Bank Failure: Some details on ANB Financial
Submitted by
CalculatedRisk on Fri, 05/09/2008 - 4:00pm (130 comments)
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Eight blog posts on CR today? We're not worthy!
Why is Cliffo such a smart ass? Anyways, does anyone know how big the FDIC war chest is? Big Ben himself said that he expects bank failures. Its amazing how hard they try not to cause panic, customers will come in tomorrow and not be any the wiser. Until the next failure my friends.
That's El Cliffor to you, dumb ass.
Thursday and Friday must have been CR records for posts! Love It, great job CR and Tanta.
I am not sure I understand how banks can be failing while the worst of the credit crunch is now over. I mean, all this has blown over, yes?
How much of Citigroups 500 Billion dollar selloff could possibly be tied to these commercial construction type loans?
El Cliffo writes:
That's El Cliffo to you, dumb ass.
Whatever tough guy.
Play nice boys.
How much of Citigroups 500 Billion dollar sell off could possibly be tied to these commercial construction type loans?
On top of that what was the value of their mortgage business that they want to unload?
the first of many c&d lenders that are on the way to failure. this is why bailout bair should be spending more time thinking about ways to recapitalize the fdic insurance fund (when these failures mount) instead of telling the mortgage industry how to workout their upside down mortgages or being the guest host on bubblevision.
"Something Wicked this Way Comes" is apt for the bank failure cascade possibility. Scary. I need another beer. And a bourbon. And a scotch. Maybe not in that order.
In 2005 during FDIC's RIF it liked to proclaim loud and often that we were in a 'golden age' of banking. This golden insight continued well into 2006 and Chairman Bair even picked it up from former chairman Powell. It was a golden age alright and the damn last one for a while.
Estimates on total write downs from CRE?
Safety & Soundness
Bankrate.com Safe & Sound (tm): Bankrate free rating system for banks, thrifts, credit unions
How much of Citigroups 500 Billion dollar selloff could possibly be tied to these commercial construction type loans?
I would call that splitting up the bank. Even if they don't call it that.
IMB has been on the 1 star list for the last year. How much longer can they hang on? That should make quite a splash!
LITTLE ROCK, Ark. - It's a happy Mother's Day for an Arkansas woman she's pregnant with her 18th child. Michelle Duggar, 41, is due on New Year's Day, and the latest addition will join seven sisters and 10 brothers. There are two sets of twins. She was also in charge of risk management at the bank.
Too bad it doesn't take a lot of CRE to export wheat. Maybe the new WPA could somehow be office-type work? I bet if we employed everybody to sit around and listen to wiretaps of their friends and neighbors we could really get government to absorb some of that impending inventory!
"Too bad it doesn't take a lot of CRE to export wheat."
No just fuel, water, machinery, fertilizer and good luck.
Germany's bees are still in better shape than those in the United States, where the mysterious "Colony Collapse Disorder," or CCD, has devastated the American beekeeping industry. "Bees in the US -- with its huge farms -- get a lot more attention than Germany, with its little fields the size of handkerchiefs," Hederer says. "It's sad, but true: There always has to be a huge catastrophe before people start to use their brains."
Bee Emergency: Unexplained Mass Die-Off Hits German Hives - SPIEGEL ONLINE - News - International
...with an estimated $214 million hit to the FDIC insurance pool
CR, thanks for the precise wording.
How long before we see a rate increase for FDIC members?
The DIF stood at 1.22 percent of estimated insured deposits as of December 31,
2007, 2006. from http://www.fdic.gov/deposit/insurance/assessments/assessment_rates_2008.pdf
If you like Arkansas you are going to love California.
"Something Wicked this Way Comes" is apt for the bank failure cascade possibility. Scary. I need another beer. And a bourbon. And a scotch. Maybe not in that order.
JJL | Homepage | 05.09.08 - 8:23 pm | #
The correct order is one bourbon, one scotch, and one beer.
Some numerical perspective on bank failures by year, from a quick hand-count of the FDIC historical data:
1973 4
1974 4
1975 12
1976 17
1977 5
1978 5
1979 10
1980 22
1981 38
1982 117
1983 98
1984 103
1985 480
1986 203
1987 262
1988 470
1989 534
1990 381
1991 271
1992 180
1993 50
1994 15
1995 8
1996 6
1997 1
1998 3
1999 8
2000 7
2001 4
2002 11
2003 3
2004 4
2005 0
2006 0
2007 3
Now, the present day industry is a lot more concentrated, at least in the larger cities …
CR has been way ahead of the curve on C&D loans. The problem with these loans isn't just the economy or CRE slump. It's the bad ways banks did biz. There are three big failures embedded in a lot of C&D loans:
1) lack of independent due diligence and market analysis into the feasibility of the project. You would think before you loaned a developer $20 million for a hotel, you would check out how many other hotels are around, and how full they are. Not so.
2) wrong stuff. Condo C&Ds will turn out to be the worst stuff and the first to belly-up. But retail and hotel will be right behind.
3) throwing money. Banks didn't really negotiate these deals. They just threw money at developers who appeared to have track records.
