I have to admit it. I really hoped and even thought maybe Obama would and could change things. But the new plan to save the banks that Geithner presented on Tuesday is basically the same thing as Bush/Paulsen's plan. No details. Give the banks money. And one more thing, "Transparency." But it is basically just a government-backstopped credit call option available to private investors, that exposes taxpayers to even further losses presuming asset market prices are artificially high.
Why won't the government just let the market determine a value on its own? Yes we know it will not be pretty, but as long as government tries to claim that all these mortgage backed securities are worth what people paid for them, this sinkhole will just get bigger and bigger. Printing money only leads to inflation. And at the rate Geithner is accelerating matters (this plan will cost $2 Trillion after Paulsen's failed $700 billion plan), we are looking at some serious hyper-inflation.
The problem is nobody is sure who is solvent and who is not. Can GM survve? Starbucks? Citibank? Your neighbor? When the governmentjust props them all up and won't let any of them fail, then nobody is going to loan anybody any money. Which means no new buildings, no new business to pick up where things are falling. No new jobs to help those in need pay for their rent. And eventually no food on the shelves of the local grocery store. And not enough money to buy what is on the shelf.
I know it is hard to believe that is where we are headed. Take a trip to Best Buy and it all looks the same as two years ago. And inflation? I must be crazy. Have you seen the price of a car lately? Or gasoline? I know I know. Prices are going dOWNN. And for now they are. But believe me, our government's policies are taking us down a dangerous road. Much more dangerous than the also painful road of raising taxes, raising interest rates, and letting banks fail or even nationalizing them. No self respecting Republican or Democrat seems to agree with me (except Ron Paul)
Obama says we need bold moves, but is not delivering them.
Here is Goldman Sachs' research department on the "new" Geithner plan:
KEY POINTS:
1. As expected, the Treasury's financial rescue plan will work within the constraints of existing TARP funding (of which about $350bn remains), attempting to catalyze private sector funds to purchase bad assets and restart the securitization process. However, the speech and accompanying fact sheet leave open many questions about the timing of these interventions and the terms of asset purchases and recapitalization. Much of the program clearly remains to be worked out over the coming weeks and months.
2. Bank stress test. A key feature of the program will be a "stress test" for all banks with assets >$100bn. This will be used to determine which banks need to be recapitalized, or shut down. However, details on the exact nature of the stress test are scant. The Treasury will make additional TARP funds available to purchase convertible preferred shares that will be converted to common "if needed to preserve lending in a worse-than-expected economic environment."
3. Public/private bad bank. Rather than a fully government-funded bad bank, the Treasury will attempt to catalyze private sector investment via a "public-private partnership." This will start at “up to” $500 bn in size, and potentially expand to $1 trn. It is clear from Geithner's remarks that this is a concept at this point, rather than a fully designed entity -- Geithner mentioned getting public comment on the potential structure. Supposedly, private sector investors will determine the prices (perhaps with the benefit of cheap financing or partial loss protection from the government).
4. TALF expansion. As leaked repeatedly prior to the speech, the Fed's Term Asset-Backed Securities Lending Facility will be scaled up by a factor of five to $1 trillion and expand to backing CMBS and possibly RMBS. The goal here is to restart securitizations and thereby expand the flow of new lending (this is not an approach to deal with bad assets). While potentially an innovative approach to restarting securitization, it remains to be seen how effective this program will be. The Treasury's commitment to this would be $100bn rather than the $20bn currently earmarked and would be drawn from the $350bn remaining in TARP.
5. Transparency and accountability provisions. Not many surprises here, though it bears emphasis that the provisions apply to new extensions of aid rather than to those already supplied. Institutions that accept new help will be required to pay only $0.01 per quarter in dividends, refrain from purchasing shares and from pursuing new acquisitions. Geithner also outlines a number of additional reporting requirements intended to keep the pressure on institutions to make new loans.
