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Author Topic: Fixing the Enron Nation  (Read 2729 times)
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WhiskeyGirl
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« on: December 08, 2008, 09:48:25 AM »

Has the nation learned anything from the collapse of Enron?

Quote
December 05, 2008

The sudden collapse of what had been assumed by most to be an apparently robust global economy bears parallels to that of Enron (a company that was the fifth largest in the US by value at its peak) which had invented the 'asset-lite' energy trading model, and was declaring record profits before its collapse in 2001. Average pay for each of its top 200 executives had gone from a generous $1m in 1998 to a stunning $7m by 2000, just before the business was revealed to be a massive fraud.

When Enron unravelled, the $13bn of debt declared on its balance sheet was revealed to actually amount to $38bn, hidden in offshore and off-balance sheet 'special-purpose vehicles' established with the connivance of Wall Street bankers (very like the off-balance sheet mortgage SIVs that have blown up the US banking sector)...

I wonder if the same hands that were in Enron, had a hand in Freddie/Fannie.  Do they want your 401k, IRA next?   Government Retirement Account?

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Enron, like the mortgage crisis, was a conjunction of reckless political deregulation, investor delusion, management corruption and stunningly short-sighted greed by all concerned. If there was one clear lesson from the Enron debacle, it was to be suspicious of financial complexity. And yet the illusory prosperity of the last few years has been based on a financial pyramid scheme of such complexity that the senior directors of the very banks building it didn't comprehend the instruments involved, let alone the solvency risks entailed. Per-capita real economic growth in the US has averaged 1.4%, 1.7% and 1.9% over the past 25, 50 and 100 years. Let's call it 2% at best. The corporate sector in aggregate can't grow sustainably faster (or corporate profits would end up bigger than the economy); trend share prices and earnings can't grow sustainably much faster either.

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For a long-term investor, assuming stable P/E averages, stock returns will revert to a 2% real rate over time. Real growth in EPS for the S&P 500 has been 3.2, 2.0 and 1.5 % over the past 25, 50 and 100 years respectively...

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...The negative compound returns since then reflect a brutal reversion to the historical mean after many years of self-serving distortion and delusion...

read more here -
http://seekingalpha.com/article/109357-fixing-the-enron-economy

Paper fortunes, paper money, paper investments...

Internet fortunes, internet money, internet investments...

For some reason, taxpayers are left holding the empty bag.

Who is going to bail out Uncle Same and the taxpayers?  At what price?

just my humble
opinions
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WhiskeyGirl
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« Reply #1 on: December 08, 2008, 07:50:18 PM »

Too Big Not To Fail
We need to stop using the bailouts to rebuild gigantic financial institutions.
cheers

By Eliot Spitzer
Posted Wednesday, Dec. 3, 2008, at 5:59 PM ET

Quote
...the risk that current bailouts—a remarkable $7.8 trillion in equity, loans, and guarantees so far—may merely perpetuate a fundamentally flawed status quo. So far, at least, we are simply rebuilding the same edifice that just collapsed. None of the investments has even begun to address the underlying structural problems that are causing economic power to shift away from the United States, sector by sector:

Our trade deficit has ballooned from about $100 billion to more than $700 billion annually in the past decade, and our federal deficit now approaches $1 trillion. These twin deficits leave us at the mercy of foreign-capital inflows that may diminish as Asian nations, in particular, invest increasingly at home.

Our household savings rate has been close to zero—and even negative in some years—not permitting the long-term capital accumulation required for the investments we need; China's savings rate, by comparison, is an astonishing 30 percent of household income.

U.S. middle class income has stagnated over the past decade, while the middle class in China—granted, starting from a lower base—has seen its income growing at about 10 percent annually.

Our intellectual advantage could soon turn into a new "third deficit," as hundreds of thousands of engineers are being created annually in China.

We are realizing that the service sector—all the lawyers, investment bankers, advertising agencies, and accountants—follows its clients and wealth creation. This, not over-regulation, is the reason investment-banking activity has begun to migrate overseas.


