So the bailout for the US auto industry didn't pass through congress today, falling short of the required 60 votes by a mere 8 votes. No doubt we will see the effects of this on Wall Street as this will signal an almost apocalyptic loss of jobs in the US. In all likelihood, a few revisions will be made and we will see the bill passed in the new year - I can't see how the Govt can bail out the financial sector and then turn a blind eye to a sector which supports millions of jobs.
It has been suggested that the requested 15 billion dollars come from the TARP funds already approved by the Government, however it looks like this isn't an option.
Regarding TARP, complete lack of transparency from the Government to the tax payer and abuse of the funds continues. Bloomberg itself filed a suit under the freedom of information act to ascertain where these funds were going - The information still remains secret.
What a joke that the Government lumps billions of dollars of obligations on future tax payers and then refuses to tell them where the money is going. This program has been used and abused from the very start.
DS
Thursday, December 11, 2008
Friday, November 28, 2008
Peter Schiff predicts the global downturn
Peter Schiff is head of Euro Pacific Capital, and predicted the economic meltdown in many arenas back in 2006/2007. Among his predictions were the collapse of the housing market and the drying up of global credit. Check out the video, its amazing to see so called seasoned financial professionals literally laughing in his face!
Other predictions in the video from so called financial experts were Merryl Lynch being "given away" at 7 times earnings, Goldman Sachs at 175 dollars being equivalent to a sale at Dolce and Gabbana (They're in the 70's now) and probably the most ironic - recommending Bear Stearns for being such a brilliantly run company.
Nobody listened to Peter Schiff. Of course the nature of predictions are that you will get some right and some wrong. But how did the world get this one SO wrong? I know they say hindsight is 20/20, but everything he said made perfect sense - nobody wanted to listen.
So what else has Peter Schiff predicted? His latest prediction is 4 years of hell under Barack Obama and his big Government agenda, and his hopes that we will have a huge ideological shift back to small Government after this first term. Video below -
Other predictions in the video from so called financial experts were Merryl Lynch being "given away" at 7 times earnings, Goldman Sachs at 175 dollars being equivalent to a sale at Dolce and Gabbana (They're in the 70's now) and probably the most ironic - recommending Bear Stearns for being such a brilliantly run company.
Nobody listened to Peter Schiff. Of course the nature of predictions are that you will get some right and some wrong. But how did the world get this one SO wrong? I know they say hindsight is 20/20, but everything he said made perfect sense - nobody wanted to listen.
So what else has Peter Schiff predicted? His latest prediction is 4 years of hell under Barack Obama and his big Government agenda, and his hopes that we will have a huge ideological shift back to small Government after this first term. Video below -
Saturday, November 22, 2008
Abuse of TARP
The Wall Street bailout, also known as TARP (standing for Troubled Assets Relief Program), is turning into a real joke. The purpose of this tax payer funded injection of capital was to free up liquidity in the credit markets. Has it done that? No. All it has effectively done is be abused and presented as a stop gap solution to the tax payers of America. If I were one of them, I would be furious. For all the articles relating to the points made, the highlighted points provide a link directly to them.
First of all, let’s look at the American banks that are suddenly funding large take overs of foreign companies. Bank of America has spared no time in acquiring a larger stake of a Chinese construction bank as they receive federal aid and cut jobs, and JP Morgan is spending millions on a new European HQ in London’s Canary Wharf. Let’s keep on receiving tax payer funds though, because we’re struggling with liquidity!
While we are at it, let’s allow foreign companies to benefit from American tax payer dollars too!
But wait, there’s more! So you need to be a bank to access TARP funds? No problem lets just acquire a cheap bank and exploit it by accessing TARP funds worth billions through it!
All the above points and many more have been made by various financial professionals in many arenas. Why then are people letting tax payer funds be abused like this?