Thursday, February 12, 2009
Monday, February 9, 2009
The Crux of the Matter
Reading about the possible solutions Tim Geithner is going to announce on Tuesday just drives me crazy. Why can't these educated economists see the truth like foolish little me? They are making the exact same choices that our leaders made in 1928-1936 which fueled our last Great Depression for more than twelve years.
Here is the rub. Take for example that 1200 sq ft Miami condo that sold for $1 million in 2005. Its owner could not pay the accelerated monthly payment that his/her ARM charged, and he could not sell it for even $500k. So now he/she has defaulted and walked away, leaving the bank with an "asset" which is worth $1 million on its books, but is really not worth half that. It may not even be worth 1/10th its original price. So if the bank has to write down that asset to 10 cents on the dollar, it would have to take a massive loss for which it doesn't have the equity to cover, thus ending in bankrupcy.
Of course in the case of BofA, Citi, Chase, Wells Fargo and others, we are not talking just $1 million, but hundreds of billions in write downs. Easily more money than they booked in "profits" the past 10 or so years combined! And leverage is the culprit. Not only are our banks leveraged to the abyss but so is our Federal Government.
So Geithner/Obama have been looking at ideas to keep the bad assets off the books of the banks and give them a free ride for taking failed risks. Thinking this will save the economy. We've already tried TARP, which originally was Paulsen's plan to flat out purchase the toxic assets with taxpayers money. Were they going to pay $1 million for that Miami condo? or $800k? or $600k? It doesn't matter because what they did is just hand them some of the money and purchase preferred shares in the banks (overpaying in the process) which did not help the value of those assets go up at all. So TARP 2 doesn't look like it will work to Geithner, so they have floated arount the idea of a bad bank, or using Taxpayer money again to buy up the assets (again at what price?) and put them in a bank created to hold these assets until the value returns. The only fair price for that condo in Miami is $100k, but that would force the banks to book that income at a 90% loss. Something their balance sheet can't handle. That would cause instant bankrupcy.
Then the idea was to "insure" the value of the assets. The banks would pay the government an insurance premium against the value of those assets falling further in value. But that would mean the USA would have to hand over a million dollars for that Miami condo when it finally does sell for $100k.
You see Geithner has to make up something so complicated as to fool the American people and congressmen into believing they are not on the hook for the whole risk taken on the asset to begin with. The crux of the matter is there is only one answer and those in power, weather you argue it is the politicians or Wall Street, are trying everything they can to avoid that answer. What is the answer? Tell the truth! Admit that the Miami condo is worth only $100k. Admit the assets on your balance sheet are worth a fraction of what you say they are worth! Go Bankrupt and wipe out sharehoder value completely and force your creditors to accept the loss of their risk too. Start over from scratch! It is the only answer.
Anything else only makes things much much much much worse.
So the question of the day is what price to pay? Almost any price over 10 cents on the dollar may be too much for that condo in Miami, yet that is what Geithner and Obama are going try to force taxpayers to do. Pay more than they are worth and take the bath for the bankers. Don't they realize that is a recipe for riots?
The numbers I am talking about are real, not because 90% of loans are bad. No it is true that most mortgages and car loans and such out there are pretty good. But when you consider that the most of the big banks' assets are in the form of mortgage backed securities, credit default swaps, and collateralized debt obligations, and that these instruments actually ratchet up the leverage tenfold because they are not regulated, these derivatives will be considered the thing that brought our economy (and way of life it will turn out) to its knees.
Here is the rub. Take for example that 1200 sq ft Miami condo that sold for $1 million in 2005. Its owner could not pay the accelerated monthly payment that his/her ARM charged, and he could not sell it for even $500k. So now he/she has defaulted and walked away, leaving the bank with an "asset" which is worth $1 million on its books, but is really not worth half that. It may not even be worth 1/10th its original price. So if the bank has to write down that asset to 10 cents on the dollar, it would have to take a massive loss for which it doesn't have the equity to cover, thus ending in bankrupcy.
