From $2.00 gas to $5.00 gas in 4 years

Pascal, are you heading up to the Chesapeake for a leaf-peeper cruise? Hope you post plenty of pics.

"There is a tiny possibility that the U.S. will experience a nasty little 2008 recession, early '70s vintage.
Europe feels it, too.
China's Shanghai Index, recently on a real tear, takes a deep dive.
Same for India's over-bought Sensex.

Result: sub-$75 USD oil.

Remember the Asian monetary crisis less than ten years ago?

Fearless prediction: gas in the two-buck range in the U.S. as a Christmas present this year, with folks laughing at all the Prius drivers.

Put this in your time capsule. Whoever gets closest (I bet $2.09) wins a prize."

Some wag wrote this nine months ago (post #96) in the precursor ["$2.00 gas" by Codger; now a Closed Thread] to this thread.

Thoughts?

Did you ever think you would say "Not too bad" about $3.24/gal.?

Here is the oil companies version:

Step one - Raise the prices, people get upset and Washington takes notice.
Step two - Lower the prices, people and Washington calm down.
Step three - Raise the prices until people get upset and Washington takes notice.
Step four - Lower the prices but not back to where they where before.
Step five - Go back to step one and repeat the process.

This drop in price is an anomaly because of the financial crisis hitting everyone hard and will keep up for awhile. Then we will be right back to the cycle above.

"Gasoline ranging from CDN$.95 to 1.09/litre so 4.27 to4.93 US$ per USGallon."

I'm not the greatest mathematician but with the Canadian $ at .82 to the US $ and 3.8 liters to the US gallon, I figure gas costs from $2.96 to $3.39 per gallon in US dollars.

I couldn't key in my house door with a cast on!

And I almost didn't post that since I have been bit on the butt so many times before making those calculations ... they almost cry out for trasnposing something or the other.

Hi,
Do you really thing GWB is alone amongst the serious offenders who put the world wide economy this way?

It is a global thing and I am not afraid to be seen as saying that the US has a lot of blame owing to it's loose and often reckless bank operations, I feel that there is now a need to unite and defend the normal (You, Me, Mom and Pop investors) people's stake in the modern economy.

Obama or McCain aint going to be able to fix this no matter who wins next month.

SEC Regulatory Exemptions Helped Lead to Collapse

How SEC Regulatory Exemptions Helped Lead to Collapse

The losses incurred by Bear Stearns and other large broker-dealers were not caused by "rumors" or a "crisis of confidence," but rather by inadequate net capital and the lack of constraints on the incurring of debt.

--Lee Pickard, former director, SEC trading and markets division.
________________________________________________________


Is Financial Innovation just another word for excessive and reckless leverage?


Apparently so.

As we learn this morning via Julie Satow of the NY Sun, special exemptions from the SEC are in large part responsible for the huge build up in financial sector leverage over the past 4 years -- as well as the massive current unwind

Satow interviews the above quoted former SEC director, and he spits out the blunt truth: The current excess leverage now unwinding was the result of a purposeful SEC exemption given to five firms.

You read that right -- the events of the past year are not a mere accident, but are the results of a conscious and willful SEC decision to allow these firms to legally violate existing net capital rules that, in the past 30 years, had limited broker dealers debt-to-net capital ratio to 12-to-1.

Instead, the 2004 exemption ---- given only to 5 firms ---- allowed them to lever up 30 and even 40 to 1.

Who were the five that received this special exemption? You won't be surprised to learn that they were Goldman, Merrill, Lehman, Bear Stearns, and Morgan Stanley.

As Mr. Pickard points out that "The proof is in the pudding — three of the five broker-dealers have blown up."

So while the SEC runs around reinstating short selling rules, and clueless pension fund managers mindlessly point to the wrong issue, we learn that it was the SEC who was in large part responsible for the reckless leverage that led to the current crisis.

You couldn't make this stuff up if you tried.

Here's an excerpt from The Sun:
"The Securities and Exchange Commission can blame itself for the current crisis. That is the allegation being made by a former SEC official, Lee Pickard, who says a rule change in 2004 led to the failure of Lehman Brothers, Bear Stearns, and Merrill Lynch.

The SEC allowed five firms — the three that have collapsed plus Goldman Sachs and Morgan Stanley — to more than double the leverage they were allowed to keep on their balance sheets and remove discounts that had been applied to the assets they had been required to keep to protect them from defaults.

Making matters worse, according to Mr. Pickard, who helped write the original rule in 1975 as director of the SEC's trading and markets division, is a move by the SEC this month to further erode the restraints on surviving broker-dealers by withdrawing requirements that they maintain a certain level of rating from the ratings agencies.

"They constructed a mechanism that simply didn't work," Mr. Pickard said. "The proof is in the pudding — three of the five broker-dealers have blown up."

The so-called net capital rule was created in 1975 to allow the SEC to oversee broker-dealers, or companies that trade securities for customers as well as their own accounts. It requires that firms value all of their tradable assets at market prices, and then it applies a haircut, or a discount, to account for the assets' market risk. So equities, for example, have a haircut of 15%, while a 30-year Treasury bill, because it is less risky, has a 6% haircut.

The net capital rule also requires that broker dealers limit their debt-to-net capital ratio to 12-to-1, although they must issue an early warning if they begin approaching this limit, and are forced to stop trading if they exceed it, so broker dealers often keep their debt-to-net capital ratios much lower.

