Monday, March 31, 2008

Financial Optimism in the Face of Insanity

I have in the past week heard a little faint optimism. It makes me feel a little better then my brain kicks in. An upside to all the financial mess is that more people are looking into it and more of it is being reported. When big companies and government are involved there are rules and practices that make no sense. Take these numbers with a few tons of salt, i don't have direct references. My recollection the Fed can loan money seven time actual money and banks only have to keep 16 to 20 cents on the dollar of money deposited. I understand the Fed lending more than they have, it keeps things growing, but seven times? Changing that ratio would give much more direct control that changing interest rates. As for the second ratio, shouldn't it be in line more with expected money on hand in the future, ie. profits of the company. Something along the lines of 30% cash and 30%+ in assets, i don't really know, but 16 cents of a dollar? yum salt good.

That said for what its worth I am sure most of the current problem would have been avoided if someone has passed a law or issued a guild line or rule that just said that banks couldn't lend more than 99% of the value of residential property. A 125% loan what? No one thought that was a bad idea. The real horror show of all this is that it will allow all sorts of new regulations and law. I am not for no regulation and not for increasing it every time there is a problem. Solutions, way over my head.

The original article tends to disappear. This from Centerfield
The Economist this week published an article suggesting that serious overleverage is afoot. Leverage is the ratio of loans to capital at hand. If it's too big, it's hard to resist financial trouble. The article's freely available to nonsubscribers, so far. They give numbers that suggest Merrill is 50:1, and Goldman is 28:1. Note, an earlier Econ article had the now-deceased Bear-Sterns at roughly 30:1. This article talks about some of Bear's problems in some detail.

Doesn't allow much movement, but if the loans are solid and transparent it should make little difference. When your offering 100% loans like their water and your just getting cliff notes on bundles of loans not so good. Look at it this way 100:2, 100:3.6, 100:3.3 so if the value of the loans decreases by 2-3.6% you have no cash left and everyone is trying to sell to cover the dept.

The Dilbert Strategy Form The NYT op-ed points to Bush lack of regulation. I agree that the
Bear Stearns of the world need some regulations, there are a lot of pensions tied up in them, but let's not go overboard. The typical reshuffling won't due, but the current thinking only allows that or massive government interference, not the smart streamline of regulation thats really needed.

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