A Better Bailout
By Minyanville Staff Sep 30, 2008 3:09 pm
Is the nationalization of Irish banks the solution for what ails the US?
Earlier today, the Irish government attempted to stave off financial crisis by guaranteeing all deposits and certain debts in 6 Irish banks. The full government statement can be found here.
The move comes 2 weeks after a US-style FDIC deposit protection limit of €100,000 was introduced and follows Monday's record losses for Irish financial stocks.
The plan, which guarantees an estimated €400 billion ($567 billion) of liabilities, covers retail, commercial and inter-bank deposits as well as covered bonds, senior debt and dated subordinated debt.
This proposal has been offered by some as a potential alternative to the Paulson Bailout Bill, now 
stalled in Washington D.C. Below, several Minyanville professors take a look at the Irish bank guarantee and consider whether something similar should take place in the U.S. to stem the financial crisis here.
Mr. Practical: Just Protect the Deposits.
The Irish have shown their peers on the continent how to do it, and one shouldn't be surprised if many others follow. It's good to see someone showing strong leadership, though we must watch Irish sovereign Credit Default Swaps today just in case. 
Professor Kevin Depew: A Wolf In Sheep's Clothing
I've looked at this proposal all morning to try to understand why some think it's even slightly more helpful than the Paulson Bailout Bill, which itself is simply a disaster waiting to happen. From my perspective, I simply cannot see it.
First, let us be clear: The Irish government has nationalized that country's banking system. Any government backstop on the deposit base is nationalization, pure and simple.
Evaluating the economics of this plan, we can see how it is impossible to add 2 and 2 and arrive at a similarly workable nationalization effort here, even if such a massive nationalization attempt was desirable.
The Irish government is banking, literally, on guaranteeing 10 times their national debt and twice their economic output with this. The numbers for a similar plan here are simply astronomical. Ireland's GDP as of 2007 was about $186 billion USD, which puts their economy at roughly the size of Alabama's.
But let's assume the impossible for a moment - that this plan is workable here from an economic standpoint. The main problem is that guaranteeing deposits does not kickstart credit demand, and may not even kickstart supply, which is the real issue for the US.
No matter what deposit guarantees are put in place, the primary issue that must be accepted is that underlying collateral is declining in value - NOT because there is not enough available credit to purchase it, but because there is too much supply of it and it has been overleveraged.
Finally, and most importantly, there's the notion that guaranteeing deposits protects the saver. It most assuredly does not. A government guarantee of deposits is a con game where the depositors are reassured that their savings are safe, while the very act of guaranteeing the deposits destroys the underlying value of that which is being guaranteed.
The hard truth is that this just another wolf in sheep's clothing, a way to continue the massive transfer of wealth from those who are risk-averse to those who behave (and have long been rewarded for behaving) as if all risk is meaningless.
There are 2 realities that this country must face, and face right now. One, the size, interconnectedness and scope of the financial system puts it beyond fiscal and monetary control. Two, this debt deflation is global, secular and psychological... and unstoppable. It must be allowed to run its course.
I understand the attempts at intervention. Really, I do. But the fights over which Bailout Bill to go with and how to intervene should be seen for what they really are: In the grand scheme, simply squabbles over who gets to keep the most out of what's left over from the inevitable deflationary debt unwind. Judged through the lens of history, Lehman Brothers and Bear Stearns will be seen as arbitrary victims of these minor squabbles.
For those living in the real world on Main Street, there's a simple and clear prescription for how to manage through this deflationary debt unwind.
First, do not be fooled by political and monetary gibberish about what proposal will save us next. Instead: Get out of debt. Protect your assets. Determine the safest institutions to protect your savings. Continue to live as you always have, while keeping in mind that the people who are now entrusted with "rescuing America's economy" are the very same people who brought us to this breaking point in the economy... even as they either failed to see it coming, or, if they did see it coming, denied its existence in order to take out of it the most they could before the inevitable collapse.
At some point, a reasonable person will be forced to question either the intelligence of these people, or their committment to serving the American people.
This morning on national television, President Bush pleaded for the passage of the Bailout Bill while noting, ominously, that yesterday the stock market lost $1 trillion in value. That number is supposed to move the American people, who remain defiantly against a bailout, by stoking their fear of loss.
The question, then, after all the dire warnings, is why don't Americans care about the consequences of No Bailout? The answer is very simple: Because the vast majority of Americans have already been living with those conditions for more than 5 years now.
I call it a Stealth Depresion because it's been running so far below the radar of economic elites and the mainstream media, who prefer to report on happier things. Now that it's becoming less stealthy, there's suddenly a crisis.
Remember: Get out of debt. Protect your assets. Determine the safest institutions to protect your savings. Continue to live as you always have.
No positions in stocks mentioned.
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Reply
2008-09-30 16:17:15
My two cents
I agree with Bennet's line of thinking. If your going to need to Socialize, why not give the money to those banks that have excellent balance sheets.
Even Socialization should at least try to adhere to the principles of Capitalism. Protect those who got sucked into this mess, thru no fault of their own, and who didn't make irresponsible decisions.
Let the others fail. I can't see how one can reward irresponsibility. A free market certainly does not.
Even Socialization should at least try to adhere to the principles of Capitalism. Protect those who got sucked into this mess, thru no fault of their own, and who didn't make irresponsible decisions.
Let the others fail. I can't see how one can reward irresponsibility. A free market certainly does not.
2008-09-30 16:39:43
Valuation
Any attempt to prop up these assets (debts) at unrealistic values will ultimately fail. In the end, the marketplace will determine their value. Any bill passed by Congress to ease the credit markets should include an equity stake for the taxpayers, as they are most definitely purchasing these assets (debts).
2008-09-30 16:52:30
Loss Subsidisation Squabbles
After years of the insipid availability of cheap credit with the consequent capital gain from overbid assets, smart money cashed out leaving the "I don't know what hit me" parties to pick up the tab.
A squabble of equal proportion to the original liquidity bubble has ensued on how to divy up the losses of those over bid assets, and how to halt the manifestataion of further loss.
Where was the sqabble about the folks who missed out and had not wisened to the cheap, readily available credit---asset overbidding game, and were subsequently left laying in the dust of asset hyperinflation?
As Kevin observed....
".......the vast majority of Americans have already been living with those conditions for more than 5 years now."
So the vast majority of Americans have suffered diminished real income and capital. Yet so much of the underlying strength of the economy is linked to what 'they' can afford.
Which these days, is not much.
What we are witnessing is a reversion to the bulk of income generation having to come from productive gain, as the artifical capital gain of the last few years deflates, and so now the squabbling over who now gets the limited first first aid begins in earnest.
Bear in mind that Asia is now the defacto production economy of America, so productive capacity in America is going to be limited going forward, as the 'vast majority' are now a competitor of the Asian labor pool. Unless it's flatpack furniture, watch America's productive capacity diminish and shift offshore, and so with it real income will further slide.
So where is the money to come from for the loss subsidisation......the bailout
Increased taxation?
Printing of money?
Borrowing money...larger deficits?
All on lower real incomes?
The loss subsidisation squabbles will echo down the financial and political canyons for years to come.
To fix it...
first and foremost, there must be an honest calculation of inflation to enable the correct application of fiscal and monetary remedy.
This will at least reward savers with an interest rate that does not eat base capital.
shake off the corrupt special interest groups and run budgets that are in surplus to ease the burden on the taxpayer.
let business fail, there is more than enough sidelined capital to pick up and rejuvenate with fresh capital.
There is a hoard of ex sub-prime money on standby. Just ask Hank!
A squabble of equal proportion to the original liquidity bubble has ensued on how to divy up the losses of those over bid assets, and how to halt the manifestataion of further loss.
Where was the sqabble about the folks who missed out and had not wisened to the cheap, readily available credit---asset overbidding game, and were subsequently left laying in the dust of asset hyperinflation?
As Kevin observed....
".......the vast majority of Americans have already been living with those conditions for more than 5 years now."
So the vast majority of Americans have suffered diminished real income and capital. Yet so much of the underlying strength of the economy is linked to what 'they' can afford.
Which these days, is not much.
What we are witnessing is a reversion to the bulk of income generation having to come from productive gain, as the artifical capital gain of the last few years deflates, and so now the squabbling over who now gets the limited first first aid begins in earnest.
Bear in mind that Asia is now the defacto production economy of America, so productive capacity in America is going to be limited going forward, as the 'vast majority' are now a competitor of the Asian labor pool. Unless it's flatpack furniture, watch America's productive capacity diminish and shift offshore, and so with it real income will further slide.
