....We're reaping the fruits of deregulation...!
And it's effecting much of America.
Quentin
Samantha wrote: I did not intend my comments regarding the underlying cause of the credit crunch to turn into a political commentary. It is an economic issue. Since they have produced a flurry of political commentary, I changed the posting to remove any reference to politics.
I did not intend my comments regarding the underlying cause of the credit crunch to turn into a political commentary. It is an economic issue. Since they have produced a flurry of political commentary, I changed the posting to remove any reference to politics.
This is a topic rife with politics and emotions...and a pinch of reality(?)!
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The accounting for derivatives is regulated by the SEC and the American Institute of Certified Public Accountants. The regulations are difficult to understand. Whether they are appropriate is beyond the reach of this forum.
Most railroads in the United States use derivatives to hedge their fuel costs. They buy diesel fuel with commodity forwards or futures contracts, which are relatively simple derivatives.
Let's keep this nonpolitical but examine the source of the problem. This passage is from Walter Williams an economist at George Mason University:
"The Community Reinvestment Act of 1977 is a federal law that intimidated lenders into offering credit throughout their entire market and discouraged them from restricting their credit services to low-risk markets, a practice sometimes called redlining. The Federal Reserve Bank, keeping interest rates artificially low, gave buyers and builders incentive to buy and build, thereby producing the housing bubble. Lenders were willing to make creative interest-only loans, often high-risk "no doc" and "liar loans," in order to allow people to buy more housing than they could afford. Of course, with the expectation that housing prices will continue to rise, it was no problem for lenders and borrowers but housing prices began to fall, leaving some people with negative home equity and banks in trouble.
The credit crunch and foreclosure problems are failures of government policy. In fact, what we see now is a market correction to foolhardy government policy. Congress' move to bailout lenders and borrowers who made poor decisions will simply create incentives for people to make unwise decisions in the future. English philosopher Herbert Spencer said, "The ultimate result of shielding men from the effects of folly is to fill the world with fools."
Franklin Raines at Fannie Mae and a political appointee is the one who snowballed this into a disaster. As usual our government (insert party of choice here) has created the problem and will now investigate the very people they forced to do their bidding claiming outrage and blame capitalism for the problem. Every decade congress has picked off an industry that they decided needed their special attention. Every one of them has basically gone out of business starting with textiles. The rediculous and unachievable mileage demands on the auto industry (in my opinion) will drive that one over the brink. It looks like the one they are working on currently is the taxpayer.
ndbprr wrote:And You and I will bear the costs. By the way, the Clinton administration started this by appointing Franklin Raines as head of Fannie Mae. He personally gave himself $100,000,000 before being canned. In addition he forced banks to approve the subprime loans or face stiff penalties for not giving people who can not pay their mortgages the money. He also set up Countrywide as the lender of choice. Once the risk was removed the speculators jumped in and the housing bubble started. The rest is history.
There are those who will say that Ronald Ragen started this with his self indulgent ecnomic policies often referred to as Ragenomics, Trickle Down Theory, or VooDoo! Everytime we have had a free swinging, unregulated economic system the robber barons have lead us into depression and economic havoc while walking away with billions stuffed in their shirts. I am all for capitalism and enterprise, but it has to be tendered with responsibilty. Responsibility not for the common of society, but for the economic integrety and strength of the Country.
After that, yes, the rail industry will be affected by this collapse. There will be fewer people buying less or at least less high ticket items that would move by rail. There will be industrial closings with support and ancilliary business closing in thier wakes. So there eventually will be some kind of slow down in the shipment of natural rescources, just-in-time-assembly line traffic, and finished product. How much depends on how deep and how long the effects of this Wall Street Collapse.
One old timer stockbroker once told me that the up and down number of any given day was not as important as the percentage of the change. And that the market can usually survive or rebound on less than 6% change. Even with the loss of the banking and brokerage houses and near collapse of others, we are still hovering around teh 6% mark which, under his thinking, is recoverable and repairable with little long term affects. I hope.
Samantha wrote: The problems on Wall Street are driven in large part by a systemic issue in the American economy. Too many people have been living beyond their means for too long, i.e. over using credit to fund their lifestyles while saving little or nothing. And too many lenders gave them the money without determining how they would pay it back. To be sure there is plenty of blame to go around. Most people want to place the blame on everyone but themselves. But in a sense we are all party to the problem.
The problems on Wall Street are driven in large part by a systemic issue in the American economy. Too many people have been living beyond their means for too long, i.e. over using credit to fund their lifestyles while saving little or nothing. And too many lenders gave them the money without determining how they would pay it back. To be sure there is plenty of blame to go around. Most people want to place the blame on everyone but themselves. But in a sense we are all party to the problem.