Chalk up another win for excess deregulation . . .





Source:
SEC's Old Capital Approach Was Tried - and True
Lee A. Pickard
SECTION: VIEWPOINTS; Pg. 10 Vol. 173 No. 153
American Banker, August 8, 2008 Friday
http://www.americanbanker.com/article.html?id=20080807ZAXGNH3Y&queryid=2110207978&

Ex-SEC Official Blames Agency for Blow-Up of Broker-Dealers
They constructed a mechanism that simply didn't work'
JULIE SATOW,
NY Sun, September 18, 2008
http://www.nysun.com/business/ex-sec-official-blames-agency-for-blow-up/86130/

American Banker excerpt after the jump.

Lee A. Pickard, former director, SEC trading and markets division, on Leverage and Net Capital exemptions :

A brutal combination of bad financial decisions and serious misjudgments about the inherent value and liquidity of securitized instruments, coupled with the use of excessive leverage, contributed to the demise of Bear Stearns and seriously weakened the capital structure of other major broker-dealers.

The Securities and Exchange Commission oversees the financial condition of all broker-dealers, and it used from 1975 to 2004 a "net capital rule" as its primary tool to ensure that broker-dealers had adequate capital bases and sufficient liquidity.

The rule, which I participated in formulating, required that every broker-dealer compute its net capital daily by doing two things. First, it had to value all liquid assets at market prices and then subject that value to a "haircut" of a specified percentage, depending on the assets' expected market risk. (A 30-year Treasury bond was carried for net capital purposes at 94% of its market value because changes in interest rates would affect its market value; riskier securities were subject to bigger haircuts.) Second, the broker-dealer was limited in the amount of debt it could incur, to about 12 times its net capital, though for various reasons broker-dealers operated at significantly lower ratios.

The SEC's basic net capital rule, one of the prominent successes in federal financial regulatory oversight, had an excellent track record in preserving the securities markets' financial integrity and protecting customer assets. There have been very few liquidations of broker-dealers and virtually no customer or interdealer losses due to broker-dealer insolvency during the past 33 years.

Under an alternative approach adopted by the SEC in 2004, broker-dealers with, in practice, at least $5 billion of capital (such as Bear Stearns) were permitted to avoid the haircuts on securities positions and the limitations on indebtedness contained in the basic net capital rule. Instead, the alternative net capital program relies heavily on a risk management control system, mathematical models to price positions, value-at-risk models, and close SEC oversight.

As the SEC itself has noted, this alternative program requires significant judgment, as contrasted with the numerical tests and capital charges (the haircuts) imposed on broker-dealers under the basic net capital rule. The alternative approach also requires substantial SEC resources for complex oversight, which apparently are not always available.

The SEC has maintained that the Bear Stearns collapse was precipitated by rumors and an unprecedented crisis of confidence, driven by lack of liquidity for the large securities positions it held. If, however, Bear Stearns and other large broker-dealers had been subject to the typical haircuts on their securities positions, an aggregate indebtedness restriction, and other provisions for determining required net capital under the traditional standards, they would not have been able to incur their high debt leverage without substantially increasing their capital base.

The losses incurred by Bear Stearns and other large broker-dealers were not caused by "rumors" or a "crisis of confidence," but rather by inadequate net capital and the lack of constraints on the incurring of debt.

The SEC should reexamine its net capital rule and consider whether the traditional standards should be reapplied to all broker-dealers. Moreover, broker-dealer losses should give the SEC pause regarding its recent proposal effectively to abandon the objective debt ratings of nationally recognized statistical rating organizations in favor of "subjective" tests of broker-dealers in determining adequate levels of regulatory net capital.

As the Bear Stearns collapse showed, no broker-dealer is "too big to fail" — unless the federal government comes to the rescue.

[Rant ON]
Gosh, this kind of leaves out the non-regulated hedge funds and other private equity companies whose jillions just vaporized due to CDOs & CMOs gone bad.
Add to the mix those who smelled the rot and (correctly) shorted all the securitized mess once they saw that the emperor indeed had no clothes---I'd call that a "crisis of confidence".
If one believes Adam Smith's Wealth of Nations, which has a couple of hundred years for proving the worth of free markets, plus a few other worthy ideas, no one person or one regulatory body mandates a collapse of a market. Stuff happens.
From the Dutch Tulip bubble on out to the end of time--there will be bubbles.

Cuba and Russia will never have bubbles...oh, nor prosperity, for that matter, 'cuz they each got a one-man SEC.

With the world awash in liquidity following the 'Greenspan Put', there was no way for anyone anywhere to make any decent money unless *they*--from Calpine on down to the lowly individual investor--bought into the highly leveraged schemes that might not have crashed so hard without Fannie & Freddie & the Dems pushing Joe Sixpack into places he could ill afford. And, in all fairness, even without F & F and Barney Frank's machinations, the housing bubble would have collapsed anyway.
But, so what. In 6 or 8 or 10 years' time, the Dow will be past 20,000, the boat biz will be booming mightily, and most will have forgotten this ugly patch.
IMHO.
[Rant OFF]

That just goes to show how easily we get used to being screwed. We then get giddy when we get screwed a little less. It's a game the oil companies have been playing successfully for quite a while.

What is diesel now in South Florida? Gas dock vs. truck?