So where is the money to come from for the loss subsidisation......the bailout
Increased taxation?
Printing of money?
Borrowing money...larger deficits?
All on lower real incomes?
The loss subsidisation squabbles will echo down the financial and political canyons for years to come.
To fix it...
first and foremost, there must be an honest calculation of inflation to enable the correct application of fiscal and monetary remedy.
This will at least reward savers with an interest rate that does not eat base capital.
shake off the corrupt special interest groups and run budgets that are in surplus to ease the burden on the taxpayer.
let business fail, there is more than enough sidelined capital to pick up and rejuvenate with fresh capital.
There is a hoard of ex sub-prime money on standby. Just ask Hank!
2008-09-30 17:32:14
Pumping in Equity
If the government adds equity into financial institutions and gives the taxpayer ownership rights, haven't they essentially created giant credit unions? :-)
I was hoping somebody would address another theory I have heard bandied about: Give money back to the taxpayers by rebating the prior 5 years of federal income tax payments, with the caveat that 50% of the rebate must be used to pay down debt. That would eliminate a lot of debt and get money into the banks. If you have no debt, where will the money go? Back into the banks, of course! Anybody care to analyze this one?
Also, I'm wondering what is the responsibility of Congress to reduce government spending and debt in these trying times. How do we get Congress to stop spending while dealing with these issues?
I was hoping somebody would address another theory I have heard bandied about: Give money back to the taxpayers by rebating the prior 5 years of federal income tax payments, with the caveat that 50% of the rebate must be used to pay down debt. That would eliminate a lot of debt and get money into the banks. If you have no debt, where will the money go? Back into the banks, of course! Anybody care to analyze this one?
Also, I'm wondering what is the responsibility of Congress to reduce government spending and debt in these trying times. How do we get Congress to stop spending while dealing with these issues?
2008-09-30 18:18:56
bailout , schmailout!
Here in humble Minyanville, we can see why the bailout measure is so overwhelmingly rejected, for what is happening right here in this mighty discussion of actual things that might work, is exactly what did not happen with Hank and Co. Here some real ideas are circulating with up and down commentary, with a dose of The Reality that a whole lot of of bank assets are so impaired that they are unwanted by anyone at any price for fear of buying pig in a poke. Well done Minyans, lets find an equitable solution that most people can understand, and implement. No harm in thinking and discussing, someone tell Hank and Bush, to hold on a minute.
2008-09-30 19:06:16
bailout
It will happen, the government will put the borrower in a loan they can afford and the taxpayer will eat the rest. Housing subsidies continue, problem solved, or so they think.
2008-09-30 19:28:33
No grand solution, but we can find minor solutions
There is no grand solution. I oppose the bailout for the reasons most people do - it assures the wealthy walk away with ill gotten gains. We cannot retroactively ask CEOs who took undeserved bonuses to turn the money back - but why impair those who are trying to fix things by limiting their ability to benefit? It sounds good...but it seems...odd.
In the end, it's unlikely any of them WOULD benefit, anyway.
However, I do believe this - the Irish solution is the first step of many small steps that MUST be taken to slow the process and allow things to come down properly. Panic and collapse benefit nobody. But orderly retreats allow for consolidation and counterattack.
The politicians in the US, rather than sniping at each other and trying to assure they KEEP their undeserved seats, would do well to focus on simple things, like assuring everyone's deposits to prevent runs on the bank.
While this won't jumpstart demand for credit, it will avoid a run on bank assets and a deflationary spiral on one front.
Once this is done, other steps can be taken.
And the great thing about assuring deposits is that it doesn't really cost "anything", though any costs incurred can be footed by the banks themselves.
This first step will allow the next step (whatever it is) to take place. Perhaps assuring homeowners whose debt is limited, and have done things right, that they will not be foreclosed upon.
I worry that people like me, who did everything right, will be asked to pay for those who took outlandish risks. I am in a great place today, and I'm sure I'll be in a great place regardless of what happens. That's just who I am...
But when others panic or fear, then they act on those impulses, and these impulses spread quickly. Herd behavior is not something I engage in, but I certainly don't want to get trampled, either.
I watch my wife's behaviors for indications on the populace as a whole. She is very, very worried. It takes every bit of my ability to convince her that the "only thing we have to fear is fear itself". Wiser words were never spoken.
In the end, it's unlikely any of them WOULD benefit, anyway.
However, I do believe this - the Irish solution is the first step of many small steps that MUST be taken to slow the process and allow things to come down properly. Panic and collapse benefit nobody. But orderly retreats allow for consolidation and counterattack.
The politicians in the US, rather than sniping at each other and trying to assure they KEEP their undeserved seats, would do well to focus on simple things, like assuring everyone's deposits to prevent runs on the bank.
While this won't jumpstart demand for credit, it will avoid a run on bank assets and a deflationary spiral on one front.
Once this is done, other steps can be taken.
And the great thing about assuring deposits is that it doesn't really cost "anything", though any costs incurred can be footed by the banks themselves.
This first step will allow the next step (whatever it is) to take place. Perhaps assuring homeowners whose debt is limited, and have done things right, that they will not be foreclosed upon.
I worry that people like me, who did everything right, will be asked to pay for those who took outlandish risks. I am in a great place today, and I'm sure I'll be in a great place regardless of what happens. That's just who I am...
But when others panic or fear, then they act on those impulses, and these impulses spread quickly. Herd behavior is not something I engage in, but I certainly don't want to get trampled, either.
I watch my wife's behaviors for indications on the populace as a whole. She is very, very worried. It takes every bit of my ability to convince her that the "only thing we have to fear is fear itself". Wiser words were never spoken.
2008-09-30 21:54:44
Congressional
meddling is making the problem worse, the House"new and improved" bailout is a perfect example.
2008-10-01 04:00:07
Moral hazards abound
Has this country reached such a point where people can actually seriously discuss the destroying of 2 million houses because they look bad on someone else's balance sheet? If so, I think we had also better discuss outlawing that evil organization called Habitat for Humanity and throwing it's founder in prison.
Or paying people not to build? I don't have any problem with that as long as I can get a contractors license 15 minutes before the law goes into effect. As long as we're at it, why not pay people not to loan the money to build houses?
Why isn't anyone discussing all the structual incentives to buy, build, rebuild and flip houses that are baked into the tax code?
How about the dirty little secret that a 2000 square foot house can be built with about one and a half man years labor. But, because of the way the system is structured it can gobble up half of two professional salaries for thirty years to make the payments? And no; materials or land don't make up the difference.
Why did it make sense to build thousands of houses two hours commute from where there was employment in California, and then quadruple the price of fuel?
If the people that bought those houses don't stop getting squeezed it won't matter how many of the houses you bulldoze, a new equilibrium value will be established that is nowhere near the value on someone else's balance sheet.
How did thing ever get so crazy?
Does anyone remember back in 2003 when Warren Buffet said ,,that you cannot run an economy simply by selling the same houses back and forth to each other at higher and higher prices,,? Guess what? It looks like he was on to something while the rest of Wall street was on something.
Or paying people not to build? I don't have any problem with that as long as I can get a contractors license 15 minutes before the law goes into effect. As long as we're at it, why not pay people not to loan the money to build houses?
Why isn't anyone discussing all the structual incentives to buy, build, rebuild and flip houses that are baked into the tax code?
How about the dirty little secret that a 2000 square foot house can be built with about one and a half man years labor. But, because of the way the system is structured it can gobble up half of two professional salaries for thirty years to make the payments? And no; materials or land don't make up the difference.
Why did it make sense to build thousands of houses two hours commute from where there was employment in California, and then quadruple the price of fuel?
If the people that bought those houses don't stop getting squeezed it won't matter how many of the houses you bulldoze, a new equilibrium value will be established that is nowhere near the value on someone else's balance sheet.
How did thing ever get so crazy?
Does anyone remember back in 2003 when Warren Buffet said ,,that you cannot run an economy simply by selling the same houses back and forth to each other at higher and higher prices,,? Guess what? It looks like he was on to something while the rest of Wall street was on something.
2008-10-01 06:40:35
Now am even more scared
Great article by all of you.
But seriously, none of you agree. This makes it more likely that Congress will pass SOMETHING, ANYTHING just to pass it.
There doesn't seem to be any one way to deal with this issue. Do nothing and banks fail with credit completely drying up. Do the $700 billion bailout and taxpayers are on the hook for the debt PLUS the massive inflation it would cause. Do something in between and who knows if our Congressmen even have time to listen to alternatives.
