In layman's terms what is this crisis all about?

[Pager]

So can anyone explain in simple terms what this current financial mess is all about ?, who has all this debt and to whom is it owed, why do central banks have to pump $$$$$$$$$$$$ into the market ?.

Why did Lehman's go belly up ?, why are some saying the at even the US fed may go belly up and why is this going to affect us all when it filters through the system down to the man in the street ?.

Although i derive a good portion of my income from trading futures on a short term basis i realistically have very little understanding of whats going on in the financial markets as i trade price only, no fundermentals or reccomendations, pure price action long or short and when there closed i sit on cash so my risk is very low as far as i can see.

Anyone :confused:

[Whiskers]

Whooh... explain all that in "simple terms"!

Geez, that's a big ask for a saturday night as the footy is just about to kick off. :p:

Something might come to mind tomorrow. :o

[fimmwolf]

Bad debt

lots of high risk housing loans that went unpaid

The banks could, and in many cases did, foreclose, but the sheer number of sub-prime loans was huge.

foreclosure didn't mean the banks got their money back either

They lent money during a property boom, cost of housing was high, but it isn't high now

Of course, banks being the f***ers they are, bundled up the debt into obscure products, called CDO's (collateralised Debt Obligations) that no-one understood and many investment funds, hedge funds, and even other banks bought into


So the banks have a large amount of bad debt, they have screwed investors with their dodgy products, investors are now hesitant to invest in the financial sector, (who can blame them) which means less liquidity for banks, which means a higher cost for intra-bank cost of borrowing, and that in turn creates a capitalisation problem for banks

Moreover, it means that the cost of lending to the consumer (main St) also must increase.

and that staves national growth, because projects that might have been undertaken, are now too costly.


In summery, you now have, banks with large debt, higher inflation in the U.S, higher unemployment in the U.S, many that can't pay their mortgages, higher cost of credit for the banks, higher cost of borrowing for the banks end users, as well as a slowing national growth.

Since then, we have seen banks file for bankruptcy, banks made insolvent, and the general populace do a run on the banks. The ultimate no-confidence vote.

Why wasn't Lehman brothers saved like the other banks?
Lehman wasn't as important as fannie mae and freddie mac. Those 2 banks had approximately 50% of all the mortgages in the U.S.

hope that explains it

[Spanning Tree]

To sum it up in one sentence: Everyone thought property prices went up all the time and they were wrong.

[Julia]

Bad debt

lots of high risk housing loans that went unpaid

The banks could, and in many cases did, foreclose, but the sheer number of sub-prime loans was huge.

foreclosure didn't mean the banks got their money back either

They lent money during a property boom, cost of housing was high, but it isn't high now

Of course, banks being the f***ers they are, bundled up the debt into obscure products, called CDO's (collateralised Debt Obligations) that no-one understood and many investment funds, hedge funds, and even other banks bought into
It's reasonable at this juncture to include the fact that the ratings agencies labelled these CDO's Triple AAA so it's not appropriate to lay all the blame on investors who bought those securities.

On that score, I felt a cold chill today when I heard Wayne Swan assuring us that the $4 billion of our money being pumped into the mortgage market "is going into Triple A rated securities". Nasty sense of deja vu was unavoidable.



So the banks have a large amount of bad debt, they have screwed investors with their dodgy products, investors are now hesitant to invest in the financial sector, (who can blame them) which means less liquidity for banks, which means a higher cost for intra-bank cost of borrowing, and that in turn creates a capitalisation problem for banks

Moreover, it means that the cost of lending to the consumer (main St) also must increase.

and that staves national growth, because projects that might have been undertaken, are now too costly.


In summery, you now have, banks with large debt, higher inflation in the U.S, higher unemployment in the U.S, many that can't pay their mortgages, higher cost of credit for the banks, higher cost of borrowing for the banks end users, as well as a slowing national growth.

Since then, we have seen banks file for bankruptcy, banks made insolvent, and the general populace do a run on the banks. The ultimate no-confidence vote.

Why wasn't Lehman brothers saved like the other banks?
Lehman wasn't as important as fannie mae and freddie mac. Those 2 banks had approximately 50% of all the mortgages in the U.S.

hope that explains it
There's also a good explanation from Sunder on another thread, sorry can't recall the name of the thread now but it was started by Tech/A, something along the lines of "Economic Guru Required". He gives a good picture of just what would happen if credit were to completely dry up.

