Yes, I would agree with you. But we still have the problem of peak oil ahead of us. Just because oil prices have dropped doesn't mean that peak oil is not a factor.
I hope you are right, CR. I still worry about a "tectonic shift" in confidence, I worry about the (apparently) worsening credit contraction, and I worry about the truly enormous CDS exposure spread throughout the system.
A year ago, did you ever imagine we would lose even one investment bank?
OK, bedtime for me. Thanks once again for the best financial blog in the world.
I was surprised the Feds didn't just confiscate the whole thing. None of these bills are due until there is a new President and Bush and Paulson will be collecting their pensions by the time it all gets sorted out as to how very much the taxpayer will have to eat.
This is the deleveraging if a massive debt bubble that took 20 years to build. It will not be over in a year. It will take much longer to create a new functional financial system.
Great post. I'm not sure if you're retired, but the experience that you've gained by being the in center of the storm puts you in a great position to suggest future policy.
It would be easier to accept the "bailouts are the lesser of two evils" argument if we could get some agreement on who is responsible for this and how we will stop this from happening again.
The beginning of the end comes when everyone is forced to admit there's a big elephant in the room and it just made a big stinky pile on the carpet. We're there.
Now we're into the cleanup phase. There is more dung yet to be uncovered, so maybe another major wave down, stimulated by the option ARM/AltA / NotSoPrime mortgage default wave, before it's all over. But the cleaning crews are now on the job and the zookeepers are getting fired (albeit with far too much severance pay).
Switching metaphors, one might also say that the patients are now getting the help (or amputation) that the triage nurses (Bernanke/Paulson) decide they need.
I think pragmatism describes the new approach out of Washington, and I'm pleased to see that they aren't taking a one-size-fits-all approach. Every one of these problems has had its own unique solution tailored to the nature of the crisis. The exact details are worth a quibble and the moral hazard issue needs more attention, but from a big picture perspective at least we've managed to keep the "orderly unwind" going for a year now. Which is more than we had in the 1929 crisis and may yet prevent a serious depression.
it's more than all of that...institutions took these gambles to prop a rickety economic system. The only country in the world offering growth is China.
I would only say that, even though you might be fundamentally correct, the financial system is now of such marginal robustness that it could easily be knocked off the course of recovery by an unexpected shock.
I keep asking myself "does this feel like the end" and I have to say the answer is always no. Importantly I think we have the bulk of the mortgage fallout still ahead of us. As home prices continue to fall we reach farther back in time, finding people who bought 5 or 6 years ago and thought they had large amounts of equity. Very large numbers of them overborrowed or just overspent based on that equity. At best they will have to dramatically ratchet back their spending, at worst they will lose their homes. I don't see any end to this until we're past the large bulk of the Neg-AM recasts and have shaken out all of the stated income borrowers who can't truly afford their payments. This is still months if not a year or more away.
Thank you for the analysis. However, in saying that this is the beginning of the end are you not being somewhat domestically minded? There is still the issue of our debt and the willingness of others to finance it for us.
Others have said we are headed for hyper inflation etc, but I fear that we have, with all the different pieces of toxic instruments and leveraging, created a financial Frankenstein's Monster of our national debt. This is a monster that needs billions of lightning bolts a day from overseas to keep going before it starts feeding on the villagers.. (us!).
My fear is that T-bills will start to look less and less attractive to the overseas economies who you point out are feeling accute pain themselves.. and hence rates will have to go up to add lustre to our paper. This is where the lender of last resort will start looking round the room for a loan and discover the room is empty...
How much of that beginning of the end is dependent on the Fed and the nation being able to be there?
When consumption stops....China will no longer grow. They will grow hungry and march across the ocean and ask for their money back. This might casue financial doom here but many contries will simply starve or die from wars that no longer can be financed by the good ol' USA. Then we will have millions of people in thousands of areas wanting us to die...hmm perhaps we are already to that point?
Believe me, the rest of the world used to profit on our consumption...they do not want to see us go away entirely. USA no longer wants plastic GI Joe dolls, China no longer needs Oil from Iran...just what do you think Iran will do?
Thank you CR for all the works and wisdom on this blog over the years. It's a thoughtful summary of the consequences that we will have to face once this massive housing bubble bursts. Many thanks.
CR:
I have been an observer for a few months, have gain a tremendous amount knowledge, been exposed to a wide variety of different viewpoints and am much better able to defend my economic views in a coherient and comprehensive manner. I could not have been able to develop a deeper understanding of complicated issues without this blog. Thank you for you and Tanta's superb efforts.
It was like Roubini wrote the first half and then you came in with your dependable yang. Frighteningly understated conclusion: "I believe there is a chance."
If you want to capture someone's attention, whisper.
This is a slow-motion recapitalization of the U.S. financial system, and it is being led by the government.
I would feel better about this being the beginning of the end if private capital were playing a more significant role.
The U.S. Federal Government (including Fed Reserve) is putting everything at risk to play this lead role: dollar value/hegemony, U.S. cost of borrowing, etc. Time will tell if the U.S. Gov will get the right return for its risk.
I would also feel more comfortable if someone -- anyone -- were talking about trying to put the CDS genie back in the bottle. It seems that CDS is one of if not the major litmus test for too-big-to-fail. If so, shouldn't we be doing a little fire prevention to go along with all the fire fighting?
Wisdom Seeker, I agree - and at the least the problem is being recognized (at least most now see the elephant in the room). There are still institutions unwilling to admit the extent of their problems. But we are on the way.
sdtfs, there is still uncertainty in that forecast too! Hopefully I'll be in Vancouver in 2010.
How many national homebuilders have declared bankruptcy? The credit collapse hasn't even rippled through the most exposed sector; housing and you are calling a beginning of the end?
The end of the beginning will be when we are saying it cannot get any worse. There isn't a regular on this blog who thinks that. We all know there is worse to come. Even you say there are 200+ banks dead lender walking. Heck their branch square footage alone is enough to depress CRE for years. We haven't even seen many rent decreases or lease recasts yet. We won't get to the end of the beginning until everybody know what is coming and is resigned to that process. $85 billion extraordinary support for counterparty insurance positions is NOT a sign of acceptance but denial.
As long as there is denial we are still in the beginning. Try to convince me again when L3 assets are market to market. Until then the bottom won't even be visible.
"I believe a collapse of A.I.G. would probably have been worse than the rescue."
Worse for who?
The retiree, with no debt, few assets, and little income.
Or the levered, invested, indebted, wage earner.
As a person who has lived well below his means for an entire lifetime, saving nearly everything;
I'll take the systemic collapse combined with massive deflation in place of the inflation, debt, and taxes, anytime thank you.
Those who are levered to the throat living high on the hog, deserve to loose it all.
The IBs just don't get it! Housing has crashed and their balance sheets aren't worth anywhere near what they think they are (Just like the homeowners'!).
It's tough to wake up and realize the party is over!
Although I respect your blog greatly, I have to disagree. I have not seen any actions to date to justify the following statement:
"The good news is the U.S. is finally taking the necessary steps towards eventually resolving the crisis"
In my opinion, the housing crisis is merely a side effect of much broader issues effecting the US economy. For example, I don't think we would have such a big housing bubble without foreign purchases of mortgage securities, even if our regulators were asleep at the wheel.
I am still waiting to see some leadership in addressing these issues and withold judgement until I see any movement in this direction.
I think in a year or two foreclosures are going to get so bad we'll see congress put a freeze on foreclosures for one year, possibly longer. Or they might pass a law preventing home values from dropping past a certain amount. Just my tin cents.
The solution to the crisis comes when no corporation or institution is "too big to fail" and everyone knows it and behaves appropriately
The only way to get there is cut the rope and start letting them fail...and to come in at the bottom and try and rebuild
All we are doing with current FED/Treasury solutions is making the problem bigger, and the bottom farther away and more painful
For example AIG was allowed to transfer 20 billion from the policy writing subsidiaries to the holding company. Stupid, the policy holding companies are now less liquid
And all to prop up some greedy sob's on wall street that made the crisis occur and to prevent the FED and Treasury regulators from looking like they were asleep at the wheel the last 10 years.
Let's start letting these businesses fail, that is the only way we get through to the bottom and start rebuilding. It will suck, but there is no free lunch
Great Post. I think we are 60-70% through the financial correction but only 25% through the actual economic pain. So while it will suck, it is better than the alternative of stretching the pain out for a decade plus ALA Japan.
CR, great post. Thanks to you and Tanta for the education I've received on this blog.
I do agree somewhat with Tyaresun-- I think the Administration is still very much in a reactive mode. We still have a huge struggle coming on re-regulation and issues such as the dollar's role as international currency, dealing with our trade deficit, re-balancing consumption and saving in the U.S., etc.
People still think DAP is a good idea, builders are still building, banks are still hanging onto phantom inventory hoping for a turnaround. And, as Dawg says, how many homebuilders have BK'd?
As far as I can tell, we're still in the early innings... and the Fed is working overtime to keep us here.
Wonderfully thought out post, as usual CR. I have learned so much here from you and the merry band. Thanks for all you do.
Hopefully I'll be in Vancouver in 2010.
Me too! I have the sign up emails coming and my couple of grand tucked away to put up money for tickets. We, of course, want to see the figure skating. Very spendy.
But not near as spendy as when the daughter was going through the USFSA ranks in the 80s and early 90s. Gulp. We only got as far as regionals, but what a learning experience and the confidence she learned in "commanding" a huge patch of ice by herself at aged eight has stayed with her to this day. See you in Vancouver;)
People have been consistently too optimistic re this crisis. And of course it is now a world crisis that will exacerbate and prolong the US crisis. Hence I would think "end of the beginning" is more likely than "beginning of the end." Is there any economy in the world in good enough shape to begin to pull us out of this? I can't think of a single one.
A week ago nobody could've imagined the carnage of the past week, and yet now that we've all seen it, somehow we're supposed to now believe that that's it?
So we should just resign ourselves to being suprised, shocked and overwhelmed by it all, every f'in day???
I agree with the naysayers that point out that we have to be extremely careful how we proceed because the world is incapable of sustaining our increasing debt.
I'm very pessimistic and think that there will be systemic collapse eventually (I mean I trust Roubini when he says that we are barely 1/3 of the way through writedowns!) and that claiming "systemic risks" is NOT sufficient for government intervention.
That said I think the AIG thing is the proper role for the government for really one reason: unlike Lehman, Bear and Fannie/Freddie, it truly seems that they are not insolvent in the long run. They have a ton of valuable assets that are profitable and worst case the government shouldn't lose a dime. Maybe we're being lied to or I don't know something, but that's the impression everyone is giving.
I anticipate that there will be many late nights coming and pray that someone somewhere starts coming up with a coherent long term strategy or otherwise we're going to be looking at a ton of worthless junk on the public dole at the expense of good stuff being unnecessarily pawned.
that glimmer of light, isn't the end of the tunnel...
...it's a train coming right for us.
and instead of figuring out how to get off the tracks everyone seems to be debating how much we should slow down (and congradulating themselves they've decided they need to stop speeding up)
Excellent post/explanation of motivation for FED's actions re:AIG. But the actions of the gov't do not seem to indicate any motivation or intention (by Congress, et al) to draft some statutes, etc., that might prevent similar problems or even to begin enforcing what anti-trust laws already exist. Instead it seems to be accepted that the role of Congress & various agencies/gov't created entities is to fix what the private sector has done. Letting Lehman file for BR doesn't seem to balance out bailing out BS (or the supposed corporate rescue of same), putting Fannie & Freddie into conservatorship, setting up the TAFs & accepting ever less secure collateral at same. There's no indication the TAFs will ever end. In addition, what guarantee is there that the feds won't just forgive the interest owed by AIG & privatize at a good price to some private entity(ies) a few years from now? (or another giveaway).
Or do you, CR, see indications of other thinking & actions?
Instead of breaking up these huge financial entities into smaller ones (that might not be "too big to fail" without precipitating systemic risk) that could fail without major repercussions & might even compete.
Very little to no indication that the method of compensating IBers, & other CEOs, & creation of passive/captive boards is seen as a mistake & that it's something that needs to be changed.
Another poster noted that if the "retirement", bonuses & separation packages for the past 2-3 years were returned by upper management for say, Wamu, GS, Lehman's, WB, CFC, AIG (plus what's stashed in Starr International--a Greenburg vehicle for rewarding the CEO & upper management ranks of AIG), some of these messed up entities might be better capitalized. But that would probably seen as an illegal taking while it's ok to take from the taxpayers to bailout the entities these greedy bozos lead.
Guess I'm saying, what is happening to make this huge debacle less likely to happen in the future? And will those in the private sector who played a big role in making it happen walk away obscenely wealthy? No penalties?
Like your comments. It may well be the beginning of the end since we have washed out or rescued all of the basket cases-I hope. If you haven't seen it you might want to take a look at Infectious Greed this evening. He raises some important points about the political fallout from all of this.
Excellent general prognostication in the spirit of empiricism.
Unfortunately, all these deals were done so quickly that I can't feel comfortable that the actual condition of the companies is now known or will be known in the next 6 months or so. In particular the leverage instruments are a black hole, CDSs don't seem have to have any way to centrally clear, and hidden/off balance sheet horrors (including most of the level 3 assets) are yet to be discovered.
All of these non-transparent risks make the situation unknowable and investors very cautious - and I see nothing which will happen to resolve/end these practices. Simply put, financial services have been a major part of the economy and fast growing, but there is almost no there there.
When the phony profits are stripped out because they drain the economy and make money-players think they own the world and have no responsibility, where is the economic basis for sustenance to the public coming from?
Denial is still rampant on Wall Street (and most of DC), and the public has barely been awakened to the crisis. Papering over the crisis seems to be strategy, and that is the 180 degree wrong approach.
This could end well in some number of years, but it seems equally likely given the unfaced problems that it could end badly, very badly.
Wars have been fought for far lower stakes, and revolutions as well. Until those dangers are admitted, they won't be attended to.
We need to substantially reduce being a debtor/consumer economy and become a saver economy to provide the capital to repair this disaster, yet there is no appetite for this anywhere I can see.
We still haven't faced up to the petro crisis, the climate change crisis, and other worrying problems (nuclear weapons proliferation, etc.), and I don't see how we get out of the financial death spirial when we are ignoring the other realities.
AIG needed to be left to their own devices, period. AIG is being rewarded with a Federal loan (bailout) for their reckless business practices over recent years. If AIG had practiced sound risk mitigation then they would have not been in such dire trouble. AIG made their own mess, let them drown in it.
The American tax payer (thanks to Hank Paulson) now owns AIG. The bankruptcy of AIG would have been nasty, I give you that. But, I did not ask AIG to be reckless with their business so why am I responsible for their clean up? Hank Paulson left Lehman to die because their impact to the global capital system would not be as bad, but AIG.. well they were just too important to fail.
Wake up folks.. Hank Paulson is playing God, selecting who gets to live or die on Wall Street.
At OpenSecrets.org, I learned that 28 Congressmen were invested in Fannie Mae and Freddie Mac. 28 were invested in AIG.
Just 8 were invested in Lehman.
Lehman went bankrupt and Fannie, Freddie and AIG were bailed out the government.
I'm certain there was no self interest. Of course.
Who were the top recipients of Congressional campaign contributions from Fannie Mae and Freddie Mac? #1 was Hilary Clinton and #2 was Barack Obama. From Lehman, #1 was Sen. Dodd and #2 was Barack Obama.
Looks like the finance industry got the worst Congress their money really did buy.
I'm with "retired", and I'm not even close. The question is always "better for whom?". The Fed's message is clear: tie yourself to your so-called competitors with unconscionably risky swaps or merge into a monopolistic super-financial entity and we will bail you out or buy you out with the public's money.
The Seattle area is finally beginning to feel the housing drop. We were serious bubble territory (although not on the magnatude of California) for a long while. Fairly stable employment with high incomes via Boeing, Microsoft, other techie companies and the bio-tech companies. Wonder what a WAMU roll up will do? Can't be good!
"The 11 percent decline was the first double-digit year-over-year drop for King County since the subprime-mortgage crisis turned the market on its head." Local News | King County home prices in August slide back to April 2006 | Seattle Times Newspaper
we are in the 1st inning of the 2nd game of a day/night doubleheader.
LEH and AIG was the end of extra innings with the taxpayers losing.
I think people are getting scared. obama was all over this today- it's become a front page story. the problem is other institutions like WB and wamu are openly talked about as having problems. we get an FDIC takeover in those and we could have problems.
CR, I'm with you. It's encouraging that Hank let LEH go. It's encouraging that that AIG's loan is a slow mo bankruptcy. It could still all collapse, but at least that possibility seems to have registered beyond the fringe.
I don't know. After essentially seeing the failure of Fannie, Freddie, Lehman, Merrell, and AIG within the span of seven days, I would love to pronounce this as the time at which "things can't get any worse" and therefore a bottom or end of the beginning.
I have the very sinking feeling, however, that we have actually reached a brief interlude, before things will start to deteriorate even more rapidly. My first reason for this is that there has thus far been no element of public panic in this crisis--the crisis has remained within the domain of wall-street-types, economists and other wonkish sorts of people over the past year--there are now, however, signs that the broader public is starting to wake up to the crisis. We are one WaMu-failure away from mass bedlam.
Secondarily, there are now signs that the scope of the crisis is beginning to rapidly spread. The crash of the Russian stock market yesterday is to me deeply disturbing. To me it is an omen of broader political troubles there to come, as well as in Eastern Europe more generally--previously considered relatively immune to the global troubles. A broader, truly global crisis has grim implications for a global society that only subsists because of global trade.
So in summary, I think the next phase of this crisis will be defined by broader public panic, as well as the further globalization of this crisis beyond places we'd seen it before, as well as by even greater downside risks manifested in a Roubini armageddon situation. The latter began yesterday with the crash of the Russian stock market. The former will commence as soon as WaMu is shuttered by the FDIC.
"Telecommunications of the United States, the premiere innovation in the past 15 years, comes right through the Commerce Committee. So you're looking at the miracle that John McCain helped create," Holtz-Eakin said. "And that's what he did. He both regulated and deregulated the industry."
Steve G. writes:
I was surprised the Feds didn't just confiscate the whole thing
I assume the idea here is that the golden-parachute executives can keep their overcompensated positions without risk of having to lose their third yachts or their beach houses on the Vineyard, while the taxpayers ensure that their incompetence does not result in global financial collapse. Far from supporting any notion of "moral hazard," the disparate treatment of Lehman and AIG sends an unequivocal message to the incompetents of Wall Street: double down, double down, and double down again, until your losses are so large that you can blackmail the government into sticking the taxpayers with the consequences of your greed and incompetence, safe in the knowledge that the government will do nothing to interfere with your golden parachute.
we've just started with the failures and the Fed is already running out of ammo.
Level 3 is barely acknowledged.
And your scenario has a mysterious detachment from how the credit crunch will drag down the real economy, even if we see oil prices head lower. Housing is in for a boatload of hurt even if by some miracle, we found $500 bil in the federal budget to do three more stimulus packages. Now that the Fed is bailin hard, that isnt going to happen.
So, take your pic, deflationary spiral, or Fed printing induced inflationary destruction. Either way, kiss your standard of living goodbye. But hey, the bottom is almost in.
CR, that was the most optimistic thing youv'e written yet. Did someone pay you off?
we can't shake the ordinary person's confidence.
enough with the baseball metap
I think unless you understand the language of finance (and Lord knows I am still learning) the ordinary guy hears/reads this stuff and doesn't see where it effects him. I have been talking to people and have sent friends and family member's this link: InvestorWords.com - Investing Glossary
and told them to reread the headlines and finance pages with it.
Several have gotten back to me and said OMG, I get it!
Toll free Capitol Hill #'s to call your reps and give 'em hell if their Dems , or call and give support if they did not vote for the F/F bailout.
If Marcy Kaptur, D. OH, is your rep., call and tell her thanks for not voting for the F/F bailout. She was one of only 3 dems who voted against it. Give her encouragement to keep voting against her party. She needs it.
well CR,
maybe you are right, it's time to curb our pessimism. However I believe the end of the crisis will be sudden, one day within the next six month we will wake up and realize that the worst is over. Assuming the government will stop feeding the walking zombies.
Real Vapid Bimbos of OC writes:
Is AIG really a bail out? Is it a bail out when they take 80% of your company, fire management and set up a plan to sell of the assets?
To me that looks like a slow motion BK.
butter writes:
bloomberg is calling the AIG deal a gov take over.
It doesn't sound like much of a bailout to me, either. The interest rate was hardly a favor to AIG. I literally did a double-take when I read they were going to pay 850 BP above LIBOR 3-month. Not quite credit-card territory, but within sight of it.
Government will own 79.9% of AIG (why not a nice, round 80%???), all of AIG's assets are pledged as collateral (and most of AIG is profitable).
LET THEM FAIL
This is the kind of simplistic thinking which led to the Great Depression. Just to satisfy your schadenfreude, do you really think it is worth it to have a complete collapse of our economy? A complete freezing of our credit markets? That would take down healthy businesses as well as poorly-run ones.
Thank goodness the people in charge of the Fed are smarter than this. Now if only we can elect Obama, who for sure will re-enact Glass Steagall or some version of it.
There's a lesson to be learned here, if anyone is paying attention: we got into this mess in large part because the Republicans have for a generation preached 'deregulate, deregulate, deregulate'. Which is shorthand for, 'let Wall Street do whatever the fuck it wants and don't worry about the consequences'.
And what do you get when you let Wall Street do whatever the fuck it wants?
You get Enron. Worldcom. The mortgage bubble. One Ponzi scheme after another.
It's the same fucking shit as happens whenever the GOP tries to 'streamline' environmental regulations. It's shorthand for raping the environment.
We need intelligent regulation, and Republicans have proven they have no interest in that. Time to kick the bastards out.
Just noticed CR's archive only goes back to Jan '05 (I just looked at the earliest post, and someone went to the trouble of posting "first!?" on the comment thread...funny.) CR, is it my imagination or did you start blogging before that? I have a vague recollection of posts during the 2004 election campaign.
Anyway, seems like that long I've been reading your blog. Keep up the great work.
Not sure I agree about the glimmer of light... I think the real crisis is on main street, not wall street. I'd like to see some cliff diving in the gini coefficient graph. But I'll take what little optimism is available.
U.S. Mortgage Rates May Wreak Havoc After Libor Gain
Sept. 16 (Bloomberg) -- The biggest jump in the London interbank lending rate in at least seven years could wreak further havoc on the U.S. housing market and there's nothing the Federal Reserve can do about it.