I am scared to think why none of you mentioned relaxing the FASB rule that forces banks to mark Level 3 assets to market. Let banks keep the assets on their balance sheets at some level to market based on distance to maturity. The farther away from maturity, the closer to par value the asset. The closer to maturity, the more you have to mark it to market.
Wouldn't that single thing solve the entire problem? I mean, even if you did the simplest thing and let banks hold these level 3 assets on their balance sheets at par, isn't this a better non-taxpayer solution than anything we have seen so far?
Its a balance sheet problem, this is a balance sheet solution. What am I missing?
The strong will still swallow the weak.
But seriously, none of you agree. This makes it more likely that Congress will pass SOMETHING, ANYTHING just to pass it.
There doesn't seem to be any one way to deal with this issue. Do nothing and banks fail with credit completely drying up. Do the $700 billion bailout and taxpayers are on the hook for the debt PLUS the massive inflation it would cause. Do something in between and who knows if our Congressmen even have time to listen to alternatives.
I am scared to think why none of you mentioned relaxing the FASB rule that forces banks to mark Level 3 assets to market. Let banks keep the assets on their balance sheets at some level to market based on distance to maturity. The farther away from maturity, the closer to par value the asset. The closer to maturity, the more you have to mark it to market.
Wouldn't that single thing solve the entire problem? I mean, even if you did the simplest thing and let banks hold these level 3 assets on their balance sheets at par, isn't this a better non-taxpayer solution than anything we have seen so far?
Its a balance sheet problem, this is a balance sheet solution. What am I missing?
The strong will still swallow the weak.
2008-10-01 09:52:26
Mortgage Based Securities: Attn. Toddo, Mr.P, Etal
I'd like to add to my prior "Market Clearance Plan" 2 add'l suggestions. Recapping. 1st Fed
pushes all the junk out, taking back their Tbills.
(usually bank rules/regs/acctg are temp N.A),
2nd banks divide MBS into 10 'value sets'. They
built these monsters, they can make the best
guesses. The Fed then assigns a set of prices
of 25%-75%/nominal value and guarantee it.
3rd a bazaar is set up for 10 business days during which time tbill holders such as arabs japan etal would be invited to swap their Treasuries (certain to decline in value for these discounted of likely greater future value)
This eliminates the possibility of cherry picking the same assets after the bank fails and cuts down the huge overhang of Tbills that holds down the $. Added idea, allow judges
the treat equity extensions NEVER BASED
ON ACTUAL MKT VALUE AS UNSECURED PERSONAL, LOANS DISCHARGING SAME.
This is only a qwik fix to get us thru the
election. Good luck to all. JFE
pushes all the junk out, taking back their Tbills.
(usually bank rules/regs/acctg are temp N.A),
2nd banks divide MBS into 10 'value sets'. They
built these monsters, they can make the best
guesses. The Fed then assigns a set of prices
of 25%-75%/nominal value and guarantee it.
3rd a bazaar is set up for 10 business days during which time tbill holders such as arabs japan etal would be invited to swap their Treasuries (certain to decline in value for these discounted of likely greater future value)
This eliminates the possibility of cherry picking the same assets after the bank fails and cuts down the huge overhang of Tbills that holds down the $. Added idea, allow judges
the treat equity extensions NEVER BASED
ON ACTUAL MKT VALUE AS UNSECURED PERSONAL, LOANS DISCHARGING SAME.
This is only a qwik fix to get us thru the
election. Good luck to all. JFE
2008-10-01 10:02:03
Class Clown minyan Brad-A solution for the United States problem would be a 700 billion Loan program for all people who bought homes and took out mortgage between 2004-2008. The Program would allow the home owner to Borrow 30% of the value of the original mortgage and the money would go directly to the bank to pay down the mortgage. The mortgage holder would then issue a new fixed rate 30 year loan for the remaining 70% of the mortgage with no new fees.
The 30% loan would be a naked loan similar to a student loan it would follow the borrower independantly of selling the home. the interest rate would be 2% with all proceeds going to pay down the treasury bills that fund the program with no funds being used for anything other than national debt reduction.
This Plan would infuse a small amount of capital into the banking system and would help free up people to sell and buy homes without fearing a tremendous hit to their wallets.
This would also lower peoples monthly payments and make them far more likely to be able to stay in their homes or pursue new opportunities in other cities or areas without crushing them financially.
This plan would require a lot of work from the banks but I think the trade off is worth it. Maybe a small fee would be in line but don't let them tack it on the back end or they will jack it up to the point where the bank is the only beneficiary.
By the way a 500,000 dollar fdic insured account system would greatly stabilize banks as the larger balances tend to stay put accept during major crises. So the banks would have a more secure client base. The insurance premiums should obviously be raised and the reality is most of the bigger accounts have been moved to more secure banks anyway so the fdic would probably see an influx of cash and a more secure system.
Being Irish I just have to say I am not sure if its a good idea what the Irish banks did but if it came from an Irish man I would tend to err on the side of caution and assume it was a bad idea. If they could guarantee the bar tabs they could stabilize the pubs and that would atleast lead to merriment. AHHH SEAN set me up with another meee tabs been gauranteed so keep em coming!
The 30% loan would be a naked loan similar to a student loan it would follow the borrower independantly of selling the home. the interest rate would be 2% with all proceeds going to pay down the treasury bills that fund the program with no funds being used for anything other than national debt reduction.
This Plan would infuse a small amount of capital into the banking system and would help free up people to sell and buy homes without fearing a tremendous hit to their wallets.
This would also lower peoples monthly payments and make them far more likely to be able to stay in their homes or pursue new opportunities in other cities or areas without crushing them financially.
This plan would require a lot of work from the banks but I think the trade off is worth it. Maybe a small fee would be in line but don't let them tack it on the back end or they will jack it up to the point where the bank is the only beneficiary.
By the way a 500,000 dollar fdic insured account system would greatly stabilize banks as the larger balances tend to stay put accept during major crises. So the banks would have a more secure client base. The insurance premiums should obviously be raised and the reality is most of the bigger accounts have been moved to more secure banks anyway so the fdic would probably see an influx of cash and a more secure system.
Being Irish I just have to say I am not sure if its a good idea what the Irish banks did but if it came from an Irish man I would tend to err on the side of caution and assume it was a bad idea. If they could guarantee the bar tabs they could stabilize the pubs and that would atleast lead to merriment. AHHH SEAN set me up with another meee tabs been gauranteed so keep em coming!
2008-10-01 10:33:01
Now am even more scared
That's what Japan did. Let's apply that to supermarkets. Just change the rules regarding expiration dates on food. Think of all the food we wouldn't have to throw away!
2008-10-01 10:38:59
Bailout
Why can't the U.S. govt. go to the banks and offer 700 billion of direct cash infusion by offering to buy and inventory the mortgages and pay say.40 on the dollar.In return the banks must agree to repurchase or have a first right of refusal to the general public. The banks must agree to pay .60 in the next 2 years for 50% of mortgages outstanding, and agree to buy the rest over another 2 years, which is plenty of time for real estate to go back up. They also must put the rules in to protect the taxpayer, which could be interest on the money they inject in companies? The taxpayer would mop up with a 50% return and interest in the meantime.The FDIC limits need to go up, which will help the system. What are your thoughts, anyone? It seems that something like this would get outside capital involved and solve the immediate price discovery problem, which should get stronger over time. If you like this send it to Congress!!! Email back! Taylor A.
2008-10-01 10:40:59
my two cents
First off, I have been a fan of the 'ville for 14 months now, and I rate this discussion as the best work I've seen. Kudos and thanks.
Second, ask yourselves "why now". What is the precise, technical crisis that demands to be immediately addressed ? The answer seems to be, interbank rates have skyrocketed - that subset of credit, which is crucial to banks, has shut down. Having therefore identified the problem, which solution best addresses it ? None ?? Perhaps what government really ought to do is guarantee that interbank loans will be repaid as contracted - up until March, 2009 (or any date post-election). A more comprehensive solution could be worked over in the breathing space provided (which could theoretically include any of the proposals in this thoughtful discussion). Hopefully, the March deadline would help to sharpen Congressional focus (like the Sword of Damocles).
