Showing posts with label mortgages. Show all posts
Showing posts with label mortgages. Show all posts

Friday, January 22, 2010

Bravo Obama







Anyone who has read my posts on the banking situation, particularly this one:


knows where I stand on the present banking situation.  I was actually astonished to see Glass Steagall repealed in the first place.  What happened was completely predictable and was worsened by its ability to spread into the global financial system also.  The time frames for the debacle was also completely predictable in that I though a collapse was likely just before the end of Bush’s presidency.  Bush himself did not have the insight and knowledge to lead on this and besides they were preoccupied with a difficult war.

Putting Glass Steagall back into full force and effect is totally necessary.  My only regret comes from waiting an extra year, but then the economy itself had to settle down and we certainly had the time.

The breakup of the banking combine system is completely necessary also for the exact reason outlined.  Failure must mean a trip through bankruptcy courts without including the taxpayer.  This can be safely done if no one bank has less than perhaps twenty same size competitors.  Canada gets away with six such general retail banks who are tightly constrained in the type of gross risk they can accept.  Three more would be welcome.  The US would be well served with possibly sixty to one hundred large retail banks.

In that environment failure becomes no big thing.

Large financings will still get done, but as before they will be distributed to the banks and others.

Of course this does not yet solve the real problem dragging on the US economy.  The mortgage market needs a major innovative reform of the foreclosure laws to jump start the market and to clean out the inventory overhang.  Maybe we will get that also before this is done.

Banks also have to figure out how to manage commercial property risk better than has been apparent. They are walking out on deals almost at a whim and merely making the market impossible.  After all a market setback will put the whole market underwater and without bank participation, it cannot be resolved.

In the event, this is the first truly positive step made by the Obama regime to right the financial ship and it is welcome, if perhaps a bit early because of the need to over come the kick in the pants provided by Mr. Brown.



European bank stocks drop on Obama plans

US President Barack Obama: "I am proposing simple, common sense reforms"


European banking shares have dropped following President Barack Obama's far-reaching plans to curb the activities of the biggest banks in the US.

In London, Barclays shares dropped 3.5% and the London Stock Exchange fell by 2.2%.
Deutsche Bank led banking falls in Europe, down 3.4%. France's BNP Paribas and other banks also dropped.

Mr Obama - who said he was "ready for a fight" with banks - plans to limit their size and restrict risky trading.

"Never again will the American taxpayer be held hostage by banks that are too big to fail," Mr Obama said.

Overnight, the US Dow Jones industrial average fell 2% - its worst fall since October - while Japan's Nikkei closed at a three-week low.

Shares in major US banks Goldman Sachs and Bank of America also fell.

Politicians in the UK were quick to sign up to Mr Obama's proposals.

The Treasury said it would consider the US bank reform plans "very carefully," while City Minister Lord Myners said the US proposals were "very much in accordance with the direction we have been setting".

Shadow chancellor George Osborne said that the Conservatives would impose an identical dismantling of UK banks if elected.

But he said he would want to see international agreement before implementing any change in the UK.

BBC business editor Robert Peston said Mr Osborne's comments would "generate profound fear in the boardrooms of Barclays and Royal Bank of Scotland".

"Banking reforms do not come bigger than those proposed by President Obama," he added.

Limiting risk taking

"While the financial system is far stronger today than it was one year ago, it is still operating under the exact same rules that led to its near collapse," Mr Obama said.

His proposals may mean that some of the biggest US banks have to be broken up.

What this means for foreign banks working in the US is still unclear.

They also include a ban on retail banks using their own money in investments - known as proprietary trading. Instead, banks would be limited to investing their customers' funds.

The moves follow popular anger at financial institutions, who have been paying large bonuses to staff even as they accepted government bail-outs to keep them going.
Mr Obama's move is also a political risk.

It is his first proposal since Republican Scott Brown's shock victory in Massachusetts to win a Senate seat.

Banks have also been lobbying against more stringent regulation.

"If these folks want a fight, it's a fight I'm ready to have," Mr Obama vowed.

He has already proposed a $117bn (£72bn) levy on banks to recoup money US taxpayers spent bailing out the banks.

The tax will claw back some of the losses from a $700bn taxpayer bail-out of US banks known amid the financial crisis last year.

Wednesday, June 24, 2009

Obama Drifting?

