did you catch that now STOCKS can be used as COLLATERAL?!?!?!?

because someone drank some fuckin’ crazy juice!!!!! how the hell is a STOCK, a think whose value fluctuates every freaking SECOND, acceptable as collateral for a loan?! what happens if that that stock bottoms out? becomes worthless? is the loan canceled, or called in immediatly? or what if the stock values goes UP exponentially? can you adjust your loan terms to the new value of the stock???

next week: monopoly money is legal tender!

Um, denelian?  Stocks *can* be used as collateral for some classes of loans.  Bank policies around that tend to be kind of retrogressive (for example, they want to hold the stock certificates - HAH) but still, it’s possible.  See, for example, http://www.wachovia.com/personal/page/0,,325_495,00.html

I really like the enthusiasm for government takeover of AIG and the implication that the same government these guys say is inherently inefficient will be able to generate the same profits that AIG did while they were taking on crazy risk.  I’m looking forward to the same arguments to support grabbing Exxon/Mobil, btw.

They’re still smart, but they have the same problem that the dumb people do: greed.  When greed makes risk look less risky, that can lead to all sorts of problems.  When it’s just me or my neighbor, we do something stupid and lose some money or potential money.  When it’s a Wall Street manager, more money gets lost since they’re playing with mine, my neighbor’s, yours, your neighbors’, and that of some foreigners and their neighbors’ money as well.

Wall Street has a bunch of elitist motherfuckers up there playing with our money, but we don’t call them that when things are good.  Then they’re “our investment guys” or something like that.

The problem here is that after decades of spending more than we take in—at the personal, corporate, and national level—all those who lend us money are coming to realize that our broke asses might not be able to pay them back as well as we have in the past.  Our currency isn’t worth as much, our ability to bank on the future isn’t as sure as before since our industrial base and consumer culture aren’t the stuff to spur growth to the level we need to get ourselves out of the huge fucking hole we’ve spent ourselves into, and the oil-based energy that runs our economy isn’t going to be as plentiful in the future no matter how much we drill, convert to other forms of energy, and reduce our usage.

But remember your GOP talking points: the economy is fundamentally sound, we’re a bunch of whiners, debts don’t matter, and the American people have faith.  Repeat as necessary, or until the beer runs out.

Jon, my takeaway on the “smart” comment is that the GOP are continuing to use anti-intellectualism and antagonism to education as a core argument.

http://www.nytimes.com/2008/09/17/business/17insure.html?hp

From the Times article, it seems that AIG pledged all of its assets to back up the loan.  Further, the government has gotten “warrants” that it can convert into stock, thus taking over the firm with a controlling share.  I have never been one for government intervention in the economy, but it seems that the government is playing this one safe enough.

Agreed, Melinda.

When facts are the enemy, attack the ones with the facts.  Populism and dumbing down never overestimate the voters, no matter how much they turn off those with minds turned on.

Still, smart or not smart, the attacks were on the elites’ accoutrements: Ivy League schooling, Wall Street jobs, Manhattan penthouses, and their arrogance (which only rears its ugly head during times of failure—when things are good it’s called “confidence”.)

So the $85 billion loan bought us 79.9% of the company, right?  When AIG pays back the loan within 24 months, does the government still retain ownership of that 79.9%?  What happens to it?

did you catch that now STOCKS can be used as COLLATERAL?

That’s nothing - at least a stock is a real asset. Much of the recent shenanigans is related to the fact that you can also use debt as collateral. If I loan you ten bucks, I can then count your IOU as collateral, and lend the same ten bucks again to somebody else. In fact, because of partial reserve banking, I can lend at least a hundred bucks to somebody else (more really, because I get to count the interest you’re theoretically going to pay me as well). And then I can use that IOU as collateral…

Hell, at least monopoly money is actually printed on real paper.

BANKS M NOT SMRT.

We don’t have a meritocratic system, we have a system that preserves privileges. A few people who don’t come through the legacy pipeline make it through these schools and up the ranks, getting financial rewards that enable them to succeed in exchange for the smarts they have to demonstrate to get in, but only if they’re willing to toe the line for the Bush/Fiorina/Romney class. You’ll notice that the people who fail tragically as leaders of these institutions always get golden parachutes, or disappear like Ken Lay (rather die than not be filthy stinking rich, I guess). That’s how this system continues.