C&D loans will turn out to be a bad combination of bad macro and bad micro. It's a horror that the U.S. is graduating so many biz school degrees and MBAs, but there is such rot in the lending departments of banks. There is no sense of history or values. Most lending officers in banks didn't learn anything and don't know anything. They're idiots.
C&D loans will turn out to be a bad combination of bad macro and bad micro.
Just exactly like they were 20 years ago. Cripes!
Im reading about a Tehachapi developer filing:
In February, a $79 million loan borrowed against Alta Estates defaulted, county records show.
As of Feb. 20, $63.7 million was past due, the default notice indicated.
If the delinquent loan isnt repaid, the lenders could repossess property used as collateral: the unsold land, pipes, concrete and other furnishings around the new tracts residents.
A group of banks organized by a Hawaiian institution, Central Pacific Bank, made the loan in April 2007, records show.
The above from 404 - Page not found
What in the world is an Ohau bank doing brokering for a California dessert sub-division?
LRB · Donald MacKenzie · End-of-the-World Trade
"... I became intrigued by an oddity that I came to think of as the end-of-the-world trade. The trade is the purchase of insurance against what would in effect be the failure of the modern capitalist system. ...
the cost of insuring against it had shot up ten-fold. Normally one can buy $10 million of end-of-the-world insurance for between two and three thousand dollars a year. By early last November, the prices quoted were between twenty and thirty thousand, and even then it was difficult to buy in quantity at least, said the banker, 'not from anyone you trusted'."
What in the world is an Ohau bank doing brokering for a California dessert sub-division?
Rob Dawg | Homepage | 05.09.08 - 10:03 pm | #
Let me guess... seeking diversification?
Maybe the bank president was vacationing in Tehachapi and liked what he saw? Maybe David Crisp flew him in?
"brokering for a California dessert sub-division?"
Because it was yummy?
My father used to rag on the mba programs for their belief that properly trained managers could run any business in any industry. Industry specific or local knowledge was of secondary importance. Obviously, this mindset still persists.
Best,
Citi, in a perfect world, would have a similar exposure to CRE & C&D as the other big banks who got burned a decade ago(ie; low), and their kitchen sink kimono in the last 8k seems to support that.
Citi's $500bn divestiture?
After a little legwork I assume it's an unloading of the insurance arm, the piecemeal work of unloading underperforming divisions could never reach that scale.
Hiker90,
In theory that works if you're hiring above a certain level, but below that level you have to have folks who know the details o the market intimately.
I have a friend who went from aerospace to telco to finance and rose up each time because he:
Is a quick learner
Puts his time in
Can relate to people both above and below his station.
Those are assets not learned in any MBA course.
Rich,
Kudos for the order of drinks, it can be hard to concentrate while drinking with "my dear old graying dad" while I "drink alone. yeah with nobody else"!
What is strange about pd130's list is the 534 number in 1989, the very beginning of the last big real estate bust. Anyone remember 1989 clearly? I was 13 years old at the time and cannot remember the economic conditions?
If you needed another reason not to name your son Jim Bob: LITTLE ROCK, Ark. - In this Aug. 2, 2007 file photo, Michelle Duggar, left, is surrounded by her children and husband Jim Bob, third from right after the birth of her 17th child in Rogers, Ark.
Mental acuity, dedication, communication. I sure could use a heaping dose of those assets. Similarly, a friend of mine got his degree in building construction and went into refinery maintainence and construction. His ability to work with people from all walks of life was key to his success, that being on time, on budget, and not blowing up the place. He has some of the funniest and scariest stories. I couldn't cut it in that world.
Best,
bigchubasco - First, erase your browser history so you can't ever do that Google search again by accident, then step away from the keyboard and get some fresh air.
Bentonville is, of course, the home of Wal-Mart. There has been phenomenal development in the area as a result of Wal-Mart (and Tyson, and some other large firms). Residential development got way ahead of itself. Northwest Arkansas is a nice place, and somewhere one would not expect a "boom," either residential or commercial/retail. But there it is. There could be other failures in the area later.
Development loans often have interest carry built in. If the developer can't sell out as planned, once that interest carry is consumed, well, it's foreclosure time. Just what the bank wants--more RE it can't sell.
Hmmm, Tyson...does this mean the chickens are coming home to roost?
So much for the Fed being interested in bailing out a $1.5 billion bank.
The Fed won't bail out a $1.5 billion bank nor a $10 billion bank like Freemont or Corus. These are small potatoes and the Fed doesn't have enough ammunition.
Besides, let the FDIC worry about it.
JJL- "Anyone remember 1989 clearly?"
Like it was yesterday. Please don't remind me.
What is strange about pd130's list is the 534 number in 1989, the very beginning of the last big real estate bust. Anyone remember 1989 clearly? I was 13 years old at the time and cannot remember the economic conditions?
JJL | Homepage | 05.09.08 - 11:03 pm | #
I was there for it - it was wild. The thing is most of the root cause damage had been done 3-4 years earlier and it just took that long for all those banks and S&Ls to actually die. The root cause was all those failed loans in the oil patch and agriculture and related spec development in the mid-80s that finally triggered mass failures later in 89-90.
It makes you almost wonder if the same thing couldn't happen again... that the bank failures won't really kick in for another 2-3 years as the poison works its way into the system.
pd130 | 05.09.08 - 9:52 pm
CR should graph this.
