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Strategies & Market Trends : Graham and Doddsville -- Value Investing In The New Era -- Ignore unavailable to you. Want to Upgrade?

To: Daniel Chisholm who wrote (806)	9/25/1998 5:16:00 PM
From: porcupine --''''>	Read Replies (2) \| Respond to of 1722

I would not cast this episode in the forces-of-darkness-are-out-to-get -us style of rhetoric some commentators favor, because, however true that might be, it still doesn't advance my understanding, in any scientific sense, of what is going on. That said, there is still a serious problem here. Say you lend me money to operate a business. When it's time to repay the loan, I hand you a deed for a bankrupt business. The money you loaned me is no longer available to lend to a healthy business -- hence, a loss to the economy. Further, you may have a problem now repaying the people you borrowed the money from -- with possible domino effect consequences. Once or twice a decade this may be okay. But, Japan got addicted to it -- now all of their potential risk capital is instead tied up rolling over loans for wealth destroying businesses -- and therefore, the overall economy is destroying more wealth than it's creating. Hence, output is plunging, demand is plunging, and the rest of East Asia has no hope of recovering until somebody actually goes bankrupt -- thereby freeing the capital that's proping them up to be used for more profitable purpose. But, this type of rescue, even only once or twice a decade in the beginning, has what some call a "moral hazard". Some say the Mexican bailout only encouraged profligacy in lending to East Asia. If the lenders to LTCM really did get equal equity in exchange for the defaulted loans, why not keep making loans to people doing things that no one really understands the risk of? If shareholders of the lenders are still whole, why should they scrutinize the lender more closely? Eventually, there's a fiasco that's "too big to rescue". Adding insult to injury, the principals of LTCM will be left in charge (two of them Nobel laureates -- including half of the team credited with the Black-Scholes options pricing formula). This is because the lenders admit that, even now, no one really understands what the principals were doing -- so only they can continue doing it! If you were a shareholder in the lender, how would this strike you?

To: Daniel Chisholm who wrote (806)	9/25/1998 7:07:00 PM
From: Freedom Fighter	Respond to of 1722

Daniel, >>If my understanding is true, then it is not a Fed-brokered subsidy to the rich and reckless. Instead, it is the (reckless;-) lenders taking over what is left of their assets. Comments?<< I agree with you. I am quite upset about all this so I did not express my thoughts clearly. The IMF bailouts have been taxpayer money used in large part to protect the system and banking interests. Some countries have also used liquidity (the printing press). This is an indirect taxpayer bailout. In addition, in the effected countries, the austerity programs that are the conditions for receiving the bailout money are devastating many of the countries, both economically and socially. There are suicides etc... The Fed brokered intervention in the Hedge fund bailout would appear to be private money. That I have no problem with. One could question what is really going on there and I'm sure there is going to be an investigation. Even Paul Volker expressed anger about it. My real point behind it is that easy credit, massive leverage, bailouts, confidence in liquidity coming from the Fed etc... has fostered an era of speculation and risk taking, caused enormous bubbles that have now burst, put the entire global financial system at risk (including us), devastated numerous countries (40% in recession or worse right now), caused social and political upheaval in a couple of places...You get the picture. And is not over yet. As far as we can tell it is still in progress. As soon as the Brazilian election is over in a few weeks, there are sure to be similar programs announced there. The finances are just as bad. The hedge fund bailout, while not exactly the same, is part of the same problem. I am so emotional about this topic because it is primarily the result of rich people's greed. With the little guy picking up the tab, at risk, or suffering the consequences. As a few of the contributors to this group know, it was all very predictable. I have been writing about these risks for a couple of years.