Actions have consequences

Thursday, May 19,2010: Highlighting the failures of this administration becomes more and more redundant given the rising tide of better understanding by the American voter for just how dangerous this Presidency and his Democrat Congress really is. Continuing to Point this out may seem like trying to close the barn door after the horse is gone, but I just have to say again how little he, his Chicago buddies and most members of Congress understand about how a capitalistic free market economic system works. This is particularly true with regard to the business of banking, finance and Wall Street. Does that mean that Wall Street is without sin? Of course not, but in a market based economic system, there has to be a mechanism to transfer capital from the saver to the risk taker. In this way the underwriter or investment banker is the intermediary and carries the risk of failing to meet the contracted expectation of savers, investors and the issuer during any public offering. Granted this statement is a pretty simple explanation of how our system works but it is as it is. Because the Government is a guarantor of a certain level of depositor’s account value, the investment bank has less concern that their depositors who qualify for government protection might be concerned with whatever strategy the Bank implements. In other words, there is no reason for the depositor to be concerned about the risks the banker is taking since any loss won’t affect them. This attitude made it easier for big investment banks to assume greater or more unusual risk than they did historically in the management of the commercial bank’s business strategy. This unbridled risk assumption led to the excess leveraging of the bank’s capital base and the erosion of that base through the securitization of unsound mortgages offered to their clients seeking a money market like investment vehicle. This left them with huge amounts of toxic assets on their balance sheet and a limited if any amount of credibility to assure counterparties in ongoing derivative transactions. The large purchasers of mortgage loans, Fannie Mae and Freddie Mac were urged by members of Congress, mostly Democrats but some more liberal thinking Republicans too, to make it easier for lower income family to buy a home. This attitude resulted in the sub prime mortgage bubble built upon questionable credit ratings issued by companies like Moody’s, S& P, etc, finally reach the edge of the cliff and the word “Wall Street Bailout” was born.Now because the financial markets and Wall Street underwriters were saved (“bailed out”) by “hard working American taxpayers”, President Obama and his Democratic majority in Congress have decided to rewrite how free market capitalism will be regulated to assure equity and fairness. Of course the legislation does nothing to solve insolvency ($500 Billion) of the two federally backed mortgage companies FNMA and FREDDY MAC, but it does throw sand into the mechanism by which capital is raised in the market place and distributed to issuing companies of all sizes. The process of administering a public offering is complicated. It requires extensive due diligence by the Underwriter, and considerable risk of capital should an offering fail for any uncontrollable reason. The issuing company receives the negotiated amount and the Underwriter depends on willing buyers to achieve their profit. They also have a legal responsibility to support the security’s price in the after market. To do so they often oversell the issue thereby creating a short position, and purchase or cover these short positions over time from shares that come into the market thus stabilizing the price somewhat close to the initial offering price.It is this process that members of Congress and the Committee chairman opined that the Underwriter was telling their clients to buy when in reality they were selling the very same shares short. So now the new Financial and Consumer Protection Act has been passed and it will make it more difficult for small and large companies to raise capital through the Wall Street underwriting process and in many cases will make it impossible for soliciting companies to obtain initial or secondary financing through present day underwriting system.Thank you members of Congress and Mr. President for poking those guys in the eye. “Take that Wall Street!”. You made a big mistake paying out contracted bonuses prior to the resolution of this problem. We surely will have more jobs and get to a balanced budget sooner with legislation of this type. Wont we? Huh?One Man’s Opinion – Bud Brewer



2 Responses to “Actions have consequences”

1. Thomas Williams says:

   August 29, 2010 at 12:18 pm

   my grandfather is a baby boomer and i am quite proud of his longevity all these years.”;
2. Jessica Bailey says:

   January 23, 2011 at 8:04 pm

   I am very thankful to this topic because it really gives useful information :”