Second, ask yourselves "why now". What is the precise, technical crisis that demands to be immediately addressed ? The answer seems to be, interbank rates have skyrocketed - that subset of credit, which is crucial to banks, has shut down. Having therefore identified the problem, which solution best addresses it ? None ?? Perhaps what government really ought to do is guarantee that interbank loans will be repaid as contracted - up until March, 2009 (or any date post-election). A more comprehensive solution could be worked over in the breathing space provided (which could theoretically include any of the proposals in this thoughtful discussion). Hopefully, the March deadline would help to sharpen Congressional focus (like the Sword of Damocles).
2008-10-01 10:47:05
Ridiculous Ideas
I am fully on board with a complete FDIC guarantee of all deposits as well as changes to the accounting and regulatory laws that would let buyers of long duration assets like mortgages price them as such and thus help clear the market. If this is done correctly I don't think the $700B fund is neccessary.
While intelligent people can politely disagree on the very complex bailout/work-out issue, it really boils my blood when I hear retrograde lunatics like Professor Stephanie Pomboy advocating "torching" perfectly useful housing that was contructed using real resources and labor. Is she aware that there are many working people in this country who aspire to own the home she thinks we should torch using their tax money? Does she realize that there is a buyer (saver) for every seller (speculator)? Just as we need housing we also need natural gas- but with natural gas prices so low perhaps we should use our tax money to burn some of the supply off. Really scary that someone like that has any influence. Ditto for the guy who wants to use resources to pay builders not to build- isn't the inventory # and lack of financing enough to discouragee them? And there isn't one national housing market- just because there is oversupply in California does not mean there isn't undersupply in Texas. Stop the central planning- it's hard enough to maintain a centrally planned monetary system.
While intelligent people can politely disagree on the very complex bailout/work-out issue, it really boils my blood when I hear retrograde lunatics like Professor Stephanie Pomboy advocating "torching" perfectly useful housing that was contructed using real resources and labor. Is she aware that there are many working people in this country who aspire to own the home she thinks we should torch using their tax money? Does she realize that there is a buyer (saver) for every seller (speculator)? Just as we need housing we also need natural gas- but with natural gas prices so low perhaps we should use our tax money to burn some of the supply off. Really scary that someone like that has any influence. Ditto for the guy who wants to use resources to pay builders not to build- isn't the inventory # and lack of financing enough to discouragee them? And there isn't one national housing market- just because there is oversupply in California does not mean there isn't undersupply in Texas. Stop the central planning- it's hard enough to maintain a centrally planned monetary system.
2008-10-01 11:13:03
Now am even more scared
I agree in a perfect world it would be nice to change the FASB rules, but the markets are already contaminated and having no market right now for the mortgages you could run into the problem of wondering how the Fed knows better than the market what the price should be for these differing securities. With the lack of confidence right now, no one will believe the Feds price they set. You have to let the market set a price with the Feds assistance. It is such a cluster f..k!
2008-10-01 11:25:12
Quants?
What really chaps my hide in all this is that their is precedence here.
Insurance is insurance no matter how it get sliced up wether it's issued by the governments or private sector.
The aftermath of Hurricane Andrew left the insurance companies with a compromised situation which they ultimately resolved.
The problem is the massive event was consolidated to just a few companies.
That was the first warning flag . . . insurance can go pretty wrong! Just like LTCM was the first flag that massive hedging can go wrong.
That event was small compared to what's going on now and any government that thinks they can "insure" us out of this mess is really fooling just themselves.
AIG "insured" every one and his bum brother and look where that got them.
The quants will get this wrong!
Insurance is insurance no matter how it get sliced up wether it's issued by the governments or private sector.
The aftermath of Hurricane Andrew left the insurance companies with a compromised situation which they ultimately resolved.
The problem is the massive event was consolidated to just a few companies.
That was the first warning flag . . . insurance can go pretty wrong! Just like LTCM was the first flag that massive hedging can go wrong.
That event was small compared to what's going on now and any government that thinks they can "insure" us out of this mess is really fooling just themselves.
AIG "insured" every one and his bum brother and look where that got them.
The quants will get this wrong!
2008-10-01 11:36:10
Banks
Why hasn't anyone asked these banks to suspend dividends as a means to shore up their over leveraged balance sheets? This was brought up by by Marc Faber.
2008-10-01 12:29:47
Ridiculous Ideas
What if the torching of the houses benefited the community. For example lets say the government was to use emminent domain to purchase homes bordering on parks and expand the parks. Making more greenspace available to the neighborhood while reducing the oversupply of homes. I think this would be very expensive but there will never be a less expensive time to do it barring a complete collapse of the economy. Yes it is a tremendous waste of resources but we have more homes than people the only way to change that is to stop building and wait for the population to catch up or start smashing.
My question is why are they even going to rebuild area's wiped out by the hurricane the government and insurance companies should step in and cordon off the areas turning them to parks and let the former residents purchase some of the many homes available though out the country. I know it is private property and people have a right to rebuild but it seems like such a waste in this current environment.
My question is why are they even going to rebuild area's wiped out by the hurricane the government and insurance companies should step in and cordon off the areas turning them to parks and let the former residents purchase some of the many homes available though out the country. I know it is private property and people have a right to rebuild but it seems like such a waste in this current environment.
2008-10-01 13:13:42
Banks
if they cancel dividends their stocks would go down which would make it harder for them to borrow money.
2008-10-01 13:20:03
Can't Help myself
I told myself I would not post this week, but I can'y help myself.
1) Bonds are supposed to be a longer term, safe investment. They have become a new commodity to be traded. Let the owners continue to hold them to maturity, marked to the price they bought them for, and let them sort themselves out when they mature. Quit trading bonds.
2) Stocks are supposed to be an investable assett. They have become a new commodity to be traded. Initiate a three day settlement period that must be abided by. If you buy stock you must wait three days for your settlement date, then you can sell it.
If you sell a stock you must wait three days for your settlement before you get your cash.
These two proposals would reduce the demand for liquidy very substantially as stocks and bonds would be bought and sold on a cash basis.
From what I read in the article and the comments no one seems to want to believe that the financial crisis is centered on the fact that the economic policies of America are based on the acceptance that growth is the primary basis of economic practice. The fear of the Government is that if growth stops or slows they will not be able to meet their obligations. Another way to say this is that the government is facing a mark to market catastrophy of it's own financial house of cards. Now that will be a real capitulation.
Finally, we can babble back and forth amongst ourselves, but realise know one in the decision making process is listeneing.
1) Bonds are supposed to be a longer term, safe investment. They have become a new commodity to be traded. Let the owners continue to hold them to maturity, marked to the price they bought them for, and let them sort themselves out when they mature. Quit trading bonds.
2) Stocks are supposed to be an investable assett. They have become a new commodity to be traded. Initiate a three day settlement period that must be abided by. If you buy stock you must wait three days for your settlement date, then you can sell it.
If you sell a stock you must wait three days for your settlement before you get your cash.
These two proposals would reduce the demand for liquidy very substantially as stocks and bonds would be bought and sold on a cash basis.
From what I read in the article and the comments no one seems to want to believe that the financial crisis is centered on the fact that the economic policies of America are based on the acceptance that growth is the primary basis of economic practice. The fear of the Government is that if growth stops or slows they will not be able to meet their obligations. Another way to say this is that the government is facing a mark to market catastrophy of it's own financial house of cards. Now that will be a real capitulation.
Finally, we can babble back and forth amongst ourselves, but realise know one in the decision making process is listeneing.
2008-10-01 13:42:03
A great day for the Irish
Ireland has guaranteed all deposits - retail, commercial and interbank - along with covered bonds, senior debt and what's known as dated-subordinated debt, according to a note Tuesday from BMO Capital Markets.
That little island is showing this big socialistic society how to do it. All the government has to do is guarantee the deposits in all banks. Faith is restored. End of Crisis. Wow, a government that get's it.
If they are truly worried about credit seizing up, then why reward the poor management of the poor performing banks? The idea that we would not be on the hook for much if any loss is ludicrous. Real estate valuation has more to give up. Simply taking the median income ( 50,233 end 07) of an American family and throwing the old 28/36 risk based ratio's against this along with some simple assumptions for taxes and insurance brings us to a median mortgage amount of @ $120,000. As of the forth quarter of 07, the median sales price in the US is $206,000. Using a 10% down payment, that leaves us with a mortgage amount of $185,000. A simple back of the napkin calculation brings us to @ 35% more to fall. Or, incomes have to increase. No more exotic mortgages to fill this affordability gap. That ship has sailed. Either income rises or prices fall or a combination of both. Incomes have not risen much if any in the past 5 years. So, to say that we may actually make money on these asset sales is disingenuous at best.
There is a simpler solution that doesn't cost us anything.
