Monday, February 23, 2009

And So the Naiveity Continues

Short post this week, too stressed with finals, I wanted to leave a longer post about Terrorism and an excellent article I found about it, however I was so enraged by this week's events that I needed to say something.

First off, Someone please tell me why I seem to know more than Economic Professors, Teachers, and Journalists, Politicians, and of course business bankers!!!!!!

I'm getting ahead of myself lets back up a second. My story begins two years ago (keep in mind I was 17 and a junior in high school) as I was reading in the Economist about the current state of things and started noticing huge potential problems. This problem became the now well-known Subprime mortgage crisis. I realized right then that this new crisis where all sanity was lost in pursuit of short-term profits could sink our economy.
Granted I was wrong about the method's it would take, and being naive failed to understand the full complexity until I had conducted more research, however I did pickup on the fact that not only would this crisis crush our ballooned housing market and finally pop the false bubble that our lovely ex chairman of the federal reserve created to stem the losses from another ill conceived bubble. I rightly predicted that this would hurt banks and being very interested in the field figured that this would kill private equity, which at that time was actively engaged in turning around failing businesses (Chrysler).
My reasoning was that Private Equity required a massive amount of credit and leveraged debt to make their acquisitions and if the banks can't afford to lend them the money well then there would be no saving actions. As I previously mentioned I was naive and did not figure out the scope until a couple of months later, but I did predict a sort of credit crisis like the one we have found ourselves marred in today.
So over the next months I watched closely as the major banks Citi included took write-down’s totaling over $100 billion dollars and how much their over exposure to these investments had hurt the companies. I assumed others had paid attention to these articles as well, I was foolishly mistaken. So along came Bear Stearns and investor panic started forcing one company after another into what should have been bankruptcy. But no, our fading president had one last gift to us.
The president and his former hedge fund boss that now ran the Secretary of the Treasury considered the investment banks to large to fail and orchestrated a rescue selling these failing banks into and I quote as the newspaper's put it a "SAFE BANK". Who was this safe bank, JP Morgan and Chase. Now this process continued until the strategy became clear that the way out of this credit crisis and recession. (By the way I've been saying we are in a recession since last summer) So one by one failing businesses were absorbed by the only "safe banks" until we arrived with around four major banks controlling most of the investment and banking system.

Fast-forward to October, I attended a panel sponsored by RIT featuring economic professors from RIT, UofR, and other respectable organizations. Make no mistake these were educated, intelligent professionals. I listened to their opinion on the crisis and heard little to nothing new. There was the now redundant speech about how mortgages were sold as securities, rubberstamped by the bond companies and sold to corporations as secure securities. The panel continued explaining how the government had to intervene to save Bear Stearns, and by this time Merrill Lynch, AIG, the list goes on but I think you get the point. Finally it was question time and I got right up in front of the microphone and asked my simple, common sense question, Why are we assuming that these "Safe banks" who have had billions in write downs are equipped or even stable enough to handle these toxic assets? The response well they are safe and it has to be done. I wouldn't take no for an answer so I went up to the speakers and talked to a very bright Professor and Writer, about my fears. He explained to me that there was really no chance of these institutions failing.
WAIT am I Hearing this right Citi faces the prospect of Nationalization today, and I saw this coming when the experts didn't. Dear God, we are screwed.
This brings us to today and I have to say I am enraged, even more so than when the first bailouts were announced, we bailed out these companies that purposely structured their company's growth around risky short term investments, that were not only foolish but dangerous, and we have provided TRILLIONS of dollars to these same failing companies. WHAT???!!!
I just have to say I am extremely disappointed with the current situation and irritated at the doomsday talk of now two administrations that offers but one solution. I really would like to know what are your parameters for success of these bailouts because so far we have hundreds of billions of dollars un-accounted for and those same companies are still asking for money.
There is however a bright spot. Bank of America has started paying bank the interest to the federal government on a loan they received. Maybe we can have one "safe bank."

Eric Morel


  1. Oh, how awful the burden of brilliance must be. To have to stop and think ahead of everyone everyday must be greater than the weight that Atlas felt so many years ago. But wait, maybe not. Let's look at your comments and put them into context. First: None of your posting look at the future but at a summary of the past so it is hard to put your comments into context since we did not see them before they became reality. Second: Wrong, wrong, wrong. The banks are currently failing because of deep economic factors that involve not just what governments have done but the over regulation of businesses. The intervention by the government on behalf of people was required because the free markets were inhibited from recovering on their own be intervention from regulators all of over the world in the past five years.

  2. Since I can not respond to you on your blog, I'll address your comments here. First let me say thank you it's nice to here a dissenting voice.

    However, I think you misheard me. I fully admit that this was me venting and it is not how I usually do my blog posts, but I was so annoyed that I figured rather than drive my friends crazy I could vent to the internet. Right I realize this sounds very ridiculous and what not, but trust me most people hate talking about this stuff and thrive on it so I felt he need to jump right in. I apologize that all you have is my word I only started posting a month or so ago so I understand your trepidation at taking my words at face value. Secondly I can assure you I know the reason the banks are failing and I fully understand the complexities but this post was not designed to inform my readers about them. I agree with your statement that their are complex economic factors that caused the banks to fail, but I firmly disagree with your statement that regulations caused this problem I am hard pressed to find any sources indicating that the problem was to much regulation, rather than a lack there of.

    In conclusion I would like to say I thoroughly enjoyed your sarcastic opening, and I look forward to more debates.

    Eric Morel

  3. What no article this week or for the last few weeks? Looking forward to a new posting soon