Of course in the case of BofA, Citi, Chase, Wells Fargo and others, we are not talking just $1 million, but hundreds of billions in write downs. Easily more money than they booked in "profits" the past 10 or so years combined! And leverage is the culprit. Not only are our banks leveraged to the abyss but so is our Federal Government.
So Geithner/Obama have been looking at ideas to keep the bad assets off the books of the banks and give them a free ride for taking failed risks. Thinking this will save the economy. We've already tried TARP, which originally was Paulsen's plan to flat out purchase the toxic assets with taxpayers money. Were they going to pay $1 million for that Miami condo? or $800k? or $600k? It doesn't matter because what they did is just hand them some of the money and purchase preferred shares in the banks (overpaying in the process) which did not help the value of those assets go up at all. So TARP 2 doesn't look like it will work to Geithner, so they have floated arount the idea of a bad bank, or using Taxpayer money again to buy up the assets (again at what price?) and put them in a bank created to hold these assets until the value returns. The only fair price for that condo in Miami is $100k, but that would force the banks to book that income at a 90% loss. Something their balance sheet can't handle. That would cause instant bankrupcy.
Then the idea was to "insure" the value of the assets. The banks would pay the government an insurance premium against the value of those assets falling further in value. But that would mean the USA would have to hand over a million dollars for that Miami condo when it finally does sell for $100k.
You see Geithner has to make up something so complicated as to fool the American people and congressmen into believing they are not on the hook for the whole risk taken on the asset to begin with. The crux of the matter is there is only one answer and those in power, weather you argue it is the politicians or Wall Street, are trying everything they can to avoid that answer. What is the answer? Tell the truth! Admit that the Miami condo is worth only $100k. Admit the assets on your balance sheet are worth a fraction of what you say they are worth! Go Bankrupt and wipe out sharehoder value completely and force your creditors to accept the loss of their risk too. Start over from scratch! It is the only answer.
Anything else only makes things much much much much worse.
So the question of the day is what price to pay? Almost any price over 10 cents on the dollar may be too much for that condo in Miami, yet that is what Geithner and Obama are going try to force taxpayers to do. Pay more than they are worth and take the bath for the bankers. Don't they realize that is a recipe for riots?
The numbers I am talking about are real, not because 90% of loans are bad. No it is true that most mortgages and car loans and such out there are pretty good. But when you consider that the most of the big banks' assets are in the form of mortgage backed securities, credit default swaps, and collateralized debt obligations, and that these instruments actually ratchet up the leverage tenfold because they are not regulated, these derivatives will be considered the thing that brought our economy (and way of life it will turn out) to its knees.
Thursday, February 5, 2009
Real Estate Bubble
As I contemplate the economic turmoil we are all only just beginning to experience, I always try to wrap my brain around how it happened. I want to figure it out. How could it get so bad that the pundits now talk about avoiding a depression (which means we are already in one)? I've written some about the mortgage business and about debt and money creation, so now I want to turn to the Real Estate bubble that so many news stories refer to.
I recall , over the years, driving through many towns or cities, including the one I live in, and marveling not just at how many new houses could continually get thrown up (pun intended), but also at how expensive they seemed. On a trip to Washington DC I saw 900 square foot townhomes for $400,000! Even 2500 square foot homes in Dallas asking for the same price seemed steep. I read about $1 million condos (900 sq ft again) in Miami. 40 year old homes in LA that cost $600,000. Of course all they sold. And sold. And sold. How could so may people afford all these expensive homes, I kept asking myself. Then I had to buy my own home and I found out how. I was offered loans that allowed me to pay only $400 per month (with fine print stating that could and would change of course). I opted for a more traditional fixed rate, but at least I knew how all these people could keep buying all these expensive houses. I also figured it wouldn't last forever.
And I also know why there are so many foreclosures today too. Those Option ARMs and alt-A loans are kicking in to higher payments and worse, at a time when many people are losing their jobs. So how did all this happen. Is it just chance you may ask (like I did)?