Alec - C is underwater...who cares whats to go...sell, sell, sell,
kinda like out damd spot out, out, out I say!
I was 13 years old...1989
ggeezze, I feel really old, right 'bout now!
JJL
"What is strange about pd130's list is the 534 number in 1989, the very beginning of the last big real estate bust. Anyone remember 1989 clearly? I was 13 years old at the time and cannot remember the economic conditions?"
the economy of the 1980s was characterized by rolling regional recessions. the farm/rust belt went first; next up was the oil patch; then new england; and finally southern california. the southeast largely escaped. so as far as 1989 goes, it depends upon where you were. the northeast and CA were in the middle of their downturns. TX was on the backside of it and the southeast slowed but did not stop.
this cycle will be very different. more like the 1970s when the shocks (financial and commodity spike) were national in nature.
btw, looking at the raw numbers of failures can be a bit misleading as it should be normalized as a rate. today, 534 failures would represent 6.3 percent of institutions today. in 1989, there were about 13,000 institutions, so the faiure rate was about 4.0 percent. a similar failure rate today would be about 340 institutions.
also, the historical numbers should be split between banks and thrifts. i will have to do those calculations, but it is a given that the thrift failure was a multiple of the bank rate. in this cycle, the bank failure rate could be the highest in the last 50 years. however, the banking regulators will do their very best to forebear like they are doing with home mortgage loans. this will be a japanese style workout.
Dryfly- "It makes you almost wonder if the same thing couldn't happen again..."
Dryfly, you had to go and say it, didn't you? You hit the nail on the head with your comment, and I'm hoping this commercial crap isn't the third spike.
CR is probably expecting the worst, but not saying. Needless to say, Conjure and I expect this "recession" to be a doozy.
"ggeezze, I feel really old, right 'bout now!"
Me too, but at least know what's coming and it be ugly. Been here, done this.
It looks like someone at the NYTimes has been reading Tanta and CR:
Mortgage Holders Find It Hard To Walk Away From Their Homes - NY Times
I have to say, this is clear and simple and plain writing - but just about every word rings true. Nothing new in it for readers of CR.
In reference to the 1989 thing, I remember the market for both new and used machine tools imploding. You couldn't give the stuff away. I specifically remember a McDonnell-Douglas division in California selling a very large 3-axis milling machine (think super quiet submarine propellors) to China for scrap. They couldn't find a buyer. Unbelievable.
Conjure and I battened down the hatches months ago. Most of the others here have probably already done the same.
"least know what's coming"
How many out there know this?
What in the world is an Ohau bank doing brokering for a California dessert sub-division?
Rob Dawg | Homepage | 05.09.08 - 10:03 pm | #
Some one said Well, you know, I have some beach front property for sale and the other one bought it.
1989 thing
I started my own firm in this year - left a six figure job to do so. While very tough, it was the best thing.
This was the time of SIP - Self Imposed Povery... we spent nothing! We had some cash-o-la but did not spend a dime we did not have to...
I think this time is different, I think it will be more confused. The oil prices will create havoc and the declining economics will drive saving - if only to pay off debt.
Barley- "The oil prices will create havoc and the declining economics will drive saving - if only to pay off debt."
Yup.
One bourbon, One scotch, One beer.
ok so heres my question
if fdic has 52 billion set aside to cover depositors in case of bank failures...
in which banks have they deposited that money ?????
CR is probably expecting the worst, but not saying. Needless to say, Conjure and I expect this "recession" to be a doozy.
mp | 05.09.08 - 11:47 pm | #
I am beginning to come to that conclusion - regrettably. But it isn't for the reasons the 'deflationists' propose [a debt reset]... I think its going to be the 'Peter Principal' that nails us - debt precipitates the crisis but its systemic failure to manage the crisis that kills.
I have a handful of client companies I represent. I then call on many others... 'rep, contract acct mgmt & new biz' stuff all rolled into one... so I get to view a pretty good cross section of organizations.
I can tell you right now I can count the well run companies on one hand. There are a lot of people up and down the org charts in most of these firms that are way over their head. I mean WAY OVER their head.
And the bench is real short too. Weak line up, short bench add in a crisis - not good.
I could cite examples galore but I don't know who reads this, might recognize some if too specific - but I just ran into THREE examples today of people in a position where they were required to make a critical decision for their firm and they completely whiffed.
Now in a good economy - high liquidity & decent margins, etc. - they'd get a mulligan or maybe two. Not now - not in this climate. If they trip putting the check in the mail the banks are likely to call in the loans immediately.
The worst offenders are private equity firms - Cerberus like firms though the ones I work with are lots smaller. I can't imagine their 'partners & principals' putting up with massive losses - they'll walk away from these LBOs faster than condo flippers in Vegas.
I won't say anymore except the ones I've run into are very shaky & very poorly run from an 'operational' perspective. I bet they all had wonderful business plans when the leveraged acquisitions were hatched. I bet those plans are all out the window now and those mgmt teams are in complete retreat mode - retreating into the economic equivalent of a Russian winter.