The Chinese must be extremely wealthy if they can save 30% of household income.  Can they afford to pay more for American goods?

The US is bankrupt.  The gamblers have left town, and taxpayers are realizing they were always holding the losing hand. 

When will the US focus on the technical and scientific disciplines?   How many foreign graduates will want to come to a US that is in decline?


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This long-term change frames the question we should be asking ourselves: What are we getting for the trillions of dollars in rescue funds? If we are merely extending a fatally flawed status quo, we should invest those dollars elsewhere. ...

Look at all the opportunity the breakup of Ma Bell created.  It was painful for some at first.  Sometimes change works well, given time.  All kinds of new products and services to please the public.  Are all these carriers asking for a bailout?

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A more sensible approach would focus not just on rescuing pre-existing financial institutions but, instead, on creating a structure for more contained and competitive ones. For years, we have accepted a theory of financial concentration—not only across all lines of previously differentiated sectors (insurance, commercial banking, investment banking, retail brokerage, etc.) but in terms of sheer size. The theory was that capital depth would permit the various entities, dubbed financial supermarkets, to compete and provide full service to customers while cross-marketing various products. That model has failed. The failure shows in gargantuan losses, bloated overhead, enormous inefficiencies, dramatic and outsized risk taken to generate returns large enough to justify the scale of the organizations, ethical abuses in cross-marketing in violation of fiduciary obligations, and now the need for major taxpayer-financed capital support for virtually every major financial institution.


Sounds like the federal government.  How can the Fed become more competitive? 

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The better policy is to return to an era of vibrant competition among multiple, smaller entities—none so essential to the entire structure that it is indispensable.

The concentration of power—political as well as economic—that resided in these few institutions has made it impossible so far for this crisis to be used as an evolutionary step in confronting the true economic issues before us. But imagine if instead of merging more and more banks together, we had broken them apart and forced them to compete in a genuine manner. Or, alternatively, imagine if we had never placed ourselves in a position in which so many institutions were too big to fail. The bailouts might have been unnecessary.


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In that case, vast sums now being spent on rescue packages might have been available to increase the intellectual capabilities of the next generation, or to support basic research and development that could give us true competitive advantage, or to restructure our bloated health care sector, or to build the type of physical infrastructure we need to be competitive.


I imagine that in a few years someone will determine that we spent something silly like $1,000 each to replace light bulbs that were already in the budget and scheduled for replacement.   

I imagine that in a few years roads will need resurfacing, and existing infrastructure in need of repair.  States and communities will again look to all taxpayers to foot the bill for their local maintenance needs.  Will this ever stop?  If you can't afford to maintain something, why build it?  Maybe you don't need it in the first place, and/or you should have factored maintenance into your plans on day one. 

I haven't seen anything that suggests that the nation will train more engineers and technical people.  It seems like the new focus is on the internet.  How many engineers has the internet trained?  How many degrees has it granted?  Lawyers?  Doctors?

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It is time we permitted the market to work: This means true competition with winners and losers; companies that disappear; shareholders and CEOs who can lose as well as win; and government investment in the long-range competitiveness of our nation, not in a failed business model of financial concentration and failed risk management that holds nobody accountable.


Why is it that Main Street business are closing at an alarming rate, and Wall Street spends their days at resorts?  GM & Chrysler want a Wall Street package to.

Is my check for $1 billion in the mail yet?


http://www.slate.com/id/2205995/pagenum/all/#p2

Just my humble opinions.
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WhiskeyGirl
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« Reply #2 on: December 08, 2008, 08:28:08 PM »

Quote
Too Big To Be Allowed to Exist?


My generic view of regulations, is that we ought to try to have fewer, but clearer and perhaps harsher. You want regulations that can’t be gamed by the regulated and don’t depend on hubristic assumptions about what the regulators are actually going to do in practice.

To that end, what’s the deal with banks that are too big to fail?

