the performance of the security, at some point it becomes unsustainable,” said Julian Mann, who helps oversee $5 billion in bonds as a vice president at First Pacific Advisors LLC in Los Angeles.

and then they'll just get bailed out again. because they are too big to fail.

I'm sorry, what's this about "the Japanese government making no drastic effort to save the economy" after the bubble burst in the early 1990s? Maybe no successful efforts, but the government certainly threw a lot of money at the economy (similar to our stimulus program). They called it the "Big Bang". It didn't work, but it was certainly tried. This is why today Japan has such a high national debt-to-GDP ratio (even higher than the U.S.).

and they desperately tried to avoid deleveraging.

NYC212 - what makes no sense is why the bond holders of these big banks didn't lose their investments. There is no good explanation. These bond holders should have been forced to convert their debt to equity in the company. Why... here's how it works.

Simply put.
Let's say a bank has $1B in assets but because of losses in their loan portfolio it has $1.25B of debts. Let's say $500M of those debts are to the companies bond holders. If the bond holders were to convert 50% of their holdings from debt to equity it would reduce the total debt of the company to $1B, but it would increase the amount of assets to $1.25B - the bank would be solvent again.
The debt holders would now be equity holders (which of course they don't like) but so what.

Can anyone out there explain to me why the bond holders of the major banks weren't forced to convert their debt to equity?
Can someone explain to me why employees of banks that I bailed out are getting huge bonuses while at the same time were allowing owners and employees of failed smaller banks to go bankrupt?
Can someone explain to me why nationalizing the huge banks and selling them off in pieces wouldn't have been better than what we have now?

It's all such dirty politics - not what's good for the country, but what's good for your friends/political donors.

Personally I will vote against every incumbent and I will donate to the candidate who has the greatest chance of beating them. There's not one guy out there I want to keep including Bloomberg - the corruption and back room deals are so pervasive in their culture that our only hope is to get as many of them out as possible and replace them with people who are honest, courageous, and who have a great love for country than they do for themselves. There is now more than a Billion of pork in the Health Care Bill - it's just doesn't end.

Post87 - The Big Bang refers to financial sector deregulation commenced in the late '90s. In terms of economic stuimulus it is a second or third order issue. The throwing-a-lot-of-money-at-the-economy part of the policy response - whether fiscal stimulus (public works spending, etc.), monetary stimulus (ZIRP, etc.) or recapitalizing the banking system - started basically at the beginning of the downturn in 1990 and has continued in various forms and to greater and lesser degrees for almost 20 years.

Whether any of this worked is an interesting question. It's sort of like the question in the US today - things are bad but would they be worse absent the stimulus program. I think almost certainly so. So does that mean the stimulus worked or didn't work? (This is a separate question from whether whatever was done, here and in Japan, could have been done better.)

sidelinesitter - "It's sort of like the question in the US today - things are bad but would they be worse absent the stimulus program. I think almost certainly so."
What I think is a more important question is will our kids be worse or better off because of the stimulus plan? I hope so, but I don't think so. They will be paying for our greed - it's nonsense. Agreed that we're most likely better off because of the stimulus - we're borrowing money from our kids to pay for a better life for us now. We should take it on the chin not pass it down the line.

Re: Japan's drastic efforts. It depends on your definition of "drastic." I would argue that throwing money at infrastructure is not really "drastic" action, but pretty easy stuff for a politician to vote for provided his district gets something. Drastic action would have been forcing the banks that had blown up the bubble to deal with their losses, and would have required banks with loans out to related corporations to act on those defaulting loans. Instead the whole thing just dragged on. People with jobs largely kept them and stared out the window all day and few new jobs were created because nobody could make new loans. Its a pretty high level generalization but this is what a lot of people agree happened and where the scary parallels are today -- no politician wants to stand up for short term pain even if it is in his country's best interests.

I've been saying for some time that often the worst damage from crashes comes during the "recovery". There is still much to shake out.