About 6 million U.S. mortgages, including almost all subprime home loans and 41 percent of prime ARMs, are linked to the London Interbank Offered Rate, or Libor, according to First American CoreLogic in Santa Ana, California.
I'm very curious about the mechanics if WaMu were to be taken over. Based on the size and staffing required to take it over, plus the cost to FDIC (basically 10x indymac) of I'll guess ~70B, wouldn't the Fed prefer to just nationalize it and let it be operated by JPM? You're going to blow the 70B anyway, why not make sure that all the retail employees keep their jobs.
I'm going to predict that WM will not be a standard takeover. We will not have the crazy lines and general panic. That would remove confidence, and Paulson is clearly not about to let that happen. Shareholders will be wiped out, but the show will go on. Combining the 70B that WOULD come from the FDIC/congress, with whatever JPM, or GS might be willing to pay to get the retail presence and deposits probably results in solvency.
Systemic financial armageddon! Horseshit.
All banks could fail tomorrow and we could reinvent a system to lend money to worthwhile necessary enterprises in an hour.
I don't mind bailing out farmers but bankers are on their own.
Great post. I think we are seeing the beginnings of the financial players really grasping the seriousness of the issues we face. I really got a sense of this, for the very first time, yesterday. We've gone past the denial stage to the acceptance stage. That's a very good sign.
However, I think we are in for a significant adjustment to our economy and I don't feel this has been fully grasped by many financial professionals. No longer are we going to be able to spend $1.22 for every $1.00 we earn. As people dig themselves out of debt our savings rate will need to rise, possibly to the long term average of 8-10%. Leon Levy who wrote in a brilliant book called the "The Mind of Wall Street" figured out that for every 1% rise in the savings rate you would have a 11% drop in corporate profits. We've had above trendline corporate profits for some time now. A recent article in Barrons put the PE of the S&P at 25 if you used reported earnings rather than forecasted earnings. I have a bad feeling the stock market has much further to fall.
Consumer spending driven by a massive deterioration in lending standards, as well as high finance became a disproportionate portion of our economy. That will revert. We are now in a process of deleveraging and adjustment were consumer spending and finance go back to sustainable levels. This will be a significant structural adjustment to our economy and it will be painful.
I do sense a change over the last couple of days that people in the world of finance are realizing the size and scope of the problem and this does mark a beginning to the end of the credit crisis. What I don't think has been fully realized is how significant the fallout will be to the real economy.
I still think we have a long ways to go before the majority of folks understand and have accepted the new normal.
Not being well-versed in the complexities of finance, can someone explain to me how it is that an insurance firm like AIG was unprepared to cover its obligations? Aren't there oversight rules and regulations that require an insurance company to maintain sufficient capital (or access to capital) to be able to honor claims against it? A catastrophic event is exactly the sort of thing that insurance is for. So how did AIG get caught up in this mess?
Morgan Stanley officials were not in merger talks as of late Tuesday, CNBC said, citing unnamed people close to the matter.
"But senior people at Morgan concede that further zig-zags in the company's stock price could and possibly will force the company to change course and seek a merger partner, probably a well capitalized bank," CNBC reported on its Website.
Morgan Stanley shares closed down 10.8 percent at $28.70 on Tuesday, having fallen 46 percent so far this year.
Morgan Stanley officials in Hong Kong declined to comment on the report.
In an interview with Reuters on Tuesday, Morgan Stanley's Chief Financial Officer Colm Kelleher said the No. 2 U.S. investment bank remains confident in its broker-dealer model and dismissed the need to merge with a deposit-taking bank, even as he maintained a cautious stance about the markets.
Respectfully the fundamental problem is not housing or financial anything. It is that consumption has exceeded production for a long long time. The end of the beginning will come when consumption falls below production. Until then, it is all just politically-determined pain redistribution. The actual work will be rebuilding authentically productive assets. I'd guess it's another couple years before the US gets seriously started on that.
Same any of us can do. Pay down debt, get into cash as much as possible, that I've moved my 401s/IRA into the most conservative posture I can and watch the spending.
What else can we do?
About 6 million U.S. mortgages, including almost all subprime home loans and 41 percent of prime ARMs, are linked to the London Interbank Offered Rate
Since the FM's were nationalized, can't the Fed intervene directly in the mortgage market in terms of interest rates ? Seems like they could completely rewrite contracts if they wanted too.
re; Russian collapse..the Shaghai and Hong Kong are also getting pummeled. I'm not sure what it means. Maybe a sharp slowdown in China, or worries about the real value of their trillion dollars in treasuries ?
"do you really think it is worth it to have a complete collapse of our economy? A complete freezing of our credit markets? That would take down healthy businesses as well as poorly-run ones."
Gaucho writes:
Banking crises can only be solved by massive bailout programs from the govt. You just need to look at the experience of other countries around the world. So now we're accepting the reality that the system requires a massive bailout, an RTC multiplied by 10. The real question is where the money will come from in a country with no savings, huge budget deficits and an increasingly reluctant base of foreign investors? I think I have a hint, but, as a prudent saver, I don't like it.
I second yogi's comment. These businesses want you to think they are ever so important, so important it is a matter of national security. We can do without Bear Stearns. We can do without Lehman. We can do without...
For years guys like Jim Cramer claim our country is diverse and made up of a lot of industries. Now they are saying bailout or bust. Sounds like these stock salesman are just feeding a sales line.
All this will be for naught if the US of A can't get its financial house in order at the governmental level. That means some combination of significant curtailing of spending (that means cutting entitlements and defense, chasing welfare moms ain't gonna get anyone anywhere) and increase in taxes.
Which is pretty much the opposite of what either presidential candidate is offering.
There is still a window of opportunity to do it "self directed"; the alternative is to wait and let external creditors force it on terms not of our choosing.
There are no other options that don't involve nukes.
Agree with your thoughts about Wamu: with 2300(?) branches WaMu be a standard pizza and shits takeover. Nor, can TPTB risk a run with little-old grandmas in wheelchairs waiting to get out their money. The media firestorm would be outrageous.
I suspect WaMu is dealt with quickly and quietly as you suggest.
There are, of course, other teetering institutions.
If the Libor jumps, then the interest rates to AIG go sky high. They're going to need more business. Say, they sell annuities to the US public. Why don't we buy an annuity for each of the Social Security recipients? Denationalize the SS system and throw all the screwy financial stuff into one basket.
Or we could pursue a "good" company/ "bad company" deal. The "bad insurance company" could deal with the "bad IB" or WaMu's future "bad bank" and we set up a bizaaro world financial system to move our problems into.
Ed,
The financial giants apportion their donations to both parties based on the odds of winning (very uncertain outcome), and mostly based on how much the candidate accumulates from other sources. Had McCain raised more, they would have given more to him. If you check his major donations you will see the same big donors.
To get an idea of how beholden each candidate is, try looking into earlier election cycle data, before they were on the brink of incredible power.
Opensecrets.org is a great source.
Even though I buy what Senor Dawg says, it's also hard to argue with the overall thrust of the post, when CR leaves open the possibility of economic collapse... pretty balanced post really.
But what I can't get my arms around... is what and where are the catalysts for economic renewal and sustainable growth... I guess more will be revealed... probably after a half a decade of malaise.
Tens of trillions of dollars in credit/debt has been built on top of the country's productive assets...
...forming an inverted pyramid that has gotten too heavy to balance.
That "money" is crashing down and vaporizing. ALL of it will disappear, until there's nothing left but real money that represents real productive assets.
People with real money, or real and unencumbered productive assets will be fine.
Everyone else will be annihilated.
It ain't gonna be pretty, and it ain't even started yet.
Insurance and banking, both marvelous "industries". Get a fat salary and bonus in the fat years, get bailed out or just declare BK in the lean years. On balance, you can't really lose. 1 in 1000 get sent jail to appease the mob. Good gamble.
The only strong economic future I can see for the U.S., and I don't think this would be popular, would be to abolish the EPA and all similar state agencies, and go back to being a developing country. Kind of like the Chinamen. Drill, Baby, Drill!!
"I don't think the Americans quite realize yet that behind this hill lies the Himalayas," said Takashi Watanabe, a top official at the Bank of Japan in the 1990s and now a professor at Tokyo's Bunkyo University. "The U.S. is going to go through a lot more before this is over."
CR,
The beginning of the end won't happen until housing prices bottom and possibly CRE bottoms. Once that bottom is reached, at least 2 more years will be needed for the end to be declared.
There is no glimmer of light. Deflationary hurricanes and a long L shaped recession are upon the world. Followed by a quick and vigorous partial recovery followed by the long descent.
Rather than provide instant opinions (AIG's failure "posed significant risks" to the financial system and "a collapse of AIG would probably have been worse than the rescue") what's wrong with telling us the truth --- that you DON'T KNOW. How about suggesting that we learn more about the facts before forming a judgment?
Remember weapons of mass destruction, smoking gun nukes and Saddam's ties to 9/11? Hardly anybody said what was actually true: WE DON'T KNOW. The first step to recovery is acknowledging the problem, and the problem is WE DON'T KNOW what the swaps are worth, who are the counterparties and whether a majority of the participants in this unregulated market can survive without government intervention. Yet you conclude within minutes that all of the risks of these unknown unknowns are worth $85 billion of taxpayer money.
Just look at the farce Paulson made of our congressional "leaders". He's spent days in closed meetings with all the participants but spends less than an hour briefing congressional leaders this evening. They all come out mouthing "support" for the bailout. I doubt many of these people could balance their checkbook in an hour, much less understand the nuances of this alleged "systemic risk" we keep hearing about.
Finally, which is it Mr. Bush? Is the American economy fundamentally sound or are we vulnerable to systemic risks of such a magnitude that $85 billion is suddenly and without debate required to avoid them?
"We need intelligent regulation, and Republicans have proven they have no interest in that. Time to kick the bastards out."
And then?
Perhaps the silver lining here is that now that we're all gettting kicked in the head, we'll begin to realize we need to slide a little to the left down the socialism-capitalism continuum. Oh no! Oh, run for your lives.. socialism! That's like Stalin and Genocide and KGB or Mao and, um, Mao Jackets?
How do you like Canada? Big, clean, friendly (except Vancouver and The Pas). Scandinavian countries? (except Norway -- they can afford to be prodigiously socialist).
But no! Free markets, the American Dream, and as long as I'm secretly mean to other people I can leave them in the dust. This is all key.
Oodles of good people out there who do well by doing good. Even more out there who take advantage of them, or wish they were strong enough or smart enough to do it.
We all want to live better, relatively, than the next guy. I drink your milkshake indeed.
Regulation, of course. But what are we really regulating? The urge to dominate, I think. It's a matter of discipline. I'll bet we're smart enough to come up with something that won't turn into fascism. Sh*t, even Fascism with a capital F turned into little f fascism.
Puhlease stop with the Blue/Red baloney. Tell all your friends: it doesn't matter. Anyone stepping into the current political system automatically becomes an enemy of the people (or impotent like brother Ron Paul.) Ipso facto and QED, we need a new one. A better one. And lord help us if better, more tempered minds than mine aren't working on this right now.
My favorite fantasy theory is that our meltdown was indeed manufactured, but not by the illuminati or china, or russian mob, but by a group of effete oxford dons who decided to make things better, at least in the medium run. They knew we had to tear it all down first in order to build something better and lasting.
Get this free market garbage out of your head. It's easy... if we don't regulate ourselves, we consume ourselves. Eventually all that's left is the ultimate top feeder, and he's a very lonely, hungry top feeder indeed. With no one around him to philanthropize.
Paulson was inteviewed years ago. His world view: you have to look at the top of the food chain to check the health of the entire ecosystem. Woops! Uncle Bill at Pimco says he's more concerned with plankton, in this big ocean of ours. Don't know about that.
We have a lot of kicking out to do, but who's worrying about who we kick in? And into what?
I find CR's optimism refreshing, although I do not share it.
My most optimistic wish is to see the US government forced to stop its military bingeing. Less money down the Pentagon crapper; empire's appetites curbed. We need this if we are to rise above our present grim reality as invaders and revive our ancient possibilities as a people.
While it's remotely possible if the size of bailouts -- let's call it the moral hazard budget -- grows alongside a dwindling tax base, I admit it's a longshot. "The encrustation of the mechanical on the living," as Bergson called it, is probably too advanced in our system. We are no longer in charge. Worse, nobody has a clue as to how to otherwise employ the many now running the permanent war economy.
"The beginning of the end won't happen until housing prices bottom and possibly CRE bottoms. Once that bottom is reached, at least 2 more years will be needed for the end to be declared."
Big question here is unemployment and inflation in combination with the credit crunch. The American consumer, who is the driver of CRE is tapped out and his CCs are at the max. He can't get a re-fi for the bloated home he bought when RE "could only rise" and his retirement is in jeopardy.
In my neck of the woods there are brand new strip malls sitting vacant and a new "village" mall has had three national retailers pull from the project.
The real question is where the money will come from in a country with no savings, huge budget deficits and an increasingly reluctant base of foreign investors?
How about the people who have been looting the country for the last generation?
The end of the beginning will come when consumption falls below production. Until then, it is all just politically-determined pain redistribution. The actual work will be rebuilding authentically productive assets. --rigtsal
rigtsal writes:
Does anyone have a source for a list of small banks that unusually high CRE and/or C&D loans? Tx.
rigtsal | Homepage | 09.17.08 - 2:31 am | #
Accuity has a database with that info. Cross reference it with an FDIC call report.
"Puhlease stop with the Blue/Red baloney. Tell all your friends: it doesn't matter. Anyone stepping into the current political system automatically becomes an enemy of the people (or impotent like brother Ron Paul.) Ipso facto and QED, we need a new one. A better one."
Hear, hear.
We can be sure that nothing of the sort is going to be willingly chosen by our savage and unyielding oligarchy.
And obviously that is one reason why the present chaos is so interesting. As the unthinkable becomes the practicable and then the inevitable in political discourse, all kinds of possibilities, good and wretched, appear.
Mind, while I like Ron Paul, he makes too much sense and is far too decent ever to catch on. Go to YouTube and look up Ted Nugent from last year toting machine guns at a rock concert as he rallies his roaring right wing fans -- it's quite the antigen to revolutionary fever.
My whole problem with this is that right when we start to turn the corner in 2012 or so, we start to get hit with the social security meltdown. An aging population is a huge headwind that the economy is going to have to struggle mightily against.
Nice summation of what feels like it should be a Friday.
My biggest concerns with AIG FED:
We are essentially holding up a largely unregulated shadow finance system that even the Fed Chairman admits to not fully understand;
What appears to be an insufficient amount of time for due diligence on a loan and equity stake of this magnitude; and
It follows on the heals of a largely missed and under discussed loan by the NY FED to Lehman in the amount of 78 Billion that was structured to also benefit JPM as the pass through agent.
This seems like trying to create a bottom when the bottom is probably six feet under for a lot more banks, investment companies, and average folks whom were maligned by an abandonment of basic fiducial requirements of all the "professionals" in the process of selling the ownership society dream.
And no one is going to care one bit about those average folks who were told they could afford that home loan after November 4th or their kids or whole ruined neighborhoods and communities while Wall Street corrects itself. We can attribute to bad luck on them and poor financial judgment as lots of other people made a lot of money on this sad saga. But lots of people relied on the economy of trust which requires professionals, even in finance, to concern themselves with the welfare of society while making a buck. So as we work toward a bottom I suspect it may take a long time to restore confidence, good faith, reliance, and trust required of our financial professionals and regulators that prevents American society from becoming one big shell game or lottery.
A musical contribution, From A Whisper To A Scream -
'Oh it's not easy to resist temptation
Walking around looking like a figment of somebody else's imagination
Taking ev'ry word she says just like an open invitation
But the power of persuasion is no match for anticipation
Chorus:
Like a finger running down a seam
From a whisper to a scream
So I whisper and I scream
But don't get me wrong
Please don't leave me waitin' too long
Waitin' too long
Waitin' too long
Waitin' too long
Hey
Oh oh oh oh oh
Oh if the customers like it then they'll keep on paying
If they keep on drinking then they'll end up staying
I heard someone say where have we met before
But the one over the eight seem less like one or more like four
Chorus
Elvis Costello
Personally, I still think we are at the point of drawing in our breath.
And as for mild recession? That was so 2008 - what 2009 brings should be something entirely else. The collapse of the building that American financial engineering has only just started - after all, where is 85 billion dollars coming from? The same organization that is currently borrowing more than a billion dollars a day just to keep paying its bills? Think about it a moment.
Gizmo, AIG's insurance subsidiaries have segregated "regulatory capital" that cannot be used by the parent. It must be held to pay policyholder claims. These subs are regulated by state insurance commissions. According to the WSJ today, almost all of AIG's problems originated with its issuance of credit default swaps, not with its insurance subs. CDS are insurance contracts issued to holders of other companies' debts. If the debts are not paid when due, the holders call on AIG to make good. As just one ironic example, AIG issued a CDS to Lehman's London landlord, effectively guaranteeing the landlord's rent if Lehman defaulted. There are many more examples of how the CDS have infected the real economy, and that is what CR is referring to as a "significant risk to the system" from an AIG collapse. But other than such anecdotal evidence, there is absolutely no significant information being released to the public identifying the scope or nature of the risks, so we are being asked simply to accept the opinion of others, many of whom may have less than honorable motives to stoke fear of collapse and to push for a taxpayer bailout.
Nice summary and analysis by CR; however, it fails to adequately recognize that this credit crisis is actually part of a meta-problem: we as a nation have been living beyond our means, with out of control budget deficits, trade deficits, balance of payments, and household debt. As Herb Stein said "If something can't go on forever, it won't." And our profligate ways will come to an end, one way or another. The overextended US households are just beginning to face that reality, and WS is having its first casualties. It is not clear when the good folks in Washington will come to that realization also. But hopefully they will, and that's when we will see the real beginning of the end of the Crisis.
"I don't think the Americans quite realize yet that behind this hill lies the Himalayas," said Takashi Watanabe, a top official at the Bank of Japan in the 1990s and now a professor at Tokyo's Bunkyo University. "The U.S. is going to go through a lot more before this is over."
Best description of our coming travails.
SO MUCH BETTER then the tired baseball comparison.
Nice post, but in short, it's pain now, or more pain later. We've chosen later.
Your Aristotelian "moderation in all things" would normally be right, but these are not normal times. To accept failure is the first step to recovery; but we're still trying to muddle through. Let. It. Fail.
Hustlers of the world, there is one Mark you cannot beat: the Mark Inside. -- William S. Burroughs
The bottom was visible before the top was reached, so you can see the bottom but not know the exact depth just as you could see the top but not know its exact height.
People who had vision to see this event before now have a responsibility to show those in panic now that there is a process here that was predictable.
Bottoms are becoming more visible now and people who have positioned correctly can now prepare for the next phases.
I beg to differ. First the Fed and Treasury's hands have been forced in every instance here. There is nothing that indicates anything at all has been put in to actually prevent this kind of situation occurring again. In fact I would argue that the situation has ONLY been exacerbated and we will pay much more heavily down the road. Just look the banks new found abilities to raid their deposits to shore up their balance sheets as a prime example. Down the road the dollar is toast, period. I am also starting to see a sickness creeping into these kinds of commentaries such that what was once considered unthinkable is now somehow normal. Kedrosky's commentary on moral hazard is a prime example- "Real people in real markets don't think that way" he says. But the last 7 years were a much contrived financial market in the first place. And we DO KNOW how real people act in a contrived market-greed trumps all. Perhaps no one knows what normal even used to look like anymore.
"I believe a collapse of A.I.G. would probably have been worse than the rescue." I think maybe, just maybe, the collapse of AIG would have knocked some sense into some people. Instead we just have more hypocrisy and more socialism for the rich, and no end in sight. Clearly the banking system and especially the major banks were insolvent as of 2007. But everyone thinks they can somehow cheat their way out of it so instead we are on our merry way to bankrupt the entire country. You might as well think you can cheat death. The beginning of the end of the crisis? Not a chance. Are you really ready for President McCain's permanent tax cuts and Treasury secretary Phil "no whining" Gramm? You'd better get a grip.
I think one of the "infrastructure" investments we're going to have to make will be alot more "low income" senior communities. So many boomers have counted on their house as their nest egg, and have not saved what it's going to require to live well in their retirement.
I think one thing we can do is teach our children fiscal responsibility. God knows, my generation (boomer) didn't have it.
Kaboom: "in 2012 or so, we start to get hit with the social security meltdown" Krugman went on about this trying to show us how it's all very safely wrapped up and waiting for us. The thought I keep having through all the charts and graphs was: Bottom line, checks need to be written. Bankrupt governments can write checks I guess, but...
Jeffrey: "These subs are regulated by state insurance commissions" Jeffrey, do we have hard evidence that the insurance companies have been maintaining their reserves? I-don't-think-so. I heard that many of them got antsy with so much cash and started making loans on commercial property. And that state regulation... it might be easier to bribe an insurance regulator than a dmv employee. I think.
Thanks whereismyretirement and HC. Got to get down to brass tacks, right?
USA is toast USSR style. Too much debt, too many useless eaters, too little production, too much corruption, too much military, too much deficits.
116.1 million people out of 137.5 (non-farm employment) providing "services" and only 21.4 million producing something (construction + manufacturing).
There will be no one monolith USA left within ten years. 5-6 regions more or less independent is the most likely outcome after the federal government collapse 2-3 years from now. California will be the first to go...
whereis, indeed. I don't know much about them, but I don't see aarp doing a heck of a lot for seniors except make money from them. I have great hope for the kids. We can turn them around in a single generation.
I tend to believe that investment in basic infrastructure and energy independence would have a fair better effect on stabilizing market forces and the economy than the amount of money we have seen come from the FED since the intervened in the collapse of Bear Sterns when their High-Grade Structured Credit Strategies Master Fund Ltd. and High-Grade Structured Credit Strategies Enhanced Leverage Master Fund Ltd. collapses set off this fire.
It does not seem clear to me that what is transpired is really about long term economic health and more about facilitating an "orderly" unwind so those so blessed or just darn lucky can get out the emergency exits with enough cash in hand to start anew. That is a narrow percentage of the population.
Putting time and money into investment in basic infrastructure and energy independence after 9/11 would have probably offset some of what the wrath of these complex financial instruments will do to the economy for sometime to come.