My recommendation to anyone who works for an operation run by a PE firm - get another job ASAP, liquidate debt & buy rice. Its worse than the 80s LBO mess from what I can see - operationally anyway... I can only imagine what their books look like.
El Cliffo (did I get that right...."El Cliffo")
Yup that right...thx, nice, smooth song
Illuminating explanation, CR; I knew absolutely nothing about 'C&D.'
What a rapid fall. Wow.
C&D troubles..
Gene Sperling is on board too
Double-Bubble Trouble in Commercial Real Estate: Gene Sperling - Bloomberg.com
"Conjure and I battened down the hatches months ago"
Pfffft. Don't you know anything? The Vince Ferrel bottom was put in on March 17th, according to Kudlow. Even Greenspan, Paulson & Thain said this week the credit crisis is over. Time to buy financials - Especially financial services. Credit card receivables are really hot right now too, since TGT sold $3.5B to Dimon - the smartest guy in the room. TGT card stuff... secured by 5 year old bath towels, socks, underwear and stuff like that.
Off to the races!!
barely, I confess to having nibbled at some financials. After all, it is the only game in town and the Fed said to do it. I might add that, although Conjure likes Vegas, I don't.
Having said that, don't ever expect Mr. Market to reflect what's really going on. Business-wise, Dryfly's perspective is very similar to mine. It's getting dangerous out there.
"I confess to having nibbled at some financials"
Well, you can sell Calls against them. I hold some and have made more than I lost on the shares by doing serial selling and buying them back cheaper, while collecting the dividends... for now. I may get caught, but in that case I'll dump the stock & settle...
"How many out there know this?"
Pleased to meet you
Hope you guessed my name, oh yeah
But whats confusing you
Is just the nature of my game
Just as every cop is a criminal
And all the sinners saints
As heads is tails
Just call me lucifer
cause Im in need of some restraint
So if you meet me
Have some courtesy
Have some sympathy, and some taste
OK dryfly, what's it take to bring you over to the debt reset scenario? Here you are talking about these doomed companies with too much debt. How is the Fed gonna save all of them and all the homedebtors?
Debt is being destroyed faster than the Fed can reflate. They can slow it down, but they cannot stop it.
CR, you said:
"Here come the C&D failures"
A friend in a position to know recently told me that banks have been very slow to recognize losses in ADC lending ("A" for acquisition), and have essentially been relying upon non delinquent status to pass such loans from adverse classification. However, in many instances the loans are current due solely to interest carry, as you pointed out. My friends opinion is that losses will be shocking in the most distressed markets when the truth is finally flushed out.
Man, you guys are starting to sound just like me. The dark side beckons further...
I said, Debt is being destroyed faster than the Fed can reflate. They can slow it down, but they cannot stop it.
That is, unless the Central Banks want to destroy their currencies and bring on hyperinflation. I don't think they want to do that, but I own plenty of gold, just in case.
I read the papers in the morning, and am reassured-- "mood has turned on Wall Street;" "we've reached bottom" "surprising retail activity" "well priced houses selling" etc. etc. Then, at night, I turn to CR, and am alarmed again. Let me just say, I hope the papers are right and CR and his astute band of commentators are wrong!
jac,
That would be a triumph of hope over experience, given that this blog has a much better track record than the paper these past years.
president of opec chakib kalil threatens 200 dollar per barrel oil if dollar continues to devalue...
OPEC's Khelil Says $200 Oil Possible With Weak Dollar (Update2) - Bloomberg.com
you guys are all a bunch of worry-ers and bad to the bone bears...
i'm with ya
cause the evidence is there
as my grandmother used to say, prepare for the worse and hope for the better.
I think maybe a different Stones lyric:
I see people turn their heads and quickly look away
Like a new born baby it just happens evry day
I look inside myself and see my heart is black
I see my red door and it has been painted black
Maybe then Ill fade away and not have to face the facts
Its not easy facin up when your whole world is black
No more will my green sea go turn a deeper blue
I could not foresee this thing happening to you
Hoocoodanode?
"Man, you guys are starting to sound just like me. The dark side beckons further..."
tj, I've always enjoyed your comments, and yet at the same time considered them too pessimistic. That too pessimistic part might be wrong.
Update on the S&P 500's PE ratio. With the index dropping about 20 points on the week, the PE ratio still rose slightly, up to about 23 now.
Might be time to reconsider that buy-the-dips strategy.
hiker90,
Thanks. I'm a computer analyst, and when the RE boom started so soon after the tech bust I sensed something odd afoot and started analyzing macroeconomics. Didn't like my conclusions, and still don't.
Protect yourself.
sdtfs,
nice..How about some Who...
I'll tip my hat to the new constitution
Take a bow for the new revolution
Smile and grin at the change all around
Pick up my guitar and play
Just like yesterday
Then I'll get on my knees and pray
We don't get fooled again
Don't get fooled again
No, no!
Yeaaaaaaaaaaaaaaaaaaaaaaaaah!
Meet the new boss
Same as the old boss
Protect yourself.
tj & the bear | 05.10.08 - 1:31 am | #
like many here i have taken steps
more conservative investments
no mortgage
full pantry
can provide self defense to home and family
hard money
but ya know.. i just keep coming back to the idea that an island of security in a sea of chaos...just isn't that secure.
the world around us is what worries me
What is strange about pd130's list is the 534 number in 1989, the very beginning of the last big real estate bust. Anyone remember 1989 clearly? I was 13 years old at the time and cannot remember the economic conditions?
