The Global Financial Meltdown Thread

Nearly 15 percent of hedge funds closed last year

A record 778 hedge funds liquidated during the fourth quarter, capping a year that saw financial markets melt down and investors yank $150 billion of their money at the end of 2008, Hedge Fund Research Inc said on Wednesday.

Given the number of people that must be out of work in the financial sector, you have to love the AIG argument that the bonuses were necessary to retain talent. Talent that would go where, exactly?

 

Anybody else get the feeling that said AIG bonuses might actually be hush money instead?

 

Yeah, because everyone knows that when you pay hush money that it's public knowledge.

 

I thought it was contractually obligated, though.

 

Find a way to void the contracts.

Without government intervention, there would be no bonuses, because AIG would no longer exist. There should be not one cent of bonuses. None. Every person who is employed by AIG should be thankful that they didn't meet Lehman's fate. If they need any kind of humbling, they should go find a former Lehman employee and ask how they're doing these days.

 

Near as I can tell, though, AIG doesn't have the ability to do that. The contract is supposed to be binding. Now, I think one could suggest that the gov't, in bailing them out, could have done something. And it seems they might have tried.
From an article on the AP,

I'm trying to dig up the story I read the other day that involved some quotes at least implying that people in Washington knew it would be an issue. But I think its ridiculous to say that a company should be able to opt out of a contract because they feel like it, beyond the terms of the contract. Bankruptcy, I think, would be a different circumstance, but I don't have the legal background to back that up.

Incidentally, has anyone heard about the retention bonuses for Freddie Mac and Fannie Mae?

 

Although I agree with E_S in a broad sense that this is a downturn from which things will recover in a little time, I'm not sure I can agree that it's part of a CYCLE itself in the same way other recessions are. To say that would confuse it with the recessions of 2001, 1992, the early 80s and beyond.

Something big, I think, is going on here, and to call it cyclic isn't quite true. It might appear afterwards to have been cyclic, but that's not precisely the case.

 

There is a legal way to void and/or renegotiate the contracts. It's called bankruptcy court. If AIG had taken that route, it would have been possible to block the payment of the bonuses (or, at least, those receiving bonuses would simply be another group of creditors to be paid).

That's the same reason why the unions don't want GM filing for bankruptcy, because then they could get the court to legally void or modify the various contracts with the unions in order to restructure the company.

These bonuses were contracted before the February 11 cutoff that was implemented by Sen. Dodd's amendment to the bailout. As such, the company is still bound by contract to pay them.

You also need to seriously consider the ramifications of voiding the contracts. Consider the fallout if the government can simply step into any endangered company and eliminate or void contracts that it doesn't like. One of the most basic principles of business is the ability to rely on contracts being enforced. If you remove that principle, then you are as likely to make things far, far worse than they are now. You could completely destroy any remaining confidence in the economy and the government.

Kimball Kinnison

 

The main difference is one of scale. The crash of 29 was preceded by an earlier Florida real estate bubble in much the same way that the giant credit bubble was preceded by the internet bubble. Small and big hurricanes happen cyclically, but the really big killer hurricanes, the high end category fives at landfall are rarer. The 29 crash and the current crash are century storms.

What was interesting to me about the recent residential real estate bubble which was sort of a subset of the larger credit bubble is how little the lessons of the internet bubble seemed to transfer even though the two speculative peaks were well under a decade apart. The bubble speak was visible clearly visible at a distance of several miles "housing prices can't go down" "our sophisticated 21st century investment strategies have fully tamed the risk of leveraging"

Maybe the lesson is that even though individual investors can learn from their mistakes and learn from recent history, markets can't. Aggregate market behavior is fatally blind to history, for whatever the reason.

 

Find a way to void the contracts....

To echo the concerns that KK just posted, there is also another way to "void contracts" like this, so to speak, even if it's too late to apply to this specific bonus payout. It's called holding those in positions of power responsible.

If you feel so strongly about the AIG bonuses, how does the reference to the article that Lowie provided make you feel?

Wyden and Snowe happen to split parties, and both wanted to nullify the bonuses as a requirement of AIG accepting bailout funds. Dodd, who happens to be a democrat, pushed for a softer version, with no bonus restriction. Dodd's softer version is what the administration signed off on. Based on this, Wyden and Snowe should get your support on this issue that you feel so strongly about.

Instead though, you promote this "global view" that seems to suggest that anything one party does as a whole will "keep it in power for the next 30 years" (to paraphrase your quote.) It's a strange contradiction in focus.

If more people shared your view on the bonuses, then politicians like Wyden and Snowe would be re-elected, while politicians like Dodd would be put out to pasture, regardless of their party affiliation. (To hit this idea home, Dodd has been a Senator for almost 30 years.)

Instead of simply defaulting to some sort of "brand loyalty," I wish more political races were decided on the issues that matter to people. I don't want to politicize this thread, but this is yet another example, in a long line of examples, that illustrates why I always repeat my mantra of "look to the specifics of the topic."