Take 250 Billion and disperse to 125 demographically and geographically diverse mid level and regional banks that have shown proper fiscal and risk management throughout the decade ( they are out there in abundance) and let them fill the supposed cash void. They are not weighed down by poor performing loans. Give them each 2 billion and the ability to leverage to a more standard 12-1. This would give each bank a new infusion of 24 billion ( with the leverage). The added money would create up to 3 trillion in new credit. End of other crisis. Each cash infusion would be repaid over time through an equity stake in each bank leaving the taxpayer whole. The poor performing banks would have to sell their poor performing assets on the open market at whatever the market will bear. Unfortunately, many banks will go out of business due to their insolvency. But, because the government is standing behind each and every taxpayer's deposits, banks going out of business will not matter. They took the risk, now they should take the loss. This used to be a benchmark of a free market economy. Poor performing businesses go out of business and are replaced by better performing ones. As I am sure you are aware, this is not what is happening here.
This is a plan that truly protects those that need protecting. The taxpayer. Guarantee their deposits. After all, they trusted that the government was ensuring that the banks and brokers were regulating when the facts show the opposite. This lacks much detail. Just as Paulson's first run did. How can a new bank fill a lending void in a timely fashion? Where will these new banks get the talent to handle this new credit? How can we regulate so as to ensure that this never happens again? There are many details that need to be filled in but the overall context is a sound one.
Peace,
Steve Sullivan
That little island is showing this big socialistic society how to do it. All the government has to do is guarantee the deposits in all banks. Faith is restored. End of Crisis. Wow, a government that get's it.
If they are truly worried about credit seizing up, then why reward the poor management of the poor performing banks? The idea that we would not be on the hook for much if any loss is ludicrous. Real estate valuation has more to give up. Simply taking the median income ( 50,233 end 07) of an American family and throwing the old 28/36 risk based ratio's against this along with some simple assumptions for taxes and insurance brings us to a median mortgage amount of @ $120,000. As of the forth quarter of 07, the median sales price in the US is $206,000. Using a 10% down payment, that leaves us with a mortgage amount of $185,000. A simple back of the napkin calculation brings us to @ 35% more to fall. Or, incomes have to increase. No more exotic mortgages to fill this affordability gap. That ship has sailed. Either income rises or prices fall or a combination of both. Incomes have not risen much if any in the past 5 years. So, to say that we may actually make money on these asset sales is disingenuous at best.
There is a simpler solution that doesn't cost us anything.
Take 250 Billion and disperse to 125 demographically and geographically diverse mid level and regional banks that have shown proper fiscal and risk management throughout the decade ( they are out there in abundance) and let them fill the supposed cash void. They are not weighed down by poor performing loans. Give them each 2 billion and the ability to leverage to a more standard 12-1. This would give each bank a new infusion of 24 billion ( with the leverage). The added money would create up to 3 trillion in new credit. End of other crisis. Each cash infusion would be repaid over time through an equity stake in each bank leaving the taxpayer whole. The poor performing banks would have to sell their poor performing assets on the open market at whatever the market will bear. Unfortunately, many banks will go out of business due to their insolvency. But, because the government is standing behind each and every taxpayer's deposits, banks going out of business will not matter. They took the risk, now they should take the loss. This used to be a benchmark of a free market economy. Poor performing businesses go out of business and are replaced by better performing ones. As I am sure you are aware, this is not what is happening here.
This is a plan that truly protects those that need protecting. The taxpayer. Guarantee their deposits. After all, they trusted that the government was ensuring that the banks and brokers were regulating when the facts show the opposite. This lacks much detail. Just as Paulson's first run did. How can a new bank fill a lending void in a timely fashion? Where will these new banks get the talent to handle this new credit? How can we regulate so as to ensure that this never happens again? There are many details that need to be filled in but the overall context is a sound one.
Peace,
Steve Sullivan
2008-10-01 14:13:30
Banks
"if they cancel dividends their stocks would go down which would make it harder for them ... " It would make it more dilutive to raise capital through the sale of shares. The suspension of the dividend, conceptually, could make it easier to borrow - although, since interbank loans are all about perceived viability, probably not.
2008-10-01 17:03:54
Can't Help myself
Ron,
I think what you are trying to say is that this exposes the lie that "Deficits don't matter". Or, that growth only from debt-induced largesse is a healthy way to grow the economy. Sure, in the short term some debt can be manageable, but we are now seeing the effects of 30 years of its accumulation. Proverbs clearly states it: The debtor is *slave* to the lender. The leaders who have put our country in the slave position are treasonous, especially when their whole point was to rob the lower/middle classes to give to the rich.
I think what you are trying to say is that this exposes the lie that "Deficits don't matter". Or, that growth only from debt-induced largesse is a healthy way to grow the economy. Sure, in the short term some debt can be manageable, but we are now seeing the effects of 30 years of its accumulation. Proverbs clearly states it: The debtor is *slave* to the lender. The leaders who have put our country in the slave position are treasonous, especially when their whole point was to rob the lower/middle classes to give to the rich.
2008-10-01 19:38:19
The bubble still hasn't burst for some areas....
Two years ago when we came to Seattle, we looked around and saw a tremendous housing bubble here. We could have taken one of the questionable mortgage loans which too many other people did, but we were smart and didn't do that. Shouldn't I receive some sort of reward from the government because I wasn't part of the problem? (just kidding)
Here, the bubble is leaking a bit of air, but still way over-inflated. And local realtors are still in self-denial that the prices are over-inflated. About the only thing on the market are the foreclosures, and they are still about 30% over where a normal sane house price should be.
So it is not just the banks, mortgage brokers and borrowers who are in the game, but the real estate profession as well. When you get rid of the 6% fees associated with real estate sales, and make it a flat rate of, say, $500 a house, that also brings an idealogical change to future housing sales.
Here, the bubble is leaking a bit of air, but still way over-inflated. And local realtors are still in self-denial that the prices are over-inflated. About the only thing on the market are the foreclosures, and they are still about 30% over where a normal sane house price should be.
So it is not just the banks, mortgage brokers and borrowers who are in the game, but the real estate profession as well. When you get rid of the 6% fees associated with real estate sales, and make it a flat rate of, say, $500 a house, that also brings an idealogical change to future housing sales.
2008-10-01 20:08:33
Best Article This Year
Hands down the best, and there have been some special articles (nod to Toddo's Sept. 11th missive).
Pros and cons, solutions and suggestions superior to the bureaucrats.
Well done Comrades, well done.
Pros and cons, solutions and suggestions superior to the bureaucrats.
Well done Comrades, well done.
2008-10-01 20:43:12
First a compliment...
This is an excellent article. This is the kind of debate I wish had actually taken place on Congress instead of panic and an attempt to strong-arm into bad legislation.
Second, I can help but feel Kevin Depew is hitting the problem on the head. The party was over for Main Street America for a while ago and the media and the elite haven't appeared to noticed until this month. And now it's a "crisis".
An email discussion in my family went around today about the bailout package now in the Senate. My sister joke how relieved she was that the FDIC limit was going to be upped, because $155K somehow just accumulated in her accounts and what was she to do? Congress to the rescue!
That's what Congress, and I hate to say this, many financial commentators and gurus are not getting right now. The "average" American lives paycheck to paycheck. They are lucky to have $5k in the bank, let alone $10K or $100K.
There is nothing in this bailout for Main Street America. Main Street America's worries consist of food on the table, gas in the tank, and a job. Right now, we have all that. Calm is breaking out everywhere I look.
What Main Street America sees are paper castles are burning in the sky. We're worried much more worried about day to day problems. I think it's pretty rational to not yet be particularly worried about the problems of folks who, generally speaking, have a yearly taxable income that equals the entire yearly income of the average wage earner.
Ironically, it may very well be because Main Street is so far removed that they are proposing the correct solution. The paper mechanisms by which the current global economy is based must be rebuilt. Now is the time for creativity and those who created the problems to fix them. Nothing will be solved by throwing money at the issue.
Another reality is that even if the $700bn is passed, it will be like tossing a few buckets of sand in the way of a tsunami. We have no choices from here: asset prices must come down or wages must come up to meet them. Change the models, buy bad assets, force us to listen to Bush at 7:45am. No congressional action will ever change the relationship between the wages of the masses and the assets they hold.
Second, I can help but feel Kevin Depew is hitting the problem on the head. The party was over for Main Street America for a while ago and the media and the elite haven't appeared to noticed until this month. And now it's a "crisis".