JJL | Homepage | 05.09.08 - 11:03 pm
Back for a little while. One thing, I'm thinking about what interest rate spread to plot against the failures, something to catch the borrowing short-lending long that was supposed to have been the catalyst for the banking troubles.
Subsequent to the spread problem becoming clear around '79 and lots of insolvencies showing up with a couple years lag, per some commenters above, there was a kind of lull period of "regulatory forbearance," known to some as "cover-up," followed by either a policy break or some how can I put this naturally occuring explosive alimentary event, which led to those two or three big numbers in the series. These breaks in the environment should be definable as distinct dates, like Aug. 9 of last year.
And the point about normalizing by some index of industry size and composition is well-taken if you want to do anything comparative with the series. Note, howver, that the change in industry concentration might not be uniform. Just recently I saw some research to the effect that consolidation was much greater in large metro area markets than in relatively isolated smaller cities and towns. My immediate point, anyway, was just to show that things can go fugazi* on this industry in a hurry.
Anyone remember 1989 clearly? I was 13 years old at the time and cannot remember the economic conditions?
JJL | Homepage | 05.09.08 - 11:03 pm
At 13, the economic conditions were:
MAD Magazine: $2.00
Topps card pack: $.75
Playboy: priceless
pd130
i remember 89 very well (yes i'm old, but not too old to remember
either the 87 or the 89 dip was in part precipitated by the Japanese balking at purchasing us treasuries, allegedly because we had run up huge deficits during the 80s
obviously there were other issues
in westchester county NY where i lived at the time, my recollection is that interest rates were high, and across the usa as the prime was over 10 %
but interest rates had spiked to double digits twice before in that decade.
Anyone remember 1989 clearly?
Nope, it's all fuzzed together, just a mass of LBO's, S&L failures, crazy business ideas. Liar's Poker, Serpent on the Rock, Barbarians at the Gate, Wall Street (the movie), Bonfire of the Vanities, and other books have destroyed what accurate recollection of what I remember and what I learned about later. Crazy lying businessmen screwing everybody who trusted them is what I think now.
the world around us is what worries me
I hear that. We live in the Hollywood Hills, surrounded by this City of (so-called) Angels.
In '89 the wife and I were house-hunting right at the top of the last SoCal RE bubble.
And in 1989, I was a year away from buying my first house...lived in Winston-Salem NC and everybody talked about RJR and the KKR Barbarians.
But my best memories are of watching the Krispy Kreme donuts made at 2 AM while sipping hot coffee at the counter.
and across the usa as the prime was over 10 %
but interest rates had spiked to double digits twice before in that decade.
My recollection as well. I suspect that the failure boom was largely a result of some lag kicking in, more than a contemporaneous event. I even have an idea about some of what happened (
, but want to have sound narrative in place before I get to sayin' much.
Something from YouTube for the commodities players, foodies, and people who can barely remember the decade we're talking about although they were there:
Don Cherry, Brown Rice
big dow drops
rank,date,close,net pt chng, % chng
89 ranks 19 on the list...87 was a biggie
1 12/12/1914 54.00 -17.42 -24.39
2 10/19/1987 1,738.74 -508.00 \t-22.61
3 10/28/1929 260.64 -38.33 -12.82
4 10/29/1929 \t230.07 -30.57 -11.73
5 11/06/1929 232.13 -25.55 -9.92
6 12/18/1899 \t58.27 \t-5.57 \t-8.72
7 08/12/1932 \t63.11 \t-5.79 \t-8.40
8 03/14/1907 \t76.23 \t-6.89 \t-8.29
9 10/26/1987 1,793.93 -156.83 \t-8.04
10 07/21/1933 \t88.71 -7.55 \t-7.84
11 10/18/1937 \t125.73 \t-10.57 \t-7.75
12 02/01/1917 88.52 \t-6.91 \t-7.24
13 10/27/1997 7,161.15 -554.26 \t-7.18
14 10/05/1932 66.07 \t-5.09 \t-7.15
15 09/17/2001 8,920.70 -684.81 \t-7.13
16 09/24/1931 \t107.79 -8.20 \t-7.07
17 07/20/1933 \t96.26 \t-7.32 \t-7.07
18 07/30/1914 \t71.42 \t-5.30 \t-6.91
19 10/13/1989 2,569.26 -190.58 \t-6.91
yeah TJ & the bear
i used to get the same feeling living just north of NYC
8 million people living in an area the size of an average us county.
thats why i moved to the pacific northwest...needed room... as in head space
pd 130
lewis rukeyser on wall street week interviewed experts endlessly.
many talked about program trading, derivatives AND that gov officials made il-considered comments about not wanting a strong dollar...