If we can identify such banks, why not try to make a rule preventing banks from becoming that big? As a tradeoff, banks that rested in the small-enough-to-fail category could be allowed to operate with much, much laxer oversight and regulation since everyone would understand that if they fail they’re going to sink. Presumably, there are some efficiency gains associated with the economies of scale involved in big financial institutions. But there would also be efficiency gains associated with relaxing the regulations on financial institutions. And the only reasonable way to seriously relax those regulations would be to commit to a no-bailouts scenario. But to do that, we need to make sure the banks aren’t too big to fail. So why not focus the regulatory effort on that — on making sure that institutions don’t get so big that they need bailing out?

http://yglesias.thinkprogress.org/archives/2008/11/too_big_to_be_allowed_to_exist.php

Comments -

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bobbo Says:
November 25th, 2008 at 4:03 pm

I hear they have something called “anti-trust” for this.

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Marshall Says:
November 25th, 2008 at 4:25 pm

the economies of scale involved in big financial institutions

Really? Name one. All this “everything under one roof” claptrap courtesy of Sandy Weill ca. 2000 has been proven wrong. Investment banking is a commission business with a business model of a law firm that, every couple of weeks (or days) takes out an enormous loan in the morning which it repays in the afternoon.

Investment banks are not investors. They do not take bets except that their underwriters are sufficiently prepared so that one-day market moves don’t spell disaster. Any position that an investment bank takes extending past sundown should have no expectation of taxpayer backing.

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Frankly Mr Shankly Says:
November 25th, 2008 at 4:39 pm

Isn’t this why we used to have Anti-Trust laws on the books? And haven’t these been flaunted for years? Ignored by our government, which is supposed to enforce them?

To the normal American, no company should ever be able to get “too big to fail.” If we’re going to have regulations, that should be the number one goal. Because too big to fail leads to too much moral hazard.

...banks spending taxpayer money on buying other smaller banks and insurance companies spending large amounts of money at resorts...

What is economy?

Have the meeting on site, teleconference, conference call, webinar, etc.  At the beginning of the day, give everyone  $10 for "breaks, lunches, and misc. refreshments" and tell them to "make it stretch" ... better yet, tell them to brown bag it.

just my humble opinions
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WhiskeyGirl
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« Reply #3 on: December 08, 2008, 08:34:57 PM »

Quote
Suddenly, small is big...

As the rolling bailout ball gathers momentum, it is hard not to notice one financial segment is doing OK. [And in case you haven't been paying attention, OK is the front of the pack these days.]

Small banks.

You know - those guys who take in deposits and pay interest and then loan it to guys like me who pay a little more interest. Dull, boring banking.  No securitized anything.  No swaps or merger deals. Just green eyeshade banking.

Quote
...I favor small banks, for several reasons.

They are 5 minutes away, and a force for good in my community.

They've been berra, berra good to me. At least, my bank has. 

I can deal with lifelong friends.

They protect my identity.  The woman who processes checks, along with eveyone else in the bank, knows I don't (or shouldn't) write checks for cash in Las Vegas or Singapore. 

I'll trade a little financial privacy for help protecting my small pile of money any day.

I like knowing my loan interest gets paid back out to senior citizens I know who deposit their SS checks and need the income.  My farm supports more than our two local families, in a sense.

I think agriculture is in for some collateral damage (pun intended) as both large banks and the Farm Credit System struggle with the credit market meltdown.  Don't get me wrong - I think the FCS does a great job, and I also believe they will weather this storm, but their problem right now is while they used to command a premium in the money market for their implied government guarantee, suddenly every other piece of commercial paper has a FULL government guarantee.  And we're only starting.  Their very business model is under duress, regardless of how well they do their job.

...I think lots more small financial institutions would not decrease our financial efficiency and would go a long way toward increasing our financial system security.

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Meanwhile, reports of farmers meeting with their lenders are trickling in, and are not reassuring.