[chops_a_must]

On that score, I felt a cold chill today when I heard Wayne Swan assuring us that the $4 billion of our money being pumped into the mortgage market "is going into Triple A rated securities". Nasty sense of deja vu was unavoidable.

Yeah, it's gone largely unnoticed but it is ****e.

I mean, we clearly aren't light years away if we are bailing out our banks as well!!!!

Clearly the hushing of Malcom was to retain confidence because one of our banks is obviously in trouble, and they are doing everything to hold off a run.

Most likely SUN I think. Not sure if they would be able to give money to WankBest...

[nunthewiser]

Hi , wrong thread [perhaps...... question ........ how safe is Bendigo/adelaide Bank viewed bu you guys? recently pulled all funds/savings/deposits out of ANZ and moved to BEN .. i felt more comfortable with BEN after doing a bit of reading BUT would love to hear others opinions in these uncertain times

[chops_a_must]

Hi , wrong thread [perhaps...... question ........ how safe is Bendigo/adelaide Bank viewed bu you guys? recently pulled all funds/savings/deposits out of ANZ and moved to BEN .. i felt more comfortable with BEN after doing a bit of reading BUT would love to hear others opinions in these uncertain times

From memory, most of the guys here do not like BEN as they swallowed a lot of crap with Adelaide Bank.

[fimmwolf]

posted by Julia
It's reasonable at this juncture to include the fact that the ratings agencies labelled these CDO's Triple AAA so it's not appropriate to lay all the blame on investors who bought those securities.

Absolutely, that's a great point, and one that has been pretty much over-looked to this point. The banks should never have been able to sell their level 3 assets with the ease that they did. Such assets should have had an appropriately low rating. It's fair to say that many investors would never have been fooled if these bank products had been rated correctly.

In America now, many are in the streets demanding "jail not bail"

[Julia]

Hi , wrong thread [perhaps...... question ........ how safe is Bendigo/adelaide Bank viewed bu you guys? recently pulled all funds/savings/deposits out of ANZ and moved to BEN .. i felt more comfortable with BEN after doing a bit of reading BUT would love to hear others opinions in these uncertain times
Why on earth would you move from one of the big four to a small player???
I do my everyday banking with ANZ but have the large term deposit with CBA.

[Julia]

Yeah, it's gone largely unnoticed but it is ****e.

I mean, we clearly aren't light years away if we are bailing out our banks as well!!!!

Clearly the hushing of Malcom was to retain confidence because one of our banks is obviously in trouble, and they are doing everything to hold off a run.

Most likely SUN I think. Not sure if they would be able to give money to WankBest...
You may be right. Here is further comment on that.
http://www.news.com.au/business/story/0,23636,24411317-14334,00.html

[posh]

and do we think that the collapse of one or other of the institutions somehow alleviates this crisis?

[nunthewiser]

Why on earth would you move from one of the big four to a small player???
I do my everyday banking with ANZ but have the large term deposit with CBA.

Main reason being lower overseas exposure , mainl;y in house funded ie deposits to loan ratio, ANZ lack of confidence in there investment desicion ability , and just because the big 4 are viewed as the big 4 , does it make them safer ? Seems these days the bigger they are the harder they fall , American pillars falling by the day , i think they were viewed as invincible once upon a time too

only trying to find opinions on Bendigo as a banking institution not a Q and A on why i choose to invest where i do

[cuttlefish]

On that score, I felt a cold chill today when I heard Wayne Swan assuring us that the $4 billion of our money being pumped into the mortgage market "is going into Triple A rated securities". Nasty sense of deja vu was unavoidable.




I agree and had the same thoughts - very concerning and quite illogical I would have thought - though chop's comments might be more of an indication about the true motivation behind it which is even more worrying but at least would mean there's some logic to it and our treasurer hasn't completely lost the plot.

[Dannyboy80]

Does anyone even think of the "Rich Dad Poor Dad" syndrom?

Since he went of Oprah, property fever in the US went mental. Go Robert K!!!

Did he put more wood on the fire? Who knows...

Anyways, that's all l have to say.