So we have no competitive physical base to move from. Just more debt. We have an aging/worthless infrastructure that is inhibiting innovations in manufacturing production. We are still at the mercy of petro-monarchies and oligarchies and the Chinese Government. Not good. Not good at all. And I suspect there is not political will or public appetite to sacrifice and change direction in any meaningful way when you have so many other media and consumer distractions to live for.
CR, thanks for yet another most excellent analysis.
I find it difficult to disagree with anything you said and only began to squirm when I read the last sentence:
"But unlike observers that believe this only marks the end of the beginning, I believe there is a chance that these events mark the beginning of the end of the crisis."
You "believe," so do many others, and there's nothing wrong with that, but I don't.
If this crisis is proving anything, it's proving that the US economy and its financial system are not as transparent as we thought. We were led to 'believe' they were. The recognition that they really aren't is causing a loss of faith, not only among "average" investors, but mega-investors as well.
A company's book can no longer be trusted as a fair and accurate representation of its business. Accounting has become a true art form, capable of producing smoke and mirrors. The result is that uncertainty has increased, not decreased. It makes fundamental security analysis extremely difficult, if not impossible for the "average" investor, let alone the Warren Buffetts of this world. This is a dangerous set of affairs.
As one columnist said today, "Financial crises are usually the result of a miscalculation." In light of what's happened over the past months, I'd say that was a gross understatement.
The true dimensions of the problem have yet to be determined, so opportunities for 'miscalculation' are rife. We don't know what the facts really are, neither do the banks, central banks, or regulators.
You should have seen Vancouver 25 or 30 years ago. A completely different town, so much nicer, the real McCoy. But TPTB decided to sell the brand, and everybody that bought the brand helped destroy the brand.
Quite an optimistic post by CR, although I tend to agree with the posters here, that things might actually get worse from here on.
Also, I believe this won't end till we start saving more, or atleast start spending in line with our incomes...
Just look at the mindset of the general population, they raised a big hue and cry when the gas prices were high a few months back, but now, the issue of conservation,etc are back where they were before, on the back burner.
On the other hand, i think, if you are forced to be so engrossed in the grinding of the daily mill, you really dont get time to think about these things.
M. Canadien, I did see it 25 years ago, almost to the year. My grandma lived in an apartment overlooking Stanley Park. I took her all over town. Got her plastered!
Tx.
Anyone remember Laura Richardson, poster child for mortgage fraud and current california congresswoman? $1,800/mo. taxpayer funded towncar? That one. Check out her competition:
CR-
Late but not forgetting, I'd like to thank you along with many of the new and old commenters. Your even keel has led to better diagnoses than we have a right to expect, and I've gained some satisfaction (and compensation) from the rants and tips here in the comments.
It's not easy, but keep it up. Each summit is its own reward.
Sorry, didn't have time to read the whole comment thread, so this may already have been said.
I think CR is being too sanguine for three reasons:
there is still a substantial risk that a major deposit-taking institution (think WaMu) will fail. The impact of this on consumer behaviour would potentially be catastrophic;
there is every reason to believe that the macro-economic situation will significantly deteriorate for as far ahead as one cares to look, partly due to the ongoing deleveraging process. This still has the potential to produce a vicious circle in which the financial and economic crises feed off each other.
Great overview of the situation so far but your key omission is the fact the credit crunch is going global. In every corner of the global economy the credit crunch is biting and is getting worse. Financial failures are ahead of us across Europe and Australia. Already severe stress in some European economies (ie Spain) are causing some to question the survival of EMU. Worse will be the crisis in emerging markets. The end of cheap credit will see much of eastern Europe face economic meltdown as their economies recess to a catastrophic degree.
It would be nice to think the worst is behind us but take a global perspective and it becomes clear the crisis is just getting started.
Might I offer this? The 'smartest guys in the room' became victims of their own hubris, and took everyone else down with them. In effect, they MIScalculated risk. That is one of the meta-analyses of the credit unwind, and why no one here can convincingly argue whether this metaphor (baseball) or that one (hill / himalayas) or this one (survivor) is more apt.
It is precisely the miscalculation of risk, its (mis)representation and sale to the alpha-chasing investors of the world, and then the originally unseen but always lurking inevitable credit default, that both infuriates those who abhor the dishonesty, and that makes modeling the outcome an absurd exercise.
And again, would meta analysis indicate that it is modeling itself- this economic model - that is flawed? Trying to define and predict the outcome of this multi-variable real-time exercise, while using the language and inputs that were used in its formulation, is impossible. We end up with tautologies - failure is wrapped up in the construct of the miscalculation.
So how do we go about un-miscalculating, and being able to reasonably predict outcome? How can we return to Calculated Risk?
CR, I wonder if your post is as much a plea to some who might need that glimmer of light to continue fighting the good fight, as it is a read of the tea leaves.
Oh, one more thing - I'm with Whitney on this one. And I hope you're right.
IMHO the beginning of the end is not there at this time. Asset valuations are still too high, over leverage still exists for many institutions - and also the over leverage at the consumer level. The coming years will be very painful for the average middle-class citizen since no more cheap credit exist. IMO housing, while a significant contributor to the overall economy in the past, will not be a factor for many years to come. Wall Street can cleanse themselves much quicker than the housing industry. However, housing is where the wealth is for the average citizen.
Another comment I would like to make is to the notion of "Free Markets" in the US. It can no longer be argued, for some time now, that true free markets exist in the US. Sure regulation plays a role, so do circuit breakers at the NYSE, excessive lending facilities by the Feds to IB's and CB's but the US Government required to step in and provide liquidity to an insurance company is the icing - for now - on the cake. This crisis was not the last one looking forward 12 months from now. What it did, is setting a new precedence, further evaporating the notion of Free Markets.
If you are leveraged 30:1 and fail, no 3rd party should be required to step in. Let the markets correct themselves not through artificial injections of liquidity. If the markets would have crashed yesterday, who knows, might have been better for a faster and real recovery.
Exit: Damn, have to overcome the urge to go supermeta or transmeta. Ok. Done.
Miscalculated Risk. I posted about this recently. But for some reason the CR google search doesn't bring it up when you search for it. I tried "bunny slippers" as well. Bupkes. Any trick to getting the search to work?
"If this crisis is proving anything, it's proving that the US economy and its financial system are not as transparent as we thought."
mp you surprise me. I thought the whole world knew the set up? It suited us all really, Now it does not. Not so much is really going to change quite possibly, just a painful adjustment and no more probably.
Instead of dealing with this crisis piece by piece, bank by bank, etc., etc. Congress should immediately enact something like the Resolution Trust Corporation? and simply take over all banks and other financial institutions on the brink of failure or that clearly cannot survive. No matter how big, nationalize them all, in effect, sort out the assets, etc., liquidate them and pay the creditors what is feasible. If some creditors are too important to stiff then pay them off from public funds. Let all the stockholders be wiped out. Too bad for them. Then reprivatize them as soon as possible. Stop pussyfooting around.
You should have seen Vancouver 25 or 30 years ago. A completely different town, so much nicer, the real McCoy. But TPTB decided to sell the brand, and everybody that bought the brand helped destroy the brand.
Joni Mitchell saw it coming:
They paved paradise
And put up a parking lot
With a pink hotel, a boutique
And a swinging hot SPOT
Dont it always seem to go
That you don't know what youve got
Til it's gone
They paved paradise
And put up a parking lot
They took all the trees
And put them in a tree museum
Then they charged the people
A dollar and a half just to see 'em
Don't it always seem to go,
That you don't know what youve got
Til its gone
They paved paradise
And put up a parking lot
"Jeffrey, do we have hard evidence that the insurance companies have been maintaining their reserves? I-don't-think-so. I heard that many of them got antsy with so much cash and started making loans on commercial property. And that state regulation... it might be easier to bribe an insurance regulator than a dmv employee. I think. "
My little personal point of view is that legacy regulation from the great depression has actually worked pretty well and that partial deregulation combined with "financial engineering" has been an utter failure.
Furthermore, there is an active movement to "modernize" regulation in a number of ways.
The state regulated insurance companies have done quite well with respect to solvency compared to their banking counterparts.
The new banking model of using a FDIC deposit base to support an investment bank makes me very uncomfortable.
Even though Patterson was going to let AIG swap out some assets, the deal wasn't done and it was also contingent on additional financing. Furthermore, they weren't going to strip out the assets, but rather be allowed to move assets between the various entities. This would have resulted in some reduction in economic capital, but much less then the $20 B.
Insurers have been getting killed by banks because they were much less "capital efficient" due to legacy regulation and old fashioned rule of thumb capital requirements.
GAAP isn't perfect, but we have a pretty good idea of its weaknesses, unlike the proposed international standards.
One might wonder what happened to last years crisis -- the bond insurers. Well, they still have cash and have still payed claims and will likely be around years longer then Ackman predicted. Yes the equity was crushed, but they were forced to use 1930's based accounting to book revenue over a 10 year period as well as other archaic practices that actually bulked up their balance sheets.
I suppose I could write a book about my Luddite world view on regulation, but most of the old stuff was developed based on fighting the last war, and that war was the great depression.
This isn't really directed at you, but at a common point of view that looks toward new and better regulation before fully considering what we had and mostly tossed out.
London Banker had a nice post that paralleled my point of view, but included a heavy dose of plausible paranoia.
In some sense, many people believe the problems are due to people breaking the most obvious, common sense rules. I suppose my pov is similar, but I am very top down, thinking that greed is more or less a constant and am not particularly interested in blaming irresponsible individual borrowers, since the traditional role has been for the lenders to set and enforce standards. There is virtually an infinite demand for bad loans and I see it as a "supply side" problem.
So everyone wants to blame someone/something. I blame financial engineering and destroying 1930s regulation.
jim, i agree with the sentiment but i dont think we need to go as far as nationalization. we could do what japan did in the 90's. after a period of consolidation of the main city banks and long term credit banks the MOF bought preferred shares to recapitalize the banks. the banks were then able to write down their bad loans (real estate related losses). the prefrerred shares had a repayment schedule. the banks all repaid before the mandated period. the common stock was not forced to 0.
the way the treasury is managing this is astonishing - forcing common to 0 and almost incentivising the shorts to go after banks and investment banks with little risk of being stopped out.
"It is precisely the miscalculation of risk, its (mis)representation and sale to the alpha-chasing investors of the world, and then the originally unseen but always lurking inevitable credit default, that both infuriates those who abhor the dishonesty, and that makes modeling the outcome an absurd exercise.
And again, would meta analysis indicate that it is modeling itself- this economic model - that is flawed? Trying to define and predict the outcome of this multi-variable real-time exercise, while using the language and inputs that were used in its formulation, is impossible. We end up with tautologies - failure is wrapped up in the construct of the miscalculation."
I couldn't agree more.
Particularly since the (mis)representation of risk has been the principal financial "crime" in this era. Of particular note is (mis)representation via complexity (cdo^2 anyone?) under the barely plausible rationale of diversification and financial theory.
Ziggurat - do you think your thesis (1930s regulation worked better than Reagan era deregulation) could be verified? Could an economic historian come up with a conclusion?
Exit, this is not about modelling the outcome. We don't need models. We have precedents. Other societies whose successes led to militarism and empire-building, over-extension, and ultimate collapse that was inevitably preceded by rampant corruption, debasement of currency, and gross mismanagement.
The Roman Empire is my favorite, but history is littered with examples. all different yet all the same.
AIG is saying here that it has insured $307bn of corporate loans and prime residential mortgages that are on the balance sheets of banks, mostly European banks.
The banks have bought this insurance to protect themselves against the risk that these loans would go bad, that borrowers would default.
Their motive for doing so was to reassure their respective regulators - such as the FSA for UK banks - that these loans are of minimal risk.
And the benefit of doing that was that they could lend considerably more relative to their capital resources.
But if AIG is in trouble, then doubts arise about whether it would be able to honour the financial commitments it has made through these insurance contracts (which, for those of you who like to learn the lingo, are called super senior credit default swaps).
In fact, in a wholly mechanistic way, the downgrades of AIG's credit rating that we saw last night automatically increased the perceived riskiness of loans made by banks that have insured credit with AIG.
Our problems are not solely economic ones, and they are not problems that can be approached in a systemic, methodical way. An analysis would be off-topic here, but I'm afraid many of us are only gliding over the surface of a deep sea.
All I see is public money being spent to stave off the inevitable. More debt is being created when the problem is too much debt. No real effort to look at the root cause.
-Too much leverage (Total debt in this country at 350% of GDP and growing exponentially)
-Derivatives as Weapons of Mass Financial Destruction (used to increase personal wealth of the
Managerial owners wealthy)
-Deregulation (used by managerial owners to skim money into their own pockets)
Until some of these problems are taken care of, no amount of public money will solve the real problems. There is no one that is adult enough to solve the real problems.
Attack outside US embassy in Yemen. Seems a well-timed incident to taunt the idiot cowboy into further military adventure, distracting the public but sealing the ultimate bankruptcy.
On the AIG, I think US Fed is delaying the sales of these $307bln worth of loans and mortgages securities"
Minh
You are not reporting anything new to this blogg and it not just European banks that are on the hook here. A worry all along is that if these insurance companies failed then it would force a disorderly unwind. On the other hand no unwind is just as unhelpful. Cleansing is what was needed and is what is now happening.
They attack the embassy in Yemen all the time. No big deal. The threat is in places like Egypt, Saudi Arabia, Pakistan where a regime collapse or loss of control would pose major geopolitical problems no matter who is the US president. As a note aside the US has just provided the latest iteration of bunker busting munitions to Israel!
It does appear this morning that the US crisis has spread to the UK. The HBOS story is one to follow
A well written piece must I disagree that the bailout of AIG should have happened.
The FED was created as a lender of last resort for the banking system. Now it's taking equity as collateral and in some way investing in corporate America.
Why stop with AIG? There are many more ways that profits can be privatized and losses socialized.
This is not about the average person but about a legalized, and some may say it's not legal and beyond the Federal Reserve Act, looting of the the Treasury via the Fed.
I am sadly disappointed that appointed officials are getting the blessing of elected ones to behave in this manner.
It could well be that those measures were all necessary. But I see embarrasment and improvisation in all the process. And It is not clear that the measures will accelerate cleaning up the mess. Some would whereas other wouldn't.
They of course talking about this on Bloomberg radio this morning and were using $79.9 billion figure not 85..
They saying that if the government baled at 80 billion they would have had to put it on the books..
This way remains off balance sheet.
Does anyone know if this correct?
Also, there is the problem with a hedge fund industry that is unregulated and run amuck. This problems is still hidden, but it will become visibly destructive to the global financial system in the months ahead.
The real light that I saw at the end of the tunnel yesterday was the anger finally being expressed by politicians (of both parties) and their resolve to totally re-regulate financial markets. It may be election bs now. But I don't think voters will let it be election bs for long.
First, whether you agree or disagree with the FHFA and Treasury Secretary Paulson placing Fannie and Freddie in conservatorship, it has been obvious for some time that the U.S. Government had to explicitly guarantee the debt of Fannie and Freddie, or face a complete shutdown of the housing and mortgage markets...
Second, Secretary Paulson's no bailout approach to Lehman removes some moral hazard from the process...
It's true that the rescue tonight of A.I.G. suggests there are still moral hazard issues, but an A.I.G. collapse posed significant risks to the system, and the Fed was stuck with a dilemma and no good alternatives. I believe a collapse of A.I.G. would probably have been worse than the rescue.
So suppose I take this all as a given. (I have no grounds to disagree in any case.)
What frustrates me is that we are not having a national conversation about what is going on and how to deal with it. Just how is Paulson judging which companies live, and which die? What are the criteria to decide when the collapse is worse than the rescue? Paulson's gut? Bernanke's?
These are political decisions that are being made, and our political process is simply not involved. We have an entire branch of government dedicated to controlling the purse strings, but they are MIA in doing the sort of probing oversight that might bring clarity to the situation and help the American people understand why their tax dollars were needed, and why they should be confident they are being used correctly to prevent collapses that are worse than the rescues. (If they are being correctly used; if they are not, oversight could expose that, as well.)
Though I think the lion's share of the blame can be placed on one party, that's not really my point. I'm frustrated that the political process is simply not happening here. However incompetent or run by stoogers or even corrupt it might be, it's the only remotely legitimate way we have to exercise control and oversight over, bring critical facilities to bear on, and obtain buy-in for, the national decisions being made now.
They of course talking about this on Bloomberg radio this morning and were using $79.9 billion figure not 85..
Are you sure they were not talking about the 79.9% ownership stake? When you get to 80% ownership of a company, you have to consolidate its assets and liabilities onto your own balance sheet. Or something like that.
The $85 billion credit line is an arbitrary figure which the Fed can increase or decrease at will. The accounting is the same whether it is $1 or $100 billion, I believe.
Dear Joe and Jane TP:
Congratulations. You are now in the insurance business. A wise move, to spread out from your recent foray into the banking business and the housing business. Soon you will be in the auto business. I trust you will be compassionate capitalist owners, paying the former leaders of the companies you now control handsomely for their fine efforts before you took over the helm. May you enjoy a continued AAA credit rating.
Futures pointing to a slightly down open, have to say that close to unchanged seemed like the least likely outcome when I went to bed last nite. Other interesting news this AM are the Mortgage Bankers numbers, with total applications up about 33% due to refi aps up 88%. Know aps do not = new mtgs these days, but def a very good sign. Hope it is mostly Alt-A's that are refi'ing to help defuse that time bomb. Takeover of F/F does seem to have lowered mtg rates pretty well and it is having some effect.
CR the MBA numbers are prob worth a seperate thread.
Lehman Brothers Holdings Inc., the securities firm that filed the biggest bankruptcy in history yesterday, was advanced $138 billion this week by JPMorgan Chase & Co. to settle Lehman trades and keep financial markets stable, according to a court filing.
...
The first advance was repaid by the Federal Reserve Bank of New York, Lehman said. The bank didn't say if the second amount was repaid. Both advances were ``guaranteed by Lehman'' through collateral of the firm's holding company, the filing said. The advances were made at the request of Lehman and the Federal Reserve, according to the filing.
Isn't this just more Fed loan laundering? If that is the intent again, then clearly they are trying to be sneaky...
Dispite all the imperfections, the US remains the most powerful country in the world and got that way with the system you have now rather than the system you seem to yearn for.
My guess is that the nationalization of AIG has nothing to do with AIG itself. Rather, this is designed to protect the credit insurance policy holders. If AIG had been allowed to go BK, the policy holders would have gotten pennies on the dollar on their insurance against their bad investments. This way, the government can make sure Mr. and Mrs. Taxpayer have to make good on all of it.
"the government can make sure Mr. and Mrs. Taxpayer have to make good on all of it."
There are i think trillions in potential payouts? The idea the banks could ensure their uninsurable risks was a fantasy as much the idea the insurance companies could make a profit out of the premiums insuring what they could not possibly afford to insure. Seems fair they just sort out the trades and agree their joint stupidity.
Looking forward, one of the things we need to do is to put the CDS genine back in the bottle. Perhaps the way to do that would be to not allow them to be written over the counter in private transactions and instead standardize them and make them exchange traded. That would greatly reduce the counter party risk. Not a heck of a lot of "fail to delivers" in the commodity markets.
If Wall Street and Mortgage Company executives repaid their incentive based compensation that they did not earn, the feds would not have to spend nearly as much for the bailouts.
Remember Mozillo? He's keeping a low profile. I wonder why he's not chiming in on CNBC?
CR,
You make so much sense it almost seems you're more qualified than Palin. Are you a good shot--or do you like to down shots? Thank you, I now go to this blog first to get the news--then to the Daily Show. Is that a compliment to you or a critique of me--or an indication of MSM's decline?
Love ya--and Tanta too (who seeming has excellent aim).
"Who were the top recipients of Congressional campaign contributions from Fannie Mae and Freddie Mac? #1 was Hilary Clinton and #2 was Barack Obama. From Lehman, #1 was Sen. Dodd and #2 was Barack Obama."
So, you're saying that Clinton, Dodd, and Obama forced Bush, Paulson, and the rest of the Republican establishment to do their bidding? And here I'd been thinking all this time that the Dems were so impotent... who knew they were the secret masters behind all this!
So, one day the board generally regards Paulson and his cronies as pirates, shopping for pitchforks, but when CR makes his lengthy and incisive commentary, you're not so sure any more. Whatever happens, I predict you'll see that Krugman and CR's viewpoints are exactly the same.
A few years ago, reckless lending wasn't stopped, but that's no reason to sanction reckless, patchwork solutions. CR says, "the U.S. Government had to explicitly guarantee the debt of Fannie and Freddie, or face a complete shutdown of the housing and mortgage markets." I believe in that case we'd temporarily go to the system used successfully in the US for a little while, called In God We Trust, All Others Pay Cash.
The hidden tragedy of these improvised Fed and Treasury maneuvers is that the Democratic party has forgotten its historic role as the afflicter of the too-comfortable, and the scourge of plutocrats--rather, they act like enablers. Perhaps the Democrats always read Krugman in The New York Times before forming all any opinions about economics.
Very pragmatic and well written CR! And I totally agree the this marks one of the low water (if not the low water) point in this process. The terms of the AIG bailout are very, very punative. To me this upholds the moral hazard precept: this wasn't a gift and basically requires the company to break itself up with the treasury getting a bonus in the terms of equity and 8.5% over LIBOR.
And this tells everyone to get real. Now you have one of the last IBs standing looking for a husband. Will Goldman be next? And who is the suitor? Is it in the UK, or is it a competitor to BoA in NY? By the time this is over with, I would be surprised even if Goldman survives as is.
And this is all before a couple of major bank failures. Those are coming and probably soon. I can think of three right now that can't make it period, given the numbers. Whether they are tossed into someone's arms or taken over remains to be seen, but right now there is some background work being done to try to marry two off me hears.
I still will not retract my macro-economic calls though no matter what happens here. As the headlines suggested, people think this is bad, but they don't know how it affects them personally. And I'm not sure any of this effects things on the macro level at this point that isn't already in play.
Really nice post. I think you are about a year early but still it is excellent.
I just have a hard time believing that this is the "beggining of the end". We haven't even seen real pain yet. We are witnessing the bursting of a 30 year credit bubble, the biggest bubble the world has ever seen, and within that bubble is the bursting of the biggest housing bubble the world has ever seen.
And all that is going to be resolved by extending a few loans by the FED and a nationalization or two? If that is all then why not blow bubbles?