People may be using credit, but normally, using credit does not mean that one is living beyond his or her means. Credit and the ability to service the loan is part of one's means. In any case, I see no connection with people spending their own money and the current housing crisis. When lenders gave them money without knowing how they would pay it back, it was because the lenders did not care if they paid it back. There was a government agenda to loan money to people who would otherwise be denied loans by prudent lenders because those people were unlikely to be able to pay the loans back.
Ultimately, the government guaranteed those loans with our (the taxpayers') money. The government made us taxpayers co-sign those bad loans without our knowledge. This did indeed create a credit bubble, and there were other players such as loan originators and appraisers who added to the problem. But government policy set this into motion with what amounted to socialized housing through the back door by their control of Freddie and Fannie. Naturally they are not pointing fingers at everyone but themselves, and it might be confusing with so many entities being blamed. But despite the fact that so many are being blamed, it is an error to believe that many are to blame for this, or worse yet, that we are all to blame for this. Those at fault would love us to believe that.
I agree with you. There was a lot of agitation in the minority and poor peoples' lobbies for relaxed credit for minority and low income people.
I wonder if a certain former "community organizer" wasn't involved with this?
Samantha wrote:Like every business railroads depend on credit to help finance their operations. It may be for working capital or bridge loans or long term debt to construct facilities or lease equipment. Leasing is a form of credit. As the availability of credit (short and long term) tightens, which is one of the fallouts of the housing problems, the railroads will have to pay higher interest rates to obtain financing. This will result in lower profits, unless they can increase their margins to offset the increased cost of the financing. The inability to obtain money at favorable rates can put a lot of capital projects on hold.The problems on Wall Street are driven in large part by a systemic issue in the American economy. Too many people have been living beyond their means for too long, i.e. over using credit to fund their lifestyles while saving little or nothing. And too many lenders gave them the money without determining how they would pay it back. To be sure there is plenty of blame to go around. Most people want to place the blame on everyone but themselves. But in a sense we are all party to the problem. Now that the chickens have come home to roost, or are coming home to roost, people are running out of credit to funding living beyond their means. They are being forced to pull in their horns as indicated by the weakest housing market in 17 years and slumping consumer sales. The decline in the housing market and the auto markets, as two examples, will have a direct impact on the railroad industry. There will be fewer home building items to ship and fewer vehicles to transport. The effect is already being felt. I talked to a UP conductor in Alpine, TX two weeks ago. He told me that the UP has laid off more than 60 conductors and engineers in El Paso. Alpine is a crew change point on the UP and a great train watching spot.Derivatives (futures contracts, fuel hedges, foreign exchange hedges, etc.) can be an prudent risk management tools if they are structured and managed properly. A key is whether the issuer and counterparty understand them. And whether the counterparty has the wherewithal to honor the contract! If the derivative is written as a risk management tool, the risks are manageable. My company used derivatives to hedge the volatility in the electric futures market. But if it is purely speculative, the risks can spiral out of control quickly. A key concept in risk management is an in-depth understanding of the nature of the risks and the mitigation strategies. It appears that the Wall Street folks who helped engineer the current mess did not understand what they were buying, packaging, and selling. And neither did the regulators.
Like every business railroads depend on credit to help finance their operations. It may be for working capital or bridge loans or long term debt to construct facilities or lease equipment. Leasing is a form of credit. As the availability of credit (short and long term) tightens, which is one of the fallouts of the housing problems, the railroads will have to pay higher interest rates to obtain financing. This will result in lower profits, unless they can increase their margins to offset the increased cost of the financing. The inability to obtain money at favorable rates can put a lot of capital projects on hold.
Now that the chickens have come home to roost, or are coming home to roost, people are running out of credit to funding living beyond their means. They are being forced to pull in their horns as indicated by the weakest housing market in 17 years and slumping consumer sales.
The decline in the housing market and the auto markets, as two examples, will have a direct impact on the railroad industry. There will be fewer home building items to ship and fewer vehicles to transport. The effect is already being felt. I talked to a UP conductor in Alpine, TX two weeks ago. He told me that the UP has laid off more than 60 conductors and engineers in El Paso. Alpine is a crew change point on the UP and a great train watching spot.
Derivatives (futures contracts, fuel hedges, foreign exchange hedges, etc.) can be an prudent risk management tools if they are structured and managed properly. A key is whether the issuer and counterparty understand them. And whether the counterparty has the wherewithal to honor the contract! If the derivative is written as a risk management tool, the risks are manageable. My company used derivatives to hedge the volatility in the electric futures market. But if it is purely speculative, the risks can spiral out of control quickly.