Here is how it happened.
All the demand for homes (and cars and TV's and stuff too) was created out of thin air by the banks and government who encouraged lending to a larger and larger spectrum of people, using tools like the ARMs and Alt-As and even credit cards to get the demand cranking. With everybody in on the action and buying and flipping homes left and right, demand kept sending prices and values up. And it seemed perpetual. Hairdressers became real estate speculators. Profits were made flipping houses. Additional loans were taken out on the increased equity and spent on other things like cars and TV's and additions to the house. Which paid salaries to people who took out still more loans on homes and it was just a big neverending party!
Of course, every party has to end. And clean up is never fun. But what if every time the party seemed to end we just bought more beer and turned the music up? What if every time we seemed to go into recession, the government just stepped in with more tax breaks and "stimulus" spending and borrowed to do it? Well the party would seem to go on because everybody loves beer and music and free money from the government, don't they? So everyone would continue to hang around and buy more TV's and houses and listen tothe music and drink more beer. Would the party ever end?
Of course it would. You can avoid a hangover can you? And you can't avoid a recession either. Just like a hangover, if you treat it with more beer and loud music it only gets worse and worse and worse. Until CRASH!
I recall , over the years, driving through many towns or cities, including the one I live in, and marveling not just at how many new houses could continually get thrown up (pun intended), but also at how expensive they seemed. On a trip to Washington DC I saw 900 square foot townhomes for $400,000! Even 2500 square foot homes in Dallas asking for the same price seemed steep. I read about $1 million condos (900 sq ft again) in Miami. 40 year old homes in LA that cost $600,000. Of course all they sold. And sold. And sold. How could so may people afford all these expensive homes, I kept asking myself. Then I had to buy my own home and I found out how. I was offered loans that allowed me to pay only $400 per month (with fine print stating that could and would change of course). I opted for a more traditional fixed rate, but at least I knew how all these people could keep buying all these expensive houses. I also figured it wouldn't last forever.
And I also know why there are so many foreclosures today too. Those Option ARMs and alt-A loans are kicking in to higher payments and worse, at a time when many people are losing their jobs. So how did all this happen. Is it just chance you may ask (like I did)?
Here is how it happened.
All the demand for homes (and cars and TV's and stuff too) was created out of thin air by the banks and government who encouraged lending to a larger and larger spectrum of people, using tools like the ARMs and Alt-As and even credit cards to get the demand cranking. With everybody in on the action and buying and flipping homes left and right, demand kept sending prices and values up. And it seemed perpetual. Hairdressers became real estate speculators. Profits were made flipping houses. Additional loans were taken out on the increased equity and spent on other things like cars and TV's and additions to the house. Which paid salaries to people who took out still more loans on homes and it was just a big neverending party!
Of course, every party has to end. And clean up is never fun. But what if every time the party seemed to end we just bought more beer and turned the music up? What if every time we seemed to go into recession, the government just stepped in with more tax breaks and "stimulus" spending and borrowed to do it? Well the party would seem to go on because everybody loves beer and music and free money from the government, don't they? So everyone would continue to hang around and buy more TV's and houses and listen tothe music and drink more beer. Would the party ever end?
Of course it would. You can avoid a hangover can you? And you can't avoid a recession either. Just like a hangover, if you treat it with more beer and loud music it only gets worse and worse and worse. Until CRASH!
Tuesday, February 3, 2009
How money works today
Our economy is based on fractional reserve banking. Long before fractional reserve banking, savers, looking for a safe place to keep their money, deposited it with a goldsmith or other businessman and would receive a note for the deposit. Eventually these notes became a medium of exchange or as money (i.e. they were used to purchase items instead of using the actual gold on deposit). Also, these notes were never redeemed all at once, so the businessmen started to loan the deposits out to other people, collecting interest as profit. Further, they would loan the deposit out many times over. If one in ten loans defaulted, they could cover that loss with the interest collected from the other nine loans given out. All the while, they still only had one deposit to cover the ten loans given out. Eventually these businessmen became known as bankers. And fractional reserve banking was born.