We are now a half year into the Obama presidency. The high emotion brought on by the global credit collapse has somewhat abated and perhaps the banking system is getting a decent handle on present business conditions and their own portfolio. In the meantime, they have used government funds to slowly bring their capital requirements back into line. Several of the largest have also given hack bailout funds making them independent.

We have posted on the scariest parts of the ongoing credit restructuring and just how big it could become.
Assume that the worst case scenario can be avoided and that a chastened banking system will limp back into business.

The long term problem is that their customers have been severely hurt. A real percentage of the customers has been actually put to the wall. Everyone who financed a house using excessive leverage has likely lost all their capital if not their job. Assets like stocks and cars are always sold to support the house before one throws in the towel. Once lost, a citizen is starting over completely with incremental savings and a really bad attitude to banks and other financial institutions who encourage such imprudent behavior in the first place.

Since we are doing this the hard way, it is certain that a number of years must pass before these customers are back and strong.

My problem is that so far Obama produced reassurance and little else that convinces anyone that positive steps are underway, unless you think that the defacto nationalization of GM is actually going to work at all. He has been also less than insightful in terms of preserving the integrity of bilateral agreements, but that is because his supporters are not above pushing through a fast one or two. The point is that he and his staff can be had, which is not unusual for a rookie president.

So while he is riding along, he is also trying to ignore the big domestic government finance disaster rushing down the rail toward him. California is screaming for help and others can not be far behind. The cities must be facing huge contractions in their budgets. In the end it will become visible and congress will be forced to react again in a panic. All this is foreseeable and plans can be made.

And while the financial punditry inventories the credit balloon and takes fearful conclusions from it, I do want to make one observation. The mere fact that the larger banks chose to pay back their bailout funds is very encouraging. They felt no need to hang on to the government lifeline. This suggests that the subprime collapse was actually isolated in terms of making losses and that the remaining portfolios are intact and operating normally. If true, this is good news because it means that everything else will slowly get back to work from the present base.

We still have not resolved the housing problem, but without doing as I posted, the market will continue to grind out a solution while brutally slashing household wealth. Everyone with a good job gets to pay of their credit cards for a couple of years.

It would be wonderful if in fact the only problem Obama faced in the financial realm is the subprime portfolio.

Monday, March 9, 2009

Economic Floor and Rick Cook

We are in what should be and actually needs to be the floor of this economic down swing. Most commentators have now bought into the trend line and are all making the classic mistake of projecting its continuance. It is correct to say that it is very ugly and that everyone has had to reevaluate their financial position.

I am calling it a floor for a very simple reason. Asset pricing is now such that it is impossible for the lender to take possession and realize significant recovery. Instead he realizes both a loss and a hit on capital. The hit on capital impacts his lending ability by at least ten times the loss. At best he is unable to replace the asset.

If the only possible solution is a work out that somehow limits the immediate effects of the capital loss, then willy-nilly that is the way it will go. That means that entire inventory is not really in the market. So it is possible to slowly rebuild our way up out of this from the current floor using the programs now going into place.

This article catches the flavor of the times and certainly encourages a massive lowering of expectations. That is now happening a little more directly in the US auto industry. Today it is reported that the auditors saw that they must stick in the chapter 11 warning into the GM financials.

Again no one is getting it. Yes, the banking system needs a massive influx of cash to make up the reduction in their lending multiple and to replace money never to be recovered. That prevents fire sale liquidation of their assets and the total destruction of the economy.

What is also needed is a replacement of credit card debt with cheap term debt, perhaps with a government guarantee and the IRS as enforcer. That begins to free up the individual. After that we need to implement a government sponsored mortgage restructuring program so that the homeowner can ultimately pay off the property and that there is some chance of the government recapturing its investment.

It can be done that simply and that smoothly. Do you hear anyone else saying this?

[“The Last Picture Show” was a 1971 film depicting the decay of small town America . It took place in the fictitious town of Anarene , Texas .]

We hear a distant tune reminiscent of America ’s high and lonely places and the sound of a dry wind blowing. It’s March 2010 in the tiny West Texas town of Anarene . Nothing much happens here any more. The last business shut down a couple of years ago. It was a cement plant that went broke after the housing bubble burst and the banks stopped lending. The kids out of high school drive their jalopies from one end of Main Street to the other past boarded-up storefronts.