The events of the past week were not done so fast and with so little thought that nobody can possibly understand or forsee the unintended consequences that will arise. They weren't so much "solutions" as they were delays. And as Meredith Whitney said, a ton of liquidity was just removed from the economy over the past week on top of the already beggining to bite credit crunch we are experiencing.
And amidst all this, we haven't even seen a real correction in the equity markets. Things are still expensive and that indicates a lot of underlying bullishness and denial.
And the pain on main street is just beggining to feed back into the finacial losses IMO.
John Snow(job) on bubble vision right now. "We have to get rid of this decades old regulatory system" What an ass, the problem is that we got rid of the decades old reg system with Graham Leach Bailey (99) and the Commodity Futures Mod Act (01). Why do they put a guy who wrecked the balance sheet of the tresury and then went to the pvt sector and buys GMAC and Chrysler in the summer of 07 on TV. Heck, this idiot should not be allowed to even watch TV (other than maybe Nickelodeon)
The terms of the AIG bailout are very, very punative. To me this upholds the moral hazard precept
No way, ipodius. The fact that shareholders kept 20% and unwind orderly is moral hazard. But even more so, the problem is systemic and true moral hazard would have been those companie involved picking through the rubble and piecing it back together.
That AIG needed bailing out is arguable for sure, but that the government funded $85 billion instead of the private sector performing the bail out certainly wipes out any moral hazard.
Wachovia is toast. Shotgun wedding in the offing. Will they make it to end of Q3? Given the accelerating trend of failures and takeovers can you be sure they will survive in current form?
Who will be the chosen acquirer?
WFC?
GS?
MS?
Once the trend for "price discovery" picks up some more steam the true extent of the sorry state of Wachovia's balance sheet will be appparent - and they will be so screwed. Commercial loans, commercial mortgages, PAP, LEH and AIG exposure, losses on GSE sales, legal exposures, reputation in the toilet. They are done - just a question of when.
If you are an employee - dust off the resume.
If you are a shareholder - SELL!! while you still can get some value. Common's will be wiped out.
If you are over the FDIC limit - don't say you haven't been warned.
CR: Excellent post. I also note that you are channeling Tanta in word count.
ipodius: The terms of the AIG bailout are very, very punative.
This is dependent on whether the Fed inserted themselves ahead of the bondholders. The fact that any common survived the wash out is absolutely moral hazard (is there a shelf registration with more shares to be awarded?)
Does anyone have a readout on whether the bond holders are ahead of the Fed?
Of all these 'events' so far, Bear Stearns was handled worst... but it was the one that took Bernanke and Paulson to school. I think they have done better this time around, but the risks get high and higher, too.
They might have been a bit tougher on AIG, but that is a nit. They were tough enough on Lehman to let Merrill, and apparently even Morgan Stanley, see into the abyss. It isn't that AIG is too big to fail, it is that they are too interconnected. All the AIG credit insurance customers combined are definitely too big to fail; there is not even an argument there.
True BK would have been a nightmare, would have had to held it at the UN with 50 state Ins commisionars and commisionar of 129 other countries. This has basically the same outcome. Common and Pref shareholders lose almost everything, perhaps debt holders take a small haircut, policy holders saved.
I fail to see how we are even close to the end of this debacle. I've noticed none of the bloviators on cnbc or any of the news channels bother to even mention the huge bundle of ARMS that are going to reset the end of this year and beginning of next. I remember reading some time ago it was the biggest batch yet. I would have to guess it will also be the biggest batch of foreclosures yet as unemployment and inflation have only gotten worse since the last batches reset...I would know, I'm one of the poor schmucks holding one of those ARMS and I'm scared to death...I didn't have a choice, Mom died, I had no mortgage history, and I was unemployed for a year taking care of Mom, it was the only way to keep the family home (Mom died with a mortgage)
"Looking forward, one of the things we need to do is to put the CDS genine back in the bottle. Perhaps the way to do that would be to not allow them to be written over the counter in private transactions and instead standardize them and make them exchange traded. That would greatly reduce the counter party risk. Not a heck of a lot of "fail to delivers" in the commodity markets."
This would eliminate a lot of the issues with mark to model (level 2) and mark to "wish upon a star" (level 3) stuff. IB's wouldn't like this because the transparency would hurt their profitability. They would likely revert to acting as agents on behalf of their customers instead of trading as principals to facilitate their customers.
bluestatedon writes:
"Who were the top recipients of Congressional campaign contributions from Fannie Mae and Freddie Mac? #1 was Hilary Clinton and #2 was Barack Obama. From Lehman, #1 was Sen. Dodd and #2 was Barack Obama."
The F/Fs were astute and figured this was a Democratic year, so sent their pimp money there. I would be interested in their lobbying priorities 2000-2006.
"The world urgently needs to create a diversified currency and financial system and fair and just financial order that is not dependent on the United States."
The commentary suggested China must brace for grave economic fallout and look to alternatives, saying the crisis brings to mind the Great Depression of the 1930s.
"Lehman Brothers announced bankruptcy will not only have a domino effect on the global financial world, it will bring a shock to the world economy," the front-page comment stated.
But unlike observers that believe this only marks the end of the beginning, I believe there is a chance that these events mark the beginning of the end of the crisis.
With all due respect to CR, and he is due a great deal of respect, I simply don't believe anyone can say with any confidence whatsoever how this will play out or when it might end. Now the "credit crisis" is playing against a backdrop global price depreciation and economic slowdown.
And is this really just an acute credit crisis, or generational deleveraging?
asl, the private sector isn't able to fund AIG. There are too many systemic problems right now, so that's just an impossibility. And respectfully I disagree. If you are certain to lose your job, have the company broken up, have the equity and bond holders take a bath, and pay punative interest for the rescue money, I'm not sure how this is evoking moral hazard. You just steered your company into a brick wall and the treasury is just stepping in so that no one is looting what is left.
So I'm viewing this as the fed/treasury being the cops in this situation to prevent looting. Many people here want the riot to happen but I certainly don't. I want to be sure that, when a company is broken up, it isn't looted in a disorderly unwind but that people pay full value for the assets.
Yet as of today and from the beginning of the year you can still "easily" get a 3.5% down payment or a no downpayment loan with a 599 FICO..... how many new loans made in 2008 will foreclose? 60%? 70%?
"I fail to see how we are even close to the end of this debacle."
Well maybe if you look at it in aviation terms it looks different?
The economy approached the stall and dropped a wing and entered a spin where one wing is flying and the other is stalled. The economy descends dangerously. The pilot applies opposite rudder until the aircraft stops rotating and while it continues to head towards the earth in a none flyable manner. Once rotation has stopped then both wings are now stalled and the nose dips down and the aircraft now increases speed. Once flying speeed is reached the aircraft can be pulled out of the dive and level flight regained.
At this stage maybe we can say we have recognised we are in a spin and can now apply the recovery method? Whereas previously we were in high anxiety and disorientated?
I dunno, I keep waffling back and forth on what is happening. It seems to me that the Fed knows that the financial system is f****d and is jumping around trying to keep most of the plates spinning.
But being the chief mobster, some examples need to be made. How about some movie analogies? I'm sure you can tear them apart, but how about some laffs, eh?
***LEH (Movie:Batman, Tim Burton version)
The Joker (aka Fed), shaking Dick Fuld's hand : "Whoooaaa! We got a live one here!"
***AIG (Movie:The Untouchables, Brian Depalma version)
Al Capone (aka Fed) shows AIG a "real" baseball analogy.
***The FED (Movie:Scarface, Brian Depalma version)
As the SWFs close in, Ben/Hank/whoever screams "I'm Tony F***ING Montana, mang!"
I hate people that make those baseball analogies, (We're in the 3rd inning, blah, blah, blah....)
BTW - We're mid-way thru the 2nd quarter, and we're going to need one hell of a half-time speech by the next commander-in-chief.
I'm sending this from my Crackberry. I'm on the 7th tee, and I just made a horrible quadruple bogey on #6. I hope I can turn it around on the back side, but damn, it's getting awfully windy out here.
With the Primary Fund (a money market fund) breaking the buck, I took a look at my money in my money market fund. Fortunately, there is no exposure to Lehman or AIG. However, there was exposure to Fannie and Freddie.
It just made me realize what my exposure would have been, had the government NOT taken over the two firms.
As much as I deplore the actions of the government in bailing out (seemingly) everybody, the alternative would have been much worse. sigh
What worries me is this continued passion for "price discovery", which in the context of a systemic financial crisis could simply mean another downward turn in the debt-deflation spiral.
Everyone wants to see the capital markets functioning normally again, but it's wishful thinking at this point to imagine they'll find their "natural" equilibrium if the feds just get out of the way.
I mean, market fundamentalists may criticize the Japanese for how they handled the aftermath of their big bubble, but compared to our experience in '29-'33, a decade of stagnation starts to look pretty good.
I still don't see this as the start of the end, here, in San Jose, CA, we have far too many foreclosures, far too many homes for sale, and our salaries haven't really gone up for years.
Most folks that were doing ok three years ago now can't even pay their most basic bills, and many are struggling without health insurance.
I remember reading last year that some "expert" stated the housing mess had seen the worst and would rebound, I keep hearing from the "experts" that our productivity is strong (no mention of wages though), and the "experts" are those who have created the conditions we are now seeing.
I am no "expert" but can tell you this: as the housing market was going crazy, and folks were taking out those interest only loans, and banks were lending to anyone who could hold a pen, I knew that it spelled disaster, why didn't those who were in charge see this?
I know why: Because their bottom line was lining their pockets, and line them they did. Now they have walked away, keeping ALL of their assets and destroying our nation. At what point do Americans wake up and see that hard working Middle Class Americans are being given the finger by those who claim to know best?
And if you think things are bad now, just wait if McCain/Palin are elected and we have two people who have little to no experience with economic issues running the country. McCain has always been in favor of deregulation, and at a time when we need to regulate and hold people accountable, he would be the new Hoover of our century.
Okay, so when is housing going to return to affordable levels?
Where are the new jobs going to come from now that we've gutted our entire economy and reduced it to a debt-shuffling shell?
What are we going to do with the huge number of unfunded liabilities dragging our economy down: health care, illegals, bailouts, the war, etc.
Until the basic issues regarding the average American's ability to: get a steady, decent-paying job and be able to afford housing (and energy, and health care, etc.) are addressed, this problem is nowhere near over.
At least Mish's loophole in the Federal Reserve act would not appear to be able to accommodate a city, county or state. Maybe there is another one for that. Thanks again for this fantastic prologue to the beginning of the end.
Great post! I appreciate your reasoning, and I agree with much of it.
However Im not at all sure that I agree with you on the Feds approach to the AIG rescue.
This transaction appears to be a packaged bankruptcy to me in all but name, but without the legitimacy of a court as overseer. The Fed is effectively providing DIP financing, given the seniority of their asserted claims and control (and the OUCH! rate); the equity holders are essentially wiped out by the Feds 80% equity stake.
It seems to me that much the same thing could have been accomplished within a Chapter 11 bankruptcy, with the Fed providing (or backing) a formal DIP line (which seems somewhat more secure, albeit equally unprecedented); Bankruptcy courts exist precisely to adjudicate claims in such situations. To be sure, a Bankruptcy filing would have been a shock to the system, but Im coming to the view that relying on the discipline of traditional remedies, regardless of how shocking they may seem, is likely what we need to do.
Backing up my point, the swift action by Barclays in scooping up parts of Lehman once it was in Bankruptcy suggests what might have played out had AIG followed the traditional route.
I do agree that the Fed/Treasury approach to Fannie/Freddie was appropriate. I worked in the Mortgage Industry from 1968-90, and must say that it was always understood that these two agencies had the implicit backing of the Treasury. The Fed/Treasure action was simply recognition/resolution of this implied assurance. To be sure, when I knew them both Freddie and Fannie saw their primary mission as providing stability to the private mortgage markets (at first institutional and later securities) rather than reacting to Wall Streets insistence on generating profit growth every quarter which ultimately led to their problems. Much blame is (inappropriately) on them now and, indeed, they did screw up but over time much good came from their being there. (Regrettably, that babys probably in the bath water that will be chucked into the alley.)
And I agree that Lehman should have been forced into Chapter 11. While I accepted the Bear-Stearns rescue as appropriate at the time, Ive changed my mind; they should have been forced into Chapter 11 as well. Let the legal infrastructure that society has set-up to handle these problems do its thing.
At the end of the day, this all turns out to be a failure of regulation the players simply figured out how to slip out from under traditional regulatory constraints, and the laisser-faire philosophy of the last decade or so allowed them to get away with it. Unfortunately, having accomplished this, the hubris of these whizzes led them to decisions that can only be called bizarre.
That these companies have created hugely complex structures doesnt necessarily mean that Only New, Untested, Fixes will provide a solution ad-hoc is not the same as innovative. Traditional regulation, discipline and remedies worked pretty well for a long time and handled a lot of innovation along the way. I suspect its time to re-apply the rules, and bring some traditional discipline back to the system.
We need to substantially reduce being a debtor/consumer economy and become a saver economy to provide the capital to repair this disaster, yet there is no appetite for this anywhere I can see.
Agreed in all particulars. The AIG bail indicates an awareness at the Fed and Treasury that some insolvencies are at key crossroads in the leverage flow, and therefore more like timebombs than plain bankruptcies. In addition, holding out until the last possible moment helps to reinforce the Lehman message. We need to maintain liquidity first, then as far as possible within that framework get the toxic paper to wring itself out.
"Fear itself..."
You've been waiting all day to write that post, haven't you?
Yes, I would agree with you. But we still have the problem of peak oil ahead of us. Just because oil prices have dropped doesn't mean that peak oil is not a factor.
I hope you are right, CR. I still worry about a "tectonic shift" in confidence, I worry about the (apparently) worsening credit contraction, and I worry about the truly enormous CDS exposure spread throughout the system.
A year ago, did you ever imagine we would lose even one investment bank?
OK, bedtime for me. Thanks once again for the best financial blog in the world.
I was surprised the Feds didn't just confiscate the whole thing. None of these bills are due until there is a new President and Bush and Paulson will be collecting their pensions by the time it all gets sorted out as to how very much the taxpayer will have to eat.
This is the deleveraging if a massive debt bubble that took 20 years to build. It will not be over in a year. It will take much longer to create a new functional financial system.
Beware Of The Moving Goalposts.
But.....Errrrrr.....I Can See The End Zone.
CR,
Great post. I'm not sure if you're retired, but the experience that you've gained by being the in center of the storm puts you in a great position to suggest future policy.
Thanks for what you do.
Ted
The Hedgies now have the "go-ahead" on shorting to zero. The Fed will not save the stock owners. Who's next?
It would be easier to accept the "bailouts are the lesser of two evils" argument if we could get some agreement on who is responsible for this and how we will stop this from happening again.
Right now it just looks like desperate flailing.
Excellent, thoughtful post.
The beginning of the end comes when everyone is forced to admit there's a big elephant in the room and it just made a big stinky pile on the carpet. We're there.
Now we're into the cleanup phase. There is more dung yet to be uncovered, so maybe another major wave down, stimulated by the option ARM/AltA / NotSoPrime mortgage default wave, before it's all over. But the cleaning crews are now on the job and the zookeepers are getting fired (albeit with far too much severance pay).
Switching metaphors, one might also say that the patients are now getting the help (or amputation) that the triage nurses (Bernanke/Paulson) decide they need.
I think pragmatism describes the new approach out of Washington, and I'm pleased to see that they aren't taking a one-size-fits-all approach. Every one of these problems has had its own unique solution tailored to the nature of the crisis. The exact details are worth a quibble and the moral hazard issue needs more attention, but from a big picture perspective at least we've managed to keep the "orderly unwind" going for a year now. Which is more than we had in the 1929 crisis and may yet prevent a serious depression.
it's more than all of that...institutions took these gambles to prop a rickety economic system. The only country in the world offering growth is China.
WAMU, WAMU, WAMU!!!!!
Next?
Excellent essay, well thought-out. Thank you.
I would only say that, even though you might be fundamentally correct, the financial system is now of such marginal robustness that it could easily be knocked off the course of recovery by an unexpected shock.
In other words, no sure thing, any which way.
All this bad news is depressing,...I have an idea! How about a post on the 2010 Winter Olympics,...i dunno, ummm, say maybe Ice Skating?!!!
I keep asking myself "does this feel like the end" and I have to say the answer is always no. Importantly I think we have the bulk of the mortgage fallout still ahead of us. As home prices continue to fall we reach farther back in time, finding people who bought 5 or 6 years ago and thought they had large amounts of equity. Very large numbers of them overborrowed or just overspent based on that equity. At best they will have to dramatically ratchet back their spending, at worst they will lose their homes. I don't see any end to this until we're past the large bulk of the Neg-AM recasts and have shaken out all of the stated income borrowers who can't truly afford their payments. This is still months if not a year or more away.
CR,
Thank you for the analysis. However, in saying that this is the beginning of the end are you not being somewhat domestically minded? There is still the issue of our debt and the willingness of others to finance it for us.
Others have said we are headed for hyper inflation etc, but I fear that we have, with all the different pieces of toxic instruments and leveraging, created a financial Frankenstein's Monster of our national debt. This is a monster that needs billions of lightning bolts a day from overseas to keep going before it starts feeding on the villagers.. (us!).
My fear is that T-bills will start to look less and less attractive to the overseas economies who you point out are feeling accute pain themselves.. and hence rates will have to go up to add lustre to our paper. This is where the lender of last resort will start looking round the room for a loan and discover the room is empty...
How much of that beginning of the end is dependent on the Fed and the nation being able to be there?
Cheers
"The Hedgies now have the "go-ahead" on shorting to zero. The Fed will not save the stock owners. Who's next?"
Hey look, someone from TF is here. Sorry guys, this isn't the end of the world...
CR writes: "this crisis has been unavoidable for several years. If action had been taken in 2004 or 2005 to curtail the loose lending practices..."
cue the greenspan ARM comments...lol
those are actions
Email Senator Shelby and tell him you oppose this bailout of AIG: United States Senator Richard Shelby : Contact Senator Shelby
Ok, CR, nice post. Thoughtful. So when do we hear you say that unemployment will 'soar with wings like a black swan' above 8 percent?
Just wondering.
Nice post, CR.
So when will we hear you say that unemployment will 'soar with wings like a black swan' above 8 percent?
Wondering.
When consumption stops....China will no longer grow. They will grow hungry and march across the ocean and ask for their money back. This might casue financial doom here but many contries will simply starve or die from wars that no longer can be financed by the good ol' USA. Then we will have millions of people in thousands of areas wanting us to die...hmm perhaps we are already to that point?
Believe me, the rest of the world used to profit on our consumption...they do not want to see us go away entirely. USA no longer wants plastic GI Joe dolls, China no longer needs Oil from Iran...just what do you think Iran will do?
Is AIG really a bail out? Is it a bail out when they take 80% of your company, fire management and set up a plan to sell of the assets?
To me that looks like a slow motion BK.
bloomberg is calling the AIG deal a gov take over.
Thank you CR for all the works and wisdom on this blog over the years. It's a thoughtful summary of the consequences that we will have to face once this massive housing bubble bursts. Many thanks.
Good post - but I would wait to form an opinion until after October passes. If things go nuclear - it will be in October.
Totally irrational I know - but it's my gut feeling.
CR:
I have been an observer for a few months, have gain a tremendous amount knowledge, been exposed to a wide variety of different viewpoints and am much better able to defend my economic views in a coherient and comprehensive manner. I could not have been able to develop a deeper understanding of complicated issues without this blog. Thank you for you and Tanta's superb efforts.
The good news is the U.S. is finally taking the necessary steps towards eventually resolving the crisis.
You have a really weird idea of what "good news" is.
Your Magnum Opus! Tanta-stic.
Reasoned nicely, and seasoned lightly.
It was like Roubini wrote the first half and then you came in with your dependable yang. Frighteningly understated conclusion: "I believe there is a chance."
If you want to capture someone's attention, whisper.
This is a slow-motion recapitalization of the U.S. financial system, and it is being led by the government.
I would feel better about this being the beginning of the end if private capital were playing a more significant role.
The U.S. Federal Government (including Fed Reserve) is putting everything at risk to play this lead role: dollar value/hegemony, U.S. cost of borrowing, etc. Time will tell if the U.S. Gov will get the right return for its risk.
I would also feel more comfortable if someone -- anyone -- were talking about trying to put the CDS genie back in the bottle. It seems that CDS is one of if not the major litmus test for too-big-to-fail. If so, shouldn't we be doing a little fire prevention to go along with all the fire fighting?
Nemo, yes.
And others - thanks for the comments.
Wisdom Seeker, I agree - and at the least the problem is being recognized (at least most now see the elephant in the room). There are still institutions unwilling to admit the extent of their problems. But we are on the way.
sdtfs, there is still uncertainty in that forecast too!
Hopefully I'll be in Vancouver in 2010.
Best to all.
Excellent post. But what is Bernanke's credit limit ?
Ask Dodd to arrest himself here: United States Senate Committee on Banking, Housing and Urban Affairs : Home
I had some choice words for this guy.
How many national homebuilders have declared bankruptcy? The credit collapse hasn't even rippled through the most exposed sector; housing and you are calling a beginning of the end?
The end of the beginning will be when we are saying it cannot get any worse. There isn't a regular on this blog who thinks that. We all know there is worse to come. Even you say there are 200+ banks dead lender walking. Heck their branch square footage alone is enough to depress CRE for years. We haven't even seen many rent decreases or lease recasts yet. We won't get to the end of the beginning until everybody know what is coming and is resigned to that process. $85 billion extraordinary support for counterparty insurance positions is NOT a sign of acceptance but denial.
As long as there is denial we are still in the beginning. Try to convince me again when L3 assets are market to market. Until then the bottom won't even be visible.
"I believe a collapse of A.I.G. would probably have been worse than the rescue."
Worse for who?
The retiree, with no debt, few assets, and little income.
Or the levered, invested, indebted, wage earner.
As a person who has lived well below his means for an entire lifetime, saving nearly everything;
I'll take the systemic collapse combined with massive deflation in place of the inflation, debt, and taxes, anytime thank you.
Those who are levered to the throat living high on the hog, deserve to loose it all.
"maybe Ice Skating?!!!"
Totally forgot about that. Maybe CR could get Sascha Baron Cohen on as guest blogger for a day while he's out testi...er, hiking.