In '89 I was a senior in college. I knew there was a big Ponzi scheme going on (never took an econ course in my life though). I thought we were in for some tough times and it was a very bad time to be looking for a job. Somehow this country was able to keep it together for another 18 years. Easy money I guess. What happens now?
what happens now...we wish we knew
but many here more than suspect a day of reckoning (or more likely a couple or several years of reckoning) are just around the corner
(More from the hank 10:15 article):
Over recent months, banks have frequently been accused of hiding their credit losses. The truth is scarier: such losses are extremely hard to measure credibly. Marking-to-market requires that there be plausible market prices to use in valuing a portfolio. But the issuing of CDOs has effectively stopped, liquidity has dried up in large sectors of the credit default swap market, and the credibility of the cost of protection in the index market has been damaged by processes of the kind Ive been discussing.
How, for example, can one value a portfolio of mortgage-backed securities when trading in those securities has ceased? It has become common to use a set of credit indices, the ABX-HE (Asset Backed, Home Equity), as a proxy for the underlying mortgage market, which is now too illiquid for prices in it to be credible. However, the ABX-HE is itself affected by the processes that have undermined the robustness of the apparent facts produced by other sectors of the index market; in particular, the large demand for protection and reduced supply of it may mean the indices have often painted too uniformly dire a picture of the prospects for mortgage-backed securities. One trader told the Financial Times in April that the liquidity of the indices had become very poor: Trading is mostly happening on interdealer screens between eight or ten guys, and this means that prices can move wildly on very light volume. Yet because the level of the ABX-HE indices is used by banks accountants and auditors to value their multi-billion dollar portfolios of mortgage-backed securities, this esoteric market has considerable effects...
Josef Ackermann, the head of Deutsche Bank, has caused a stir by admitting I no longer believe in the markets self-healing power. The state has had to stand between the market and the abyss. Had the British government not rescued Northern Rock, bank runs would have brought down other institutions and destroyed confidence in the UKs financial system. Had the Federal Reserve not bailed out Bear Stearns, at least one other major Wall Street bank would most likely have failed, and chaos might have ensued. With private lending having dried up, government-sponsored lenders now provide 90 per cent of the funding of new mortgages in the US.
Modern central banking, backed ultimately by the tax payer, can almost certainly prevent financial catastrophe on the scale of 1929. Restoring normality, which requires repairing the cognitive state of modern finance, is quite a different matter. As Carruthers and Stinchcombe note, market liquidity depends on facts. However, todays financial facts depend on liquidity. The credit markets remain stuck in a vicious circle.
Excellent background on CDO's and related sophisticated trading instruments!
What a nightmare.
I do remember working for a contractor on Don Dixon's Rancho Santa Fe estate (just north of San Diego) around then and wondering where Mr Dixon got all the money. (He was building a guest house the size of a barn and talking about a hefty hunk of change for landscaping.) He was a VP of a Texas S&L that blew up and the work was never finished. One of the guys I worked with was from Houston and told me horror stories about how bad the situation there was.
unirealist...thanks
do you have a link?
sdtfs
yes i heard similar tails from brother who traveled often to dallas-fortworth
hugh hang-over in office real estate overbuilding etc and oil patch stuff
texas was hit hard
hugh should be huge
as in huge hang over from office real estate building late 80 in texas
cant spell cant type
tired and under the affluence of incahol
good night
mock turtle, the link was provided by hank at 10:15, above.
From what I excerpted, it may sound like criticism of the call (from critics like Denninger--whom I do appreciate) for more mark-to-market pricing of securities. But that is not the sense I get from the article (which is from, oddly, the London Review of Books). Rather, it reveals how utterly insane a financial house of cards has been constructed by the geniuses of Wall Street.
unirealist
1015
thanks
Ok. So does anyone have any thoughts on where one might find a comprehensive listing of S&Ls with heavy C&D exposure?
CR? Rich? Conjure?
Spyboy
Where do I find the law that is so clear about possession in New York?
XRegul8r writes:
Bentonville is, of course, the home of Wal-Mart.
I'm tramatized again. A long time ago the bubble hit me when over at Ben's blog he published about the bubble in NW Arkansas. For some reason that is what it took for me to understand this was global.
I need to go home and drink heavily. Normally, I'm very happy in my position as one of the "optimist bears." Having this bank fail as one of the early ones just drives home how global this is.
Got Popcorn?
Neil
Its 03:25 Pacific time (10:25 Zulu) and there are only 2 visitors Online.
That just seems odd on CR.
Got Popcorn?
Neil
OT, but here's a reporter writing about what we are all thinking concerning the fed's policy on moral risk (from ny times):
Euthanizing Bear - DealBook Blog - NYTimes.com
Off topic. But I'm sure Tanta will pick up on this today sometime. The NYTimes on walking away: "Investors are going to default right away because they have negative equity, said Robert Van Order, an adjunct professor of finance at the University of Michigan. But thats different from people who moved into the house.
I sense the hypothesis is correct. Now, where's the data?
Investors and speculators never intended to live in the house or only did so for a short time while they made improvements.
link to nytimes article:
Mortgage Holders Find It Hard To Walk Away From Their Homes - NY Times
How will Paulson et al explain away their call of a bottom to the crisis when the next phase gets going? Seems to me that they are contrarian idicators. If they say all is well, it really means all is not well.