[Whiskers]

It's reasonable at this juncture to include the fact that the ratings agencies labelled these CDO's Triple AAA so it's not appropriate to lay all the blame on investors who bought those securities.

Absolutely, that's a great point, and one that has been pretty much over-looked to this point. The banks should never have been able to sell their level 3 assets with the ease that they did. Such assets should have had an appropriately low rating. It's fair to say that many investors would never have been fooled if these bank products had been rated correctly.

In America now, many are in the streets demanding "jail not bail"


Yes indeed.

I believe there are numerous enquiries and court cases pending or being considered for everything from preditory lending and fraud re the original loans and further fraud as they were repackaged and onsold, to further market manipulation, both tit for tat retaliation and prey by healthy suitors to try to capitalise on the whole mess.

Another good question... where were the regulatory authorities as all this was unfolding. Were they also asleep at the wheel, completely under resourced or also implicated in fraud, corruption or whatever.



On that score, I felt a cold chill today when I heard Wayne Swan assuring us that the $4 billion of our money being pumped into the mortgage market "is going into Triple A rated securities". Nasty sense of deja vu was unavoidable.


Seems to be little detail out yet, but as I understand it this $4b is going to non-bank mortgage lenders to shore up our property market and beef up competition against the banks. If that's the case, subject to the detail, it's probably better than what the US is proposing.

Although having said that, the US had little chioce now but to try to stabalise the situation... so long as they follow up with approperiate charges and recovery action against the exec's involved rather than punishing the whole company, it's employees and customers.

[Schmuckie]

Why did Lehman's go belly up ?

There was a great analogy quoted in one of the Canadian papers about Lehman and the U.S. government actions and why they selectively went to the rescue.

Lehman was like a kid pulling a dog's tail, you know eventually the dog is going to turn around and bite the kid, but nobody really cares. He had it coming. (Bankruptcy allowed to go ahead.)

Bear Stearns was like the neighbourhood pyromaniac kid with a box of matches. Not only could he burn down his own house, but the rest of the houses in the neighbourhood. (Intervention and negotiated sale to a rival.)

AIG, on the other hand, was the kid who accidentally stumbled into a biological weapons laboratory and walked out into the middle of a crowded stadium with a bunch of unlabeled, and very dangerous, vials. (Outright rescue.)

[rederob]

So can anyone explain in simple terms what this current financial mess is all about.
Anyone :confused:
It's about debt.
It began with poor assessments of capacity to repay debt.
And it was compounded by financial institutions creating debt instruments that removed the original debt from the original lender.
It was capped of by insurers of debt having no capacity to cover defaults.

The problem US Congress has in trying to stabilise its financial markets is that it has no certainty that the money it's pouring in will will stop the cascading debt burden evidenced since the subprime market kicked it off over a year ago.
This problem exists because complex financial instruments must first be unravelled to determine what debts have been repackaged (or collateralised), what level of insurance reduces the debt, and who previously "owned" that debt.
Given that we are talking about tens of millions of loans it is apparent that the "unwinding" effects - or ramifications - will take a lot longer to work through the US financial system than Congress has to stem the tide.

[Green08]

"There are global flow-ons, undoubtedly, from American dystrophy, but our economy differs from the American,in substantial ways. The US is grappling with massive war bills from Iraq and with inadequate taxation to meet them. American taxes are about 25 per cent of GDP, compared with Australia's 31 per cent. Capital expenditure the source of growth and prodctivity - is a lowly 17 per cent of the American economy compared wtih 27 per cent here. Its infrastructure, therefore is decaying, and its finance industry is in disarray, thanks to sloppy practices in mortagage lending." - Phil Ruthven, Chairman of the economic forecaster IBISWorld

[Julia]

Main reason being lower overseas exposure , mainl;y in house funded ie deposits to loan ratio, ANZ lack of confidence in there investment desicion ability , and just because the big 4 are viewed as the big 4 , does it make them safer ? Seems these days the bigger they are the harder they fall , American pillars falling by the day , i think they were viewed as invincible once upon a time too


OK, very fair comment.

[Green08]

I'm with St George and happy. Not so happy about Westpac taking over but then we'll see that happens at the share holders vote.

I have a SMSF which I began in Oct 07 and very happy with my move then.