Oh yea - Take a look at Macquarie in Australia... Nice juicy short opportunity there. 45 Billion to refinance in the near term.
at the bottom of CRs post
he mentions the outside chance for systemic financial collapse as expounded by roubini being an unlikely but possible outcome.
what is a systemic financial collapse?
to my way of thinking it means the entire financial machinery of our economic system evaporates???
it means,barter, subsistence farming, unemployment above 50%
my notion cant be right...can it?
That glimmer of light may be the end of yonder rainbow.
"I believe a collapse of A.I.G. would probably have been worse than the rescue."
How do we tell when CR is talking his book?
oh and I agree, Vancouver is a nice place to watch ice skating.
The IBs just don't get it! Housing has crashed and their balance sheets aren't worth anywhere near what they think they are (Just like the homeowners'!).
It's tough to wake up and realize the party is over!
CR,
Although I respect your blog greatly, I have to disagree. I have not seen any actions to date to justify the following statement:
"The good news is the U.S. is finally taking the necessary steps towards eventually resolving the crisis"
In my opinion, the housing crisis is merely a side effect of much broader issues effecting the US economy. For example, I don't think we would have such a big housing bubble without foreign purchases of mortgage securities, even if our regulators were asleep at the wheel.
I am still waiting to see some leadership in addressing these issues and withold judgement until I see any movement in this direction.
Comrade Yossarian, we will see. If I'm wrong, I'll be the first (and not the last!) to point out the bad forecast.
Steelhead, thanks! And others too -thank you.
eh, I would have preferred if people would have listened years ago. Then the solutions would have been easier.
Oh well ... we are here now.
Best to all.
I think in a year or two foreclosures are going to get so bad we'll see congress put a freeze on foreclosures for one year, possibly longer. Or they might pass a law preventing home values from dropping past a certain amount. Just my tin cents.
The solution to the crisis comes when no corporation or institution is "too big to fail" and everyone knows it and behaves appropriately
The only way to get there is cut the rope and start letting them fail...and to come in at the bottom and try and rebuild
All we are doing with current FED/Treasury solutions is making the problem bigger, and the bottom farther away and more painful
For example AIG was allowed to transfer 20 billion from the policy writing subsidiaries to the holding company. Stupid, the policy holding companies are now less liquid
And all to prop up some greedy sob's on wall street that made the crisis occur and to prevent the FED and Treasury regulators from looking like they were asleep at the wheel the last 10 years.
Let's start letting these businesses fail, that is the only way we get through to the bottom and start rebuilding. It will suck, but there is no free lunch
Great Post. I think we are 60-70% through the financial correction but only 25% through the actual economic pain. So while it will suck, it is better than the alternative of stretching the pain out for a decade plus ALA Japan.
CR, great post. Thanks to you and Tanta for the education I've received on this blog.
I do agree somewhat with Tyaresun-- I think the Administration is still very much in a reactive mode. We still have a huge struggle coming on re-regulation and issues such as the dollar's role as international currency, dealing with our trade deficit, re-balancing consumption and saving in the U.S., etc.
CR
let me add my meager voice to the chorus
thank you, thank you, thank you,
your blog is simply the best to be found
i am eternally in your debt for your writing and for hosting the awesome CRCC community
i have learned a ton from you all in the nearly 2 and 1/2 years i've been visiting...
People still think DAP is a good idea, builders are still building, banks are still hanging onto phantom inventory hoping for a turnaround. And, as Dawg says, how many homebuilders have BK'd?
As far as I can tell, we're still in the early innings... and the Fed is working overtime to keep us here.
and ps thank you CR and Tanta for your posts........and thanks to all the commentors. I have learned so much.
Wonderfully thought out post, as usual CR. I have learned so much here from you and the merry band. Thanks for all you do.
Me too! I have the sign up emails coming and my couple of grand tucked away to put up money for tickets. We, of course, want to see the figure skating. Very spendy.
But not near as spendy as when the daughter was going through the USFSA ranks in the 80s and early 90s. Gulp. We only got as far as regionals, but what a learning experience and the confidence she learned in "commanding" a huge patch of ice by herself at aged eight has stayed with her to this day. See you in Vancouver;)
People have been consistently too optimistic re this crisis. And of course it is now a world crisis that will exacerbate and prolong the US crisis. Hence I would think "end of the beginning" is more likely than "beginning of the end." Is there any economy in the world in good enough shape to begin to pull us out of this? I can't think of a single one.
Yeah, what Rob Dawg said...
We can't even see the bottom yet.
A week ago nobody could've imagined the carnage of the past week, and yet now that we've all seen it, somehow we're supposed to now believe that that's it?
So we should just resign ourselves to being suprised, shocked and overwhelmed by it all, every f'in day???
I agree with the naysayers that point out that we have to be extremely careful how we proceed because the world is incapable of sustaining our increasing debt.
I'm very pessimistic and think that there will be systemic collapse eventually (I mean I trust Roubini when he says that we are barely 1/3 of the way through writedowns!) and that claiming "systemic risks" is NOT sufficient for government intervention.
That said I think the AIG thing is the proper role for the government for really one reason: unlike Lehman, Bear and Fannie/Freddie, it truly seems that they are not insolvent in the long run. They have a ton of valuable assets that are profitable and worst case the government shouldn't lose a dime. Maybe we're being lied to or I don't know something, but that's the impression everyone is giving.
I anticipate that there will be many late nights coming and pray that someone somewhere starts coming up with a coherent long term strategy or otherwise we're going to be looking at a ton of worthless junk on the public dole at the expense of good stuff being unnecessarily pawned.
that glimmer of light, isn't the end of the tunnel...
...it's a train coming right for us.
and instead of figuring out how to get off the tracks everyone seems to be debating how much we should slow down (and congradulating themselves they've decided they need to stop speeding up)
Excellent post/explanation of motivation for FED's actions re:AIG. But the actions of the gov't do not seem to indicate any motivation or intention (by Congress, et al) to draft some statutes, etc., that might prevent similar problems or even to begin enforcing what anti-trust laws already exist. Instead it seems to be accepted that the role of Congress & various agencies/gov't created entities is to fix what the private sector has done. Letting Lehman file for BR doesn't seem to balance out bailing out BS (or the supposed corporate rescue of same), putting Fannie & Freddie into conservatorship, setting up the TAFs & accepting ever less secure collateral at same. There's no indication the TAFs will ever end. In addition, what guarantee is there that the feds won't just forgive the interest owed by AIG & privatize at a good price to some private entity(ies) a few years from now? (or another giveaway).
Or do you, CR, see indications of other thinking & actions?
Instead of breaking up these huge financial entities into smaller ones (that might not be "too big to fail" without precipitating systemic risk) that could fail without major repercussions & might even compete.
Very little to no indication that the method of compensating IBers, & other CEOs, & creation of passive/captive boards is seen as a mistake & that it's something that needs to be changed.
Another poster noted that if the "retirement", bonuses & separation packages for the past 2-3 years were returned by upper management for say, Wamu, GS, Lehman's, WB, CFC, AIG (plus what's stashed in Starr International--a Greenburg vehicle for rewarding the CEO & upper management ranks of AIG), some of these messed up entities might be better capitalized. But that would probably seen as an illegal taking while it's ok to take from the taxpayers to bailout the entities these greedy bozos lead.
Guess I'm saying, what is happening to make this huge debacle less likely to happen in the future? And will those in the private sector who played a big role in making it happen walk away obscenely wealthy? No penalties?
Okay AIG crisis over ...next one which will it be :
-WaMu
-Wachovia
-Merril
-UBS
I think this starts as early as today...
Am hearing MER is worried and maybe looking to sell stuff or be acquired.
Nothing out there that steel-toed bunny slippers can't fix. (see link below. CR & Tanta at Burning Man)
...or single malt beer, fricasee squirrel recipes, jellied moose nose, or even tranches of cowbell, lined with the finest Zhangdong tinfoil.
http://i537.photobucket.com/albums/ff334/UncleBillyLovesCR/steeltoedbunnyslippers.jpg
Like your comments. It may well be the beginning of the end since we have washed out or rescued all of the basket cases-I hope. If you haven't seen it you might want to take a look at Infectious Greed this evening. He raises some important points about the political fallout from all of this.
Thanks for the wise words, CR.
Have a restful evening.
"As long as there is denial we are still in the beginning. "
ecce homo
Excellent general prognostication in the spirit of empiricism.
Unfortunately, all these deals were done so quickly that I can't feel comfortable that the actual condition of the companies is now known or will be known in the next 6 months or so. In particular the leverage instruments are a black hole, CDSs don't seem have to have any way to centrally clear, and hidden/off balance sheet horrors (including most of the level 3 assets) are yet to be discovered.
All of these non-transparent risks make the situation unknowable and investors very cautious - and I see nothing which will happen to resolve/end these practices. Simply put, financial services have been a major part of the economy and fast growing, but there is almost no there there.
When the phony profits are stripped out because they drain the economy and make money-players think they own the world and have no responsibility, where is the economic basis for sustenance to the public coming from?
Denial is still rampant on Wall Street (and most of DC), and the public has barely been awakened to the crisis. Papering over the crisis seems to be strategy, and that is the 180 degree wrong approach.
This could end well in some number of years, but it seems equally likely given the unfaced problems that it could end badly, very badly.
Wars have been fought for far lower stakes, and revolutions as well. Until those dangers are admitted, they won't be attended to.
We need to substantially reduce being a debtor/consumer economy and become a saver economy to provide the capital to repair this disaster, yet there is no appetite for this anywhere I can see.
We still haven't faced up to the petro crisis, the climate change crisis, and other worrying problems (nuclear weapons proliferation, etc.), and I don't see how we get out of the financial death spirial when we are ignoring the other realities.
AIG needed to be left to their own devices, period. AIG is being rewarded with a Federal loan (bailout) for their reckless business practices over recent years. If AIG had practiced sound risk mitigation then they would have not been in such dire trouble. AIG made their own mess, let them drown in it.
The American tax payer (thanks to Hank Paulson) now owns AIG. The bankruptcy of AIG would have been nasty, I give you that. But, I did not ask AIG to be reckless with their business so why am I responsible for their clean up? Hank Paulson left Lehman to die because their impact to the global capital system would not be as bad, but AIG.. well they were just too important to fail.
Wake up folks.. Hank Paulson is playing God, selecting who gets to live or die on Wall Street.
Free market... my ass.
'Stop the Bailouts' !
At OpenSecrets.org, I learned that 28 Congressmen were invested in Fannie Mae and Freddie Mac. 28 were invested in AIG.
Just 8 were invested in Lehman.
Lehman went bankrupt and Fannie, Freddie and AIG were bailed out the government.
I'm certain there was no self interest. Of course.
Who were the top recipients of Congressional campaign contributions from Fannie Mae and Freddie Mac? #1 was Hilary Clinton and #2 was Barack Obama. From Lehman, #1 was Sen. Dodd and #2 was Barack Obama.
Looks like the finance industry got the worst Congress their money really did buy.
AIG case is not a bail out, it's a BK in disguise. See Asia markets reaction...
I'm with "retired", and I'm not even close. The question is always "better for whom?". The Fed's message is clear: tie yourself to your so-called competitors with unconscionably risky swaps or merge into a monopolistic super-financial entity and we will bail you out or buy you out with the public's money.
LET THEM FAIL
Hopefully I'll be in Vancouver in 2010.
Best to all.
Calculated Risk | Homepage | 09.17.08 - 1:12 am | #
Let me know which plane you're on and I'll be the guy standing by the glidepath on 26Right where you'll touch down waving hello.
at YVR that is.
The Seattle area is finally beginning to feel the housing drop. We were serious bubble territory (although not on the magnatude of California) for a long while. Fairly stable employment with high incomes via Boeing, Microsoft, other techie companies and the bio-tech companies. Wonder what a WAMU roll up will do? Can't be good!
"The 11 percent decline was the first double-digit year-over-year drop for King County since the subprime-mortgage crisis turned the market on its head."
Local News | King County home prices in August slide back to April 2006 | Seattle Times Newspaper
Looks like the finance industry got the worst Congress their money really did buy.
Ed | 09.17.08 - 1:38 am | #
Wow! The smoking gun. Send it to Hank Paulson- he'll be glad to know. No wonder he's been forced to do his little dance for us.
Rob Dawg - 09.17.08 - 1:13 am
Right on the button. I totally agree.
i give rich props, he called the AIG problems like a year ago.
but, AIG wasn't on the radar screen for a bailout even a week ago. that makes me wonder who is next...
Is the new mantra "Who is Next???"
Thanks CR for all u do!
This isn't a bail out, it's debtor in possession financing.
JPM and GS had been tasked by the Fed to do a deal, right? Gotta wonder what terms they were offering...
bloomie calls it a take over
we are in the 1st inning of the 2nd game of a day/night doubleheader.
LEH and AIG was the end of extra innings with the taxpayers losing.
I think people are getting scared. obama was all over this today- it's become a front page story. the problem is other institutions like WB and wamu are openly talked about as having problems. we get an FDIC takeover in those and we could have problems.
we can't shake the ordinary person's confidence.
Eenie, meenie, miney, moe
catch a bailout by the toe,
All bondholders be made whole,
Eeenie, meenie, miney, moe
For every action there is a reaction and the more the FED, treasury, and CONgress tries to stop this the worse it will get.
Okay AIG crisis over ...next one which will it be :
-WaMu
-Wachovia
-Merril
-UBS
I think this starts as early as today...
Am hearing MER is worried and maybe looking to sell stuff or be acquired.
Um, didn't MER just get acquired? Do you mean MS?
CR, I'm with you. It's encouraging that Hank let LEH go. It's encouraging that that AIG's loan is a slow mo bankruptcy. It could still all collapse, but at least that possibility seems to have registered beyond the fringe.
I don't know. After essentially seeing the failure of Fannie, Freddie, Lehman, Merrell, and AIG within the span of seven days, I would love to pronounce this as the time at which "things can't get any worse" and therefore a bottom or end of the beginning.
I have the very sinking feeling, however, that we have actually reached a brief interlude, before things will start to deteriorate even more rapidly. My first reason for this is that there has thus far been no element of public panic in this crisis--the crisis has remained within the domain of wall-street-types, economists and other wonkish sorts of people over the past year--there are now, however, signs that the broader public is starting to wake up to the crisis. We are one WaMu-failure away from mass bedlam.
Secondarily, there are now signs that the scope of the crisis is beginning to rapidly spread. The crash of the Russian stock market yesterday is to me deeply disturbing. To me it is an omen of broader political troubles there to come, as well as in Eastern Europe more generally--previously considered relatively immune to the global troubles. A broader, truly global crisis has grim implications for a global society that only subsists because of global trade.
So in summary, I think the next phase of this crisis will be defined by broader public panic, as well as the further globalization of this crisis beyond places we'd seen it before, as well as by even greater downside risks manifested in a Roubini armageddon situation. The latter began yesterday with the crash of the Russian stock market. The former will commence as soon as WaMu is shuttered by the FDIC.
I'm not sure I can sleep.
Meanwhile in another universe:
Adviser calls BlackBerry 'miracle' McCain 'helped create'Adviser calls BlackBerry 'miracle' McCain 'helped create'
Adviser calls BlackBerry 'miracle' McCain 'helped create' - CNN.com
"Telecommunications of the United States, the premiere innovation in the past 15 years, comes right through the Commerce Committee. So you're looking at the miracle that John McCain helped create," Holtz-Eakin said. "And that's what he did. He both regulated and deregulated the industry."
Steve G. writes:
I was surprised the Feds didn't just confiscate the whole thing
I assume the idea here is that the golden-parachute executives can keep their overcompensated positions without risk of having to lose their third yachts or their beach houses on the Vineyard, while the taxpayers ensure that their incompetence does not result in global financial collapse. Far from supporting any notion of "moral hazard," the disparate treatment of Lehman and AIG sends an unequivocal message to the incompetents of Wall Street: double down, double down, and double down again, until your losses are so large that you can blackmail the government into sticking the taxpayers with the consequences of your greed and incompetence, safe in the knowledge that the government will do nothing to interfere with your golden parachute.
we've just started with the failures and the Fed is already running out of ammo.
Level 3 is barely acknowledged.
And your scenario has a mysterious detachment from how the credit crunch will drag down the real economy, even if we see oil prices head lower. Housing is in for a boatload of hurt even if by some miracle, we found $500 bil in the federal budget to do three more stimulus packages. Now that the Fed is bailin hard, that isnt going to happen.
So, take your pic, deflationary spiral, or Fed printing induced inflationary destruction. Either way, kiss your standard of living goodbye. But hey, the bottom is almost in.
CR, that was the most optimistic thing youv'e written yet. Did someone pay you off?
we can't shake the ordinary person's confidence.
enough with the baseball metap
I think unless you understand the language of finance (and Lord knows I am still learning) the ordinary guy hears/reads this stuff and doesn't see where it effects him. I have been talking to people and have sent friends and family member's this link:
InvestorWords.com - Investing Glossary
and told them to reread the headlines and finance pages with it.
Several have gotten back to me and said OMG, I get it!
Dang! I wanted to put this at the top of the next thread. When did that happen?!
Our immoral Congresscritters are at it again.
A new Bill pushing Down Payment Assistance. HR 6694
here's the tickerforum link:
ALERT! Fat Frank pushing for Down Payment Assistance Tuesday [General] - MarketTicker Forums
Toll free Capitol Hill #'s to call your reps and give 'em hell if their Dems , or call and give support if they did not vote for the F/F bailout.
If Marcy Kaptur, D. OH, is your rep., call and tell her thanks for not voting for the F/F bailout. She was one of only 3 dems who voted against it. Give her encouragement to keep voting against her party. She needs it.
Um, didn't MER just get acquired? Do you mean MS?
Comrade Gavshire Hathaway
I stand corrected, can't even keep track of the names.
Essentially these forced BK and acquisitions are really just the effect of 'margin calls' to put it simply.
It is not the beginning of the end it's the end of the beginning.
Crude is up 3 bucks already, deleveraging finished?
well CR,
maybe you are right, it's time to curb our pessimism. However I believe the end of the crisis will be sudden, one day within the next six month we will wake up and realize that the worst is over. Assuming the government will stop feeding the walking zombies.
Real Vapid Bimbos of OC writes:
Is AIG really a bail out? Is it a bail out when they take 80% of your company, fire management and set up a plan to sell of the assets?
To me that looks like a slow motion BK.
butter writes:
bloomberg is calling the AIG deal a gov take over.
It doesn't sound like much of a bailout to me, either. The interest rate was hardly a favor to AIG. I literally did a double-take when I read they were going to pay 850 BP above LIBOR 3-month. Not quite credit-card territory, but within sight of it.
Government will own 79.9% of AIG (why not a nice, round 80%???), all of AIG's assets are pledged as collateral (and most of AIG is profitable).
LET THEM FAIL
This is the kind of simplistic thinking which led to the Great Depression. Just to satisfy your schadenfreude, do you really think it is worth it to have a complete collapse of our economy? A complete freezing of our credit markets? That would take down healthy businesses as well as poorly-run ones.
Thank goodness the people in charge of the Fed are smarter than this. Now if only we can elect Obama, who for sure will re-enact Glass Steagall or some version of it.
There's a lesson to be learned here, if anyone is paying attention: we got into this mess in large part because the Republicans have for a generation preached 'deregulate, deregulate, deregulate'. Which is shorthand for, 'let Wall Street do whatever the fuck it wants and don't worry about the consequences'.
And what do you get when you let Wall Street do whatever the fuck it wants?
You get Enron. Worldcom. The mortgage bubble. One Ponzi scheme after another.
It's the same fucking shit as happens whenever the GOP tries to 'streamline' environmental regulations. It's shorthand for raping the environment.
We need intelligent regulation, and Republicans have proven they have no interest in that. Time to kick the bastards out.
Several have gotten back to me and said OMG, I get it!
Only problem with that is that now they want to know: What happens next?
What do you tell them?
Just noticed CR's archive only goes back to Jan '05 (I just looked at the earliest post, and someone went to the trouble of posting "first!?" on the comment thread...funny.) CR, is it my imagination or did you start blogging before that? I have a vague recollection of posts during the 2004 election campaign.
Anyway, seems like that long I've been reading your blog. Keep up the great work.
Not sure I agree about the glimmer of light... I think the real crisis is on main street, not wall street. I'd like to see some cliff diving in the gini coefficient graph. But I'll take what little optimism is available.
There's another shoe about to drop:
Bloomberg.com
U.S. Mortgage Rates May Wreak Havoc After Libor Gain
Sept. 16 (Bloomberg) -- The biggest jump in the London interbank lending rate in at least seven years could wreak further havoc on the U.S. housing market and there's nothing the Federal Reserve can do about it.
About 6 million U.S. mortgages, including almost all subprime home loans and 41 percent of prime ARMs, are linked to the London Interbank Offered Rate, or Libor, according to First American CoreLogic in Santa Ana, California.
I'm very curious about the mechanics if WaMu were to be taken over. Based on the size and staffing required to take it over, plus the cost to FDIC (basically 10x indymac) of I'll guess ~70B, wouldn't the Fed prefer to just nationalize it and let it be operated by JPM? You're going to blow the 70B anyway, why not make sure that all the retail employees keep their jobs.
I'm going to predict that WM will not be a standard takeover. We will not have the crazy lines and general panic. That would remove confidence, and Paulson is clearly not about to let that happen. Shareholders will be wiped out, but the show will go on. Combining the 70B that WOULD come from the FDIC/congress, with whatever JPM, or GS might be willing to pay to get the retail presence and deposits probably results in solvency.
What say ye?
Nice upbeat post CR. It'll keep me off the ledge for a while longer.
Systemic financial armageddon! Horseshit.
All banks could fail tomorrow and we could reinvent a system to lend money to worthwhile necessary enterprises in an hour.
I don't mind bailing out farmers but bankers are on their own.
CR,
Great post. I think we are seeing the beginnings of the financial players really grasping the seriousness of the issues we face. I really got a sense of this, for the very first time, yesterday. We've gone past the denial stage to the acceptance stage. That's a very good sign.
However, I think we are in for a significant adjustment to our economy and I don't feel this has been fully grasped by many financial professionals. No longer are we going to be able to spend $1.22 for every $1.00 we earn. As people dig themselves out of debt our savings rate will need to rise, possibly to the long term average of 8-10%. Leon Levy who wrote in a brilliant book called the "The Mind of Wall Street" figured out that for every 1% rise in the savings rate you would have a 11% drop in corporate profits. We've had above trendline corporate profits for some time now. A recent article in Barrons put the PE of the S&P at 25 if you used reported earnings rather than forecasted earnings. I have a bad feeling the stock market has much further to fall.