This is one way money is actually created in our society. Your $100,000 deposited at the bank is lent out to multitudes of people. All those people suddenly have (and spend) money that didn't exist before your deposit. And the businesses that receive this lent out money in exchange for goods and services, book it as actual money. The number of $100,000 loans the bank hands out based on your deposit is called leverage. And today many of our banks are "officially" (on the balance sheet) leveraged 30 to 50 time over. Unofficially, or off the balance sheet, they are leveraged 100+ times over. At lease Chase, BofA and Citi are.
Now all of this has worked wonderfully for so long because of the math. If I am a bank and I loan out $2 million based on your $100,000 deposit (20 to 1 leverage) in ten year terms at 7% annual compounded interest, I will make $1.4 million in profit. If three of my 20 loans default, that will only cost me $300,000. Add to that the original deposit and I still profit by $1 million. In fact I could cover the default of 13 of the 20 loans without suffering the loss of the original deposit. And even if I did have 13 defaults, I would still own the property purchased with that loaned out money. Which (as long as there are buyers of land) will still net me a profit. Really wonderful since historically, even the riskiest loans (made to people with a questionable credit history) have not defaulted at even close to a 65% rate. Of course the riskier the loan, the more you charge in interest to mitigate the amount of profit with the expected loan default rate.
Naturally it costs more than nothing to run my bank over ten years, so to cover the salaried employees, the building costs, etc. I would need to have a lower default rate, charge more interest, increase my leverage, or some combination of the three. And if I pay myself handomely today with all that profit I expect to earn tomorrow, but that profit doesn't materialize, I could be in trouble and may have to ask the government for assistance.
Now this is a simplified explanation of how it all works, but I don't think the complicated explanation is even necessary to help understand the trouble we find ourselves in today.
Our banks today book those loans as assets and value them at the amount loaned out plus the interest they will collect. (of course they "write down" the value as the defaults increast, too)Then they resell those loans to other banks and brokerages who then package them into collateralized debt obligations (CDO's) and in turn re-sell them to retirement funds, pension funds, 401k funds, municipalities, state treasuries, and anybody who is willing to buy them. And of course these "investments" are rated by credit rating agencies so the investor can know how safe or risky the investment is compared to other investments. So essentially everybody is loaning money from their savings (weather deposited at a bank or invested in a debt fund) to everybody to buy homes and cars and TV's. And as long as there are buyers for all this stuff, everyone is happy because the value of the loans is equal to or less than the value of the assets they represent.
Our banks and investment houses today have also been buying (and selling for that matter) "insurance" against massive default of these loans by purchasing credit default swaps (CDS's) from other companies. They will pay a fee to a company, who will in turn pay down the debt obligation if the default rate exceeds a certain threshold. But these companies who sell the swaps (including both insurance companies like AIG and investment banks like Bear Stearns) don't want them to be called insurance because insurance is a regulated (by the government) industry. Being regulated would mean they would have to hold x dollars in reserve to pay out claims. Which would mean less mean less money available for houses boats and TV's. So these tools were called "swaps" to get around this issue. And our government has been inclined to de-regulate financial markets the past twenty or more years anyway. So the companies who sold "swaps" were not keeping really any money in reserve in case of massive default rates on these debt obligations.
Which leads us to where we are now. There is alot more to why our economy has no hope of recovery. And much of it has to do with the steps the government is taking to avert "recession." But that is for another day. More to come.
This is one way money is actually created in our society. Your $100,000 deposited at the bank is lent out to multitudes of people. All those people suddenly have (and spend) money that didn't exist before your deposit. And the businesses that receive this lent out money in exchange for goods and services, book it as actual money. The number of $100,000 loans the bank hands out based on your deposit is called leverage. And today many of our banks are "officially" (on the balance sheet) leveraged 30 to 50 time over. Unofficially, or off the balance sheet, they are leveraged 100+ times over. At lease Chase, BofA and Citi are.