There was this guy, German fellow, who wrote a book and some pamphlets on this subject a little while back. Name was something like “Charles Mars” or something like that. On the tip of my tongue…

And there was this other German guy, well he was actually born in Austria, who figured out how to make economic populism work for the right so he could appeal to people very much like that bewildered commenter. Which is one of the things that make this crisis so scary…

“So the $85 billion loan bought us 79.9% of the company, right?  When AIG pays back the loan within 24 months, does the government still retain ownership of that 79.9%?  What happens to it?”

A loan being what it is, I expect that the ability to convert the “warrants” into stock will be forfeited upon repayment.  If the loans are in fact repaid through operations (and not asset sales), then the firm might be in the same hands that got it into this mess, not the most confidence-inspiring fact.  However, the firm might be forced to sell off assets to cover the loan, which would at least put those assets in someone else’s hands.

Unless I am mistaken, the federal government does not yet own 79.9% of AIG, but merely has a piece of paper that allows it to take the controlling share.  I have no idea whether there are restrictions on the government’s ability to do this.

I don’t see any basis for the claim of nepotism.  Wall Street is pretty Darwinian, and most of these firms have pretty strict anti-nepotism policies preventing the hiring of people’s kids, because they don’t want to dilute their talent pools. 

Something like 20% of top Ivy League grads go to Wall Street, and most of the folks who start as analysts never get far up the ladder inside the banks.  While Ivy League schools still draw disproportionately from the Northeast, the students getting into Harvard, Yale, Princeton and Columbia are all extremely accomplished and smart people. 

Median SATs for students entering these schools are above the top 25% scores at many other national universities.  And the people who rise to the top are the most successful handful of the people who begin as analysts.  It’s simply inaccurate to suggest that Wall Street is not staffed by very smart people. 

Richard Fuld ran Lehman for years.  He was considered one of the leading minds of the financial industry until last week when he became a symbol of hubris and reacting too slowly.  But it’s not like someone’s nitwit nephew has been put in charge of a major financial institution.  This is an unexpected and unprecedented failure of some of the financial industry’s central assumptions.  Debt that was supposed to be very safe turned out not to be.

Bad management leads to the failure of a company, and we let Enron and Worldcom go when their greedy executives ran the ships into the rocks.  This is a system-wide crisis situation.

Or..
meritwatcracy?

Um, it kind of burns to say this, but mitchforth is somewhat right. Nepotism, while a ginormous problem in government and at the level of legacy admissions, is not the Wall Street problem. (Certainly not the way it was for those who became lawyers, journalists, or docs!)

My classmates who went to Wall Street from our Ivy League school were typically the first in their families to enter finance at all. Occasionally someone would have a relative who worked somewhere in the system, but that usually benefited them only insofar as they were prepared for the hours and the environment. The big firms *were* extremely gun-shy about hiring someone’s kid.

I think instead it’s the boot-camp kind of environment a young analyst confronts when they start. Like law school or med school, they run you ragged until you’re so beat down you believe every word they say. You are completely isolated from all other lifestyles, because you work 100 hours a week and mostly sleep under your desk. The only people you talk to are analysts and insanely rich fuckheads.

It’s still not meritocracy, that’s for damn sure. You win by demonstrating that you are one with the Borg. But it’s not really nepotism either.

Now. Did half the people at my school *definitely* not belong there in the first place? Damn right. Reader, I tutored those 3rd-generation Ivy Leaguers from Choate and Exeter. Most of ‘em could barely string together a sentence, much less a coherent body of thought. THAT was nepotism.

Ivy admissions definitely are weighted toward legacy.  Having the children of the powerful around is good networking for other students, and huge donations from rich people and full tuition from their kids funds the extremely generous financial aid packages that go to top students from poorer backgrounds. 

Admits to top schools at the median, the top quartile and the bottom quartile tend to be extremely high, but they can hide a bunch of underachieving legacies, as well as lower admission standards for minorities, in that bottom quartile, because a median is not an average.

Generally the dumber you are, the richer and more influential your family has to be for you to get in.  For example, Harvard might overlook a low SAT for the novelty of having a movie star or a president’s kid in the class.  A run-of-the-mill hedge fund zillionaire could buy a seat for his kid with a huge donation. 

However, there are not enough seats in the class at H,Y,P and C to even admit a substantial the students with top numbers, so the legacy benefit for most applicants, seems to be an increased chance of admission when your numbers are within the target for admission.  They’re probably guilty of rejecting a kid from the sticks with a 1520 (or whatever the current equivalent of that is) for a legacy kid with a 1460 (or whatever the current equivalent of that is). 