More anon.  But if you have not spoken with your lender about what the right answer is for 2009, do it tomorrow.

read more here -
http://johnwphipps.blogspot.com/

Sounds like money for everything and every business but those on Main Street...or in rural America.
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Dihannah1
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God watch over our children and keep them safe.


« Reply #4 on: December 09, 2008, 12:02:28 AM »

Hi all,  I haven't been here for awhile.  Too tied up in Caylee case.  But with that said and not reading any posts, on this thread yet,  I will give my raw review.

First and foremost,  We do NOT need anybody to loss anymore jobs, but like the airlines who have filed bancruptcy and continued to move on, it is of my opinion the Big 3 should to do the same.  Nothing is going to change, until they file bankruptcy and reorg. period!  It will be the status quo. 

Main street is hurting and it is because of Wall street and those damn big greedy corps, taking everybody down.  If anybody suffers, then let the COE's and big time millionares take the hit!  You and I would be fired for such underperformance, then so should they.  They need to restructure with ALL new management!
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WhiskeyGirl
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« Reply #5 on: December 09, 2008, 08:01:43 AM »

I'm wondering what the big Obama picture is--I haven't seen it painted anywhere .

This man sums it up -


Quote
On Sunday Obama also told his NBC host, “We can’t worry, short term, about the deficit.” America is going to spend its way out of bankruptcy. He then told Brokaw, twice, (underscore, exclamation point!) that the recession was going to worsen.

Displaying a sure-footed understanding of the link between consumer spending and economic prosperity, Obama’s predictions of a deepening recession — weeks before Christmas — are the first step on the road to economic recovery.

“Shovel-ready programs” are on the way, America. I know this, because I’ve been listening to Obama’s promises, carefully, for two years now.

I’ve got my shovel ready.


http://www.aspentimes.com/article/20081209/COLUMN/812089946/1021/NONE&parentprofile=1061&title=Addison%20Gardner:%20Always%20Right

What is the big picture?  Is there something so terrifying that Obama cannot reveal (like the mythical original birth certificate) why his plans make sense?

jmho
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« Reply #6 on: December 15, 2008, 08:06:03 PM »

Quote
And he is seeking some regulatory concessions for some Wall Street supporters. He has proposed, for example, that the government lift a cap on how big the giant banks can get, an issue important to institutions like JPMorgan Chase. Lifting the cap would allow the biggest banks to absorb weaker ones, but it would also limit competition and increase the risks to the financial system posed by failure of one of the giants.

Mr. Schumer is also calling for the adoption of European-style regulations that impose far fewer rules and instead require banks to meet certain performance standards, a system institutions generally prefer but some banking experts criticize as not rigorous enough.

In recent weeks, Mr. Schumer has listened to Wall Street leaders for advice on what should come next. At a dinner at Morgan Stanley’s headquarters the night before the presidential election, John Mack, the chief executive, and a dozen top hedge fund officials talked with Mr. Schumer about possible changes affecting their industry.

“People feel like he is going to be fair and reasonable,” said one Morgan Stanley executive, who asked not to be identified because the session was private. “He is mindful that this is a very big part of his constituency — Wall Street.”

http://www.starnewsonline.com/article/20081214/ZNYT01/812143012/-1/SPORTS12?Title=A_Champion_of_Wall_St__Reaps_the_Benefits

I wonder how much the next collapse will cost the nation?  Taxpayers? 

Wow...I wonder when Congress will start fixing things and making it good for Wall Street?

Is my $1 billion dollar check in the mail yet?  Maybe I should be asking for more?

jmho
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« Reply #7 on: December 18, 2008, 07:40:01 AM »

I wonder if future generations will view all this bailout pork spending by government as the biggest crime committed by government on the American people?

Anyone looking at finding all the money gone asunder these past 20 year?  Where'd all that money go?  Capitol Hill doesn't seem to concerned, they just continue spending more money down that black hole.

Anyone on Capitol Hill concerned about fiscal responsibility?  No?  Just keep adding to the pork barrel?

When does the financial system collapse completely under all this weight?
 