Now all of this has worked wonderfully for so long because of the math. If I am a bank and I loan out $2 million based on your $100,000 deposit (20 to 1 leverage) in ten year terms at 7% annual compounded interest, I will make $1.4 million in profit. If three of my 20 loans default, that will only cost me $300,000. Add to that the original deposit and I still profit by $1 million. In fact I could cover the default of 13 of the 20 loans without suffering the loss of the original deposit. And even if I did have 13 defaults, I would still own the property purchased with that loaned out money. Which (as long as there are buyers of land) will still net me a profit. Really wonderful since historically, even the riskiest loans (made to people with a questionable credit history) have not defaulted at even close to a 65% rate. Of course the riskier the loan, the more you charge in interest to mitigate the amount of profit with the expected loan default rate.
Naturally it costs more than nothing to run my bank over ten years, so to cover the salaried employees, the building costs, etc. I would need to have a lower default rate, charge more interest, increase my leverage, or some combination of the three. And if I pay myself handomely today with all that profit I expect to earn tomorrow, but that profit doesn't materialize, I could be in trouble and may have to ask the government for assistance.
Now this is a simplified explanation of how it all works, but I don't think the complicated explanation is even necessary to help understand the trouble we find ourselves in today.
Our banks today book those loans as assets and value them at the amount loaned out plus the interest they will collect. (of course they "write down" the value as the defaults increast, too)Then they resell those loans to other banks and brokerages who then package them into collateralized debt obligations (CDO's) and in turn re-sell them to retirement funds, pension funds, 401k funds, municipalities, state treasuries, and anybody who is willing to buy them. And of course these "investments" are rated by credit rating agencies so the investor can know how safe or risky the investment is compared to other investments. So essentially everybody is loaning money from their savings (weather deposited at a bank or invested in a debt fund) to everybody to buy homes and cars and TV's. And as long as there are buyers for all this stuff, everyone is happy because the value of the loans is equal to or less than the value of the assets they represent.
Our banks and investment houses today have also been buying (and selling for that matter) "insurance" against massive default of these loans by purchasing credit default swaps (CDS's) from other companies. They will pay a fee to a company, who will in turn pay down the debt obligation if the default rate exceeds a certain threshold. But these companies who sell the swaps (including both insurance companies like AIG and investment banks like Bear Stearns) don't want them to be called insurance because insurance is a regulated (by the government) industry. Being regulated would mean they would have to hold x dollars in reserve to pay out claims. Which would mean less mean less money available for houses boats and TV's. So these tools were called "swaps" to get around this issue. And our government has been inclined to de-regulate financial markets the past twenty or more years anyway. So the companies who sold "swaps" were not keeping really any money in reserve in case of massive default rates on these debt obligations.
Which leads us to where we are now. There is alot more to why our economy has no hope of recovery. And much of it has to do with the steps the government is taking to avert "recession." But that is for another day. More to come.
Friday, January 30, 2009
Did you know?
I'm sure most who may read this may know the basics (which I'm posting anyway just in case). But I'm including interesting facts with them as of December according to the Wall Street Journal.
Sub Prime Loans are mortgages (and car loans) that go to people with poorer credit. Regarded as risky loans they carry higher interest rates. More than half of those $1.9 trillion (including Jumbo) issued from 2004-2007 are delinquent, in forclosure, or owned by the banks as of December. (These loans were made using math assuming less than 20% would default). This what is referred to as the "Sub-Prime meltdown."
Prime loans are mortgages (and car loans) that go to people with good credit. Regarded as less risky loans, they carry lower interest rates. 6% (so far) of prime loans issued from 2004-2007 are delinquent, in forclosure or owned by banks (again as of December).