Consumer spending driven by a massive deterioration in lending standards, as well as high finance became a disproportionate portion of our economy. That will revert. We are now in a process of deleveraging and adjustment were consumer spending and finance go back to sustainable levels. This will be a significant structural adjustment to our economy and it will be painful.
I do sense a change over the last couple of days that people in the world of finance are realizing the size and scope of the problem and this does mark a beginning to the end of the credit crisis. What I don't think has been fully realized is how significant the fallout will be to the real economy.
I still think we have a long ways to go before the majority of folks understand and have accepted the new normal.
Not being well-versed in the complexities of finance, can someone explain to me how it is that an insurance firm like AIG was unprepared to cover its obligations? Aren't there oversight rules and regulations that require an insurance company to maintain sufficient capital (or access to capital) to be able to honor claims against it? A catastrophic event is exactly the sort of thing that insurance is for. So how did AIG get caught up in this mess?
Morgan Stanley officials were not in merger talks as of late Tuesday, CNBC said, citing unnamed people close to the matter.
"But senior people at Morgan concede that further zig-zags in the company's stock price could and possibly will force the company to change course and seek a merger partner, probably a well capitalized bank," CNBC reported on its Website.
Morgan Stanley shares closed down 10.8 percent at $28.70 on Tuesday, having fallen 46 percent so far this year.
Morgan Stanley officials in Hong Kong declined to comment on the report.
In an interview with Reuters on Tuesday, Morgan Stanley's Chief Financial Officer Colm Kelleher said the No. 2 U.S. investment bank remains confident in its broker-dealer model and dismissed the need to merge with a deposit-taking bank, even as he maintained a cautious stance about the markets.
Business finance news - currency market news - online UK currency markets - financial news - Interactive Investor
Investment banks will be history before this is over.
Respectfully the fundamental problem is not housing or financial anything. It is that consumption has exceeded production for a long long time. The end of the beginning will come when consumption falls below production. Until then, it is all just politically-determined pain redistribution. The actual work will be rebuilding authentically productive assets. I'd guess it's another couple years before the US gets seriously started on that.
What do you tell them?
sdtfs
Same any of us can do. Pay down debt, get into cash as much as possible, that I've moved my 401s/IRA into the most conservative posture I can and watch the spending.
What else can we do?
I don't want my government to take over businesses. A failed business is a failed business.
About 6 million U.S. mortgages, including almost all subprime home loans and 41 percent of prime ARMs, are linked to the London Interbank Offered Rate
Since the FM's were nationalized, can't the Fed intervene directly in the mortgage market in terms of interest rates ? Seems like they could completely rewrite contracts if they wanted too.
re; Russian collapse..the Shaghai and Hong Kong are also getting pummeled. I'm not sure what it means. Maybe a sharp slowdown in China, or worries about the real value of their trillion dollars in treasuries ?
http://cgi.ebay.com/Official-Lehman-Brothers-Fire-Safety-Team-Hat_W0QQitemZ120305816173QQihZ002QQcategoryZ4041QQssPageNameZWDVWQQrdZ1QQcmdZViewItem
"do you really think it is worth it to have a complete collapse of our economy? A complete freezing of our credit markets? That would take down healthy businesses as well as poorly-run ones."
I call bullshit.
Gaucho writes:
Banking crises can only be solved by massive bailout programs from the govt. You just need to look at the experience of other countries around the world. So now we're accepting the reality that the system requires a massive bailout, an RTC multiplied by 10. The real question is where the money will come from in a country with no savings, huge budget deficits and an increasingly reluctant base of foreign investors? I think I have a hint, but, as a prudent saver, I don't like it.
"Russian collapse..the Shaghai and Hong Kong are also getting pummeled. I'm not sure what it means."
It means they aren't going to be able to keep funding our ever increasing government debt on which we are already borrowing just to pay the interest.
I second yogi's comment. These businesses want you to think they are ever so important, so important it is a matter of national security. We can do without Bear Stearns. We can do without Lehman. We can do without...
For years guys like Jim Cramer claim our country is diverse and made up of a lot of industries. Now they are saying bailout or bust. Sounds like these stock salesman are just feeding a sales line.
All this will be for naught if the US of A can't get its financial house in order at the governmental level. That means some combination of significant curtailing of spending (that means cutting entitlements and defense, chasing welfare moms ain't gonna get anyone anywhere) and increase in taxes.
Which is pretty much the opposite of what either presidential candidate is offering.
There is still a window of opportunity to do it "self directed"; the alternative is to wait and let external creditors force it on terms not of our choosing.
There are no other options that don't involve nukes.
yogi and RaT,
You both sound like Andrew Mello
@Comrade Gavshire Hathaway:
Agree with your thoughts about Wamu: with 2300(?) branches WaMu be a standard pizza and shits takeover. Nor, can TPTB risk a run with little-old grandmas in wheelchairs waiting to get out their money. The media firestorm would be outrageous.
I suspect WaMu is dealt with quickly and quietly as you suggest.
There are, of course, other teetering institutions.
If the Libor jumps, then the interest rates to AIG go sky high. They're going to need more business. Say, they sell annuities to the US public. Why don't we buy an annuity for each of the Social Security recipients? Denationalize the SS system and throw all the screwy financial stuff into one basket.
Or we could pursue a "good" company/ "bad company" deal. The "bad insurance company" could deal with the "bad IB" or WaMu's future "bad bank" and we set up a bizaaro world financial system to move our problems into.
"...probably a well capitalized bank,.."
I know one. The Federal reserve. Oh, wait..
Welp. As usual, CR's much more optimistic than the posters here.
And, unfortunately, the truth of the matter has usually been closer to the posters take on things.
So , Comrades, I'll say goodnight now with visions of CRs' optimistic post dancing in my head, and not read anymore responses for tonight.
Pleasant dreams all!
I know another well capitalized bank...
Yahoo! 404 - Page Not Found
Nevermind.
Wall Street welfare.
Here is my summary of the situation.
All conduits of credit are slowly tightening.
The only remaining conduit of credit is the US Congress via the US Treasury.
As along as foreign central banks are willing to lend us USD at dirt-cheap rates, Congress can borrow and spend. And it will.
You start seizing the assets of CEOs who made 200 million+ in retirement packages and I'll consider bailouts for wall street.
@Comrade RaT: Where did you get such revolutionary ideas? There are many cold, and dark places that could use some additional hands.
Ed,
The financial giants apportion their donations to both parties based on the odds of winning (very uncertain outcome), and mostly based on how much the candidate accumulates from other sources. Had McCain raised more, they would have given more to him. If you check his major donations you will see the same big donors.
To get an idea of how beholden each candidate is, try looking into earlier election cycle data, before they were on the brink of incredible power.
Opensecrets.org is a great source.
Even though I buy what Senor Dawg says, it's also hard to argue with the overall thrust of the post, when CR leaves open the possibility of economic collapse... pretty balanced post really.
But what I can't get my arms around... is what and where are the catalysts for economic renewal and sustainable growth... I guess more will be revealed... probably after a half a decade of malaise.
This past week has been incredible. I feel like I just got tea-bagged by Hank and Ben.
Tens of trillions of dollars in credit/debt has been built on top of the country's productive assets...
...forming an inverted pyramid that has gotten too heavy to balance.
That "money" is crashing down and vaporizing. ALL of it will disappear, until there's nothing left but real money that represents real productive assets.
People with real money, or real and unencumbered productive assets will be fine.
Everyone else will be annihilated.
It ain't gonna be pretty, and it ain't even started yet.
Insurance and banking, both marvelous "industries". Get a fat salary and bonus in the fat years, get bailed out or just declare BK in the lean years. On balance, you can't really lose. 1 in 1000 get sent jail to appease the mob. Good gamble.
The only strong economic future I can see for the U.S., and I don't think this would be popular, would be to abolish the EPA and all similar state agencies, and go back to being a developing country. Kind of like the Chinamen. Drill, Baby, Drill!!
Hilarious:
How Magazines Led Investors Toward Ruin - Fortune - Gawker
If BofA fails, is the FDIC on the hook for the debt/leverage that comes with the purchase of Merrill Lynch?
What Not to Do in a Financial Crisis: U.S. Learns From Japan - washingtonpost.com
"I don't think the Americans quite realize yet that behind this hill lies the Himalayas," said Takashi Watanabe, a top official at the Bank of Japan in the 1990s and now a professor at Tokyo's Bunkyo University. "The U.S. is going to go through a lot more before this is over."
@Kfritz,
If BAC fails the FDIC is on the hook for insured deposits, not for debt.
CR,
The beginning of the end won't happen until housing prices bottom and possibly CRE bottoms. Once that bottom is reached, at least 2 more years will be needed for the end to be declared.
We could learn something from the Russians. Their stock market craters 17% by lunchtime, and they just shut it down.
There is no glimmer of light. Deflationary hurricanes and a long L shaped recession are upon the world. Followed by a quick and vigorous partial recovery followed by the long descent.
Rather than provide instant opinions (AIG's failure "posed significant risks" to the financial system and "a collapse of AIG would probably have been worse than the rescue") what's wrong with telling us the truth --- that you DON'T KNOW. How about suggesting that we learn more about the facts before forming a judgment?
Remember weapons of mass destruction, smoking gun nukes and Saddam's ties to 9/11? Hardly anybody said what was actually true: WE DON'T KNOW. The first step to recovery is acknowledging the problem, and the problem is WE DON'T KNOW what the swaps are worth, who are the counterparties and whether a majority of the participants in this unregulated market can survive without government intervention. Yet you conclude within minutes that all of the risks of these unknown unknowns are worth $85 billion of taxpayer money.
Just look at the farce Paulson made of our congressional "leaders". He's spent days in closed meetings with all the participants but spends less than an hour briefing congressional leaders this evening. They all come out mouthing "support" for the bailout. I doubt many of these people could balance their checkbook in an hour, much less understand the nuances of this alleged "systemic risk" we keep hearing about.
Finally, which is it Mr. Bush? Is the American economy fundamentally sound or are we vulnerable to systemic risks of such a magnitude that $85 billion is suddenly and without debate required to avoid them?
I think CR's analysis relies on the presumption that there isn't an overseas blowup (especially in Europe, and double especially in Spain).
Does anyone have a source for a list of small banks that unusually high CRE and/or C&D loans? Tx.
"We need intelligent regulation, and Republicans have proven they have no interest in that. Time to kick the bastards out."
And then?
Perhaps the silver lining here is that now that we're all gettting kicked in the head, we'll begin to realize we need to slide a little to the left down the socialism-capitalism continuum. Oh no! Oh, run for your lives.. socialism! That's like Stalin and Genocide and KGB or Mao and, um, Mao Jackets?
How do you like Canada? Big, clean, friendly (except Vancouver and The Pas). Scandinavian countries? (except Norway -- they can afford to be prodigiously socialist).
But no! Free markets, the American Dream, and as long as I'm secretly mean to other people I can leave them in the dust. This is all key.
Oodles of good people out there who do well by doing good. Even more out there who take advantage of them, or wish they were strong enough or smart enough to do it.
We all want to live better, relatively, than the next guy. I drink your milkshake indeed.
Regulation, of course. But what are we really regulating? The urge to dominate, I think. It's a matter of discipline. I'll bet we're smart enough to come up with something that won't turn into fascism. Sh*t, even Fascism with a capital F turned into little f fascism.
Puhlease stop with the Blue/Red baloney. Tell all your friends: it doesn't matter. Anyone stepping into the current political system automatically becomes an enemy of the people (or impotent like brother Ron Paul.) Ipso facto and QED, we need a new one. A better one. And lord help us if better, more tempered minds than mine aren't working on this right now.
My favorite fantasy theory is that our meltdown was indeed manufactured, but not by the illuminati or china, or russian mob, but by a group of effete oxford dons who decided to make things better, at least in the medium run. They knew we had to tear it all down first in order to build something better and lasting.
Get this free market garbage out of your head. It's easy... if we don't regulate ourselves, we consume ourselves. Eventually all that's left is the ultimate top feeder, and he's a very lonely, hungry top feeder indeed. With no one around him to philanthropize.
Paulson was inteviewed years ago. His world view: you have to look at the top of the food chain to check the health of the entire ecosystem. Woops! Uncle Bill at Pimco says he's more concerned with plankton, in this big ocean of ours. Don't know about that.
We have a lot of kicking out to do, but who's worrying about who we kick in? And into what?
I find CR's optimism refreshing, although I do not share it.
My most optimistic wish is to see the US government forced to stop its military bingeing. Less money down the Pentagon crapper; empire's appetites curbed. We need this if we are to rise above our present grim reality as invaders and revive our ancient possibilities as a people.
While it's remotely possible if the size of bailouts -- let's call it the moral hazard budget -- grows alongside a dwindling tax base, I admit it's a longshot. "The encrustation of the mechanical on the living," as Bergson called it, is probably too advanced in our system. We are no longer in charge. Worse, nobody has a clue as to how to otherwise employ the many now running the permanent war economy.
Good luck, America.
"The beginning of the end won't happen until housing prices bottom and possibly CRE bottoms. Once that bottom is reached, at least 2 more years will be needed for the end to be declared."
Big question here is unemployment and inflation in combination with the credit crunch. The American consumer, who is the driver of CRE is tapped out and his CCs are at the max. He can't get a re-fi for the bloated home he bought when RE "could only rise" and his retirement is in jeopardy.
In my neck of the woods there are brand new strip malls sitting vacant and a new "village" mall has had three national retailers pull from the project.
Great post, Uncle Billy, Seriously
This is why I come here;)
The real question is where the money will come from in a country with no savings, huge budget deficits and an increasingly reluctant base of foreign investors?
How about the people who have been looting the country for the last generation?
Make the rich pay.
The end of the beginning will come when consumption falls below production. Until then, it is all just politically-determined pain redistribution. The actual work will be rebuilding authentically productive assets. --rigtsal
Amen.
Hopefully we're not rebuilding with stone tools.
rigtsal writes:
Does anyone have a source for a list of small banks that unusually high CRE and/or C&D loans? Tx.
rigtsal | Homepage | 09.17.08 - 2:31 am | #
Accuity has a database with that info. Cross reference it with an FDIC call report.
Uncle Billy, Seriously writes:
"Puhlease stop with the Blue/Red baloney. Tell all your friends: it doesn't matter. Anyone stepping into the current political system automatically becomes an enemy of the people (or impotent like brother Ron Paul.) Ipso facto and QED, we need a new one. A better one."
Hear, hear.
We can be sure that nothing of the sort is going to be willingly chosen by our savage and unyielding oligarchy.
And obviously that is one reason why the present chaos is so interesting. As the unthinkable becomes the practicable and then the inevitable in political discourse, all kinds of possibilities, good and wretched, appear.
Mind, while I like Ron Paul, he makes too much sense and is far too decent ever to catch on. Go to YouTube and look up Ted Nugent from last year toting machine guns at a rock concert as he rallies his roaring right wing fans -- it's quite the antigen to revolutionary fever.
yogurt writes:
Make the rich pay.
We regret to inform you your socio-economic structure does not encourage this but in fact encourages it.
If however you change your sentence to :
Pay the rich
You will find that this is more in tune with the group think of your society, whilst being economical with words too.
Thank you for your inquiry, we hope we have helped clear up any doubts that you may have had.
My whole problem with this is that right when we start to turn the corner in 2012 or so, we start to get hit with the social security meltdown. An aging population is a huge headwind that the economy is going to have to struggle mightily against.
CR,
Nice summation of what feels like it should be a Friday.
My biggest concerns with AIG FED:
This seems like trying to create a bottom when the bottom is probably six feet under for a lot more banks, investment companies, and average folks whom were maligned by an abandonment of basic fiducial requirements of all the "professionals" in the process of selling the ownership society dream.
And no one is going to care one bit about those average folks who were told they could afford that home loan after November 4th or their kids or whole ruined neighborhoods and communities while Wall Street corrects itself. We can attribute to bad luck on them and poor financial judgment as lots of other people made a lot of money on this sad saga. But lots of people relied on the economy of trust which requires professionals, even in finance, to concern themselves with the welfare of society while making a buck. So as we work toward a bottom I suspect it may take a long time to restore confidence, good faith, reliance, and trust required of our financial professionals and regulators that prevents American society from becoming one big shell game or lottery.
A musical contribution, From A Whisper To A Scream -
'Oh it's not easy to resist temptation
Walking around looking like a figment of somebody else's imagination
Taking ev'ry word she says just like an open invitation
But the power of persuasion is no match for anticipation
Chorus:
Like a finger running down a seam
From a whisper to a scream
So I whisper and I scream
But don't get me wrong
Please don't leave me waitin' too long
Waitin' too long
Waitin' too long
Waitin' too long
Hey
Oh oh oh oh oh
Oh if the customers like it then they'll keep on paying
If they keep on drinking then they'll end up staying
I heard someone say where have we met before
But the one over the eight seem less like one or more like four
Chorus
Elvis Costello
Personally, I still think we are at the point of drawing in our breath.
And as for mild recession? That was so 2008 - what 2009 brings should be something entirely else. The collapse of the building that American financial engineering has only just started - after all, where is 85 billion dollars coming from? The same organization that is currently borrowing more than a billion dollars a day just to keep paying its bills? Think about it a moment.
Gizmo, AIG's insurance subsidiaries have segregated "regulatory capital" that cannot be used by the parent. It must be held to pay policyholder claims. These subs are regulated by state insurance commissions. According to the WSJ today, almost all of AIG's problems originated with its issuance of credit default swaps, not with its insurance subs. CDS are insurance contracts issued to holders of other companies' debts. If the debts are not paid when due, the holders call on AIG to make good. As just one ironic example, AIG issued a CDS to Lehman's London landlord, effectively guaranteeing the landlord's rent if Lehman defaulted. There are many more examples of how the CDS have infected the real economy, and that is what CR is referring to as a "significant risk to the system" from an AIG collapse. But other than such anecdotal evidence, there is absolutely no significant information being released to the public identifying the scope or nature of the risks, so we are being asked simply to accept the opinion of others, many of whom may have less than honorable motives to stoke fear of collapse and to push for a taxpayer bailout.
Nice summary and analysis by CR; however, it fails to adequately recognize that this credit crisis is actually part of a meta-problem: we as a nation have been living beyond our means, with out of control budget deficits, trade deficits, balance of payments, and household debt. As Herb Stein said "If something can't go on forever, it won't." And our profligate ways will come to an end, one way or another. The overextended US households are just beginning to face that reality, and WS is having its first casualties. It is not clear when the good folks in Washington will come to that realization also. But hopefully they will, and that's when we will see the real beginning of the end of the Crisis.
"I don't think the Americans quite realize yet that behind this hill lies the Himalayas," said Takashi Watanabe, a top official at the Bank of Japan in the 1990s and now a professor at Tokyo's Bunkyo University. "The U.S. is going to go through a lot more before this is over."
Best description of our coming travails.
SO MUCH BETTER then the tired baseball comparison.
Nice post, but in short, it's pain now, or more pain later. We've chosen later.
Your Aristotelian "moderation in all things" would normally be right, but these are not normal times. To accept failure is the first step to recovery; but we're still trying to muddle through. Let. It. Fail.
Hustlers of the world, there is one Mark you cannot beat: the Mark Inside. -- William S. Burroughs
@John D:
I assume that the acqired assets/liabilities of Countrywide are also outside FDIC bailiwick?
Thanks for the edification!
The bottom was visible before the top was reached, so you can see the bottom but not know the exact depth just as you could see the top but not know its exact height.
People who had vision to see this event before now have a responsibility to show those in panic now that there is a process here that was predictable.
Bottoms are becoming more visible now and people who have positioned correctly can now prepare for the next phases.
It all seems good to me.
Good to try and be positive. Buy camping gear, four wheel drive, food and water, self defense stuff, seeds, etc., just in case CR is too optimistic...
I beg to differ. First the Fed and Treasury's hands have been forced in every instance here. There is nothing that indicates anything at all has been put in to actually prevent this kind of situation occurring again. In fact I would argue that the situation has ONLY been exacerbated and we will pay much more heavily down the road. Just look the banks new found abilities to raid their deposits to shore up their balance sheets as a prime example. Down the road the dollar is toast, period. I am also starting to see a sickness creeping into these kinds of commentaries such that what was once considered unthinkable is now somehow normal. Kedrosky's commentary on moral hazard is a prime example- "Real people in real markets don't think that way" he says. But the last 7 years were a much contrived financial market in the first place. And we DO KNOW how real people act in a contrived market-greed trumps all. Perhaps no one knows what normal even used to look like anymore.
"I believe a collapse of A.I.G. would probably have been worse than the rescue." I think maybe, just maybe, the collapse of AIG would have knocked some sense into some people. Instead we just have more hypocrisy and more socialism for the rich, and no end in sight. Clearly the banking system and especially the major banks were insolvent as of 2007. But everyone thinks they can somehow cheat their way out of it so instead we are on our merry way to bankrupt the entire country. You might as well think you can cheat death. The beginning of the end of the crisis? Not a chance. Are you really ready for President McCain's permanent tax cuts and Treasury secretary Phil "no whining" Gramm? You'd better get a grip.
I think one of the "infrastructure" investments we're going to have to make will be alot more "low income" senior communities. So many boomers have counted on their house as their nest egg, and have not saved what it's going to require to live well in their retirement.
I think one thing we can do is teach our children fiscal responsibility. God knows, my generation (boomer) didn't have it.
Kaboom: "in 2012 or so, we start to get hit with the social security meltdown" Krugman went on about this trying to show us how it's all very safely wrapped up and waiting for us. The thought I keep having through all the charts and graphs was: Bottom line, checks need to be written. Bankrupt governments can write checks I guess, but...
Jeffrey: "These subs are regulated by state insurance commissions" Jeffrey, do we have hard evidence that the insurance companies have been maintaining their reserves? I-don't-think-so. I heard that many of them got antsy with so much cash and started making loans on commercial property. And that state regulation... it might be easier to bribe an insurance regulator than a dmv employee. I think.
Thanks whereismyretirement and HC. Got to get down to brass tacks, right?
USA is toast USSR style. Too much debt, too many useless eaters, too little production, too much corruption, too much military, too much deficits.
116.1 million people out of 137.5 (non-farm employment) providing "services" and only 21.4 million producing something (construction + manufacturing).