 

Dodd seems to now be admitting his actions.
Link here

Although I'm wondering about the claim that he's up for a tough re-election, since he won reelection with a 66% last time.

 

Happens more often than you think, FIDo. Except that such payments are usually called golden parachutes if the execs did "well", or buyouts if the execs clearly didn't do a "good" job but are willing to leave said company without raising a public spectacle.

Look at it this way, the bonuses weren't really "public knowledge" until just this week, even though it's now been revealed that Bernanke & top members of Congress were informed all along that these knuckleheads were going to be getting parachutes/buyouts.

 

So I have been checking the stock market via Real Clear Markets. I'm basically a stock market newbie and I don't quite understand the intricacies of it, but I have been seeing green gains at the end of every day since the jumps of last week. The gains are very small though. Still, it is better than closing with a loss. If this trend continues, does it mean we have reached a bottom? Or are the gains too small to be worth anything?

 

Those gains can be seen as people stepping in to pick up bargains. This is the fundamental irrationality of the stock market as opposed to pretty much any other economic activity: when prices for good quality stocks drop in the stock market for no reason other than a general feeling a crash is on, people tend to run like hell. In any other place -- for example, the motor industry announcing it believed generally that global warming is entirely real and as such it was cutting car prices by 50 percent, you would see a flood of people coming in to buy cheap cars.

I'm not convinced the bottom's been reached, only that some people are picking large corporate stocks up for peanuts. Until you get more encouraging signs from the finance sector that they're lending again, market instability's going to continue -- by which I mean quick cycles of up-and-down rather than a sustained rise over the long term.

And just as a note on the question of cycles -- on this I agree entirely with Ender_Sai, much to my surprise. Markets move in up-and-down cycles. It's irrelevant that one cycle is deeper or stronger than others, only that eventually it swings back up. Most people sensibly investing now in long-term, solid companies without significant debt are going to benefit from arguably the biggest upward swing in modern history when the market heads back up. People who had money in the stock markets have been significantly burned, of course -- but people who have it now are getting in at the ground floor with irrationally low prices on some very good companies.

Now, if you're speculating on stock prices rising in the short term, that's another story entirely -- but you're not doing much more than visiting your local casino if you're investing short-term in the stock market. The main appeal from stocks for me is that historically they outrun inflation, which is the only real measure of whether your money will last over time. For that I'm prepared to endure a heavy hit; hell, even Warren Buffett himself has said "If you can't stand to watch your stock price drop by 50%, you shouldn't be in the stock market to begin with."

 

The market soars 400+ today. Our market is such a rollercoaster.

http://news.yahoo.com/s/ap/20090323/ap_on_bi_st_ma_re/wall_street

 

This may seem like a really stupid question but with the global financial meltdown how is it possible to afford to spend billions upon billions of dollars on space exploration?

 

NASA's a tiny fraction of the Federal Budget. We might be able to fund a manned mission to Mars for considerably less than a tenth of what we've spent on the various bailout programs to-date.

 

NASA's budget is 17 billion, the current federal budget is just over 3 trillion. It puts NASA's funding at less than 1 percent of the budget, even though we have, historically speaking, gotten a LOT of technology as a benefit of the space program.

 

Okay, may I put some things into perspective? Meow, I'm no expert on economics, but, don't you think that our problems are kind of piddly compared to Zimbabwe? Yes, the same Zimbabwe that will be the first country ever to print a 100 Trillion dollar note. Meow, as bad as things are here, don't you think we're doing a lot better comparatively?

 

For the price of the current ISS expenditure NASA could have gone to Mars and back a couple fo times over and upkept further missions within budget. But actual efficiency and goals these days with manned missions don't go over very well with the current cash cow NASA.

 

Trillion notes means runaway inflation.

 

It's amazing to me that the U.S. housing market is entering its 4th year of recession. This was now the fourth straight February of declines in new and existing home sales. Year over year, new home sales are down 41% from February 08, so not only is this the fourth consecutive year of declines, but this doesn't give much indication that we've reached bottom. Existing home sales volume was down less than 5% from the February 08, but prices were down 15%. A high percentage of the volume of course was from distressed sales.

The rate of increase in unemployment is now reaching levels not seen since the 1950s.

The global volume of export trade will likely be down 9-10% in 2009 from 2008, so prospects for a global recovery in 09 seem as unlikely as for a U.S. recovery.

 

99% of Zimbabwe's problems boil down to Robert Mugabe. Without him using starvation and famine as a tool to remain in power the country would be far far better off.

 

I'm reminded of the book Snow Crash, in which inflation is so rampant that billion and trillion dollar bills litter the streets. They are literally worth less than the paper they're printed on.

At the time, it was satire.

 

If you want I can send you some recipies for how to cook a dollar. I find a flame grilled trillion dollar bill with a side dish of seasoned five dollar bills is quite good.