Option ARM loans are prime loans that carry a multiple payment options including the ability to pay less than the interest for a given month (thus adding to the principle). Approxiamately $750 million of these loans were issued from 2004-2007. Of these, 28% are delinquent, in forclosure, or owned by the banks. Goldman Sachs estimates that 61% of those issued in 2007 will end in default (not that I trust Goldman Sachs to know what they are talking about; I bet it will bemuch more).
Jumbo loans are loans larger than $500k. I couldn't find numbers for Jumbo loans, but I don't think it is unfair to classify them with sub prime (as mentioned above) for purposes of estimating default rates.
There are additional types of loans that fall under Prime or Sub-Prime headings, but the above basicly covers the vast majority by description. When you see those numbers, you must realize that the "voo-doo math" that was used to compute rates of default and thusly interest rates to charge, basicly yielded less than a 20% default rate. So far, only true prime loans have lived up to that number. So far.
So when you think about the trouble that our banking system is in, you must realize that it is at least three times worse than has already been revealed. And that does not include derivatives trading, which I will address in a future post. Or the leverage problems the banks face which I will also address soon. But this is why I will harp time and time again about the need for our banks to come clean and "reveal what is in their vaults." The truth being told is THE ONLY WAY for us to get out of this mess we are in.
And the truth is not being told because if it ever is, all (and I mean ALL) the people who have power (CEO's, Bankers, Congresspeople) will be exposed as liars or stupid. And we know none of them want that.
Sub Prime Loans are mortgages (and car loans) that go to people with poorer credit. Regarded as risky loans they carry higher interest rates. More than half of those $1.9 trillion (including Jumbo) issued from 2004-2007 are delinquent, in forclosure, or owned by the banks as of December. (These loans were made using math assuming less than 20% would default). This what is referred to as the "Sub-Prime meltdown."
Prime loans are mortgages (and car loans) that go to people with good credit. Regarded as less risky loans, they carry lower interest rates. 6% (so far) of prime loans issued from 2004-2007 are delinquent, in forclosure or owned by banks (again as of December).
Option ARM loans are prime loans that carry a multiple payment options including the ability to pay less than the interest for a given month (thus adding to the principle). Approxiamately $750 million of these loans were issued from 2004-2007. Of these, 28% are delinquent, in forclosure, or owned by the banks. Goldman Sachs estimates that 61% of those issued in 2007 will end in default (not that I trust Goldman Sachs to know what they are talking about; I bet it will bemuch more).
Jumbo loans are loans larger than $500k. I couldn't find numbers for Jumbo loans, but I don't think it is unfair to classify them with sub prime (as mentioned above) for purposes of estimating default rates.
There are additional types of loans that fall under Prime or Sub-Prime headings, but the above basicly covers the vast majority by description. When you see those numbers, you must realize that the "voo-doo math" that was used to compute rates of default and thusly interest rates to charge, basicly yielded less than a 20% default rate. So far, only true prime loans have lived up to that number. So far.
So when you think about the trouble that our banking system is in, you must realize that it is at least three times worse than has already been revealed. And that does not include derivatives trading, which I will address in a future post. Or the leverage problems the banks face which I will also address soon. But this is why I will harp time and time again about the need for our banks to come clean and "reveal what is in their vaults." The truth being told is THE ONLY WAY for us to get out of this mess we are in.
And the truth is not being told because if it ever is, all (and I mean ALL) the people who have power (CEO's, Bankers, Congresspeople) will be exposed as liars or stupid. And we know none of them want that.
Thursday, January 29, 2009
Bailout after Bailout after Bailout
This article was of particular interest to me so let's talk about it:
http://www.businessweek.com/magazine/content/09_06/b4118000455725.htm?chan=top+news_top+news+index+-+temp_top+story
I don't suppose Obama/Bush or Paulsen/Geithner would admit they knew ahead of time that their $700B bailout late last year wasn't going to work. But it is hard for me to see how they couldn't. It's only been three months and they are already talking about $4T and a bad bank idea. And that smells fishy to me. As those who know me would attest, I saw this coming. So why couldn't they?