An email discussion in my family went around today about the bailout package now in the Senate. My sister joke how relieved she was that the FDIC limit was going to be upped, because $155K somehow just accumulated in her accounts and what was she to do? Congress to the rescue!
That's what Congress, and I hate to say this, many financial commentators and gurus are not getting right now. The "average" American lives paycheck to paycheck. They are lucky to have $5k in the bank, let alone $10K or $100K.
There is nothing in this bailout for Main Street America. Main Street America's worries consist of food on the table, gas in the tank, and a job. Right now, we have all that. Calm is breaking out everywhere I look.
What Main Street America sees are paper castles are burning in the sky. We're worried much more worried about day to day problems. I think it's pretty rational to not yet be particularly worried about the problems of folks who, generally speaking, have a yearly taxable income that equals the entire yearly income of the average wage earner.
Ironically, it may very well be because Main Street is so far removed that they are proposing the correct solution. The paper mechanisms by which the current global economy is based must be rebuilt. Now is the time for creativity and those who created the problems to fix them. Nothing will be solved by throwing money at the issue.
Another reality is that even if the $700bn is passed, it will be like tossing a few buckets of sand in the way of a tsunami. We have no choices from here: asset prices must come down or wages must come up to meet them. Change the models, buy bad assets, force us to listen to Bush at 7:45am. No congressional action will ever change the relationship between the wages of the masses and the assets they hold.
2008-10-01 21:43:14
Why pay builders not to build?
I don't see why we should pay builders to stop building. If there is no profit in it, they should stop on their own, right? If they insist on still building more, then we have a humane responsibility to lock them in a padded room to protect them from themselves. Call me crazy, but why, in this environment, would anyone be building on spec? Logic dictates that building should now be done only to order and for guaranteed money. ( You know, like cash in fist.)
Prices should go down to meet demand. Sorry if you don't like it, but owning real estate is risky. All this bailout would do is postpone the inevitable.
Prices should go down to meet demand. Sorry if you don't like it, but owning real estate is risky. All this bailout would do is postpone the inevitable.
2008-10-01 21:59:16
Now am even more scared
I'm hardly a banking expert--but believe that you are missing the "problem" that deception will ALWAYS "out", eventually. These Level 3's have no value (if they did, we all wouldn't be in this jam). By twisting accounting principles, you would "solve" this very real problem via fantasy...resultant runs on the banks would place all of us in a far worse situation. Until some outrageous "Bailout" legislation is passed, we can at least quantitate the problem using honest accounting methods.
Banana republics have always suffered problems resulting from their "wants" exceeding their "needs". Generally, their militaries step in & declare martial law, maintaining some semblance of societal order while debts are paid down. (Can be an endlessly repetitive cycle). Whether or not we wish for this scenario to befall us, we are headed there at increasing speed.
Frankly, I see no useful purpose in allowing more malinvestments--do any of you believe that foreign T-bond holders will be more pleased after YET ANOTHER US$TRILLION(S) can't be serviced & defaults? Americans have had so much anger management training crammed down their gullets that they'll no doubt leave the tarring & feathering of the perps to the foreigners their govt has borrowed from.
Banana republics have always suffered problems resulting from their "wants" exceeding their "needs". Generally, their militaries step in & declare martial law, maintaining some semblance of societal order while debts are paid down. (Can be an endlessly repetitive cycle). Whether or not we wish for this scenario to befall us, we are headed there at increasing speed.
Frankly, I see no useful purpose in allowing more malinvestments--do any of you believe that foreign T-bond holders will be more pleased after YET ANOTHER US$TRILLION(S) can't be serviced & defaults? Americans have had so much anger management training crammed down their gullets that they'll no doubt leave the tarring & feathering of the perps to the foreigners their govt has borrowed from.
2008-10-01 22:31:17
Ridiculous Ideas
I think you hit the nail on the head, with your last statement! Our Private Central Bank created this problem, and we'd be better off with NO central planning. I believe that it created the Great Depression, as well as the funk we're currently in & greater funk we seem headed for. One of FDR's grandiose "solutions" was allowing food to rot, so as to raise the price of US agricultural products. US Agriculture has been governmentally micromanaged, ever since. That the US grows & exports lots of taxpayer-subsidized agricultural products doesn't mean that the country wouldn't be better off without Farmer Sam running the communes. I'd hate to see a Homebuilder Sam added to the Retirement & Medical Plans Sams, and the recently appearing Insurance Sam and Mortgage Securities Sam...
2008-10-01 22:58:37
A much, much better subprime mortgages and credit problems workout
A much, much better subprime mortgages and credit problems workout
A much, much better subprime mortgages and credit problems workout
I don't know how I got diverted to your site from Market Watch, but I like your variety of authors, all making valid points on the same topic, so we get many different aspects of it. Kudos for that.
I agree that the underwater mortgage values are about a trillion dollars - at this moment. Values could go still further down, causing a larger negative equity, especially if credit freezes and jobs and incomes do not get re-activated. Let's suppose that the ultimate shortfall is $2 trillion, an about 30% drop in home prices from say 50% in high priced overinflated areas to closer to 20-25% for the less active parts of the country. We could even let the underwater part be $3 trillion out of say $7 to $9 trillion of total mortgage debt and home equity. Its temporary.
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Bankers who love to create new money wealth from collateralized (and especially for central bank loans to government, non-collateralized) credit, will keep pumping up the money supply at even more than the long term 6% and more recently early this century +10% and now perhaps closer to 20% or greater, while those into their own self pleasures will keep procreating, together making the dollar cheaper, so that in terms of money, the past more valuable dollar debt is repaid with the same number of now cheaper dollars, many more of which are in the money supply per capita. Thus, at some point, if we or nature do not totally destroy ourselves physically or economically, home prices will again start climbing, and it would seem from all the new money, that they will climb quite rapidly. The best indicators from the 1929 crash, show that housing prices seemed to return to 1928 levels in about 13 years, while it took the DJIA about double that time. Thus, even if we have to extend repayment periods, values will recover and lenders will somehow be repaid if they hold the loans long enough and if the borrowers can earn something make some part of the loan payments plus taxes and insurance.
The issues are whether the lender will be able to fully recover what was owed so that the mortgage doesn't have to be written down, and whether the write downs can be separate from FDIC determinations of solvency, so that the lending capacity and shareholders' equity capital in banks will not be lost and make the credit and home value problems worse. Twenty-six years ago a mortgage concept that deals with these problems was created and enonometrically tested against all previous and perceived possible economic scenarios except war or a natural event that collapsed the economy. In every test, the lender recovered 100% of what was due under the original contract, although we did not use rates as high as the subprimes have had, ie. over 11%. Thus, if we are able to swap interest rate for future appreciation in restructuring these mortgages, the lenders should come-out close to whole over time - including granting extra time to repayment - if the borrower can and will keep earning and paying what they can.
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The lenders have a real incentive to make these swaps, because chapter 13 or 11 bankruptcy will convert the portion of their loan amount that exceeds present market value into unsecured credit. The borrower may also propose a plan that lowers the interest rate and if approved by the creditors committee and then, likely by the judge, the lender will get zero for the excess rate that the loan was written for. The banker has another option though. We intend to create an entity that will swap its good debt for bad mortgages and then restructure those mortgages along these lines with a few more present value of deferred future payments to give the mortgage owners the maximum amount of fixed value, good, current payment receivables on their books that do not have to be written down. They will also get some preferred interests that will track the ultimate performance of the mortgages they swap. By not only restructuring the loans, but by also helping borrowers to work, produce and earn, we believe that no one will lose anything over time. Home values could double in 5 years given the $150 billion of Fed bank credits.
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Another approach that can help is for the FDIC to start getting realistic about their premium, and collecting at least 1/2% instead of the now measly 1/12%. Assuming a bank leverages its deposits into 10 times in loans (instead of the 11 times now allowed) the 1/2% premium on deposits would amount to only 5/100ths of a percent in loan rates to be recovered. The FDIC must also be legislated to not require mark to market, to with the Fed work out banks to not contract lending capacity or cause total shareholder losses such as at Indymac, WAMU, a number of others, and who knows where Wachovia shares will end up? The FDIC must also not use extreme write-downs of asset values to declare insolvency, which the above swaps are intended to prevent happening, in spite of FDIC and SEC pig-headedness.