I work roughly 8 blocks from the FDIC and I know they're trying to hire hundreds of people to deal with the coming onslaught. They're also trying to tap into the knowledge of those who were working there during the late 80's and early 90's since "business" has been pretty slow for a while.
pbgc employee writes:
I work roughly 8 blocks from the FDIC and I know they're trying to hire hundreds of people to deal with the coming onslaught. They're also trying to tap into the knowledge of those who were working there during the late 80's and early 90's since "business" has been pretty slow for a while.
look at the fdic website, they are not trying to hire hundreds of employees. they are seeking about 50 to 100 former liquidators on a contract basis and they are contracting with less than 100 former examiners. on the examination front, they are woefully inderstaffed in quality and quantity. much of the examnation front line force was hired post-1991; hence, there is very little experience analyzing troubles real estate projects.
"Anyone remember 1989 clearly? I was 13 years old at the time and cannot remember the economic conditions?"
I remember listening to Libe-Aid in 1985, when John Dylan walked on stage and said "Can't we do something to help the US farmers?" He took some flak for that... asking for aid to US citizens during a fundraising for Africa...
Anyway, his comment led to subsequent "Farm-Aid" concerts held through the rest fo the 1980s. Clearly the midwest was in a funk by the mid 1980s and it took years to clear the rubble.
"Anyone remember 1989 clearly? I was 13 years old at the time and cannot remember the economic conditions?"
I remember having a CD in a bank paying 9% interest, and the bank had a different name every week it seemed.
Remembering 1989 clearly? Well, I'd just had to change jobs my previous company's client base was small- to mid-size S&Ls, especially in Texas, and they kept going belly-up on us. The VCs finally got tired and pulled the plug.
That, and the earthquake.
mock turtle writes:
president of opec chakib kalil threatens 200 dollar per barrel oil if dollar continues to devalue...
Bloomberg.com ne...id=aCjCk1MBnioU
mock turtle | 05.10.08 - 1:09 am | #
From mock's Bloomie link - the OPEC minister says its the dollar than follows with this...
"Geopolitical concerns" are the cause of rising oil prices, he said. "We shouldn't see these prices" with supply and demand in balance.
[...]
"If Saudi Arabia increases supply, it's not going to have any effect," Khelil said. "Is that going to change the tension with Iran, the problems in the Middle East?" he asked. "It's not."
The current run up isn't just dollar weakness, it isn't just spec greed - there definitely is a geopolitical smell to it on top of the legit economic factors. BTW the OPEC minister is from Algeria which is about as anti-Bush-US as Venezuela & Iran. $200/bbl is in effect the equivalent of another oil embargo - a de facto embargo.
McCain [me assuming - not advocating] is going to be in for a fun four years - aren't we all.
Seems like the bank failures are starting from the heartland, not the coast as one would expect. Not sure what to make of this; I would have thought that CA and FL would be leading the way.
Off topic - just got back from Barcelona, Spain. $10 bucks for a stinkin' Burger King value meal, $5/gallon for gas.
Wonder if I can bill the treasury dept. for the difference ...
Dry,
Here is a year old article reporting a breakthrough in the fusion process:
Closer Toward High-yield Fusion Reactor: Revolutionary Circuit Fires Thousands Of Times Without Flaw
It seems to me that it may move up commercial applications for fusion generated electricity from decades to several years. But I can't find a nuclear physist to evaluate it. Maybe you have some contacts.
Whadda you think?
I'm so glad the Duggars got a $7,500 stimulus rebate for being grossly irresponsible.
Several year old Chalmers Johnson interview on imperial overstretch. A line near the end is an attention grabber "Start thinking of your escape route" Where are you going to go?
"Though wise men at their end know dark is right,
Because their words had forked no lightning they
Do not go gentle into that good night." Dylan Thomas
YouTube - The Sorrows of Empire - Chalmers Johnson
So MP, others...
When will Mr. Market reflect reality?
Or will they just come up with a new set of attributions for why earnings don't matter.
Whadda you think?
trader walt | 05.10.08 - 10:03 am | #
I think it looks like another DOD program trying to justify funding by masquerading as civilian power program. I doubt we're any closer to that 'Holy Grail'. IMHO.
unirealist writes:
From what I excerpted, it may sound like criticism of the call (from critics like Denninger--whom I do appreciate) for more mark-to-market pricing of securities.
The whole idea of difficult to mark to market is obscene and insults everyone within feces throwing distance. Buffet said it best; "sell 2% and see what you get." I'd go further, I'd make the asset managers price them to model before the sale and base their bonuses on the difference including the possibility of a negative bonus.
1989?
Well, I moved to Texas the next year and most grocery stores would take checks because during the past two years the banks and S&Ls were failing so fast that they couldn't keep up!
Rents would FALL each year when you renewed your lease, my first apartment complex (all rented) was surrounding on three sides by vacant complexes that had been fenced off, I assume that they were bank owned after foreclosure. When the wind blew, the doors on the units of the empty complexes would swing open and shut! Very spooky. Lots of vacant commerical strips too. House prices were low and falling. The Resolution Trust ending up owning nearly everything in the county. Not a happy place.
that's grocery stores wouldn't take checks!
lesson: don't type with a toddler on your lap.
Thanks, Dry!