Some of the grown-ups carpool to low-wage jobs in a city 50 miles down the road. The elderly have had their Social Security eaten up by the high price of food but still get by on Spam and Kool-Aid. There used to be a movie theater, but it too closed a few months ago. Not a single person went to the “Last Picture Show.”

But there is change in the air! President Barack Obama, who was elected president a couple of years ago, is in the middle of his fiscal year 2010 budget. The 2009 budget had a deficit of $1.75 trillion, a number no fool could even have imagined before the crash of 2008. The projection for 2010 is $1.17 trillion, due to the government’s hopes for an economic recovery. But the jury is out on whether a recovery will ever happen.

Some say the banks are starting to lend again, though no one at the Anarene State Bank knows anything about it. Some say the city down the road is getting a plant to make blades for those new wind turbines. The Anarene high school got funding for an adult training course on writing resumes. The Nightly News says, “ America is coming back.”
I wish!

So what is really going on here?

Well, President Obama’s 2010 budget has attracted a lot of attention. $1.75 trillion? That’s not federal spending. That’s new federal debt!

A good measure of fiscal policy is federal government tax revenues. Revenues for 2010 are projected at $2.19 trillion, off 13 percent from a year ago, due to the recession. With the huge bank bailouts and Obama’s $787 billion economic recovery program, 2010 expenditures are estimated at $3.94 trillion, an increase of 33 percent over 2008.
Then there’s the interest taxpayers must pay on the national debt, which will likely reach $600 billion in 2010. Of course almost 100 percent of all new federal debt is financed by foreigners, mainly China .

But don’t worry, the recovery program will succeed, and the economy will start growing again. THE GOVERNMENT PROMISES! Obama’s budget forecasts such a strong upsurge in economic activity by the end of 2009 that the net for the year will be GDP growth of 1 percent. (Yes, that’s what it says.)

Is it a contradiction that the government is conducting “stress tests” on the nation’s banks in which it is predicting that the recession will last at least until 2011 to see if those banks are strong enough to weather the storm? Yes, it is a contradiction. Even the Federal Reserve does not see recovery coming as quickly as Obama’s budget. Neither do any economists. The budget is not an honest document.

It gets worse. The budget says growth will then continue as far as the eye can see—the projections go out to 2019, when we’ll have a GDP of $22.86 trillion, 61 percent higher than 2008. Happy days will be here again!

So go back to sleep, America . It’s official. The recession we are in right now will end soon and is the last one ever.

This means that the financial industry will soon be fixed, plenty of good jobs will be available, climate change and drought will be overcome, the government budget will be right-sized, and America and the world will be content and at peace. All because of the decisions being made by the Obama administration and approved by Congress during these few critical weeks we’re in the middle of right now.

But there are a whole swarm of flies in the ointment. I’ll mention just two.
One is that according to University of Massachusetts economist Thomas Ferguson, who spoke at last weekend’s Eastern Economic Conference national conference in New York , the Bush/Obama bank bailouts alone will cause a permanent addition of interest payments on the national debt of $100 billion a year forever. That means every American will pay, during the course of his or her lifetime, over $20,000 to rescue the banks from their bad loans. To put that number in perspective, it equates to 2-1/2 years of tuition at a state university that instead will be paid to the government of China or a similar foreign investor.

Yes, America , that is what your elected government just decided you will do.

Another is that the U.S. has had virtually no real economic growth since the early 1970s, because since then we’ve lived in a bubble economy. Look it up. Most of our industrial output has been flat or has declined. Whole industries, such as steel, are shadows of their former greatness. The automobile industry is on life support. We’ve imported huge amounts of foreign capital by selling them our real estate and businesses. As stated on the Economy in Crisis website:

“The United States now no longer controls many of its domestic industries. Over the last 10 years alone foreigners have spent $1.2 trillion to acquire more than 8,000 key US companies. Already as of 2002, foreigners owned fully 20 percent of American manufacturing. In many high-tech and defense-related industries, the proportion is far higher. Such US industries as mining, cement, publishing, engine and power transmission equipment, rubber and plastics, and sound recording and motion pictures are now largely foreign owned. Even in industries like pharmaceuticals, chemicals, industrial machinery, transportation equipment, electronics, metal industries, and coal and petroleum industries, foreign ownership has recently become very high.”
Until the last year, the biggest growth industry within the U.S. had been the financial sector, producing profits of over $500 billion as late as 2006. In other words, the U.S. has replaced working for a living with the manipulation of money and the extraction of interest, either by lending it or by brokering the lending and investment by foreigners. In order to enrich themselves, the financiers, with a lot of help from the government, created the merger/buyout bubble of the 1980s, the dot.com bubble of the 1990s, and the housing/equity/hedge fund/derivative bubble of the 2000s.
All this time, the federal, state, and local governments have tried to keep up by taxing every financial transaction they can get their hands on, including by raising property taxes on the inflated value of family homes. But now, with the last of the bubbles deflating, the tax base is vanishing. So governments, along with the private sector economy, which has been living on capital gains in the absence of job income for all but the very rich, have gone into the tank as well.

President Barack Obama’s economic recovery program, along with the budget just released, is an attempt to substitute a federal government bubble for the failed private sector ones. Like the private sector bubbles, this one is also based on debt. This is because debt is the only way anyone in the U.S. can any longer think of when it comes to creating a national money supply. It includes the president’s proposed $5 billion federal infrastructure bank for lending to state and local governments. This bank will probably offer better interest rates than the bond markets, but it’s still debt.

There was a time in U.S. history when other ways were known to create money; for instance, during the Civil War, when Congress authorized the Lincoln administration to spend Greenbacks directly into existence. The banks hated the Greenbacks, of course, so they got Congress to pass the National Banking Acts of 1863-64, which were the prelude to the Federal Reserve Act of 1913. Today, Greenback-type funding for the federal government is one of the chief provisions of the American Monetary Act drafted by the American Monetary Institute (
www.monetary.org).

Another way to introduce debt-free money into the economy is through a dividend, such as the Alaska Permanent Fund, which in 2008 paid every resident $3,269 tax-free out of the state’s resource revenues. There is no good reason why such a dividend could not be paid by every state or by the federal government.

Greenbacks and programs like the Alaska Permanent Fund are part of what I call Dividend Economics. It’s why I’ve proposed the “Cook Plan,” which would be a system of vouchers for the necessities of life in the amount of $1,000 a month for any adult citizen who applied. A smaller amount would be provided as an allowance for children. The vouchers would be taxed like any other income and would supplement other entitlements such as unemployment compensation, Social Security, etc. But taxes would be low for those who would use the vouchers as a main source of income. Under the plan, the vouchers would then be accepted as deposits at a new network of community savings banks that would lend at one percent interest to consumers, students, small businesses, local manufacturing establishments, and family farms.
This would introduce over $2.5 trillion of debt-free money into the economy over the next year, because under the “Cook Plan,” the dividend would be paid directly by the U.S. Treasury without borrowing or taxation. It would not be inflationary, because it would replace money from public bank lending and would result in new goods and services being created within the U.S. producing economy. In fact, we would see a renaissance of local and regional economic activity that would eventually transform the national economy as well.

You may ask, should we just be “giving away money?” My answer is that if the banks can create trillions of dollars in credit out of thin air for lending, why can’t the government create it for the people? The same goes with the trillions the government is borrowing to pay to the banks to reinflate the bubble economy. Give it to the people instead. Look at Obama’s economic recovery program that equates to $225,000 for each new job it hopes to create and probably won’t. Give that to the people too. Let them use the money as a dividend to live on during this emergency and create new jobs as well. Right now there is nothing further from the minds of President Obama and his advisers than such ideas. That’s why his new bubble budget is America ’s “Last Picture Show.”

Richard C. Cook is a former U.S. federal government analyst. His book on monetary reform, We Hold These Truths: The Hope of Monetary Reform, is now available at
http://www.amazon.com. He is also the author of Challenger Revealed: An Insider’s Account of How the Reagan Administration Caused the Greatest Tragedy of the Space Age. He can be contacted through his website at http://www.richardccook.com.

Richard C. Cook is a frequent contributor to Global Research. Global Research Articles by Richard C. Cook

Monday, February 16, 2009

US Bank Weakness

This is a creditable assessment of the total exposure of the financial system to the deflation that is taking place. The scope of the problem is working out to be well over one trillion dollars. If the problem is not tackled, the USA will have Zombie banks until it is resolved by the methods proposed here at the least. It may turn out to be twice that and the banks are not helping matters by keeping the grief to themselves.