But the top schools are still not full of the 1200-ish types you will find at state flagship universities, or the 1000 types who inhabit the lower tiers.

Wall Street and law tend to be staffed with strivers.  People who already have theirs don’t generally put up with that lifestyle.

Generally, idiots don’t make it into positions of power and responsibility, where their stupidity can have a crashing impact on the world around them. No, you have to be pretty damn competent to make it into a position where you can really fark up big time.

Speaking ‘generally’, this of course excludes the Republican Party, where Know-Nothing rules apply.

Don’t look at the front ranks of traders and analysts when you’re trying to figure out if there’s an old-boy system. Those people are well-paid peons with only a few marketable skills, and they get laid off by the tens of thousands (along with back-office types) whenever there’s a downturn.

The ranks of Wall St upper management, where the policy decisions get made, are rather different. And once someone has made a name, enormous mistakes don’t seem to have much impact on their future job prospects.

Well, Richard Fuld presided over Lehman for a decade and a half, and everyone thought he was a super-genius until about two weeks ago, and now he’s Mr. Titanic. Meanwhile Thain over at Merrill is getting credit for super-geniusness for selling at merely “distressed” prices instead of waiting until the building was on fire, and thereby getting his investors something (about 15% of 2007 value) instead of the nothing that Bear, Lehman, Fannie, Freddy and AIG investors get.

When one company goes under, it’s because the management fucked up.  When the whole global economy goes off the rails, the problem is systemic.

Just wanted to note that when I said nepotism isn’t Wall Street’s problem, I really meant that specific problem of promoting/hiring one’s relatives.

There is most assuredly an Old Boys’ Club going on further up in the ranks. You just have to do other things to get in, rather than be someone’s kid.

Well, I was using nepotism very loosely, figuring that was so common it didn’t need explanation, but it’s not the first time I relied on my own personal lexicon.

I’d add to that observation you quote one bit more: with a boatload of very smart and vastly well informed money mavens steering these giant banks and counting their beans, it is extremely hard for me to believe they “suddenly” went bankrupt.  Some people knew this was coming months ago and just lied like the devil to the press.  Or maybe they learned all their “truth in high finance” ethics where Dubya did.

I’d add to that observation you quote one bit more: with a boatload of very smart and vastly well informed money mavens steering these giant banks and counting their beans, it is extremely hard for me to believe they “suddenly” went bankrupt.  Some people knew this was coming months ago and just lied like the devil to the press.  Or maybe they learned all their “truth in high finance” ethics where Dubya did.

The high-profile criminal indictments of two former Bear Stearns hedge fund managers are premised on exactly this point.

The real problem is crises of confidence.  If you lost your job, but you had $15,000 in the bank, you’d be in okay shape to coast for a while until you could find a new gig.  But if the bank and the credit card company and your student loan company immediately showed up at your door and demanding complete and immediate repayment of all your debts, you’d have no way to cover them.

This is what’s happening to these institutions.  Lehman and Bear were both adequately capitalized days before they collapsed.  Whispers on Wall Street can kill, and short-selling hedge funds are accused of all spreading damaging rumors and other mischief.

wait, what?

okay, so i saw the thing about stocks = collateral online at WSJ yesterday morning, and flipped, because 6?7? some years ago when trying to get a loan for a house we were told we could NOT use stocks as collateral for a loan… because they fluctuate, because they are a stake in a company, etc.

so i was FLOORED when i read that now they CAN be used EXACTLY they way we had tried to use them years ago. i had had it pounded into my head that stocks cannot be collateral for a loan because of what they represent, they ARE NOT MONEY, THEY ARE NOT “REAL” PROPERTY, and now?

i give up. i have decided that economics is really a study of black magic. CALCULUS is easier!

Well, Richard Fuld presided over Lehman for a decade and a half, and everyone thought he was a super-genius until about two weeks ago, and now he’s Mr. Titanic.

The designer of the Titanic was thought to be a super-genius until the damn thing sank.  If you lead your company/ship into a disaster that you never foresaw, people will stop thinking you’re a super-genius.

People thought that Ken Lay and Jeffrey Skilling were super-geniuses until they were indicted and the truth about the financial shenanigans came out.  CEOs can make themselves look great in public while behind the scenes they’re screwing everything up (see also Carly Fiorina).