I just love this quote from the article I linked above: "New Treasury Secretary Timothy F. Geithner is exploring the creation of a government-funded "bad bank" to buy up mortgage-backed securities and other troubled assets from banks in hopes of boosting their capital levels so they can begin lending again."
So it's not just enough to get all those bad loans they've made in the past off their books, they have to get them to make still more loans? How stupid can these people actually be? Do they really think that debt spending is going to produce a healthy economy? I suppose they know that 70% of our growth since the 90's has been consumer spending and debt has been the primary driver of all of that spending, so they must think that is the only way to grow the economy. It all has me wondering if growth is what we really want if this is where it gets us.
Meanwhile still more layoffs were announced today by Fedex, Cessna, and others. Every day the announcements are coming now. And each month the numbers grow larger. ABC news reported today that 4.5 million people are collecting unemployment. The highest number ever.
The other big news was Obama's televised disgust at the $18B in bonuses paid out to Wall Street companies who received hundreds of billions in bailout finds last year. Sure, it's 40% less than last year, they say, but it is still the sixth highest payout ever! I'm sure you feel the same disgust Obama and I do at this news. But there is a much bigger problem brewing that nobody is talking about yet. You mix more and more bailout money for Wall street with Unemployment at record levels with big bonuses for the fat cats and you've got yourself a recipe for social strife (also known as riots in the streets). In many counties this means a coup d'etat.
Remember Congress and President Bush did the opposite of what the American people wanted last October when they passed the $700B bank bailout. And it didn't work. And now, as soon as this economic stimulus becomes law, you just watch them come back to the troth for more Wall Street funds. Heck they're already writing about it at BusinessWeek.
http://www.businessweek.com/magazine/content/09_06/b4118000455725.htm?chan=top+news_top+news+index+-+temp_top+story
I don't suppose Obama/Bush or Paulsen/Geithner would admit they knew ahead of time that their $700B bailout late last year wasn't going to work. But it is hard for me to see how they couldn't. It's only been three months and they are already talking about $4T and a bad bank idea. And that smells fishy to me. As those who know me would attest, I saw this coming. So why couldn't they?
I just love this quote from the article I linked above: "New Treasury Secretary Timothy F. Geithner is exploring the creation of a government-funded "bad bank" to buy up mortgage-backed securities and other troubled assets from banks in hopes of boosting their capital levels so they can begin lending again."
So it's not just enough to get all those bad loans they've made in the past off their books, they have to get them to make still more loans? How stupid can these people actually be? Do they really think that debt spending is going to produce a healthy economy? I suppose they know that 70% of our growth since the 90's has been consumer spending and debt has been the primary driver of all of that spending, so they must think that is the only way to grow the economy. It all has me wondering if growth is what we really want if this is where it gets us.
Meanwhile still more layoffs were announced today by Fedex, Cessna, and others. Every day the announcements are coming now. And each month the numbers grow larger. ABC news reported today that 4.5 million people are collecting unemployment. The highest number ever.
The other big news was Obama's televised disgust at the $18B in bonuses paid out to Wall Street companies who received hundreds of billions in bailout finds last year. Sure, it's 40% less than last year, they say, but it is still the sixth highest payout ever! I'm sure you feel the same disgust Obama and I do at this news. But there is a much bigger problem brewing that nobody is talking about yet. You mix more and more bailout money for Wall street with Unemployment at record levels with big bonuses for the fat cats and you've got yourself a recipe for social strife (also known as riots in the streets). In many counties this means a coup d'etat.
Remember Congress and President Bush did the opposite of what the American people wanted last October when they passed the $700B bank bailout. And it didn't work. And now, as soon as this economic stimulus becomes law, you just watch them come back to the troth for more Wall Street funds. Heck they're already writing about it at BusinessWeek.
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