Surferdude, they are looking to fill more positions than what they have on the website. The initial word from a usa today article was 140 jobs but there will be more.
In response to Dryfly:
I am beginning to come to that conclusion - regrettably. But it isn't for the reasons the 'deflationists' propose [a debt reset]... I think its going to be the 'Peter Principal' that nails us - debt precipitates the crisis but its systemic failure to manage the crisis that kills.
I think this is not necessarily a disagreement but an issue of defining problem scope. The west has done a horrible, contemptible job of building its current leadership cohort. It's a mass of greed and ego sweetened with the occasional currant of diligent mediocrity.
This makes it suck at perceiving problems. As an organization; it doesn't think very far in the future, it tends to see problems as vested interests suggest it should, and it tends to grasp at solutions provided to it by vested interests (although not necessarily the same interests as the ones that set its worldview).
This is going to effect everything the state does, and it has.
We also have a Fed with an overly-blunt toolset trying to recover from past mistakes by muddling through in the finest British public service fashion. There is improvisation and cattle prod stimulus and little else. This is a recipe for a disaster in an of itself, even staffed with solid professionals.
Where is the line between them? I would say that this is definitely a credit bubble on the purely financial side. Rock bottom rates made people take death defying risks for mediocre returns.
This will be shown in 99 places -- Chinese investment, subprime sovereign lending, parts of the current commodities runup, the housing bubble, the soon-to-implode American consumer credit bubble. Easy story about the hazards of printing money and not being willing to accept the consequences that ends with Old Wizard Ben getting eaten by zombie banks after one too many conjurations. EC comics fare, poetic and complete in and of itself.
Now, when you get to the question of Old Wizard Ben's motivations, and who was in the Wizard's Rotary Club with him and what is the social dynamic between them, then you start talking about organizational or more general social failure. Is that the cause of the crisis?
"Cause" is such a fraught word. It's essentially another word for "guilt". Given that these are ongoing events and people have freedom and riches to lose, causes will be heavily obscured, and then manufactured on an ongoing basis from random detritus for the career benefit of future scholars.
These economic questions are irrevocably made in a political context. Where you pin the failure, if it's bad policy or policymakers who can't frame good policy, just depends on where you draw the circle of the narrative.
JJL said: "...Anyone remember 1989 clearly? I was 13 years old at the time and cannot remember the economic conditions?"
Well, in 1989 the Wright Model "B" yield curve inverted, rising to an 83% probability of recession.
Unlike now, when it never did invert and peaked-out at about a 46% probability of recession.
Sebastia
The whole idea of difficult to mark to market is obscene
Rob Dawg, my opinion has been the same as yours and Denninger's. The article in question was pointing out how and why the credit default system has frozen up, and how vital that system is to pricing and trading these new sophisticated investment vehicles.
The author seems to be saying that the problem with credit markets goes far deeper than petulant refusal to "mark to market."
For example, "end of the world" credit insurance, which in itself is absurd (since the insurer itself would certainly be unable to pay), has gone up ten-fold in price.
All- FDIC's budget and board meeting minutes/video give info about future staffing/contractors and it is of course subject to changes as the bank failure business quickens. In Oct. 1986 when I went to work for FDIC in Houston I was told my temporary job would only last 2 years at most. I worked for FDIC until Sept. 2005 and should still be working there.
1989: underwater, peering through a periscope, spying on the Russian Navy.
No wonder I have to read to 'see' what is coming up; I missed all of the S&L 'fun.
"Sebastian writes:
Well, in 1989 the Wright Model "B" yield curve inverted, rising to an 83% probability of recession.
Unlike now, when it never did invert and peaked-out at about a 46% probability of recession.
Sebastian"
The Wright B model was created in 2006 and was back-fitted to generate a recession signal in 1989.
However, since we have had a few business cycles since 2006, there is no way of knowing how accurate it will be going forward.
Hint: The guys (no gals, I believe) on the NBER recession dating committee have already hinted that they are getting ready to call this one; they will wait another six months or so before they are certain. The recession should be over by then...
re: "...for some reason the FDIC hasn't released an "emerging risks" report since late 2006."
any agency using public monies should at all times be required to keep current reports alerting investors and the public to potential and actual risks
pbgc employee writes:
Surferdude, they are looking to fill more positions than what they have on the website. The initial word from a usa today article was 140 jobs but there will be more.
pbgc look at the latest fdic stakeholder letter (FDIC: Error 404 - Page Not Found, it only cites rasing liquidation staffing by up to 60%. from the 2007q4 stakeholder letter -- The Board also approved an increase in authorized staffing, primarily for additional bank examiner positions, from 4,716 in 2007 to 4,810 for 2008.
the liquiddation division has a staff of about 240, so that would mean an addition no more of 140, about what has mentioned in previous media reports.
according to the fdic annual 2007 report, staff level was 4,532; hence, the proosed increse is less than a 5% build. given the bad morale at the fdic and the high attrition rate, they will be lucky to be up a net 200 by year-end.
If you are intrested in why the S&L failed check out Alan Grennspans book.He says the high inflation of the 1980's eroded the value of the loans on the books of the S&ls. Combined with Fraud = disaster. ? Did you know that John McCain was one of the Kieting five....