00 designation ...... Licence to Kill (and speculate)

In the James Bond movie series, the 00
designation is used to denote an official sanction given by a government to
a licensed agent to terminate life with legal immunity. In our current topsy turvy
world, where “fundamentals do not matter”, “unemployment does
not matter”, “debt does not matter”, we have a new definition for the 00 designation: the two 0s mean (1) Zero interest rates and (2) Zero
intention by government to let free
enterprises get on with their work.

With the latest announcement by
Chairman Bernanke

http://www.bloomberg.com/apps/news?pid=20601068&sid=a3BlApikRmTY

the world over is given a clear signal
that the 00 world is here to stay, for an '”extended period” that
has no ending.

If history is any guide, the banks and
ordinary folks alike, will take this signal to borrow and invest
aggressively, not in the nasty real world mind you, where making a
buck still requires considerable time and physical effort – or to
paraphrase the famous war time speech of Sir Winston Chruchill -
“blood, toil, tears, and sweat”, but in the fantasy, get-rich-quick world
of finance.

Meanwhile, many broken glasses will
remain broken, and the rank of joblessness will grow.

Welcome to the Brave New World where
the rich gets richer, the poor poorer, faster than ever.

Community Talk

Re: 00 designation ...... Licence to Kill (and speculate)

We talked about buying things at the bottom.  How is this for
bargain-hunting?  By the way, this is a great example of how Free Enterprises
should work!

http://www.globeinvestor.com/servlet/story/GAM.20091124.RSILVERDOME24ART...

Re: 00 designation ...... Licence to Kill (and speculate)

Your understanding is correct.  

What should happen in the old days of free enterprises when a guy takes out a mortgage to buy a house and then defaults?

1. The guy loses his house

2. The bank which gave the mortgage lost money

3. Some lucky guy gets to buy a house on the cheap, as a reward for saving and bargain-hunting

4. The taxpayers do not get involved.

In the new scheme described in the article:

1. The house buyer gets to keep his house, has his mortgage debt reduced, without any penalty

2. The bank may or may not lose money depends on whether the bank has 'sold' the mortgage to the Fed

3. The saver or vulture gets no bargain

4. The taxpayers get to eat the loss (if the Fed had bought the loan), or has to subsidise the bank that gave the bad mortgage (via TARP, zero interest, or crazy equity injection), and then have to underwrite the future credit loss via the FHA.

5. Some "structurer" earns  a lot of money "solving" the foreclosure problems for the government.

If I were an American taxpayer, I would be pretty angry. 

Re: 00 designation ...... Licence to Kill (and speculate)

Paul, I just read the NYTimes piece, and if I understand it correctly it sounds like once again Wall Street has found a backdoor profit opportunity...in this case leveraging the misery of others...backed by the collective depth of current & future taxpayer's pockets if/when the scheme eventually runs afowl. 

I made a good living on Wall Street and go there daily now as a hobby, so I'm no typical Wall Street basher...but if WE ARE GOING TO ULTIMATELY have to bail something out...shouldn't WE GET A SAY in whether or not it should be allowed? 

That would typically happen through those we hire to do our bidding in government whose charge it is to look after taxpayer interests to include undue risk!

Wedge

Re: 00 designation ...... Licence to Kill (and speculate)

Here is an example of how Free Enterprises is NOT supposed to work - when taxpayer' money are used to cover the first loss on a mortgage.

http://www.nytimes.com/2009/11/22/business/22loans.html?_r=1&hp

Re: 00 designation ...... Licence to Kill (and speculate)

Although I see myself as an optimist, I would not hang a lot of hope on the new regulatory reform to do much.

Just imagine a boxing ring with contestants about to engage in a tournament.  On one corner, you have the powerful banks which have some of the sharpest and brightest business minds in the country, and who have long track records of closing complex M&A deals under time pressures and adversary conditions.  On the other side, you have career politicians and academicians who have never stepped inside a trading floor or know how the global financial system really operates.  Who will win the match?  The evidence for the past 2 years is all too clear.

The most likely outcome?  The Fed will retain most of its powers.  The FDIC and SEC will be big losers.  The money market banks will be left alone.  There will be symbolic changes on paperwork and supervisory guidelines which will let politicians save face and declare a victory, but the financial world will soon be doing business as usual.

 

Re: 00 designation ...... Licence to Kill (and speculate)

I just pray the new regulatory changes prevent some of these banks from making the same mistakes. Unfortunately the regulators have created an environment not conducive to following the rules. Its almost like nothing will change they just want us to think it has and it is safe to invest.

Re: 00 designation ...... Licence to Kill (and speculate)

In my capitalist world, taxpayers' money should only used after
existing shareholders are first wiped out, then the junior bond
holders, and then a big chunk of the other bond holders. That's how
free enterprises should work.

 

Agreed. 

Re: 00 designation ...... Licence to Kill (and speculate)

Sorry I did not make myself clear.

What I meant "let free enterprises get on with their work" is that government was right to bail out the financial system, but has no business in bailing out the SHAREHODLERS in the affected banks, nor taking actions to favour one industry over another simply because it is a shareholder.  In my capitalist world, taxpayers' money should only used after existing shareholders are first wiped out, then the junior bond holders, and then a big chunk of the other bond holders. That's how free enterprises should work.

What happened now is that the government, after spending trillions, ends up as a MINORITY shareholder in these banks with no representation or say or influence on management decisions.  As you rightly pointed out, that's stupid.  Can you imagine Buffet doing such a deal? 

By the way, in case you miss it, the Fed through its zero interest rate policy and use of Fed discount windows, is effectively giving money for free to the banks so they can use the money to speculate in the market, or lend out to consumers at double digit interest rates.  That, my friend, is not FREE ENTERPRISES, however you look at it.  If the logic is that the government gives invisible subsidies to the banks so that they can pay back every cent, that's plain non-sense as that is just giving the majority shareholders a free ride.

Re: 00 designation ...... Licence to Kill (and speculate)

you say "(2) Zero
intention by government to let free
enterprises get on with their work."

What do you expect them to do. Bail out these companies with taxpayers billions and then let them get back to what they were doing?

That would be stupid. If you are heavily inveted in these corporations which the goverment is then they want to make sure their investment dollars aren't wasted.  They bailed them out so they have the right to tell them how to behave. Until these corrupt corporations can walk on their own tow feet and pay every cent back, then I don't think they should be allowed to act at will. 

Re: 00 designation ...... Licence to Kill (and speculate)

In case anyone did not get his message, your friendly Fed Chairman has this to say about (financial) asset price:

http://www.bloomberg.com/apps/news?pid=20601087&sid=amOdp9ISQ5cg&pos=2

One day, some historians will compare this to the famous "irrational exuberance" speech made by his predecessor Alan Greenspan in the 1990s.