If the problem is solved as suggested, then the banks will commence lending again and slowly they will start to come out of the present disaster.

My contention is that we can do a lot better than that. Setting a mark to market say today and implementing the half and half program that I have previously described will likely cost less than that proposed , while putting the property owners back in the game as good customers. This will have the effect of taking all the bad assets off the market and allow a nice bounce in the market if not a land rush to clean up all the impaired properties.

In the meantime you will find this to be a sober and clear report on the present situation. If it is not fixed, we will have a building downward pressure on asset prices that will continue until it becomes unbearable on asset prices and a reset takes place that puts all debt underwater.

Right now we have a balance in place between remaining credit and outstanding good debt. This is remaining stable for now.

I read recently that Japan tolerated 15 years of declining real estate prices before they cleaned up the zombie banks. We are entering perhaps year three or so. And the problem created here is every big as the Japanese disaster.

Remember folks, none of this is possible if financial disclosure became mandatory world wide. The system can be gamed only in secret, not with the other six billion stakeholders looking over your shoulder. This is a radical remedy, but I know no other way to circumvent human greed

Large U.S. banks on brink of insolvency, experts say

Some of the large banks in the United States, according to economists and other finance experts, are like dead men walking.

A sober assessment of the growing mountain of losses from bad bets, measured in today's marketplace, would overwhelm the value of the banks' assets, they say. The banks, in their view, are insolvent.

None of the experts' research focuses on individual banks, and there are certainly exceptions among the 50 largest banks in the country. Nor do consumers and businesses need to fret about their deposits, which are insured by the U.S. government. And even banks that might technically be insolvent can continue operating for a long time, and could recover their financial health when the economy improves.

But without a cure for the problem of bad assets, the credit crisis that is dragging down the economy will linger, as banks cannot resume the ample lending needed to restart the wheels of commerce. The answer, say the economists and experts, is a larger, more direct government role than in the Treasury Department's plan outlined this week.

The Treasury program leans heavily on a sketchy public-private investment fund to buy up the troubled mortgage-backed securities held by the banks. Instead, the experts say, the government needs to plunge in, weed out the weakest banks, pour capital into the surviving banks and sell off the bad assets.

It is the basic blueprint that has proved successful, they say, in resolving major financial crises in recent years. Such forceful action was belatedly adopted by the Japanese government from 2001 to 2003, by the Swedish government in 1992 and by Washington in 1987 to 1989 to overcome the savings and loan crisis.

"The historical record shows that you have to do it eventually," said Adam Posen, a senior fellow at the Peterson Institute for International Economics. "Putting it off only brings more troubles and higher costs in the long run."

Of course, the Obama administration's stimulus plan could help to spur economic recovery in a timely manner and the value of the banks' assets could begin to rise.

Absent that, the prescription would not be easy or cheap. Estimates of the capital injection needed in the United States range to $1 trillion and beyond. By contrast, the commitment of taxpayer money is the $350 billion remaining in the financial bailout approved by Congress last fall.
Meanwhile, the loss estimates keep mounting.

Nouriel Roubini, a professor of economics at the Stern School of Business at New York University, has been both pessimistic and prescient about the gathering credit problems. In a new report, Roubini estimates that total losses on loans by American financial firms and the fall in the market value of the assets they hold will reach $3.6 trillion, up from his previous estimate of $2 trillion.

Of the total, he calculates that American banks face half that risk, or $1.8 trillion, with the rest borne by other financial institutions in the United States and abroad.

"The United States banking system is effectively insolvent," Roubini said.
For its part, the banking industry bridles at such broad-brush analysis. The industry defines solvency bank by bank, and uses the value of a bank's assets as they are carried on its books rather than the market prices calculated by economists.

"Our analysis shows that the banks have varying degrees of solvency and does not reveal that any institution is insolvent," said Scott Talbott, senior vice president of government affairs at the Financial Services Roundtable, a trade group whose members include the largest banks.

Edward Yingling, president of the American Bankers Association, called claims of technical insolvency "speculation by people who have no specific knowledge of bank assets."

Roubini's numbers may be the highest, but many others share his rising sense of alarm. Simon Johnson, a former chief economist at the International Monetary Fund, estimates that the United States banks have a capital shortage of $500 billion. "In a more severe recession, it will take $1 trillion or so to properly capitalize the banks," said Johnson, an economist at the Massachusetts Institute of Technology.