DS
First of all, let’s look at the American banks that are suddenly funding large take overs of foreign companies. Bank of America has spared no time in acquiring a larger stake of a Chinese construction bank as they receive federal aid and cut jobs, and JP Morgan is spending millions on a new European HQ in London’s Canary Wharf. Let’s keep on receiving tax payer funds though, because we’re struggling with liquidity!
While we are at it, let’s allow foreign companies to benefit from American tax payer dollars too!
But wait, there’s more! So you need to be a bank to access TARP funds? No problem lets just acquire a cheap bank and exploit it by accessing TARP funds worth billions through it!
All the above points and many more have been made by various financial professionals in many arenas. Why then are people letting tax payer funds be abused like this?
DS
Monday, November 17, 2008
Psychology behind super wealth
Marty Fridson is a well respected Wall Street Investor, with significant experience specifically in bond markets. An author of many respected books and publications, he is a Harvard Graduate and is the youngest ever inductee into the fixed income analysts hall of fame; basically, he is brilliant and from the brief dialogue between us I can tell that he is a real Gentleman.
One of his books is called “How to be a Billionaire.” This book offers a fantastic look into the psyche of several billionaires, each examined for possessing key traits he felt were key attributes in the accumulation of super wealth. I highly recommend it, even if you’re not interested in becoming a billionaire (ha!) it is still a fascinating read.
For everyone’s benefit I have summarized the key points and principles of Marty’s research. Some of them may seem obvious, but consider how many you apply to your career.
Key Points
● Take monumental risks
● Consolidate an industry
● Do business in a new way
● Dominate your market
● Buy low
● Thrive on deals
● Out manage the competition
● Invest in political influence
● Resist the unions
Key principles
● Pursue the money in ideas
● Rules are breakable
● Copying pays better than innovating
● Maintain Growth
● Hold on to equity
● Hard work is essential
● Use financial leverage
● Keep the back door open
● Make mistakes, then learn from them
● Frugality pays
● Enjoy the pursuit
● Develop a thick skin
And the most important point;
● Make up your mind to be super rich
That may sound totally obvious, but consider it. Everyone wants to be rich; lazy people buy lottery tickets even if they’re not prepared to work for it. But to achieve mega wealth requires a complete devotion to your task.
Genuinely resolving to become a billionaire means committing yourself whole heartedly to the goal.
● Making sacrifices
● Intense focus
● Live every aspect of your life in a totally committed way
Consider that last point - EVERY aspect. You can’t have a half assed life in one area and be totally committed to another, it doesn’t work that way.
● Continuously reinforce motivation
● Work tirelessly
There are millions of people out there working hard, trying to get rich. To be different, you must work harder, be innovative, try new things, and take bigger risks.
You need to begin the journey NOW. The time is today, tomorrow will NOT be more opportune.
Get started!
PS – I got in touch with Marty because I liked his book, and he passed on this key advice from renowned Wall Street strategist Byron Wien –
“Be shameless about walking up to important people in business and introducing yourself. Befriend those people. You don't know how or when, but they will be helpful to you.”
Something to consider!
DS
Thursday, November 13, 2008
Westfield weathers the storm
It seems Sydney based Westfield can do no wrong - in the face of dwindling consumer confidence and slumping retail sales, the company has recorded 5.5% growth this year.
Its interesting to ponder how Westfield manage to weather this storm so well. The company has a highly respectable occupancy rate of 97.3% across its portfolio, with the lowest rate being in the US where the company owns 55 centres, with a respectable occupancy rate considering the circumstances of over 92%. Australian and UK centres both have occupancies of over 99%!
Westfield seems to be defying every trend out there, with its huge cash reserves and continued plans for expansion - its just opening its first centre in London worth almost 4 billion, undertaking a huge revamp of their Century City site in LA and also significant openings and refurbishments in Australia - but is this just pride before the fall?
Refinancing and the aforementioned huge cash reserves should ensure they shouldn't run into too much trouble - but with all this large scale spending occuring in key areas with initial forecasts no doubt in a non-recession climate, you have to wonder how they will handle this. It will be interesting to see how Westfield proceed into the new year.
