Bailout Plan Shows its Flaws
I was in the changing-room at my gym last night when the sky news bulletin announced a record one day surge in oil prices, just the kind of thing to get the attention of everyone and almost instantaneously the screen was surrounded by frowning investment bankers shaking their heads in disbelief. Astonishing to think that these well-paid professionals actually believed that Henry Paulson’s somewhat nutty financial peek-a-boo plan was going to achieve very much. A virtual hole to put your toxic debt into sounds more like a scam to dominate “second life” than a real financial rescue package; those American financiers need to spend more time in the real world. Anyway, having spent the weekend mulling over the details I was sure by Monday morning that the first casualty was going to be the dollar and it didn’t take long for everyone else to figure that out and thanks to the petrol-dollar cycle that immediately triggers an oil spike.
Dollar May Get `Crushed’ as Traders Weigh Up Bailout
Sept. 22 (Bloomberg) – Treasury Secretary Henry Paulson’s plan to end the rout in U.S. financial markets may derail the dollar’s three-month rally as investors weigh the costs of the rescue.
The combination of spending $700 billion on soured mortgage-related assets and providing $400 billion to guarantee money-market mutual funds will boost U.S. borrowing as much as $1 trillion, according to Barclays Capital interest-rate strategist Michael Pond in New York. While the rescue may restore investor confidence to battered financial markets, traders will again focus on the twin budget and current-account deficits and negative real U.S. interest rates.
I have a little wager with a colleague going who wants to buy an American made light aircraft, he was tempted a few months ago but I advised him that the dollar would go yet lower. He’s lost heart now but I’m still confident that I will be right soon enough, its still early days now. He just has to be patient.
Agree — Paulson’s plan is ridiculous. It won’t work.
At the end of the day you can’t get out of these holes without someone paying for it. Whether it be the bankers or the tax payers.
The issue to me, as in Nixon’s day, is, “Just how much does he know and when did he know it?”
Paulson is either completely incompetent or he is playing the incompetent patsy for much larger players.
“A virtual hole to put your toxic debt into sounds more like a scam to dominate “second life” than a real financial rescue package; those American financiers need to spend more time in the real world.” (wolfie)
Don’t know if you remember me from CU’s drinks last Xmas, but hi anyway.
You’re right, it does sound like a scam. Speaking as a city outsider (and as a trading standards guy someone who knows a thing or two about scams) the whole thing does look like one gigantic scam. Now I appreciate a good scam, and as far as scams go, this is incredible, it’s pure genius.
Eighteen months ago, I didn’t know my LIBOR from my CDO, but, thanks to the wonders of the internet I find myself a bit better informed on these things. All I can say is what a fantastic scam.
Like all good scams the participants didn’t even know it was a scam either I bet. There’s a huge pyramid scheme doing the rounds at the moment over here in the South West. Everyone involved is convinced it is ‘legal’, that it ‘has been checked by solicitors’ some of them even believe ‘the committee have set up a kind of insurance fund so that if any box breaks down the fund will bail it out so that no one loses their money’. People actually believe this crap to the bitter end too.
When we first found out about it (as usual trading standards were the last people to do so) I thought I’d check with the two girls next door to see if they’d heard about it. Low and behold one of them was only thinking about going and joining.
“I think I’m definately going to Steve, it’s legal, there’s solicitors backing it up and everything”
“Pyramid schemes aren’t legal Kelly, you can get 2 years for promoting them.”
“No Steve, this one is legal, it’s been checked out and everything.”
“Look, Kelly, trust me on this, I do work for the department that prosecutes people for promoting pyramid schemes, and I’m telling you, it’s not legal.”
“No Steve, this one definately is.”
You can’t win. An old mate of mine is also in trading standards and half the people he plays football with are trying to sign him up to it.
“I wouldn’t care Steve, if they just said it’s illegal I wouldn’t care, but they just won’t listen to me.”
Going back to when this credit crunch started, I was sitting with a few colleagues in my old job. They were sat there talking about buying property and all the money that you could make doing so. I ventured that the party might be over, they weren’t impressed. I asked them ‘haven’t you seen the news?’ still they tried to educate me that house prices can only go in one direction. I ended up getting a bit arsy with them and saying ‘Look! Do are you honestly saying it’s a sustainable economic model that we all keep borrowing bigger and bigger amounts of money, keep selling our houses to each other and all get richer to infinity?’
Responses were something along the lines of:
“They might settle down for a few months then everything will be back to normal again.”
“Steve, my Dad says property always goes up.”
There’s a pattern emerging isn’t there. I’d imagine, going on the shock and panic that is eminently detectable in the voice of every trader I’ve seen interviewed recently, that a good proportion of investment bankers thought the whole thing would keep going indefinatley too.
Now I wouldn’t go as far as saying that the housing market is a pyramid scheme, pyramid scheme no, but ponzi scheme? Yes, it has all the classic hallmarks of an elaborate ponzi scheme, allbeit a very, very good one. Not that I’ve got anything against city bonus’s, but the money has been creamed off, the organisers have walked away and the whole thing is about to collapse in an almightly heap.
Somehow the pyramid scheme complaints have ended up on my desk. It’s early days at the moment, and no one actually wants to grass up their mates, so there’s not a great deal I can do about it. Give it until Christmas, however, and I’m expecting a flood of disgruntled people crying down the telephone that they’ve lost all their money.
This is when the friendships start to get tested, and I reckon there will be a few people ready to grass up the ‘mates’ that have defrauded them out of three grand and refuse to give it back.
It’ll all end in tears, but not for me. All of a sudden I feel quite smart being a renter.
You’re right Steven (and yes I do remember you well), it is a scam but more subtle and far reaching than it appears on the surface. Investment banking is very much a pyramid scheme but this one is like the hydra with many aspects leading to this eventuality. This is where politics meets big money in an arc spanning decades.
Ah James, you’re right about Paulson as always.
Going back to scams, I used to be a salesman. Having being made redundant in the wake of 9/11 stroke dotcom I fled to Tenerife to con tourists into joining dodgy holiday clubs. I lasted the first 4 days of training, before it dawned on me that the very entertaining and likeable people I was working for were actually hardened criminals, I just picked up my suitcase one night, fled to Las Americas, and put into use the retunr flight I never intende don using.
Nevertheless they did teach me the value of ‘price conditioning’. We were instructed to provide examples to the punters using only reasonably large 5-figure sums of money.
“You want them to look like a rabbit in the headlights, ideally by the time Bryns finished with them they’ll be crying because they can’t afford it.”
When it came down to it the object of the game was to extract as much money as we could off the suckers. I wouldn’t have had a problem with it other that for the fact that these timeshare-cum-holiday clubs actually employ ‘clumpers’ to beat up their own employees and the managers try and get you on cocoaine.
Anyway, it looks to me like the bankers have managed to pull off some sort of reverse price conditioning scam. A year ago we were all shocked at writedowns of a couple of $billion. Our expectations have been slowly (and very effectivey) downgraded and all of a suddent we’re expected to believe $700 billion is pocket change. What next???
I can’t help thinking that there’s plenty of capital out there, that if we just but out the market, let it all deflate, let the shareholders lose out on writing off the bad debt and take the rough with the smooth, yes we’ll have a big recession, but banks are really just people, computers and capital and they’ll be back soon enough!