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The FDIC insuring all deposits for a heftier premium is not as cheap a solution as our debt for bad mortgages swap program. It requires a different orientation of trying to save the lending institutions and unwind their problems over time, rather that breaking them so that bigger banks can pick-up their deposits and customers, formerly for almost nothing, now for just very cheap prices to value. The FDIC has to stop trying to close down some for others to buy, and become a true workout agency, which they easily could do - if the bankers ALL wanted them to. Insuring ALL deposits means not just up to $250,000, because as one of your multiple authors correctly pointed out, a substantial number of dollars are owned by big businesses, which have billions of dollars that they now put in treasuries for protection, since those deposits would not be insured. Many of these big corporations already have over a billion dollars in working cash split among say 3 to 5 banks. More must be insured by the FDIC to put more liquidity and deposits in banks designed to be lenders and better able to lend with this money in deposits in them. The Fed system is designed so that the US Treasury can make up these lost bond dollars of large corporations by borrowing directly from the Fed, thereby also putting more money supply into circulation.
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Ultimately what this means is that the US credit implicit in its Treasury instruments are extended through the FDIC and Fed to depository lender banks, so that there might even be enough in new deposits to make the $7 trillion of home equity and other lines of credit lendable. All this does not take a wasted $700 billion of taxes or Fed printed or Treasury floated new money or both, but self liquidating by loans increased premiums from banks and swaps of good securities for holders of bad loans. This is a cheap plan that is estimated to take about $100 Million (not Billion) a year to operate. Sure, its more money, but only 1/7000th or .0000014% of Paulson's outrageous $700 billion request.
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This $700 billion has to be only a tip of the iceberg door opener, and with no details, accountability or court remedies for giving it all to his Wall Street buddies to pay investors their lost equities in leveraged re-syndications of subprime mortgages (CDOs, SIVs and CDSs) that have already lost their equity, it won't bail out any lending bank, just Morgan Stanley, Goldman Sacks (of which he was a former co-chair) and perhaps a few of the bigger banks speculations in the quadrillion or so of interest rate, credit swap, currency or other derivatives. We really ought to be told and know which of these J.P. Morgan, Citi, and Bank of America etc. actors have been profiting from derivatives on the fall in value of the dollar due to the credit and asset value problems they purposely caused to be able to scoop up assets at barn burning prices.
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Muni bonds are another issue, and somehow we must let these entities either go bankrupt or get people to run them without increasing spending and taxes every budget cycle. Investors who are defrauded by government subdivisions or securities broker-dealers or banks and borrowers defrauded by loan brokers must be given REAL and complete remedies against not just the brokers, but also the funders who used the holder in due course provisions of the UCC to allow and even induce loan brokers to defraud borrowers to get the loan closed and at the most money they could get the borrower to take. Borrowers who were defrauded must be allowed to offset their payments with their fraud damages, by US preemption of the holder in due course laws, under which borrowers are allowed offsets against present holders who would have recourse up to the loan brokers. Without that US preemption borrowers who can not pay because of their loan broker fraud damages or who need those damages to not have negative equity and just walk away could overcome frauds inducing state UCC due course provisions, as even bankruptcy courts now can not do. Investors in leveraged re-syndications of subprime mortgage pools as CDOs or otherwise, and in SIVs, CDSs and other derivatives or leveraged to increase returns that lost their equity should not be bailed out by the government - even if they are banks, insurers or public or government institutions. They must be left to their remedies against those who defrauded them, with no taxpayer money going to bail out any of the frauds of the defrauding entities and officials. They must be left to pay for their damages from their assets or go out of business. Its too bad that schools and insurance companies and government pensions and banks lost money to others' frauds, but that's the counterpart of seeking the higher returns, and the remedy is to replace the foolish people who believed in high returns and no risks. If a lending bank has committed fraud, all of its top tiers of officers allowing it, down to all persons who knowingly committed fraud must be replaced and should be prosecuted criminally, in addition to civil judgments against them by those damaged.
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Will this also free up market credit enough to accommodate the $1.6 trillion of commercial paper? WE don't know. What we do know is that this approach gives the greatest credit and lending power to the markets and the lowest cost of any, and that with it, the $7 billion is unneeded. Now its up to you readers to pass this on to your elected representatives and have them throw out Paulson's piggish frauds on us all. Likely, even if they improvidently pass the Paulson bill, it will be challenged and found unconstitutional for purporting to exclude judicial review, accountability and remedy. Thanks for reading this and I hope you will refer others to it and all of you press on your claimed representatives to prohibit the outrageous Paulson proposals and use these cheaper, and more effective means.
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If, for example, fully FDIC insuring all deposits brought $1 trillion in corporate bank deposits to be able to earn a percent over their Treasury investments, this alone could create up to $10 trillion of new lending capacity, which would cover the credit lines and commercial paper. On that point GM recently announced that is was not going to continue issuing commercial paper, but was going to borrow another $3 billion or so from its lines of credit from banks. We badly need to get the big corporations large deposits in banks, which will only happen with full amount insurance and better rates. If the bank charged an extra 1/8% on its 10 times deposits loans, they could pay the depositors 1.25% more than treasuries.
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If the FDIC and Congress fail to implement these measures, the large corporations should join us in creating their own 100% insured bank, which is possible by about five different levels of each almost full deposit insurance. GV
A much, much better subprime mortgages and credit problems workout
I don't know how I got diverted to your site from Market Watch, but I like your variety of authors, all making valid points on the same topic, so we get many different aspects of it. Kudos for that.
I agree that the underwater mortgage values are about a trillion dollars - at this moment. Values could go still further down, causing a larger negative equity, especially if credit freezes and jobs and incomes do not get re-activated. Let's suppose that the ultimate shortfall is $2 trillion, an about 30% drop in home prices from say 50% in high priced overinflated areas to closer to 20-25% for the less active parts of the country. We could even let the underwater part be $3 trillion out of say $7 to $9 trillion of total mortgage debt and home equity. Its temporary.
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Bankers who love to create new money wealth from collateralized (and especially for central bank loans to government, non-collateralized) credit, will keep pumping up the money supply at even more than the long term 6% and more recently early this century +10% and now perhaps closer to 20% or greater, while those into their own self pleasures will keep procreating, together making the dollar cheaper, so that in terms of money, the past more valuable dollar debt is repaid with the same number of now cheaper dollars, many more of which are in the money supply per capita. Thus, at some point, if we or nature do not totally destroy ourselves physically or economically, home prices will again start climbing, and it would seem from all the new money, that they will climb quite rapidly. The best indicators from the 1929 crash, show that housing prices seemed to return to 1928 levels in about 13 years, while it took the DJIA about double that time. Thus, even if we have to extend repayment periods, values will recover and lenders will somehow be repaid if they hold the loans long enough and if the borrowers can earn something make some part of the loan payments plus taxes and insurance.
The issues are whether the lender will be able to fully recover what was owed so that the mortgage doesn't have to be written down, and whether the write downs can be separate from FDIC determinations of solvency, so that the lending capacity and shareholders' equity capital in banks will not be lost and make the credit and home value problems worse. Twenty-six years ago a mortgage concept that deals with these problems was created and enonometrically tested against all previous and perceived possible economic scenarios except war or a natural event that collapsed the economy. In every test, the lender recovered 100% of what was due under the original contract, although we did not use rates as high as the subprimes have had, ie. over 11%. Thus, if we are able to swap interest rate for future appreciation in restructuring these mortgages, the lenders should come-out close to whole over time - including granting extra time to repayment - if the borrower can and will keep earning and paying what they can.
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The lenders have a real incentive to make these swaps, because chapter 13 or 11 bankruptcy will convert the portion of their loan amount that exceeds present market value into unsecured credit. The borrower may also propose a plan that lowers the interest rate and if approved by the creditors committee and then, likely by the judge, the lender will get zero for the excess rate that the loan was written for. The banker has another option though. We intend to create an entity that will swap its good debt for bad mortgages and then restructure those mortgages along these lines with a few more present value of deferred future payments to give the mortgage owners the maximum amount of fixed value, good, current payment receivables on their books that do not have to be written down. They will also get some preferred interests that will track the ultimate performance of the mortgages they swap. By not only restructuring the loans, but by also helping borrowers to work, produce and earn, we believe that no one will lose anything over time. Home values could double in 5 years given the $150 billion of Fed bank credits.
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Another approach that can help is for the FDIC to start getting realistic about their premium, and collecting at least 1/2% instead of the now measly 1/12%. Assuming a bank leverages its deposits into 10 times in loans (instead of the 11 times now allowed) the 1/2% premium on deposits would amount to only 5/100ths of a percent in loan rates to be recovered. The FDIC must also be legislated to not require mark to market, to with the Fed work out banks to not contract lending capacity or cause total shareholder losses such as at Indymac, WAMU, a number of others, and who knows where Wachovia shares will end up? The FDIC must also not use extreme write-downs of asset values to declare insolvency, which the above swaps are intended to prevent happening, in spite of FDIC and SEC pig-headedness.