DS
Its interesting to ponder how Westfield manage to weather this storm so well. The company has a highly respectable occupancy rate of 97.3% across its portfolio, with the lowest rate being in the US where the company owns 55 centres, with a respectable occupancy rate considering the circumstances of over 92%. Australian and UK centres both have occupancies of over 99%!
Westfield seems to be defying every trend out there, with its huge cash reserves and continued plans for expansion - its just opening its first centre in London worth almost 4 billion, undertaking a huge revamp of their Century City site in LA and also significant openings and refurbishments in Australia - but is this just pride before the fall?
Refinancing and the aforementioned huge cash reserves should ensure they shouldn't run into too much trouble - but with all this large scale spending occuring in key areas with initial forecasts no doubt in a non-recession climate, you have to wonder how they will handle this. It will be interesting to see how Westfield proceed into the new year.
DS
Monday, November 10, 2008
GM continues freefall into bankruptcy abyss
As I posted late last week, the outlook for the US automotive industry is definitely poor. Poor sales are even hurting titans such as Toyota, so companies like GM have no hope.
An article posted on Bloomberg today surmised that unless they receive a cash hand out now, they will be forced to declare bankruptcy even before Obama is elected. The article can be viewed here. I predicted this to happen within 6 months, and its happened sooner than anyone could have thought.
On the face of it, GM isn't worth saving. Sub standard products and a company that burns through cash like no other along with plunging sales has experienced losses of over 74billion dollars since 2004. A slide in GM's stock price shed 600million dollars of value from the company yesterday, and with a market cap now getting close to 2billion dollars, it is at its lowest eb since the 1940's.
The question is though, will GM be saved? I believe it will, along with the rest of the US auto industry. Even though the companies are terrible and don't deserve to succeed, there would be an estimated 2.4MILLION jobs lost if the company was declared bankrupt in its first year alone. This is an alarming case of a company which is so big, it could directly influence the American economy significantly with its own demise.
The company is basically a welfare organisation, kept alive so its employees don't lose their jobs and pensions. The ramifications of the Govt letting its own auto industry die are too great - loss of jobs and confidence will kill the economy further.
Expect another juicy stop gap solution from Congress, allowing the US auto industry to flounder on burning cash and pumping out sub standard vehicles for another few years. I suspect though that the Govt will attach many conditions, perhaps even forcing the companies to merge and most definitely pushing a green agenda on all future vehicle development.
DS
An article posted on Bloomberg today surmised that unless they receive a cash hand out now, they will be forced to declare bankruptcy even before Obama is elected. The article can be viewed here. I predicted this to happen within 6 months, and its happened sooner than anyone could have thought.
On the face of it, GM isn't worth saving. Sub standard products and a company that burns through cash like no other along with plunging sales has experienced losses of over 74billion dollars since 2004. A slide in GM's stock price shed 600million dollars of value from the company yesterday, and with a market cap now getting close to 2billion dollars, it is at its lowest eb since the 1940's.
The question is though, will GM be saved? I believe it will, along with the rest of the US auto industry. Even though the companies are terrible and don't deserve to succeed, there would be an estimated 2.4MILLION jobs lost if the company was declared bankrupt in its first year alone. This is an alarming case of a company which is so big, it could directly influence the American economy significantly with its own demise.
The company is basically a welfare organisation, kept alive so its employees don't lose their jobs and pensions. The ramifications of the Govt letting its own auto industry die are too great - loss of jobs and confidence will kill the economy further.
Expect another juicy stop gap solution from Congress, allowing the US auto industry to flounder on burning cash and pumping out sub standard vehicles for another few years. I suspect though that the Govt will attach many conditions, perhaps even forcing the companies to merge and most definitely pushing a green agenda on all future vehicle development.
DS
Sunday, November 9, 2008
Australian Real Estate Outlook
Real Estate, more than any other area, has always been the area where everyone is an expert. From your best friend to your gardener, your post man to seasoned Property Developers, everyone has an opinion.