A key concept in risk management is an in-depth understanding of the nature of the risks and the mitigation strategies. It appears that the Wall Street folks who helped engineer the current mess did not understand what they were buying, packaging, and selling. And neither did the regulators.
Beautifully worded, accurate and discouraging.
Nothing is more fairly distributed than common sense: no one thinks he needs more of it than he already has.
The credit crunch is driven by numerous economic variables that have, amongst other things, manifested themselves on Wall Street. As a result people are finding it more difficult to get credit, which in turn is forcing them to reduce their spends, as indicated by the weakest housing market in 17 years and slumping consumer (auto) sales.
The slowing economy is having an impact on the railroad industry. Fewer home building items and vehicles are being shipped by rail or trucks for that matter. The effect is already being felt. I talked to a UP conductor in Alpine, TX two weeks ago. He told me that the UP has laid off more than 60 conductors and engineers in El Paso. Alpine is a crew change point on the UP and a great train watching spot.
....Ndbprr....I would think we would {and should}, be keeping raw politics out of this discussion.
I agree and that is not a political statement one way or the other. It is a fact and it is what lead to the housing bubble and market collapse. The man was incompetent and saw Fannie Mae as his personal piggy bank. Risk is a very important element in controlling greedy people. With no risk, events like the runaway infllation on housing costs can only end in disaster. In this case it is close to destroying the economy as we know it for the rest of our lifetimes. That is not a political statement. It is a fact. A political statement can be had if one wants a political statement but if we can not discuss the root causes then we may as well be ostrichs in my opinion.
As far as answering the question of this thread title, I would say absolutely it will affect the RR industry. It will affect all of us. Individually, these bailouts each are presented as being the proper solution to a problem.
If we individuals overextend our borrowing, we go broke. The government, however, can spend money as though the supply is incapable of running out. They never reach a point where it does run out. Instead, they just reach a tipping point where large financial institutions begin to fall like dominos.
nanaimo73 wrote: Los Angeles Rams Guy wrote:Have been reading in the papers about the mess on Wall Street and the precarious position of some of the largest financial institutions. While the industry as a whole seems on very solid footing, could there be some effects that trickle down and slow the seeming prosperity that the industry is enjoying now?With Canadian Pacific being the smallest of the big 6, especially in revenues, it will be the CP that will be the most effected in trying to borrow for future projects. CP also has the most expensive project on the horizon, expanding DME into the coal fields. I'd say the troubles in Wall Street would increase the chances of CP buying the ICE and DME, and not moving into the PRB.CN still has that 60% operating ratio, so they don't have to look for financing.
Los Angeles Rams Guy wrote:Have been reading in the papers about the mess on Wall Street and the precarious position of some of the largest financial institutions. While the industry as a whole seems on very solid footing, could there be some effects that trickle down and slow the seeming prosperity that the industry is enjoying now?
With Canadian Pacific being the smallest of the big 6, especially in revenues, it will be the CP that will be the most effected in trying to borrow for future projects. CP also has the most expensive project on the horizon, expanding DME into the coal fields. I'd say the troubles in Wall Street would increase the chances of CP buying the ICE and DME, and not moving into the PRB.
CN still has that 60% operating ratio, so they don't have to look for financing.
I think you've got a good point there, Dale, although I'd like to think that the PRB thing will get done anyway even if not right away. I think the potential is too good to turn down.
What I would be more concerned with would be issues such as capacity expansion. Certainly the railroads can't do the work entirely by themselves but I'm wondering if there might be smaller projects that get put on the back burner because of all this stuff.
....Ndbprr....I would think we would {and should}, be keeping raw politics out of this discussion. As I'm sure you know, the amunition can come from both sides regarding the subject of the free falling of our "markets", and how we got into this, etc.....
It's a sure way to get it "locked" and bad feelings between members.
As for Wall Street Woes effecting the RR industry....My opinion, no one will be exempt. If we can get it stopped and steadied soon, perhaps not too bad...{bad enough for much of the economy}, but if not....how would the RR industry escape going into the tank as much of the business activity will be doing.
Ulrich:Conventional wisdom is to have no more than 4% of your assets tied up in a single company's stock. As a CN shareholder, I have been happy with performance over the years, but still the risk is greater to have a large portion in a couple of stocks.
ed
Ulrich wrote:The Wall Street Woes will affect the industry albeit indirectly. I have my retirement savings tied up in CP and CN stock and I'm not worried. Both companies are strong performers. As the stocks go down I'm going to use this as a buying opportunity.