There will be no one monolith USA left within ten years. 5-6 regions more or less independent is the most likely outcome after the federal government collapse 2-3 years from now. California will be the first to go...
whereis, indeed. I don't know much about them, but I don't see aarp doing a heck of a lot for seniors except make money from them. I have great hope for the kids. We can turn them around in a single generation.
alphabeta
Does this mean Hawaii finally gets its independance?
Got to get down to brass tacks, right?
Indeed!
Apparently Asia and Europe are happy will the bailout...errr...loan.
European Factors--Shares seen recovering on AIG rescue
| Reuters
Does this mean Hawaii finally gets its independance?
Uncle Billy, Seriously
No they'll get paired with AK under President Palin. (That is a scary thought isn't it?)
00h41 16/09/2008 Analysis
At 3min 57 of the tape, BBC started the blame game : Chinese currency policy.
BEst wishes, and well BEing to CR.
Whereismyretirement,
I tend to believe that investment in basic infrastructure and energy independence would have a fair better effect on stabilizing market forces and the economy than the amount of money we have seen come from the FED since the intervened in the collapse of Bear Sterns when their High-Grade Structured Credit Strategies Master Fund Ltd. and High-Grade Structured Credit Strategies Enhanced Leverage Master Fund Ltd. collapses set off this fire.
It does not seem clear to me that what is transpired is really about long term economic health and more about facilitating an "orderly" unwind so those so blessed or just darn lucky can get out the emergency exits with enough cash in hand to start anew. That is a narrow percentage of the population.
Putting time and money into investment in basic infrastructure and energy independence after 9/11 would have probably offset some of what the wrath of these complex financial instruments will do to the economy for sometime to come.
So we have no competitive physical base to move from. Just more debt. We have an aging/worthless infrastructure that is inhibiting innovations in manufacturing production. We are still at the mercy of petro-monarchies and oligarchies and the Chinese Government. Not good. Not good at all. And I suspect there is not political will or public appetite to sacrifice and change direction in any meaningful way when you have so many other media and consumer distractions to live for.
CR, thanks for yet another most excellent analysis.
I find it difficult to disagree with anything you said and only began to squirm when I read the last sentence:
"But unlike observers that believe this only marks the end of the beginning, I believe there is a chance that these events mark the beginning of the end of the crisis."
You "believe," so do many others, and there's nothing wrong with that, but I don't.
If this crisis is proving anything, it's proving that the US economy and its financial system are not as transparent as we thought. We were led to 'believe' they were. The recognition that they really aren't is causing a loss of faith, not only among "average" investors, but mega-investors as well.
A company's book can no longer be trusted as a fair and accurate representation of its business. Accounting has become a true art form, capable of producing smoke and mirrors. The result is that uncertainty has increased, not decreased. It makes fundamental security analysis extremely difficult, if not impossible for the "average" investor, let alone the Warren Buffetts of this world. This is a dangerous set of affairs.
As one columnist said today, "Financial crises are usually the result of a miscalculation." In light of what's happened over the past months, I'd say that was a gross understatement.
The true dimensions of the problem have yet to be determined, so opportunities for 'miscalculation' are rife. We don't know what the facts really are, neither do the banks, central banks, or regulators.
In my book, that's bad news, really bad news.
CR....
Great Post. Regards, Z
Uncle Billy, Seriously | Homepage | 09.17.08 - 2:32 am |
Wicked post. Seriously, and I live in Vancouver.
p.s.
You should have seen Vancouver 25 or 30 years ago. A completely different town, so much nicer, the real McCoy. But TPTB decided to sell the brand, and everybody that bought the brand helped destroy the brand.
Same as it ever was.
Quite an optimistic post by CR, although I tend to agree with the posters here, that things might actually get worse from here on.
Also, I believe this won't end till we start saving more, or atleast start spending in line with our incomes...
Just look at the mindset of the general population, they raised a big hue and cry when the gas prices were high a few months back, but now, the issue of conservation,etc are back where they were before, on the back burner.
On the other hand, i think, if you are forced to be so engrossed in the grinding of the daily mill, you really dont get time to think about these things.
Chinese currency policy
$2T in accumulated trade resulting in hot money is unnatural, hell Weimar Germany only owed $400B in current dollars to the allies after losing WW I.
M. Canadien, I did see it 25 years ago, almost to the year. My grandma lived in an apartment overlooking Stanley Park. I took her all over town. Got her plastered!
Tx.
Anyone remember Laura Richardson, poster child for mortgage fraud and current california congresswoman? $1,800/mo. taxpayer funded towncar? That one. Check out her competition:
John Canalis: Is Bulletin and News still in print? - ContraCostaTimes.com
[as we run screaming from the blague with our hair on fire]
CR-
Late but not forgetting, I'd like to thank you along with many of the new and old commenters. Your even keel has led to better diagnoses than we have a right to expect, and I've gained some satisfaction (and compensation) from the rants and tips here in the comments.
It's not easy, but keep it up. Each summit is its own reward.
Sorry, didn't have time to read the whole comment thread, so this may already have been said.
I think CR is being too sanguine for three reasons:
It's too optimistic because main street hasn't realized this is a crisis yet.
79 visitors online!!! The swing has swung, the day is 'dung'
night all . . .
Great overview of the situation so far but your key omission is the fact the credit crunch is going global. In every corner of the global economy the credit crunch is biting and is getting worse. Financial failures are ahead of us across Europe and Australia. Already severe stress in some European economies (ie Spain) are causing some to question the survival of EMU. Worse will be the crisis in emerging markets. The end of cheap credit will see much of eastern Europe face economic meltdown as their economies recess to a catastrophic degree.
It would be nice to think the worst is behind us but take a global perspective and it becomes clear the crisis is just getting started.
The term "meta" was bandied about earlier.
Might I offer this? The 'smartest guys in the room' became victims of their own hubris, and took everyone else down with them. In effect, they MIScalculated risk. That is one of the meta-analyses of the credit unwind, and why no one here can convincingly argue whether this metaphor (baseball) or that one (hill / himalayas) or this one (survivor) is more apt.
It is precisely the miscalculation of risk, its (mis)representation and sale to the alpha-chasing investors of the world, and then the originally unseen but always lurking inevitable credit default, that both infuriates those who abhor the dishonesty, and that makes modeling the outcome an absurd exercise.
And again, would meta analysis indicate that it is modeling itself- this economic model - that is flawed? Trying to define and predict the outcome of this multi-variable real-time exercise, while using the language and inputs that were used in its formulation, is impossible. We end up with tautologies - failure is wrapped up in the construct of the miscalculation.
So how do we go about un-miscalculating, and being able to reasonably predict outcome? How can we return to Calculated Risk?
CR, I wonder if your post is as much a plea to some who might need that glimmer of light to continue fighting the good fight, as it is a read of the tea leaves.
Oh, one more thing - I'm with Whitney on this one. And I hope you're right.
CR, well written post and analysis.
IMHO the beginning of the end is not there at this time. Asset valuations are still too high, over leverage still exists for many institutions - and also the over leverage at the consumer level. The coming years will be very painful for the average middle-class citizen since no more cheap credit exist. IMO housing, while a significant contributor to the overall economy in the past, will not be a factor for many years to come. Wall Street can cleanse themselves much quicker than the housing industry. However, housing is where the wealth is for the average citizen.
Another comment I would like to make is to the notion of "Free Markets" in the US. It can no longer be argued, for some time now, that true free markets exist in the US. Sure regulation plays a role, so do circuit breakers at the NYSE, excessive lending facilities by the Feds to IB's and CB's but the US Government required to step in and provide liquidity to an insurance company is the icing - for now - on the cake. This crisis was not the last one looking forward 12 months from now. What it did, is setting a new precedence, further evaporating the notion of Free Markets.
If you are leveraged 30:1 and fail, no 3rd party should be required to step in. Let the markets correct themselves not through artificial injections of liquidity. If the markets would have crashed yesterday, who knows, might have been better for a faster and real recovery.
europe markets and us futures swung to the negative rather quickly.
Thank you for all of the valuable information.
Actually, I have also learned a lot from the posters as well..................
Exit: Damn, have to overcome the urge to go supermeta or transmeta. Ok. Done.
Miscalculated Risk. I posted about this recently. But for some reason the CR google search doesn't bring it up when you search for it. I tried "bunny slippers" as well. Bupkes. Any trick to getting the search to work?
"If this crisis is proving anything, it's proving that the US economy and its financial system are not as transparent as we thought."
mp you surprise me. I thought the whole world knew the set up? It suited us all really, Now it does not. Not so much is really going to change quite possibly, just a painful adjustment and no more probably.
Instead of dealing with this crisis piece by piece, bank by bank, etc., etc. Congress should immediately enact something like the Resolution Trust Corporation? and simply take over all banks and other financial institutions on the brink of failure or that clearly cannot survive. No matter how big, nationalize them all, in effect, sort out the assets, etc., liquidate them and pay the creditors what is feasible. If some creditors are too important to stiff then pay them off from public funds. Let all the stockholders be wiped out. Too bad for them. Then reprivatize them as soon as possible. Stop pussyfooting around.
You should have seen Vancouver 25 or 30 years ago. A completely different town, so much nicer, the real McCoy. But TPTB decided to sell the brand, and everybody that bought the brand helped destroy the brand.
Joni Mitchell saw it coming:
They paved paradise
And put up a parking lot
With a pink hotel, a boutique
And a swinging hot SPOT
Dont it always seem to go
That you don't know what youve got
Til it's gone
They paved paradise
And put up a parking lot
They took all the trees
And put them in a tree museum
Then they charged the people
A dollar and a half just to see 'em
Don't it always seem to go,
That you don't know what youve got
Til its gone
They paved paradise
And put up a parking lot
Billy:
"Jeffrey, do we have hard evidence that the insurance companies have been maintaining their reserves? I-don't-think-so. I heard that many of them got antsy with so much cash and started making loans on commercial property. And that state regulation... it might be easier to bribe an insurance regulator than a dmv employee. I think. "
My little personal point of view is that legacy regulation from the great depression has actually worked pretty well and that partial deregulation combined with "financial engineering" has been an utter failure.
Furthermore, there is an active movement to "modernize" regulation in a number of ways.
The state regulated insurance companies have done quite well with respect to solvency compared to their banking counterparts.
The new banking model of using a FDIC deposit base to support an investment bank makes me very uncomfortable.
Even though Patterson was going to let AIG swap out some assets, the deal wasn't done and it was also contingent on additional financing. Furthermore, they weren't going to strip out the assets, but rather be allowed to move assets between the various entities. This would have resulted in some reduction in economic capital, but much less then the $20 B.
Insurers have been getting killed by banks because they were much less "capital efficient" due to legacy regulation and old fashioned rule of thumb capital requirements.
GAAP isn't perfect, but we have a pretty good idea of its weaknesses, unlike the proposed international standards.
One might wonder what happened to last years crisis -- the bond insurers. Well, they still have cash and have still payed claims and will likely be around years longer then Ackman predicted. Yes the equity was crushed, but they were forced to use 1930's based accounting to book revenue over a 10 year period as well as other archaic practices that actually bulked up their balance sheets.
I suppose I could write a book about my Luddite world view on regulation, but most of the old stuff was developed based on fighting the last war, and that war was the great depression.
This isn't really directed at you, but at a common point of view that looks toward new and better regulation before fully considering what we had and mostly tossed out.
London Banker had a nice post that paralleled my point of view, but included a heavy dose of plausible paranoia.
In some sense, many people believe the problems are due to people breaking the most obvious, common sense rules. I suppose my pov is similar, but I am very top down, thinking that greed is more or less a constant and am not particularly interested in blaming irresponsible individual borrowers, since the traditional role has been for the lenders to set and enforce standards. There is virtually an infinite demand for bad loans and I see it as a "supply side" problem.
So everyone wants to blame someone/something. I blame financial engineering and destroying 1930s regulation.
errrr....
right on, Exit.
jim, i agree with the sentiment but i dont think we need to go as far as nationalization. we could do what japan did in the 90's. after a period of consolidation of the main city banks and long term credit banks the MOF bought preferred shares to recapitalize the banks. the banks were then able to write down their bad loans (real estate related losses). the prefrerred shares had a repayment schedule. the banks all repaid before the mandated period. the common stock was not forced to 0.
the way the treasury is managing this is astonishing - forcing common to 0 and almost incentivising the shorts to go after banks and investment banks with little risk of being stopped out.
Zig: that looks like a great post, but I'll have to give it its due in the (later) morning. I just dozed off as I was about to start reading.
Night night. Don't let Roubini bite.
"It is precisely the miscalculation of risk, its (mis)representation and sale to the alpha-chasing investors of the world, and then the originally unseen but always lurking inevitable credit default, that both infuriates those who abhor the dishonesty, and that makes modeling the outcome an absurd exercise.
And again, would meta analysis indicate that it is modeling itself- this economic model - that is flawed? Trying to define and predict the outcome of this multi-variable real-time exercise, while using the language and inputs that were used in its formulation, is impossible. We end up with tautologies - failure is wrapped up in the construct of the miscalculation."
I couldn't agree more.
Particularly since the (mis)representation of risk has been the principal financial "crime" in this era. Of particular note is (mis)representation via complexity (cdo^2 anyone?) under the barely plausible rationale of diversification and financial theory.
Greed caused this. And it isn't over yet.
Keep it simple.
"A year ago, did you ever imagine we would lose even one investment bank?"
No actually it was 3 years ago. Ok so I was early.
Ziggurat - do you think your thesis (1930s regulation worked better than Reagan era deregulation) could be verified? Could an economic historian come up with a conclusion?
I like those two posts cheek by jowl - Zigg describing greed as a constant, BB wanting it rubbed out.
Exit, this is not about modelling the outcome. We don't need models. We have precedents. Other societies whose successes led to militarism and empire-building, over-extension, and ultimate collapse that was inevitably preceded by rampant corruption, debasement of currency, and gross mismanagement.
The Roman Empire is my favorite, but history is littered with examples. all different yet all the same.
US exceptionalism is a fantasy.
"CR, I wonder if your post is as much a plea to some who might need that glimmer of light to continue fighting the good fight"
Hope creates new realities that can never be possible if only despair exists and we all tend to see most clearly what we focus upon.
The optimists are now part of the recovery in the same way that the optimists were part of the downfall.
My impression on this CR comment is CR has just received calls from some "comrades" of the Ministry of Truth.
On the AIG, I think US Fed is delaying the sales of these $307bln worth of loans and mortgages securities.
BBC - Peston's Picks: How banks depend on AIG
AIG is saying here that it has insured $307bn of corporate loans and prime residential mortgages that are on the balance sheets of banks, mostly European banks.
The banks have bought this insurance to protect themselves against the risk that these loans would go bad, that borrowers would default.
Their motive for doing so was to reassure their respective regulators - such as the FSA for UK banks - that these loans are of minimal risk.
And the benefit of doing that was that they could lend considerably more relative to their capital resources.
But if AIG is in trouble, then doubts arise about whether it would be able to honour the financial commitments it has made through these insurance contracts (which, for those of you who like to learn the lingo, are called super senior credit default swaps).
In fact, in a wholly mechanistic way, the downgrades of AIG's credit rating that we saw last night automatically increased the perceived riskiness of loans made by banks that have insured credit with AIG.
Our problems are not solely economic ones, and they are not problems that can be approached in a systemic, methodical way. An analysis would be off-topic here, but I'm afraid many of us are only gliding over the surface of a deep sea.
That should have been "systematic."
All I see is public money being spent to stave off the inevitable. More debt is being created when the problem is too much debt. No real effort to look at the root cause.
-Too much leverage (Total debt in this country at 350% of GDP and growing exponentially)
-Derivatives as Weapons of Mass Financial Destruction (used to increase personal wealth of the
Managerial owners wealthy)
-Deregulation (used by managerial owners to skim money into their own pockets)
Until some of these problems are taken care of, no amount of public money will solve the real problems. There is no one that is adult enough to solve the real problems.
Morning,
Russian stock market closed again. Down >10%. KIT Finans blew up. Merrill involved.
666 comments on the previous thread?
Oh, and HBOS talking about a merger with Lloyds. Went from 200 to 88 to 214 in just over a hour.
Attack outside US embassy in Yemen. Seems a well-timed incident to taunt the idiot cowboy into further military adventure, distracting the public but sealing the ultimate bankruptcy.
"Minh writes:
On the AIG, I think US Fed is delaying the sales of these $307bln worth of loans and mortgages securities"
Minh
You are not reporting anything new to this blogg and it not just European banks that are on the hook here. A worry all along is that if these insurance companies failed then it would force a disorderly unwind. On the other hand no unwind is just as unhelpful. Cleansing is what was needed and is what is now happening.
They attack the embassy in Yemen all the time. No big deal. The threat is in places like Egypt, Saudi Arabia, Pakistan where a regime collapse or loss of control would pose major geopolitical problems no matter who is the US president. As a note aside the US has just provided the latest iteration of bunker busting munitions to Israel!
It does appear this morning that the US crisis has spread to the UK. The HBOS story is one to follow
A well written piece must I disagree that the bailout of AIG should have happened.
The FED was created as a lender of last resort for the banking system. Now it's taking equity as collateral and in some way investing in corporate America.
Why stop with AIG? There are many more ways that profits can be privatized and losses socialized.
This is not about the average person but about a legalized, and some may say it's not legal and beyond the Federal Reserve Act, looting of the the Treasury via the Fed.
I am sadly disappointed that appointed officials are getting the blessing of elected ones to behave in this manner.
It could well be that those measures were all necessary. But I see embarrasment and improvisation in all the process. And It is not clear that the measures will accelerate cleaning up the mess. Some would whereas other wouldn't.
They of course talking about this on Bloomberg radio this morning and were using $79.9 billion figure not 85..
They saying that if the government baled at 80 billion they would have had to put it on the books..
This way remains off balance sheet.
Does anyone know if this correct?
CR has written a good post that sticks to the facts that are known and visible. The big problem is what's still unknown and invisible.
I said a year ago there would be several life insurance company blow-ups and municipal defaults.
The problems in life insurance companies and municipalities (except Vallejo and Jeff County) are still invisible. They've been hidden.
The problem with a Treasury and Fed that have slyly been propping up U.S. equity markets by funneling liquidity and advocating leverage is hidden.
I think most of the underlying problems in the U.S. automobile industry has been papered over.
CR and the rest of us know these problems are still in the shadows. But they'll emerge in the next legs down.
So much for the consumer being shopped out.
They are buying investment banks, 50% of the mortgage debt outstanding and now a trillion dollar insurance company.
It's not the "beginning of the end"...not by a loooooooong shot.
I know you would very much like it to be. But I think you should zoom your perspective out just a tensy bit.
Also, there is the problem with a hedge fund industry that is unregulated and run amuck. This problems is still hidden, but it will become visibly destructive to the global financial system in the months ahead.
The real light that I saw at the end of the tunnel yesterday was the anger finally being expressed by politicians (of both parties) and their resolve to totally re-regulate financial markets. It may be election bs now. But I don't think voters will let it be election bs for long.
First, whether you agree or disagree with the FHFA and Treasury Secretary Paulson placing Fannie and Freddie in conservatorship, it has been obvious for some time that the U.S. Government had to explicitly guarantee the debt of Fannie and Freddie, or face a complete shutdown of the housing and mortgage markets...
Second, Secretary Paulson's no bailout approach to Lehman removes some moral hazard from the process...
It's true that the rescue tonight of A.I.G. suggests there are still moral hazard issues, but an A.I.G. collapse posed significant risks to the system, and the Fed was stuck with a dilemma and no good alternatives. I believe a collapse of A.I.G. would probably have been worse than the rescue.
So suppose I take this all as a given. (I have no grounds to disagree in any case.)
What frustrates me is that we are not having a national conversation about what is going on and how to deal with it. Just how is Paulson judging which companies live, and which die? What are the criteria to decide when the collapse is worse than the rescue? Paulson's gut? Bernanke's?
These are political decisions that are being made, and our political process is simply not involved. We have an entire branch of government dedicated to controlling the purse strings, but they are MIA in doing the sort of probing oversight that might bring clarity to the situation and help the American people understand why their tax dollars were needed, and why they should be confident they are being used correctly to prevent collapses that are worse than the rescues. (If they are being correctly used; if they are not, oversight could expose that, as well.)
Though I think the lion's share of the blame can be placed on one party, that's not really my point. I'm frustrated that the political process is simply not happening here. However incompetent or run by stoogers or even corrupt it might be, it's the only remotely legitimate way we have to exercise control and oversight over, bring critical facilities to bear on, and obtain buy-in for, the national decisions being made now.
Anonymous --
They of course talking about this on Bloomberg radio this morning and were using $79.9 billion figure not 85..
Are you sure they were not talking about the 79.9% ownership stake? When you get to 80% ownership of a company, you have to consolidate its assets and liabilities onto your own balance sheet. Or something like that.
The $85 billion credit line is an arbitrary figure which the Fed can increase or decrease at will. The accounting is the same whether it is $1 or $100 billion, I believe.
back to bed for me
Dear Joe and Jane TP:
Congratulations. You are now in the insurance business. A wise move, to spread out from your recent foray into the banking business and the housing business. Soon you will be in the auto business. I trust you will be compassionate capitalist owners, paying the former leaders of the companies you now control handsomely for their fine efforts before you took over the helm. May you enjoy a continued AAA credit rating.
Your government
Futures pointing to a slightly down open, have to say that close to unchanged seemed like the least likely outcome when I went to bed last nite. Other interesting news this AM are the Mortgage Bankers numbers, with total applications up about 33% due to refi aps up 88%. Know aps do not = new mtgs these days, but def a very good sign. Hope it is mostly Alt-A's that are refi'ing to help defuse that time bomb. Takeover of F/F does seem to have lowered mtg rates pretty well and it is having some effect.
CR the MBA numbers are prob worth a seperate thread.
akedcapitalism.com
Lehman Brothers Holdings Inc., the securities firm that filed the biggest bankruptcy in history yesterday, was advanced $138 billion this week by JPMorgan Chase & Co. to settle Lehman trades and keep financial markets stable, according to a court filing.
...
The first advance was repaid by the Federal Reserve Bank of New York, Lehman said. The bank didn't say if the second amount was repaid. Both advances were ``guaranteed by Lehman'' through collateral of the firm's holding company, the filing said. The advances were made at the request of Lehman and the Federal Reserve, according to the filing.
Isn't this just more Fed loan laundering? If that is the intent again, then clearly they are trying to be sneaky...