Because of this, its hard to see through all the irrelevant opinions out there and find ones which are actually backed by some form of substantial fact. Even experts are divided over what they think will happen with Property Prices. Saul Eslake, Chief Economist at ANZ Bank, seems to think falls will be marginal. Macquarie Bank Economists have predicted similar falls of 40-50% as we have seen in the United States. Lets take a look at some of the facts.
For one, the general sentiment that we will follow the lead of the US on house prices is because we have thus far followed their lead in other areas. The ASX has tanked along with the Dow and basically every international index, and it is no secret that Australian Banks have followed the lead of international institutions and tightened their lending restrictions.
We do however have some key differences to the US Property Market which a couple of economists have picked up on - that is, our lack of housing supply.
In the US, the backlog of homes for sale is at 12 months and increasing. Rental yields have suffered as large developers in Southern California and Florida flooded the market with higher density condominiums and lifestyle developments. The Federal Reserve kept interest rates too low for too long, and with sub prime mortgages coming off of their honeymoon rates and large scale defaults, the market was flooded with housing.
The Australian Property market suffers from a lack of supply. This has kept rental yields solid and with a solid rental yield, land lords will unlikely be liquidating their properties.
This rental yield also puts a floor on how low prices can go, at least at the cheaper end of the market. With interest rates falling and rent remaining stable, these properties benefit from a stronger yield, and properties can only fall to a certain point before they become positive cashflow properties. This is basically how low the property can go - they can't keep falling deeper into positive cashflow territory, because the bank would lend to almost anyone if they have a positive cashflow property.
Interest rates will continue to fall also. As the RBA considers 5% to be neutral policy, we can expect falls of another 0.75 as they attempt to revive the economy.
Recent Government policy, including increasing the new home owners grant to $14k and the new home owners grant to $21k, will also have a positive effect on housing.
So what are the negative issues here? Of course its very hard in any analysis to take into account the human variable of confidence, and one thing is for sure - confidence is low right now. Government initiatives with their grants and the RBA lowering interest rates to stimulate the economy are positive, but the effects of this will take a while to flow on, ditto the earlier efforts to slow the economy earlier in the year.
We have already seen falls in property prices across the board in Australia, and no doubt we will see definite contractions in the market. My view is, the premium market will suffer significantly Australia wide and could quite possibly see falls in excess of 30%, but I still believe the bottom end of the market with their solid rental yields and the stimulus provided by Govt policy will ensure the falls at the lower end are minimal.
Stay away from premium stuff, and take advantage of the market only when you see good prices in the cheaper areas because falls across the board are to be expected - just not as bad as international markets.
DS
Because of this, its hard to see through all the irrelevant opinions out there and find ones which are actually backed by some form of substantial fact. Even experts are divided over what they think will happen with Property Prices. Saul Eslake, Chief Economist at ANZ Bank, seems to think falls will be marginal. Macquarie Bank Economists have predicted similar falls of 40-50% as we have seen in the United States. Lets take a look at some of the facts.
For one, the general sentiment that we will follow the lead of the US on house prices is because we have thus far followed their lead in other areas. The ASX has tanked along with the Dow and basically every international index, and it is no secret that Australian Banks have followed the lead of international institutions and tightened their lending restrictions.
We do however have some key differences to the US Property Market which a couple of economists have picked up on - that is, our lack of housing supply.
In the US, the backlog of homes for sale is at 12 months and increasing. Rental yields have suffered as large developers in Southern California and Florida flooded the market with higher density condominiums and lifestyle developments. The Federal Reserve kept interest rates too low for too long, and with sub prime mortgages coming off of their honeymoon rates and large scale defaults, the market was flooded with housing.
The Australian Property market suffers from a lack of supply. This has kept rental yields solid and with a solid rental yield, land lords will unlikely be liquidating their properties.
