Two excerpts from a NYTimes article on what happened to the troubled mortgage lender:
What this means:
“This institution was a big question mark about the health of the deposit fund,” Sheila C. Bair, the chairwoman of the F.D.I.C., said on a conference call Thursday. “It was unique in its size and exposure to higher risk mortgages and the distressed housing market. This is the big one that everybody was worried about.” She said that the bank’s rapidly deteriorating condition prompted regulators to seize it Thursday, and not on a Friday as is typical for bank closures.
Why it happened:
[Chief Executive Kerry K. Killinger's] goal was to transform what was once a sleepy Seattle thrift into the “Wal-Mart of Banking,” which would cater to lower- and middle-class consumers that other banks deemed too risky. It offered complex mortgages and credit cards whose terms made it easy for the least creditworthy borrowers to get financing, a strategy the bank extended in big cities, including Chicago, New York and Los Angeles. With this grand plan, Mr. Killinger built Washington Mutual into the sixth-largest bank in the United States.
Doug just sent me a fascinating article on online betting on the Presidential Elections and how it looks like Intrade’s numbers are being manipulated. The authors best guess is that this is just some random individual (or group) manipulating the market (and I don’t much believe in conspiracies) but the methology in tracking this down is fascinating.
Right now, Obama is trading at 52.3 points. That is, Intrade implies that he has a 52.3 percent chance to become the next President. [...] Over at BetFair, another large UK-based gambling and futures site, you can also buy an Obama contract. But the price there is 1.62, which implies a 61.7 percent chance that Obama will become the next President.
That is a huge spread, 51.5 points versus 61.7 points. This is the equivalent of the Giants being 3-point favorites at the Bellagio Sportsbook, and 7-point favorites at the Mirage down the block. Those things just don’t happen in efficient, sufficiently liquid markets, because they create arbitrage opportunities [...]
Well worth reading.
I haven’t had any time to post over the last week or two due to way too many things happening it once but I think the following short post is very interesting and timely. There’ll be more regular posting soon.
[The] government should be putting capital into banks and other financial institutions, in exchange for a share of bank equity, rather than using taxpayer dollars to buy bank assets that no one else wants at prices no one else will pay.
Directly from Elmendorf’s article:
A second problem with buying troubled debt is that it provides the most help to the financial institutions that made what are, in retrospect, the worst investment decisions. Banks that stayed clear of this debt or sold such debt at cut-rate prices earlier this year in an effort to move beyond the crisis would receive no direct gain from such a program, while banks that made the biggest commitments to low-quality mortgages and have delayed dealing with their balance-sheet problems would be the biggest beneficiaries.
Third, this approach saddles taxpayers with significant downside risk but limited potential upside gain. One crucial feature of the Treasury and Federal Reserve rescues of Fannie Mae, Freddie Mac, and AIG is that taxpayers received substantial equity shares in these companies and could receive solid returns if financial markets rebound.
And from Krugman:
[T]he financial system needs more capital. And if the government is going to provide capital to financial firms, it should get what people who provide capital are entitled to — a share in ownership, so that all the gains if the rescue plan works don’t go to the people who made the mess in the first place.
That’s what happened in the savings and loan crisis: the feds took over ownership of the bad banks, not just their bad assets. It’s also what happened with Fannie and Freddie. (And by the way, that rescue has done what it was supposed to. Mortgage interest rates have come down sharply since the federal takeover.)
Very worth reading
P.s: My advice when reading short posts like this on any blog is that if you find the post interesting, go and read the source material. This is one of my favorite ways of discovering interesting reading and getting a deeper understanding of world issues.
Sophia forwarded me an email about BarCamp Africa this morning and I have to say that I haven’t been this excited about a conference or event in a long time. For those of you who don’t know about BarCamp it an unconference initially started as a response to O’Reilly’s invite only FooCamp (which Tristan and Beau from Apture attended this July) where people interested in a particular topic (generally related to technology) get together to give talks and host discussions about the format in question. What makes BarCamp Africa so exciting? It is the first local event that I have heard of that brings together people from Silicon Valley with academics, social entrepreneurs, and activists interested in Africa. As someone who is extremely interested in both of these I am very happy that there will be a forum for people from both communities to be able to learn from each other. If you are interested in technology and development you should definitely attend (sign up here).
Saturday, October 11, 2008
Google Campus, Mountain View, CA
8:15 am Sign-in begins
9:00 am BarCamp sessions begin
5:00 pm BarCamp sessions end
While The web isn’t flat anymore is one of the slogans of Apture, the startup I co-founded, this post is actually not about that, but about a comment that David Abernethy made during one of his lectures on India on the Stanford Travel podcast. For those of you who don’t know about it, Stanford has a large number of classes and lectures available for free download on iTunes, and I’ve been making my way through them for the last few weeks. I will write more about these other lectures later.
I have never read Tom Friedman’s The World is Flat because it’s a very long book with a relatively simple point and there are so many other fascinating things to read, but I found this particular comment really interesting. Abernathy thinks that “The World is Flat” is actually a misnomer because what the book is really about is certain points of the world being much closer connected to other points, e.g. Bangalore being linked more closely to Palo Alto.
He then goes on to argue that the world was in fact flat before the industrial revolution when economic production dependent almost entirely on human labor and the economic output of a country was roughly proportional to its population. While there were obviously some inequities due to differences in geography, etc. and some minor technological advances gdp-per-capita was relatively uniform throughout the world – the world was flat. Only with the start of the industrial revolution were some countries/regions able to vastly increase their productivity and thereby race ahead of the others and if you look at charts of per region GDP over the last few centuries you really do see them starting at relatively equal levels and then see a big gap opening up. The world isn’t flat anymore. Not rocket science but an interesting thing to keep in mind. I very much recommend the whole lecture, (European “Envasions:” Competition for Wealth and Power, 1498 -1757).