Lehman (LEH) is NEXT

 I think SKF is yet again attractively priced.This has been a nice escalator ride.I am not yet on it, but I have as idea the financials have more very unpleasant surprises in store for everyone.

From various sources...

The Economist point out: “The American financial services industry’s share of total corporate profits [rose] from 10% in the early 1980s to 40% at its peak last year (see chart below). Its share of stock market value grew from 6% to 19%.”

“The stock market,” Lewis points out, “as measured by popular market indexes, headed into stratosphere from 1997-2000, but most stocks actually fell, and most businesses stagnated. At the end of 1999, the year the S&P 500 gained 19.5% and the Nasdaq composite index 85.6%, a full 70% of NYSE-listed stocks were lower than they were the year earlier.”

It used to be that "what was good for GM was good for America" now it is "what is good for brokerages and hedge funds is what is considered good for America."

 From Mauldin, a brief defense of Greenie...

Housing prices rose by almost 50% from 1998 to 2001, before Greenspan started on his rate-cutting binge. 50% in three years when the Fed funds rate was over 6% is not exactly encouragement from the Fed to buy homes. It seems people were ready to do it without low rates. So, a good part of the bubble was not due to lower rates.

And home prices continued to rise rather sharply, even as the Fed began to raise rates in 2005-6. We built 3.5 million more homes over the last ten years than the trend growth suggested we needed. They were not all built during the period of low interest rates.

While low rates did help, the bubble was aided and abetted by sloppy lending practices. It now looks like some two million people took out loans they are going to have difficulty repaying, and are likely headed for foreclosure. Rating agencies labeled these loans as AAA credits. Mortgage and investment bankers sold them to all manner of institutions.

All these culprits took advantage of the low rates, but that was not the cause of the bubble. If proper lending practices had been followed, there would have been far fewer buyers and less building, less speculation, and so on.

Greenspan, in hindsight, should have raised rates soone. And lower rates did make homes more affordable. No question about that. But to lay the blame for the housing bubble at his feet is not entirely fair. He had a lot of helpers who did the really heavy lifting.

Jim Rogers

Hilarious...I do not agree with him for many reasons, but worth looking at...

https://www.youtube.com/watch?v=wXUU_lyb0Lc

 Yup,

 I just disagree that it is practical to abolish the Fed. But he has been right for a long time regarding commodities, right about the direction of the dollar, and I think, remains right in those areas.

 And while I agree philosophically with his point about letting investment banks fail, I am not sure he is right in this particular case.

Greenie is never around to comment unless it is to flog his book...from the NY Times

Speaking in Boca Raton, Fla., in March 1999, Alan Greenspan, then the Fed chairman, told the Futures Industry Association, a Wall Street trade group, that “these instruments enhance the ability to differentiate risk and allocate it to those investors most able and willing to take it.”

Although Mr. Greenspan acknowledged that the “possibility of increased systemic risk does appear to be an issue that requires fuller understanding,” he argued that new regulations “would be a major mistake.”

“Regulatory risk measurement schemes,” he added, “are simpler and much less accurate than banks’ risk measurement models.”

Mr. Greenberger, still concerned about regulatory battles he lost a decade ago, says that Mr. Greenspan “felt derivatives would spread the risk in the economy.”

“In reality,” Mr. Greenberger added, “it spread a virus through the economy because these products are so opaque and hard to value.” A representative for Mr. Greenspan said he was preparing to travel and could not comment.

 Rink:

 This article in the Times is as good a summary as any I have read on how we got where we are as of this moment.
 The extreme leverage of the investment banks, lack of regulation, but most importantly, the complete inability of anyone to truly value the instruments, even now, are the ingredients for the disaster.

 A guy who studiously avoids things he professes not to understand (WB, and by the way, I keep reminding myself of that simple but elusive maxim regarding investing) thought them dangerous.

https://www.nytimes.com/2008/03/23/business/23how.html?_r=1&ex=1363924800&en=c658ac05e993a3b1&ei=5088&partner=rssnyt&emc=rss&oref=slogin

 

Rat is right on this one as usual.

Leverage is the killer for these instruments and for the insurers. It is if we forgot what killed us in the past, including Asia.

if the feds swap the mortgage backed securities for  treasury bonds, wouldn't that give more liquidity to the investment banks. But, isn't the fed taking on high risk on taking those mortgage backed securities which if fails just waste more tax payers money?

https://www.bloomberg.com/apps/news?pid=20601087&sid=ad0zneiPUVjA&refer=home

The FED is swapping in the short term to ease the liquidity issues, not to literally own them. They are allowing them to be used as collateral, not a literal exchange.

really worried there for a sec! Thanks for the clarification wall