This rental yield also puts a floor on how low prices can go, at least at the cheaper end of the market. With interest rates falling and rent remaining stable, these properties benefit from a stronger yield, and properties can only fall to a certain point before they become positive cashflow properties. This is basically how low the property can go - they can't keep falling deeper into positive cashflow territory, because the bank would lend to almost anyone if they have a positive cashflow property.
Interest rates will continue to fall also. As the RBA considers 5% to be neutral policy, we can expect falls of another 0.75 as they attempt to revive the economy.
Recent Government policy, including increasing the new home owners grant to $14k and the new home owners grant to $21k, will also have a positive effect on housing.
So what are the negative issues here? Of course its very hard in any analysis to take into account the human variable of confidence, and one thing is for sure - confidence is low right now. Government initiatives with their grants and the RBA lowering interest rates to stimulate the economy are positive, but the effects of this will take a while to flow on, ditto the earlier efforts to slow the economy earlier in the year.
We have already seen falls in property prices across the board in Australia, and no doubt we will see definite contractions in the market. My view is, the premium market will suffer significantly Australia wide and could quite possibly see falls in excess of 30%, but I still believe the bottom end of the market with their solid rental yields and the stimulus provided by Govt policy will ensure the falls at the lower end are minimal.
Stay away from premium stuff, and take advantage of the market only when you see good prices in the cheaper areas because falls across the board are to be expected - just not as bad as international markets.
DS
Friday, November 7, 2008
Reading Recommendations
Here are some books I recommend for the field of business...I will review them at a later time, but at this point I will just put the titles. I have found all of the following books useful in some way or another.
For Wealth Mindset -
Think and Grow Rich - Napoleon Hill: This is the bible of business books. Nobody should tackle business without reading this book. I was put on to this book by my friend John Ngatia who recommended it be read upwards of 4 or 5 times...and I completely agree with him. It will help you develop the mindset to become super rich and take advantage of all opportunities around you.
How to be a billionaire - Martin Fridson: Marty Fridson is renowned as a titan of Wall Street, and is the youngest ever inductee into the fixed analysts hall of fame. A Harvard graduate who explores the mindset of several billionaires and their methods of success. Another must read.
Millionaire Upgrade - Richard Parkes Cordock: Written in a very interesting style, helps develop the wealth building mindset so you travel at the pointy end of the plane, rather than out the back.
Other general mindset -
I am a big believer in reading about the success of others and how you can adapt their positive attributes for your everyday life. One of my favourites is Lance Armstrong. A couple of books about him I have read and found useful are;
How Lance Does it - Brad Kearns
Every Second Counts - Lance Armstrong with Sally Jenkins
I think Donald Trump books are also useful and have a lot to offer if you read the correct ones and have an interest in Real Estate and brand building. The ones I recommend are;
How to get rich - Donald Trump
No such thing as over exposure - Robert Slater
The Art of the Deal, his first book is also excellent. It discusses in depth his ascent to the top of NYC Real Estate and in detail about how he constructed his deals and his ways of thinking. Truly worth a look.
Also, Trump Strategies for Real Estate; Billionaire lessons for the small investor by George H Ross, the old guy on the apprentice who is basically the engine room of the organisation and the greatest property law mind around. His methods of negotiation and putting deals together are brilliant and worth reading.
Getting to Yes - Fisher, Uly and Patton - This book was recommended to me by a Wall St tycoon and is great for developing problem solving and negotiation attributes in all aspects of life.
There are several others but I think those form the core of my favourites and essentials. Happy reading.
For Wealth Mindset -
Think and Grow Rich - Napoleon Hill: This is the bible of business books. Nobody should tackle business without reading this book. I was put on to this book by my friend John Ngatia who recommended it be read upwards of 4 or 5 times...and I completely agree with him. It will help you develop the mindset to become super rich and take advantage of all opportunities around you.
How to be a billionaire - Martin Fridson: Marty Fridson is renowned as a titan of Wall Street, and is the youngest ever inductee into the fixed analysts hall of fame. A Harvard graduate who explores the mindset of several billionaires and their methods of success. Another must read.