At the end of January, the IMF raised its estimate of the potential losses from loans and other credit securities originated in the United States to $2.2 trillion, up from $1.4 trillion last October. Over the next two years, the IMF estimated, United States and European banks would need at least $500 billion in new capital, a figure more conservative than those of many economists.

Still, these numbers are all based on estimates of the value of complex mortgage-backed securities in a very uncertain economy. "At this moment, the liabilities they have far exceed their assets," said Posen of the Peterson institute. "They are insolvent."

Yet, as Posen and other economists note, there are crucial issues of timing and market psychology that surround the discussion of bank solvency. If one assumes that current conditions reflect a temporary panic, then the value of the banks' distressed assets could well recover over time. If not, many banks may be permanently impaired.

"We won't know what the losses are on these mortgage-backed securities, and we won't until the housing market stabilizes," said Richard Portes, an economist at the London Business School.

Raghuram Rajan, a professor of finance and an economist at the University of Chicago graduate business school, draws the distinction between "liquidation values" and those of calmer times, or "going concern values." In a troubled time for banks, Rajan said, analysts are constantly scrutinizing current and potential losses at the banks, but that is not the norm.

"If they had to sell these securities today, the losses would be far beyond their capital at this point," he said. "But if the prices of these assets will recover over the next year or so, if they don't have to sell at distress prices, the banks could have a new lease on life by giving them some time."

That sort of breathing room is known as regulatory forbearance, essentially a bet by regulators that time will help heal banking troubles. It has worked before.

In the 1980s, during the height of the Latin American debt crisis, the total risk to the nine money-center banks in New York was estimated at more than three times the capital of those banks. The regulators, analysts say, did not force the banks to value those loans at the fire-sale prices of the moment, helping to avert a disaster in the banking system.

In the current crisis, experts warn, banks need to get rid of bad assets quickly. The Treasury's public-private investment fund is an effort to do that.

But many economists and other finance experts say that the government may soon have to move in and take on troubled assets itself to resolve the credit crisis. Then, they say, the government could have the patience to wait for the economy to improve.

Initially, that would put more taxpayer money on the line, but in the end it might reduce overall losses. That is what happened during the savings and loan crisis, when the troubled assets, mostly real estate, were seized by the Resolution Trust Corporation, a government-owned asset management company, and sold over a few years.

The eventual losses, an estimated $130 billion, were far less than if the hotels, office buildings and residential developments had been sold immediately.

"The taxpayer money would be used to acquire assets, and behind most of those securities are mortgages, houses, and we know they are not worthless," Portes said.

Eric Dash contributed reporting.

Monday, January 26, 2009

Fixing the Economy Now

This item describes the structural nature of the next and final wave of the credit disaster. I would like to say something that was reassuring, but how? Low interest rates will salvage some of this paper. But even if a lot is salvaged, a lot will not be salvaged. And it certainly cannot be rescued by further foreclosure sales. The resale market has totally failed and prices now are mostly underwater.

If foreclosure is impossible and millions of Americans will be deemed bankrupts, how do we imagine that the economy will rebound? We are losing a real percentage of the middle class consumer in the next wave. This is about millions of families. This will result in a substantial reduction in US tax revenue. All because our politicians could not resist the idea that they could gamble on the nations future by throwing of the governors of the credit system. Do not blame the brokers or the banks. They already proved that they were drunken sailors back in the great depression. We have actually had a repeat of the roaring twenties.

Throwing money at the problem is not restoring personal credit or inflating the price of homes back to where the owners become whole. All it is doing is replacing the money lost on the bad loans already made. This is not inflationary because we have already absorbed all that red hot cash – ask China.

We must restore personal credit and turn all the housing stock back into earning assets for the lenders. If we could do that at a stroke of a pen, the economy would be on a roll tomorrow morning.

I have already posted on the how in an earlier article, but it is timely to do so again. Maybe this can be circulated to politicians and other opinion makers who might be able to do some good with it.

Firstly, I spent two decades working in my own private market laboratory known then as the Vancouver Stock Exchange. I understand and know what happens from hands on experience. There is nothing harder to recover from and repair than a credit bubble of any kind but it can be done. All aspects of that laboratory passed through my hands sooner or later.

