[Springboard] Karen's car

Robert Rafos rafos at sympatico.ca
Wed Nov 19 13:28:04 EST 2008


Jim,

In a very short answer there are at least 3 drivers of the current  
crisis.  1. The need for higher returns, 2.  Hedge Funds, 3.  Desire  
for more or greed.

1.  As stock returns diminished and bond yields fell, the big players;  
pension funds, endowments, and mutual funds needed to earn better  
returns to meet their obligations.  For example pensions were  
experiencing liabilities to pension payments, but the money in the  
fund couldn't meet it.  Under law the company has to make up the  
difference over time by paying into the fund.  In some cases amounting  
to billions and one of the issues exacerbating the automotive industry  
problems.  Ergo where can we get higher returns so we don't have to  
make those contributions.  The return beast is very hungry.

2.  Along come hedge funds with some neat ideas and all kinds of  
complex ways to make more money.  One of the key ingredients to doing  
this is the use of leverage.  That is I have $100 of capital, and I go  
out and borrow $500 from an investment bank (Merrill, Bear Stearns,  
Lehman, etc.).  Now I have $600 to invest, and the plan is I can make  
more return on my investment then I have to pay in interest to the  
bank.  A classic example is a company called Long Term Capital  
Management, started no less by several Nobel winning economists.  They  
went out and raised a substantial amount from investors with the  
promise of very high returns.  For a number of years they did and the  
numbers were extraordinary.  The real numbers may never be known, but  
guesses indicated they had $2.0 billion and borrowed anywhere from 50  
to 100 times that amount.  Unbelievable leverage that worked until  
1998.  They were investing in debt of developing countries which was  
paying very high yields because of the risk.  One day Russia said we  
are going to pay off our loans.  Wham your investments were worthless  
or toxic.  To deal with this situation the Fed stepped in and circled  
the wagons, the usual paragons of virtue JP Morgan, Citibank, B of A,  
etc. to bail out the investment banks.  The cries of regulation for  
hedge funds was largely unheeded, hey those guys had deep pockets and  
a strong lobby.

3. Regardless of LTCM the return beast was still ravenous.  All kinds  
of new and exciting ways were devised to make money.  Special  
Investment Vehicles (SIVs) were designed where banks, hedge funds and  
investment dealers packaged all kinds of assets (auto loans, credit  
cards, mortgages, equipment leases, etc.) to sell to investors.  As  
long as everything is running smoothly people are making money, the  
sellers and the buyers.  I don't need to document the excesses that  
were driving this (get your Xmas bonus at the firm and buy yourself a  
Ferrari).  Where it gets sinister is what happened in the mortgage  
market.  In the desire to sell more to make more, they put out  
mortgages with 5% or nothing down, low interest rate for a couple of  
years and then it balloons to much higher rates.  This is the teaser  
to the American dream of owning your own home.  They even targeted low  
income and inner city residents.  Often the homes were way beyond  
peoples means.  The premise of this is real estate always goes up,  
right.  NOOO, it can fall too.  Here, I am in my $400,000 home with a  
$380,000 mortgage and the house is now worth $350,000.  My payments  
are going up next year, so lets get the dog and cat and split.  How  
many million defaults so far?

This is pretty simplistic, but it was fun writing it.

Bob Rafos


On 18-Nov-08, at 9:39 PM, James Wiegel wrote:

> This is great.  Talk a little bit, Bob, about where the explosion of  
> investment and finance firms ties into this . . .
>
> Jim Wiegel
>
> I know nothing grander, better exercise, better digestion, more  
> positive proof of the past, the triumphant result of faith in human  
> kind, than a well-contested American national election. Walt Whitman
>
> 401 North Beverly Way
> Tolleson, Arizona 85353-2401
>  +1 623-936-8671
>  +1 623-363-3277
> jfwiegel at yahoo.com
> www.partnersinparticipation.com
>
> --- On Tue, 11/18/08, Robert Rafos <rafos at sympatico.ca> wrote:
> From: Robert Rafos <rafos at sympatico.ca>
> Subject: Re: [Springboard] Karen's car
> To: "Springboard Dialogue" <springboard at wedgeblade.net>
> Date: Tuesday, November 18, 2008, 7:11 PM
>
> To Jim's question, What is holding this in being?
>
> Page 36, Paragraph 67: Reagan described as the modern prophet of  
> profligacy, gave MORAL sanction to the empire of consumption adding  
> to America's civic religion two crucial beliefs: credit has no  
> limits, and the bills will never come due.  Page 60, Paragraph 139:  
> Bush two weeks after 9/11 encourages Americans to "Get on board.  Do  
> your business around the country ... Get down to Disney World in  
> Florida."  Page 53: George H.W. Bush declared, "The American way of  
> life is not negotiable."  The political has given credence to the  
> economic and supported its dominance.  With the top leaders holding  
> this image and vision out to the country, the result is not a  
> surprise.
>
> To Jim's question, Where do we experience ourselves caught in this  
> in our lives?
>
> It's subliminal and sneaks up on you.  I remember arriving in  
> Toronto from Tokyo with 2 suitcases and 8 cartons (the size that the  
> print shop got its paper in).  Now we have a house full of stuff.   
> How did it happen?  It's easy to rationalize, you buy a house you  
> need furniture, then you have to decor it, one TV doesn't work since  
> we watch different things, each need our own computer, etc.  Well  
> you have a job and need to look presentable for the staff and  
> clients and wind up with 8 suits, 40 ties and 30 dress shirts.  You  
> can go on and on.
>
> One day the shoe drops and you say "What have I, we, the corporate  
> we done".  At that point I, we have the opportunity to change.  The  
> more that do, the bigger the impact.
>
> Society and our politicians need a new moral compass that inspires  
> and leads us (the US) in a new direction.
>
> Bob Rafos
>
> On 18-Nov-08, at 7:01 PM, KarenBueno at aol.com wrote:
>
>> But isn't the bottom line of the "Limits of Power" (first half,  
>> anyway) that we already have way more than we need?  Why would I  
>> need any kind of new car?  I've read studies that say my care,  
>> which gets 33 mpg on the highway, is still a less extravagant way  
>> to drive.
>>
>> But beyond that, why on earth is my decision, as one of some 300  
>> million people, going to make a difference in the way Americans are  
>> addicted to extravagance?  Breaking that cycle of profligacy (which  
>> I had to look up in my Websters) seems even more impossible than  
>> renewing the church.
>>
>> Karen Bueno
>>
>> In a message dated 11/18/2008 2:44:36 P.M. Mountain Standard Time, geowanda at earthlink.net 
>>  writes:
>> If possible, I'd wait until the next generation of plug-in hybrids  
>> come on line, possibly this Spring.  The Japanese car makers have  
>> them already, and the Americans are working on them pretty hard.   
>> They will be the bridge car to all electrics or alternate fuel  
>> types.  They might let the diesels from Europe in next year that  
>> are also high mileage cars.
>>
>> George Holcombe
>> 14900 Yellowleaf Tr.
>> Austin, TX 78728
>> Home:  512/252-2756
>> Mobile  512/294-5952
>> geowanda at earthlink.net
>>
>>
>> On Nov 18, 2008, at 12:31 PM, James Wiegel wrote:
>>
>>> Karen's answer.  How about the rest of you??
>>> --- On Tue, 11/18/08, KarenBueno at aol.com <KarenBueno at aol.com> wrote:
>>>
>>>
>>> My 2000 Saturn is still running with over 100,000 miles.  The new  
>>> auto prices are so good.  Do I with good conscience buy a new car,  
>>> or do I continue to drive my Saturn until it dies?
>>>
>>> Karen Bueno
>>>
>>> In a message dated 11/17/2008 10:06:45 P.M. Mountain Standard  
>>> Time, jfwiegel at yahoo.com writes:
>>> what is holding this in being?  where do we find ourselves caught  
>>> in and even reinforcing this crisis in our communities and in our  
>>> lives?
>>>
>>>
>>>
>>>
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>> =
>>
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