Millionaire Upgrade - Richard Parkes Cordock: Written in a very interesting style, helps develop the wealth building mindset so you travel at the pointy end of the plane, rather than out the back.
Other general mindset -
I am a big believer in reading about the success of others and how you can adapt their positive attributes for your everyday life. One of my favourites is Lance Armstrong. A couple of books about him I have read and found useful are;
How Lance Does it - Brad Kearns
Every Second Counts - Lance Armstrong with Sally Jenkins
I think Donald Trump books are also useful and have a lot to offer if you read the correct ones and have an interest in Real Estate and brand building. The ones I recommend are;
How to get rich - Donald Trump
No such thing as over exposure - Robert Slater
The Art of the Deal, his first book is also excellent. It discusses in depth his ascent to the top of NYC Real Estate and in detail about how he constructed his deals and his ways of thinking. Truly worth a look.
Also, Trump Strategies for Real Estate; Billionaire lessons for the small investor by George H Ross, the old guy on the apprentice who is basically the engine room of the organisation and the greatest property law mind around. His methods of negotiation and putting deals together are brilliant and worth reading.
Getting to Yes - Fisher, Uly and Patton - This book was recommended to me by a Wall St tycoon and is great for developing problem solving and negotiation attributes in all aspects of life.
There are several others but I think those form the core of my favourites and essentials. Happy reading.
The end of the American Auto Industry
Let's face it - American cars are terrible. They are poorly built, poorly designed, and don't cater to consumer wants at all. The American auto industry has been on its death bed for years, relying on hand outs from Congress to keep producing their sub standard cars. If they weren't going to fail before, they certainly are now.
Latest sales figures in the US show GM sales down 45% in October. Worsening consumer confidence and the credit crunch is keeping buyers away from the showroom. Ford and Chrysler are no better.
So, what does this mean for the future of the US auto industry? I think it means death. You see, GM and the other members of the big 3 have for years enticed people to buy their cars with sub prime auto loans. Chrysler offered 2 years 0% interest loans on certain models, and they have sucked people in for years with similar initiatives. Its the only way someone would buy their crappy cars, and with global illiquidity and a recession, nobody will be buying them.
My prediction is we will see the usual appeals to Congress by the CEO's of these companies saying how they are "too big to fail" and need cash to keep producing their sub standard cars. With over 2.2million direct and indirect American jobs attached to their auto industry, they may be right - but where will the money come from? I also think we will see possible mergers between any of these companies, and expect to see companies like Ford offloading assets such as Volvo as they go further into the red. The market capitalization of these companies is also now so low we could also see VC companies swooping in - but I don't think they are that stupid. (Besides Cerebrus who bought Chrysler, I bet they regret THAT!)
The US Government needs to stop this false Capitalist attitude they have going on. Big corps are seeking deregulation then screaming at Congress hat in hand when something goes wrong. The result are relic companies like the entire US auto industry and their airline industry, weighed down by ridiculous employee regulations and sub standard management practices.
DS
Latest sales figures in the US show GM sales down 45% in October. Worsening consumer confidence and the credit crunch is keeping buyers away from the showroom. Ford and Chrysler are no better.
So, what does this mean for the future of the US auto industry? I think it means death. You see, GM and the other members of the big 3 have for years enticed people to buy their cars with sub prime auto loans. Chrysler offered 2 years 0% interest loans on certain models, and they have sucked people in for years with similar initiatives. Its the only way someone would buy their crappy cars, and with global illiquidity and a recession, nobody will be buying them.
My prediction is we will see the usual appeals to Congress by the CEO's of these companies saying how they are "too big to fail" and need cash to keep producing their sub standard cars. With over 2.2million direct and indirect American jobs attached to their auto industry, they may be right - but where will the money come from? I also think we will see possible mergers between any of these companies, and expect to see companies like Ford offloading assets such as Volvo as they go further into the red. The market capitalization of these companies is also now so low we could also see VC companies swooping in - but I don't think they are that stupid. (Besides Cerebrus who bought Chrysler, I bet they regret THAT!)