Quote
Borrow, Tax, Print

There’s only one problem with the theory: a “glaring logical fallacy,” says Dan Mitchell, senior fellow at the Cato Institute, a libertarian think tank. “In the real world, government can’t inject money into the economy without first taking money out of the economy,” he says. “The theory only looks at one-half of the equation.”

The government can only spend if it borrows or taxes. Neither produces an increase in “aggregate demand,” Mitchell says. “The pie is sliced differently, but it’s not any bigger.”

“If the government finances its spending by raising taxes, it transfers spending power from one group to another,” says Paul Kasriel, director of economic research at the Northern Trust Corp. in Chicago. “If the government finances its spending by selling bonds, it transfers spending power from one entity to another.”

Get ready for the “but.”

“But if the government finances its spending by printing money, then no other group is induced to cut back on its spending, and there is a net increase in nominal spending,” Kasriel says.

Where are the cities for the homeless?  Bread and soup lines?  Where do they fall in the budget?

When will government tell American's to stop spending and start paying down their bills?  When does government start confiscating the wealth of others to pay for all this?  Is there any value in taxing a worthless dollar?

http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_baum&sid=aI5YH5eb289U

When does repayment start?  After Obama leaves office?  Where is every family going to come up with $400,000?  Carry on with the pork fest.  Business as usual.

Change will come after the US is collapses under all this weight.  Then people may wonder why government spent all this money.  And, why like with Fannie/Freddie/Wall Street - the money just seemed to *poof* - nothing behind but a bigger empty bag.
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« Reply #8 on: December 26, 2008, 01:12:48 PM »

Why is China so successful?  There was an interesting article about a 30 year anniversary...

Quote
Xiahai (Jumping into the sea), or going to do business
In the early years, a major aim of economic reform and opening up was to break the socialist command economy. For the first time since 1949, Chinese people were allowed to set up and run their own businesses. Thus the 1980s witnessed the mushrooming of small privately-run businesses, at first started by jobless urban dwellers. But then the zeal to chase after money spread to party and government officials, with employees from state-owned enterprises and institutions rushing to quit their jobs to do commercial businesses. So much so that the 1980s was also known as the age of "all people running businesses".

The commercial market was compared to the vast sea in which one had to swim or sink. As such, the phenomenon of people giving up their "iron rice bowl" jobs to start their own businesses was described as xiahai or "jumping into the [commercial] sea".

Xiahai was also epoch-making in the sense that it was the first time since 1949 that urban people could freely decide on what they would do for a living. Before then, they had to do whatever jobs the government assigned to them.


Quote
Xiagang zaijiuye, or to be laid off and find re-employment
China began to restructure its state-owned enterprises in the 1990s, which inevitably led to the massive layoff of workers, as the restructuring was aimed at improving the efficiency and profitability of the state sector through mergers, bankruptcy and the layoff of redundant employees.


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In any case, xiagang seemed to become a part of daily urban Chinese life during that period. This was evident by the fact that urban people would often greet each other by saying, "Have you been laid off?" instead of the traditional "Have you eaten?"

Quote
To avoid social unrest caused by the massive layoffs, the Chinese government launched a zaijiuye, or re-employment project, across the country to help laid-off workers find new jobs by giving them occupational training, or become self-employed by granting them small loans and preferential tax policies. The massive layoffs also prompted the Chinese government to start building a nationwide social security network.


Where are the training/retraining efforts of the new Obama administration?   Small business enterprise loans? 

Quote
"A cat that catches mice is a good one, be it black or white."
This famous motto of Deng Xiaoping represents the pragmatism the late paramount leader adopted in advancing reform and opening up. On different occasions, Deng used it to stop debates over whether the economic reform was capitalist or socialist.


http://www.atimes.com/atimes/China/JL18Ad01.html

An interesting read...fostering business, giving the people opportunity...

jmho
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All my posts are just my humble opinions.  Please take with a grain of salt.  Smile

It doesn't do any good to hate anyone,
they'll end up in your family anyway...
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