Yes, and a big part of the politcal motivation came from pressure from the affordable housing (socialized housing) lobby. Through the Community Reinvestment Act, they pressured lenders to make loans to underqualified borrowers or else stand accused of discrimation. Then, because lenders could not affort to take the risk, they structured Freddie and Fannie to absorb the risk from the lenders. Now the chickens have all come home to roost, and the ones responsible are blaming the lenders for causing the whole problem by predatory lending.
Government sowed the seeds of this housing crisis. It is a red herring to blame it on Wall Street. This has all started to come into focus only during the last couple weeks. What is needed is a criminal investigation into the dealings of Freddie and Fannie.
It's already happened again this time putting dear old Uncle sam into the business.
What happens when Uncle Sam fails. Who is going to bail HIM out?
Paul:Have you read Roger Lowenstine's When Genius Failed? It is a very interesting look at the failure of Long Term Capital in 1998. I read it just after the collapse of Bear Stearns earlier this year and interestingly many of the same charactors and methods were in use 10 years later.
Wall Street has an ability to develop products (financial engineering) which are very difficult to understand, unless you are within their fraternity. I am not and while finding their profession interesting, it is a bit scary also.
Credit default swaps (CDS) are not that radical, when used to minimize risk. For example you can basically "insure" bonds you have purchased by paying regular CDS premiums which will then reimburse you in case of a "credit event" such as bankruptcy, default, or even restructuring. When you think about it, FDIC insurance is a form of CDS, with the premium being paid by the banks, or actually by us in the form of reduced interest rates.
What appears to have gone wrong is either the use of CDS as speculation on a company's credit worthiness, without any backing security such as a bond or the inability to assign risk premiums to the writing of the CDS. I believe both are occuring. The later is no doubt based on the CDO (collaterialized debt obligations) written in the past few years which were loaded with sub prime and Alt A mortgages. These were bad cases of financial engineering on Wall Street. CDO's obviously (now) couldnt be assigned a proper risk premium nor could they properly be valued, hence the huge writedowns the past 15 months.
So, how does this affect the railroads? One would think the rails, if they can maintain their pricing power and generate sufficient cash flows to invest in future needs will be very attractive customers of credit issuers. The credit market has tightened, almost to the point of it being a major problem. The Fed keeps adding liquidity to the system, but suddenly financial companies are very very cautious about lending money out. Anyone had any success lately borrowing 100% of your house price? Probably not.
I agree with Paul. Rock solid companies will be able to borrow. They always have and will continue to do so. How it could impact the railroads is the inability of consumers to borrow and thus slow down the drunken spending spree of the past decade, which has been financed primarily by the use of our homes as ATM machines. Lumber volumes are down, as are intermodal shipments (somewhat tempered by the shift in mode from trucking to rail). Commodity prices are suddenly dropping quicker than a prom dress, reflecting reduced demand as manufacturing slows. These cycles tend to repeat.
This one has a considerably sharper edge as uncertaintly rears it's head. Where is this going?" I have no idea, it is over my head, but I am trying to keep some powder dry.
tatans wrote:I'm sure the choo-choo industry will survive this latest financial, self-caused fiasco, BUT there will have to be some new changes in the rail industry, new locomotive thinking(totally) along with designing new cars, new ideas and really pour some big bucks into the industry, railroads around the world are finding trains the only way to move stuff, maybe here in North America we had better take notice, why doesn't the rail system receive subsidies like the highways do???
Oh my word. Now you have opened the can of worms...
You could go with 'real cost pricing' and it's political dynamite. You can (pick one, and only one) price all modes of transportation to reflect the real costs (in highways, this would involve a tremendous increase in the fuel taxes to reflect what the government really spends; barges and ships, somewhat less -- possibly a toll system on harbours and locks?); in aviation I'm not sure how you get cost recovery -- charges for the air traffic control system (lots of countries do)? Increased fuel tax? Increased airport landing fees? (I'd go for the fuel tax, but that's just me). The highway trust fund is the elephant in the room, and I can't imagine a politician voting to increase the Fed's bite from $0.49 (as I recall) to $4.90 (which might be more like the real cost).
Or you could go with a Federal subsidy -- but a) the Federal subsidy for the highways is a joke (or the highways wouldn't be falling apart) and b) not sure I really want the Feds building my railroads... effectively...
I'll pick real cost pricing for all modes of transportation -- but then, I'm not a politician!
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