The US Government needs to stop this false Capitalist attitude they have going on. Big corps are seeking deregulation then screaming at Congress hat in hand when something goes wrong. The result are relic companies like the entire US auto industry and their airline industry, weighed down by ridiculous employee regulations and sub standard management practices.
DS
Thursday, November 6, 2008
The role of Government in the Sub-prime Crisis
I have read with great interest the whole media campaign against the "greedy" Investors of Wall Street, and our very own PM's attack on "Gordon Gekko Wannabes." But is all this warranted?
Although Brokers had a role to play in the crisis, Greed cannot be blamed for this shambles - their role in this crisis has been grossly overstated.
Brokers and Wall street executives alike have all been targeted by media outlets eager to place the blame of these events on a group of people. Wall Street executives didn't suddenly get greedier overnight, and neither did brokers. The occupation of a mortgage broker, being largely commission based, means they will do all they can do earn a good income. Holding them accountable for selling the product is ridiculous. Do we blame shop assistants for causing cancer when they sell cigarettes? No! Its their job!
Brokers promoting a product they have an external benefit in isn't anything new, and they are not the first or the last people to promote a product they have an external benefit in. The entire brokerage business is built on this concept, in Australian finance brokerage where a broker pushes you to go with a different bank because Westpac no longer pay them commission; or in Pharmaceuticals where drug reps entice proprietors with commissions and benefits for meeting certain sales targets. Stock brokers for years have been paid nice little fees by managed funds to get clients to invest in them. No, this problem is deeper, and started with the US Government.
The "Great American Dream" has always been to own a home. Many acts lead to this snowball effect, with an act passed in 1992 getting the ball rolling. The Federal Housing Enterprises Financial Safety and Soundness Act (1992) required Fannie Mae and Freddie Mac to devote a percentage of their loan books to support affordable housing. In October 2000, the Department of Housing and Urban Development required that Fannie and Freddie were to dedicate 50% of their loan books to low income housing. This was increased to 56% by 2004.
The result of this political populism was a soaring home ownership rate, where standard lending criteria were abandoned as regulatory bodies sat idly by and didn't regulate the use of Collateralized Debt Obligations (CDO)'s to raise money for these mortgages. Standard regulatory procedures no longer applied - after all, they were secured against Real Estate, how could you POSSIBLY lose?
The problem was further compounded by the Commodity Futures Modernization Act (2000) which BANNED the regulation of Credit Default Swaps (CDS). A CDS acts as an insurance policy on risky investments, such as mortgage backed securities, where a buyer makes a series of payments to the seller and is entitled to compensation in the event of default. The downfall of giants such as AIG, Bear Stearns and Lehman Brothers was brought on by the fact that they didn't have the equity to cover their CDS obligations. In this ridiculous situation, an insurance market was left unregulated - this was always going to lead to failure.
This all fell on its face when the record capital gains experienced in the American Real Estate market ground to a halt. Suddenly, an oversupply of houses hit the market as sub prime mortgage holders, tempted into the loans by Honeymoon rates, suddenly felt the pinch and defaulted on their loans. House prices fell, and the securities became worthless. Holders of these CDS's were left with nothing and credit dried up from many sources.
Is Australia at risk of a similar scenario? No. The RBA effectively regulates financial markets and the foundations of lending are upheld and not sacrificed for political populism. Blaming the crisis on brokers who played within the legal framework around them is uncalled for, as the Government shifts the blame away from itself after failing to regulate areas of the market which required their attention.
DS
Although Brokers had a role to play in the crisis, Greed cannot be blamed for this shambles - their role in this crisis has been grossly overstated.