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The FDIC insuring all deposits for a heftier premium is not as cheap a solution as our debt for bad mortgages swap program. It requires a different orientation of trying to save the lending institutions and unwind their problems over time, rather that breaking them so that bigger banks can pick-up their deposits and customers, formerly for almost nothing, now for just very cheap prices to value. The FDIC has to stop trying to close down some for others to buy, and become a true workout agency, which they easily could do - if the bankers ALL wanted them to. Insuring ALL deposits means not just up to $250,000, because as one of your multiple authors correctly pointed out, a substantial number of dollars are owned by big businesses, which have billions of dollars that they now put in treasuries for protection, since those deposits would not be insured. Many of these big corporations already have over a billion dollars in working cash split among say 3 to 5 banks. More must be insured by the FDIC to put more liquidity and deposits in banks designed to be lenders and better able to lend with this money in deposits in them. The Fed system is designed so that the US Treasury can make up these lost bond dollars of large corporations by borrowing directly from the Fed, thereby also putting more money supply into circulation.
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Ultimately what this means is that the US credit implicit in its Treasury instruments are extended through the FDIC and Fed to depository lender banks, so that there might even be enough in new deposits to make the $7 trillion of home equity and other lines of credit lendable. All this does not take a wasted $700 billion of taxes or Fed printed or Treasury floated new money or both, but self liquidating by loans increased premiums from banks and swaps of good securities for holders of bad loans. This is a cheap plan that is estimated to take about $100 Million (not Billion) a year to operate. Sure, its more money, but only 1/7000th or .0000014% of Paulson's outrageous $700 billion request.
.
This $700 billion has to be only a tip of the iceberg door opener, and with no details, accountability or court remedies for giving it all to his Wall Street buddies to pay investors their lost equities in leveraged re-syndications of subprime mortgages (CDOs, SIVs and CDSs) that have already lost their equity, it won't bail out any lending bank, just Morgan Stanley, Goldman Sacks (of which he was a former co-chair) and perhaps a few of the bigger banks speculations in the quadrillion or so of interest rate, credit swap, currency or other derivatives. We really ought to be told and know which of these J.P. Morgan, Citi, and Bank of America etc. actors have been profiting from derivatives on the fall in value of the dollar due to the credit and asset value problems they purposely caused to be able to scoop up assets at barn burning prices.
.
Muni bonds are another issue, and somehow we must let these entities either go bankrupt or get people to run them without increasing spending and taxes every budget cycle. Investors who are defrauded by government subdivisions or securities broker-dealers or banks and borrowers defrauded by loan brokers must be given REAL and complete remedies against not just the brokers, but also the funders who used the holder in due course provisions of the UCC to allow and even induce loan brokers to defraud borrowers to get the loan closed and at the most money they could get the borrower to take. Borrowers who were defrauded must be allowed to offset their payments with their fraud damages, by US preemption of the holder in due course laws, under which borrowers are allowed offsets against present holders who would have recourse up to the loan brokers. Without that US preemption borrowers who can not pay because of their loan broker fraud damages or who need those damages to not have negative equity and just walk away could overcome frauds inducing state UCC due course provisions, as even bankruptcy courts now can not do. Investors in leveraged re-syndications of subprime mortgage pools as CDOs or otherwise, and in SIVs, CDSs and other derivatives or leveraged to increase returns that lost their equity should not be bailed out by the government - even if they are banks, insurers or public or government institutions. They must be left to their remedies against those who defrauded them, with no taxpayer money going to bail out any of the frauds of the defrauding entities and officials. They must be left to pay for their damages from their assets or go out of business. Its too bad that schools and insurance companies and government pensions and banks lost money to others' frauds, but that's the counterpart of seeking the higher returns, and the remedy is to replace the foolish people who believed in high returns and no risks. If a lending bank has committed fraud, all of its top tiers of officers allowing it, down to all persons who knowingly committed fraud must be replaced and should be prosecuted criminally, in addition to civil judgments against them by those damaged.
.
Will this also free up market credit enough to accommodate the $1.6 trillion of commercial paper? WE don't know. What we do know is that this approach gives the greatest credit and lending power to the markets and the lowest cost of any, and that with it, the $7 billion is unneeded. Now its up to you readers to pass this on to your elected representatives and have them throw out Paulson's piggish frauds on us all. Likely, even if they improvidently pass the Paulson bill, it will be challenged and found unconstitutional for purporting to exclude judicial review, accountability and remedy. Thanks for reading this and I hope you will refer others to it and all of you press on your claimed representatives to prohibit the outrageous Paulson proposals and use these cheaper, and more effective means.
.
If, for example, fully FDIC insuring all deposits brought $1 trillion in corporate bank deposits to be able to earn a percent over their Treasury investments, this alone could create up to $10 trillion of new lending capacity, which would cover the credit lines and commercial paper. On that point GM recently announced that is was not going to continue issuing commercial paper, but was going to borrow another $3 billion or so from its lines of credit from banks. We badly need to get the big corporations large deposits in banks, which will only happen with full amount insurance and better rates. If the bank charged an extra 1/8% on its 10 times deposits loans, they could pay the depositors 1.25% more than treasuries.
.
If the FDIC and Congress fail to implement these measures, the large corporations should join us in creating their own 100% insured bank, which is possible by about five different levels of each almost full deposit insurance. GV
2008-10-02 14:17:00
From Mainstreet: Many of you still don't get it...
Why is it that when the price of milk, gas or beer "inflates" it is terrible, but when the price of our houses "inflates" it is to be desired? Why, because so many of those bemoaning falling housing prices are really bemoaning my inablity to get deeper in dept. The financial-based economy has the fundamental flaw of being based on tapping the earnings of those who actually PRODUCE something.
Like it or not, Wall Street is coming down a notch before this is done. Where middle Americans used to look at those suited Manhattenites with some degree of awe, the looks are fast turning to loathing. With the deepest respect to the professors who have taken the time to share their thoughts, some of those writings highlight that some still hold the position that what is best for Traders, Bankers and Brokers is best for America...
Yes, strong banks will eat the weak ones...and the faster the better. Yes, the financial sector will take a beating with a sudden excess of traders, brokers and bankers clogging up unemployment lines...and the sooner the better. A few strong banks may have to be nationalized and resold later with the equity belonging to the taxpayers until such time as that sale occurs - yes, the big investors will lose their shirts on that one...and the sooner the better.
I didn't take big risks, flip houses or max out credit cards. I did, however, end up with a nearly $500k mortgage on a house worth $620 at the time - for those of you not in Southern California, that is a comfortable 4 bedroom 2 1/2 bath not a grand estate. We bought the bigger house when we had a baby, not as speculation on rising values, and we plan to stay here for 20 years. I challenge anyone to show me how I will come out of this situation better off than before the government takes my money to help ensure that those with enormous wealth keep most of it.
Make no mistake, there are some Billionairs that are going to come out of this as Millionairs. I shed no tears, and the sooner the better.
Like it or not, Wall Street is coming down a notch before this is done. Where middle Americans used to look at those suited Manhattenites with some degree of awe, the looks are fast turning to loathing. With the deepest respect to the professors who have taken the time to share their thoughts, some of those writings highlight that some still hold the position that what is best for Traders, Bankers and Brokers is best for America...
Yes, strong banks will eat the weak ones...and the faster the better. Yes, the financial sector will take a beating with a sudden excess of traders, brokers and bankers clogging up unemployment lines...and the sooner the better. A few strong banks may have to be nationalized and resold later with the equity belonging to the taxpayers until such time as that sale occurs - yes, the big investors will lose their shirts on that one...and the sooner the better.
I didn't take big risks, flip houses or max out credit cards. I did, however, end up with a nearly $500k mortgage on a house worth $620 at the time - for those of you not in Southern California, that is a comfortable 4 bedroom 2 1/2 bath not a grand estate. We bought the bigger house when we had a baby, not as speculation on rising values, and we plan to stay here for 20 years. I challenge anyone to show me how I will come out of this situation better off than before the government takes my money to help ensure that those with enormous wealth keep most of it.
Make no mistake, there are some Billionairs that are going to come out of this as Millionairs. I shed no tears, and the sooner the better.
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