Dispite all the imperfections, the US remains the most powerful country in the world and got that way with the system you have now rather than the system you seem to yearn for.
It seems much worse in Russia at the moment.
Markets Post Record Single-Day Losses | News | The Moscow Times
When Russia defaulted 10 years ago you were at the pinacle of power.
If things are now a bit more balanced that seems a good thing for everybody.
Oops, WaMu being shopped around for a buyer by US regulators:
Yahoo! 404 - Page Not Found
Is this already widely known? They should be able to find some door-to-door vacuum salesmen that can help in the effort.
"But Mrs. Conway, this WaMu vacuum will give your carpet the deep cleaning your family deserves. It really sucks!"
I still think the head of any bailed out company should be in jail.
I will ask my congressmen, if they tihnk that the heads of fannie and freddie did anything wrong.
If they say no, I will ask, ok if they did nothing wrong, why were they insolvent and now in the hands of the government?
Then they will say oh yes, they did do something wrong.
And again I'll say - ok, so why arnt they in jail?
Russia tanking again...China cliff divng too...Hong Kong down down...
We might get a short term rally, but longer term we are headed much lower on all asset classes. The Great Unwinding continues
Anonymous - debtors' prisons were abolished by the Constitution.
CR is probably right but I am still buying glod. He actually makes calculated risks. Good luck to everyone
My guess is that the nationalization of AIG has nothing to do with AIG itself. Rather, this is designed to protect the credit insurance policy holders. If AIG had been allowed to go BK, the policy holders would have gotten pennies on the dollar on their insurance against their bad investments. This way, the government can make sure Mr. and Mrs. Taxpayer have to make good on all of it.
"the government can make sure Mr. and Mrs. Taxpayer have to make good on all of it."
There are i think trillions in potential payouts? The idea the banks could ensure their uninsurable risks was a fantasy as much the idea the insurance companies could make a profit out of the premiums insuring what they could not possibly afford to insure. Seems fair they just sort out the trades and agree their joint stupidity.
Looking forward, one of the things we need to do is to put the CDS genine back in the bottle. Perhaps the way to do that would be to not allow them to be written over the counter in private transactions and instead standardize them and make them exchange traded. That would greatly reduce the counter party risk. Not a heck of a lot of "fail to delivers" in the commodity markets.
If Wall Street and Mortgage Company executives repaid their incentive based compensation that they did not earn, the feds would not have to spend nearly as much for the bailouts.
Remember Mozillo? He's keeping a low profile. I wonder why he's not chiming in on CNBC?
CR,
You make so much sense it almost seems you're more qualified than Palin. Are you a good shot--or do you like to down shots? Thank you, I now go to this blog first to get the news--then to the Daily Show. Is that a compliment to you or a critique of me--or an indication of MSM's decline?
Love ya--and Tanta too (who seeming has excellent aim).
My teenage son has recently taken interest in this stuff lately and pointed out this "conspiracy" link to me -
YouTube - Zeitgeist - The Movie: Federal Reserve (Part 1 of 5)
I am glad to to see that he is at least thinking about government and economics . Maybe there is hope for change with the next generation .
One the off the books nod ,nod, wink, wink purposes of the Fed is to facilitate the socialization of losses.
I don't feel very protected by the U.S.' supposed "power." I feel like I'm being used and exploited.
"Who were the top recipients of Congressional campaign contributions from Fannie Mae and Freddie Mac? #1 was Hilary Clinton and #2 was Barack Obama. From Lehman, #1 was Sen. Dodd and #2 was Barack Obama."
So, you're saying that Clinton, Dodd, and Obama forced Bush, Paulson, and the rest of the Republican establishment to do their bidding? And here I'd been thinking all this time that the Dems were so impotent... who knew they were the secret masters behind all this!
It the law of nature my friend..Strong survive and weak and trusting die broke.
Social Darwinism!
So, one day the board generally regards Paulson and his cronies as pirates, shopping for pitchforks, but when CR makes his lengthy and incisive commentary, you're not so sure any more. Whatever happens, I predict you'll see that Krugman and CR's viewpoints are exactly the same.
A few years ago, reckless lending wasn't stopped, but that's no reason to sanction reckless, patchwork solutions. CR says, "the U.S. Government had to explicitly guarantee the debt of Fannie and Freddie, or face a complete shutdown of the housing and mortgage markets." I believe in that case we'd temporarily go to the system used successfully in the US for a little while, called In God We Trust, All Others Pay Cash.
The hidden tragedy of these improvised Fed and Treasury maneuvers is that the Democratic party has forgotten its historic role as the afflicter of the too-comfortable, and the scourge of plutocrats--rather, they act like enablers. Perhaps the Democrats always read Krugman in The New York Times before forming all any opinions about economics.
Very pragmatic and well written CR! And I totally agree the this marks one of the low water (if not the low water) point in this process. The terms of the AIG bailout are very, very punative. To me this upholds the moral hazard precept: this wasn't a gift and basically requires the company to break itself up with the treasury getting a bonus in the terms of equity and 8.5% over LIBOR.
And this tells everyone to get real. Now you have one of the last IBs standing looking for a husband. Will Goldman be next? And who is the suitor? Is it in the UK, or is it a competitor to BoA in NY?
By the time this is over with, I would be surprised even if Goldman survives as is.
And this is all before a couple of major bank failures. Those are coming and probably soon. I can think of three right now that can't make it period, given the numbers. Whether they are tossed into someone's arms or taken over remains to be seen, but right now there is some background work being done to try to marry two off me hears.
I still will not retract my macro-economic calls though no matter what happens here. As the headlines suggested, people think this is bad, but they don't know how it affects them personally. And I'm not sure any of this effects things on the macro level at this point that isn't already in play.
CR
Really nice post. I think you are about a year early but still it is excellent.
I just have a hard time believing that this is the "beggining of the end". We haven't even seen real pain yet. We are witnessing the bursting of a 30 year credit bubble, the biggest bubble the world has ever seen, and within that bubble is the bursting of the biggest housing bubble the world has ever seen.
And all that is going to be resolved by extending a few loans by the FED and a nationalization or two? If that is all then why not blow bubbles?
The events of the past week were not done so fast and with so little thought that nobody can possibly understand or forsee the unintended consequences that will arise. They weren't so much "solutions" as they were delays. And as Meredith Whitney said, a ton of liquidity was just removed from the economy over the past week on top of the already beggining to bite credit crunch we are experiencing.
And amidst all this, we haven't even seen a real correction in the equity markets. Things are still expensive and that indicates a lot of underlying bullishness and denial.
And the pain on main street is just beggining to feed back into the finacial losses IMO.
John Snow(job) on bubble vision right now. "We have to get rid of this decades old regulatory system" What an ass, the problem is that we got rid of the decades old reg system with Graham Leach Bailey (99) and the Commodity Futures Mod Act (01). Why do they put a guy who wrecked the balance sheet of the tresury and then went to the pvt sector and buys GMAC and Chrysler in the summer of 07 on TV. Heck, this idiot should not be allowed to even watch TV (other than maybe Nickelodeon)
The terms of the AIG bailout are very, very punative. To me this upholds the moral hazard precept
No way, ipodius. The fact that shareholders kept 20% and unwind orderly is moral hazard. But even more so, the problem is systemic and true moral hazard would have been those companie involved picking through the rubble and piecing it back together.
That AIG needed bailing out is arguable for sure, but that the government funded $85 billion instead of the private sector performing the bail out certainly wipes out any moral hazard.
Essentially this is an AIG bankruptcy, with $85B in DIP financiang from the Fed.
Housing starts doen 6.2%, permits down 8.9%. If this keeps up we may be able to work off the inventory.
Wachovia is toast. Shotgun wedding in the offing. Will they make it to end of Q3? Given the accelerating trend of failures and takeovers can you be sure they will survive in current form?
Who will be the chosen acquirer?
WFC?
GS?
MS?
Once the trend for "price discovery" picks up some more steam the true extent of the sorry state of Wachovia's balance sheet will be appparent - and they will be so screwed. Commercial loans, commercial mortgages, PAP, LEH and AIG exposure, losses on GSE sales, legal exposures, reputation in the toilet. They are done - just a question of when.
If you are an employee - dust off the resume.
If you are a shareholder - SELL!! while you still can get some value. Common's will be wiped out.
If you are over the FDIC limit - don't say you haven't been warned.
CR: Excellent post. I also note that you are channeling Tanta in word count.
ipodius: The terms of the AIG bailout are very, very punative.
This is dependent on whether the Fed inserted themselves ahead of the bondholders. The fact that any common survived the wash out is absolutely moral hazard (is there a shelf registration with more shares to be awarded?)
Does anyone have a readout on whether the bond holders are ahead of the Fed?
Essentially this is an AIG bankruptcy
There's no such thing as essential bankruptcy. If I'm with AIG and just kept 20% after running the company into the ground, I'm singing and dancing.
Of all these 'events' so far, Bear Stearns was handled worst... but it was the one that took Bernanke and Paulson to school. I think they have done better this time around, but the risks get high and higher, too.
They might have been a bit tougher on AIG, but that is a nit. They were tough enough on Lehman to let Merrill, and apparently even Morgan Stanley, see into the abyss. It isn't that AIG is too big to fail, it is that they are too interconnected. All the AIG credit insurance customers combined are definitely too big to fail; there is not even an argument there.
True BK would have been a nightmare, would have had to held it at the UN with 50 state Ins commisionars and commisionar of 129 other countries. This has basically the same outcome. Common and Pref shareholders lose almost everything, perhaps debt holders take a small haircut, policy holders saved.
I fail to see how we are even close to the end of this debacle. I've noticed none of the bloviators on cnbc or any of the news channels bother to even mention the huge bundle of ARMS that are going to reset the end of this year and beginning of next. I remember reading some time ago it was the biggest batch yet. I would have to guess it will also be the biggest batch of foreclosures yet as unemployment and inflation have only gotten worse since the last batches reset...I would know, I'm one of the poor schmucks holding one of those ARMS and I'm scared to death...I didn't have a choice, Mom died, I had no mortgage history, and I was unemployed for a year taking care of Mom, it was the only way to keep the family home (Mom died with a mortgage)
"Looking forward, one of the things we need to do is to put the CDS genine back in the bottle. Perhaps the way to do that would be to not allow them to be written over the counter in private transactions and instead standardize them and make them exchange traded. That would greatly reduce the counter party risk. Not a heck of a lot of "fail to delivers" in the commodity markets."
This would eliminate a lot of the issues with mark to model (level 2) and mark to "wish upon a star" (level 3) stuff. IB's wouldn't like this because the transparency would hurt their profitability. They would likely revert to acting as agents on behalf of their customers instead of trading as principals to facilitate their customers.
How did you go bankrupt? Bill asked.
Two ways, Mike said. Gradually and then suddenly.
What brought it on?
Friends, said Mike. I had a lot of friends. False friends. Then I had creditors, too. Probably had more creditors than anybody in England.
bluestatedon writes:
"Who were the top recipients of Congressional campaign contributions from Fannie Mae and Freddie Mac? #1 was Hilary Clinton and #2 was Barack Obama. From Lehman, #1 was Sen. Dodd and #2 was Barack Obama."
The F/Fs were astute and figured this was a Democratic year, so sent their pimp money there. I would be interested in their lobbying priorities 2000-2006.
China paper urges new currency order after "financial tsunami
China paper urges new currency order after financial tsunami
| Reuters
"The world urgently needs to create a diversified currency and financial system and fair and just financial order that is not dependent on the United States."
The commentary suggested China must brace for grave economic fallout and look to alternatives, saying the crisis brings to mind the Great Depression of the 1930s.
"Lehman Brothers announced bankruptcy will not only have a domino effect on the global financial world, it will bring a shock to the world economy," the front-page comment stated.
And so it has begun.
But unlike observers that believe this only marks the end of the beginning, I believe there is a chance that these events mark the beginning of the end of the crisis.
With all due respect to CR, and he is due a great deal of respect, I simply don't believe anyone can say with any confidence whatsoever how this will play out or when it might end. Now the "credit crisis" is playing against a backdrop global price depreciation and economic slowdown.
And is this really just an acute credit crisis, or generational deleveraging?
asl, the private sector isn't able to fund AIG. There are too many systemic problems right now, so that's just an impossibility. And respectfully I disagree. If you are certain to lose your job, have the company broken up, have the equity and bond holders take a bath, and pay punative interest for the rescue money, I'm not sure how this is evoking moral hazard. You just steered your company into a brick wall and the treasury is just stepping in so that no one is looting what is left.
So I'm viewing this as the fed/treasury being the cops in this situation to prevent looting. Many people here want the riot to happen but I certainly don't. I want to be sure that, when a company is broken up, it isn't looted in a disorderly unwind but that people pay full value for the assets.
wow
great post CR...I went to bed in a foul mood, and waking and reading this just put some clarity to it...more grounded.
another day...
Yet as of today and from the beginning of the year you can still "easily" get a 3.5% down payment or a no downpayment loan with a 599 FICO..... how many new loans made in 2008 will foreclose? 60%? 70%?
Not much curtailing here?
"I fail to see how we are even close to the end of this debacle."
Well maybe if you look at it in aviation terms it looks different?
The economy approached the stall and dropped a wing and entered a spin where one wing is flying and the other is stalled. The economy descends dangerously. The pilot applies opposite rudder until the aircraft stops rotating and while it continues to head towards the earth in a none flyable manner. Once rotation has stopped then both wings are now stalled and the nose dips down and the aircraft now increases speed. Once flying speeed is reached the aircraft can be pulled out of the dive and level flight regained.
At this stage maybe we can say we have recognised we are in a spin and can now apply the recovery method? Whereas previously we were in high anxiety and disorientated?
Good Wednesday morning...so what's today's collapse? WaMu?
Did anyone (everyone?) catch that Ken Lewis interview with Maria a couple of days ago?
MB finally asked the question I was waiting for - how much longer till we see daylight?
Lewis: we see the end of the write downs in q4 of 08 or q1 of 09. We see home price depreciation being pretty much over by end of H1 of 09.
If he's navigating using that assumption BOA will be in for more surprises.
what is a systemic financial collapse?--comrad mock turtle
This is a good question. How do we define financial collapse? Maybe CR or Tanta will do a post on this.
I dunno, I keep waffling back and forth on what is happening. It seems to me that the Fed knows that the financial system is f****d and is jumping around trying to keep most of the plates spinning.
But being the chief mobster, some examples need to be made. How about some movie analogies? I'm sure you can tear them apart, but how about some laffs, eh?
***LEH (Movie:Batman, Tim Burton version)
The Joker (aka Fed), shaking Dick Fuld's hand : "Whoooaaa! We got a live one here!"
***AIG (Movie:The Untouchables, Brian Depalma version)
Al Capone (aka Fed) shows AIG a "real" baseball analogy.
***The FED (Movie:Scarface, Brian Depalma version)
As the SWFs close in, Ben/Hank/whoever screams "I'm Tony F***ING Montana, mang!"
Top of the world, Ma.
I hate people that make those baseball analogies, (We're in the 3rd inning, blah, blah, blah....)
BTW - We're mid-way thru the 2nd quarter, and we're going to need one hell of a half-time speech by the next commander-in-chief.
I'm sending this from my Crackberry. I'm on the 7th tee, and I just made a horrible quadruple bogey on #6. I hope I can turn it around on the back side, but damn, it's getting awfully windy out here.
***The FED (Movie:Scarface, Brian Depalma version)
As the SWFs close in, Ben/Hank/whoever screams "I'm Tony F***ING Montana, mang!"
You might need a better analogy. Cause all des nukes we got, President Palin wouldn't allow any of those SWF terrorist to get close enuff
Great Post CR.
With the Primary Fund (a money market fund) breaking the buck, I took a look at my money in my money market fund. Fortunately, there is no exposure to Lehman or AIG. However, there was exposure to Fannie and Freddie.
It just made me realize what my exposure would have been, had the government NOT taken over the two firms.
As much as I deplore the actions of the government in bailing out (seemingly) everybody, the alternative would have been much worse. sigh
Best CR post evar, mang!
Thanks.
So the credit default swap market is something like $60 trillion overall. Now that the Fed's "bought" AIG, will they still insure that market?
I thought that was kind of the point, but given the size of the market, it also seems like putting a penny where a fuse should be.
Perhaps this is the motto of Today's Fed:
A Penny Where a Fuse Should Be.
I'm so glad they're finding a use for all those taxpayer pennies.
What worries me is this continued passion for "price discovery", which in the context of a systemic financial crisis could simply mean another downward turn in the debt-deflation spiral.
Everyone wants to see the capital markets functioning normally again, but it's wishful thinking at this point to imagine they'll find their "natural" equilibrium if the feds just get out of the way.
I mean, market fundamentalists may criticize the Japanese for how they handled the aftermath of their big bubble, but compared to our experience in '29-'33, a decade of stagnation starts to look pretty good.
I have a question are taxpayers on the hook for all of these bailouts?
I still don't see this as the start of the end, here, in San Jose, CA, we have far too many foreclosures, far too many homes for sale, and our salaries haven't really gone up for years.
Most folks that were doing ok three years ago now can't even pay their most basic bills, and many are struggling without health insurance.
I remember reading last year that some "expert" stated the housing mess had seen the worst and would rebound, I keep hearing from the "experts" that our productivity is strong (no mention of wages though), and the "experts" are those who have created the conditions we are now seeing.
I am no "expert" but can tell you this: as the housing market was going crazy, and folks were taking out those interest only loans, and banks were lending to anyone who could hold a pen, I knew that it spelled disaster, why didn't those who were in charge see this?
I know why: Because their bottom line was lining their pockets, and line them they did. Now they have walked away, keeping ALL of their assets and destroying our nation. At what point do Americans wake up and see that hard working Middle Class Americans are being given the finger by those who claim to know best?
And if you think things are bad now, just wait if McCain/Palin are elected and we have two people who have little to no experience with economic issues running the country. McCain has always been in favor of deregulation, and at a time when we need to regulate and hold people accountable, he would be the new Hoover of our century.
its more like the end of the beginning. wait till we find out whats really going on at citi.
Beginning of the end of the crisis?
Okay, so when is housing going to return to affordable levels?
Where are the new jobs going to come from now that we've gutted our entire economy and reduced it to a debt-shuffling shell?
What are we going to do with the huge number of unfunded liabilities dragging our economy down: health care, illegals, bailouts, the war, etc.
Until the basic issues regarding the average American's ability to: get a steady, decent-paying job and be able to afford housing (and energy, and health care, etc.) are addressed, this problem is nowhere near over.
At least Mish's loophole in the Federal Reserve act would not appear to be able to accommodate a city, county or state. Maybe there is another one for that. Thanks again for this fantastic prologue to the beginning of the end.
" believe there is a chance that these events mark the beginning of the end of the crisis."
Is that a predictive statement or statement of hope?
since i'm (still) a fannie mae shareholder and a taxpayer, did i just buy myself out?
Anantha Nageswaran writes:
" believe there is a chance that these events mark the beginning of the end of the crisis."
Is that a predictive statement or statement of hope?
Anantha Nageswaran | 09.17.08 - 11:23 am | #
I would doubt about predictive. I love and respect CR, but he is no Roubini.
Great post! I appreciate your reasoning, and I agree with much of it.
However Im not at all sure that I agree with you on the Feds approach to the AIG rescue.
This transaction appears to be a packaged bankruptcy to me in all but name, but without the legitimacy of a court as overseer. The Fed is effectively providing DIP financing, given the seniority of their asserted claims and control (and the OUCH! rate); the equity holders are essentially wiped out by the Feds 80% equity stake.
It seems to me that much the same thing could have been accomplished within a Chapter 11 bankruptcy, with the Fed providing (or backing) a formal DIP line (which seems somewhat more secure, albeit equally unprecedented); Bankruptcy courts exist precisely to adjudicate claims in such situations. To be sure, a Bankruptcy filing would have been a shock to the system, but Im coming to the view that relying on the discipline of traditional remedies, regardless of how shocking they may seem, is likely what we need to do.
Backing up my point, the swift action by Barclays in scooping up parts of Lehman once it was in Bankruptcy suggests what might have played out had AIG followed the traditional route.
I do agree that the Fed/Treasury approach to Fannie/Freddie was appropriate. I worked in the Mortgage Industry from 1968-90, and must say that it was always understood that these two agencies had the implicit backing of the Treasury. The Fed/Treasure action was simply recognition/resolution of this implied assurance. To be sure, when I knew them both Freddie and Fannie saw their primary mission as providing stability to the private mortgage markets (at first institutional and later securities) rather than reacting to Wall Streets insistence on generating profit growth every quarter which ultimately led to their problems. Much blame is (inappropriately) on them now and, indeed, they did screw up but over time much good came from their being there. (Regrettably, that babys probably in the bath water that will be chucked into the alley.)
And I agree that Lehman should have been forced into Chapter 11. While I accepted the Bear-Stearns rescue as appropriate at the time, Ive changed my mind; they should have been forced into Chapter 11 as well. Let the legal infrastructure that society has set-up to handle these problems do its thing.
At the end of the day, this all turns out to be a failure of regulation the players simply figured out how to slip out from under traditional regulatory constraints, and the laisser-faire philosophy of the last decade or so allowed them to get away with it. Unfortunately, having accomplished this, the hubris of these whizzes led them to decisions that can only be called bizarre.
That these companies have created hugely complex structures doesnt necessarily mean that Only New, Untested, Fixes will provide a solution ad-hoc is not the same as innovative. Traditional regulation, discipline and remedies worked pretty well for a long time and handled a lot of innovation along the way. I suspect its time to re-apply the rules, and bring some traditional discipline back to the system.
We need to substantially reduce being a debtor/consumer economy and become a saver economy to provide the capital to repair this disaster, yet there is no appetite for this anywhere I can see.
Wow, Amen Brother. A-freakin-men
Sorry CR, we're nowhere near the bottom.
A Seb impersonator?
What's this?
Didn't I hear " no more bailouts " before the AIG got bailed out ?
"Senators Gregg and Dodd: No More Shoes About to Drop"
Agreed in all particulars. The AIG bail indicates an awareness at the Fed and Treasury that some insolvencies are at key crossroads in the leverage flow, and therefore more like timebombs than plain bankruptcies. In addition, holding out until the last possible moment helps to reinforce the Lehman message. We need to maintain liquidity first, then as far as possible within that framework get the toxic paper to wring itself out.
"Fear itself..."
Irish government guarantees all bank deposits
Irish government guarantees all bank deposits
| Reuters