Brokers and Wall street executives alike have all been targeted by media outlets eager to place the blame of these events on a group of people. Wall Street executives didn't suddenly get greedier overnight, and neither did brokers. The occupation of a mortgage broker, being largely commission based, means they will do all they can do earn a good income. Holding them accountable for selling the product is ridiculous. Do we blame shop assistants for causing cancer when they sell cigarettes? No! Its their job!
Brokers promoting a product they have an external benefit in isn't anything new, and they are not the first or the last people to promote a product they have an external benefit in. The entire brokerage business is built on this concept, in Australian finance brokerage where a broker pushes you to go with a different bank because Westpac no longer pay them commission; or in Pharmaceuticals where drug reps entice proprietors with commissions and benefits for meeting certain sales targets. Stock brokers for years have been paid nice little fees by managed funds to get clients to invest in them. No, this problem is deeper, and started with the US Government.
The "Great American Dream" has always been to own a home. Many acts lead to this snowball effect, with an act passed in 1992 getting the ball rolling. The Federal Housing Enterprises Financial Safety and Soundness Act (1992) required Fannie Mae and Freddie Mac to devote a percentage of their loan books to support affordable housing. In October 2000, the Department of Housing and Urban Development required that Fannie and Freddie were to dedicate 50% of their loan books to low income housing. This was increased to 56% by 2004.
The result of this political populism was a soaring home ownership rate, where standard lending criteria were abandoned as regulatory bodies sat idly by and didn't regulate the use of Collateralized Debt Obligations (CDO)'s to raise money for these mortgages. Standard regulatory procedures no longer applied - after all, they were secured against Real Estate, how could you POSSIBLY lose?
The problem was further compounded by the Commodity Futures Modernization Act (2000) which BANNED the regulation of Credit Default Swaps (CDS). A CDS acts as an insurance policy on risky investments, such as mortgage backed securities, where a buyer makes a series of payments to the seller and is entitled to compensation in the event of default. The downfall of giants such as AIG, Bear Stearns and Lehman Brothers was brought on by the fact that they didn't have the equity to cover their CDS obligations. In this ridiculous situation, an insurance market was left unregulated - this was always going to lead to failure.
This all fell on its face when the record capital gains experienced in the American Real Estate market ground to a halt. Suddenly, an oversupply of houses hit the market as sub prime mortgage holders, tempted into the loans by Honeymoon rates, suddenly felt the pinch and defaulted on their loans. House prices fell, and the securities became worthless. Holders of these CDS's were left with nothing and credit dried up from many sources.
Is Australia at risk of a similar scenario? No. The RBA effectively regulates financial markets and the foundations of lending are upheld and not sacrificed for political populism. Blaming the crisis on brokers who played within the legal framework around them is uncalled for, as the Government shifts the blame away from itself after failing to regulate areas of the market which required their attention.
DS
First Post
Hello,
I created this blog so I have somewhere for my own reference to post my thoughts on business in general. I figured if I have to post my thoughts, they have to be backed by facts otherwise I look stupid!
This is mainly for my own benefit, but also for my friends. Business is a good topic of discussion and I think a forum where I can give my opinion and then discuss with people will be mutually beneficial.
I will be posting my general thoughts on the markets, articles I find interesting, what I think will happen, and also whatever I come across in terms of literature/books which I think my friends would benefit from reading.
Anyway, I am no expert by any stretch of the imagination - So don't take anything as financial advice, because it isn't meant to be and I am not qualified to give it!
Cheers!
DS
I created this blog so I have somewhere for my own reference to post my thoughts on business in general. I figured if I have to post my thoughts, they have to be backed by facts otherwise I look stupid!
This is mainly for my own benefit, but also for my friends. Business is a good topic of discussion and I think a forum where I can give my opinion and then discuss with people will be mutually beneficial.
I will be posting my general thoughts on the markets, articles I find interesting, what I think will happen, and also whatever I come across in terms of literature/books which I think my friends would benefit from reading.
Anyway, I am no expert by any stretch of the imagination - So don't take anything as financial advice, because it isn't meant to be and I am not qualified to give it!
Cheers!
DS
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