Our only way forward is to acknowledge that these losses are real and may never be recovered. We have to recover the customers first because their recovery and success will rebuild the whole credit business and from there our business.

All the losses stem from the housing credit bubble. Solve that, and the rest will in time sort itself out. If we do not solve that then the automobile industry becomes a money vacuum for years as everyone scrambles after a slice of a shrinking market. This will be known as a second great depression.

We start by setting a date such as the beginning of this presidential term as the mark to market date. We use a date in the past because it prevents nimble manipulation by anyone. We have had enough of that already.

We pass legislation that provides for a new rule kit for mortgage foreclosure from that date. We establish a rule, that if a property falls into default, the property is appraised as of the mark to market date. Once the emergency is over, this will be set at some other date such as year end.

That figure is used to complete the following transaction. Fifty percent of the title in the property is transferred to the lender in exchange for the write down he is about to incur. The original mortgage is replaced by a mortgage on the basis of eighty percent of mark to market price of the fifty percent held by the borrower.

As an example, a property carrying a $400,000 mortgage in foreclosure and presently appraised at $$250,000 gives up fifty percent of the ownership to the lender and the new mortgage is based on $125,000 and is $100,000. The lender immediately writes down $300,000 in exchange for an asset presently appraised at $125,000. The mortgage is a ten years mortgage at current rates, renewable every five years.

This is likely a worse case scenario, or at least should be. The borrower is paying off a mortgage that he should be able to afford. During the next few years, he will also easily clean up his credit and possibly pay off the mortgage.

When he pays off the mortgage, he then has the right to purchase the remaining fifty percent from the borrower at normal terms. He has been and continues to be a good bank customer.

How has the bank fared? The situation was taking a $200,000 loss if the property could even be sold. If everyone was also selling, then the price could easily decline to $100.000 to $150.000 leaving the bank with a fully realized loss of $250,000.

In our scenario, the bank writes off $300,000 now but retains an interest worth $125,000 for a realized loss of $175,000. However, they retain a customer holding a high quality mortgage in terms of income coverage and asset coverage. In ten years this mortgage is paid off.

Now the bank sells the fifty percent that it retains back to the borrower at current market price. Their customer owns fifty percent clear. He easily qualifies for a new mortgage and completes the purchase and the bank has another high quality earning asset.

Suppose the price has recovered from $250,000 to $350,000. That fifty percent is worth $175.000. That is the new mortgage supported by the entire property. In other words at the end of ten years the bank has recovered $275,000 while earning some income. The capital loss is still $125,000 but the this has been offset in part at least with good quality mortgage interest from a customer whose ability to borrow is improving every year.

This formula can also be used to sell off the entire present inventory as well. This means that in as little as twelve months the housing market runs out of supply. It can be that quick.

It is all financeable with cheap government financing which is what we are doing anyway, but not nearly as effectively.

This new rule applied in the normal course of business once this crisis settles down, will be quickly integrated into normal bank lending practice and properly priced. You can see that the loss is reduced for any defaulting mortgage and that the customer survives to fight another day. Please note that in a stable market, giving up half of your ownership is a loss to the owner and a gain to the bank.

It will require a change in banking rules to allow such equity to contribute to the bank’s capital base properly. This is the one case that will be hard for the banks to cook the books on, so it will be safe to allow.


The Second Half of the Credit Crisis

By Ian Cooper Saturday, January 24th, 2009

Could it be we've just entered the second half of the credit crisis?

Just as 2008 was the year of subprime woes, this one will go down as the year of Option ARM resets (or adjustable rate mortgage resets). With billions in Option ARMs resets in 2009 and 2010, this crisis is about to unleash a fury no one's prepared for.

It won't be as bad as subprime, of course. It'll be worse.

That's because lenders created these ARMs with "teaser" features to borrowers, which included making lower minimal payments for the first few years before the loan reset to a higher payment schedule. And if that weren't bad enough, there's another feature called "negative amortization," which means you're not paying back any principal.

In fact, with negative amortization loans, your loan balance increases over time. Incredulously, every time you make a payment, you owe the bank even more. These are the loans that allow consumers to buy a house they can't otherwise afford.

As for speculators, they may use negative amortization loans if they believe prices will increase at a fast pace. But with the opposite happening, they're out of luck.

And the banks will be left holding the bag.

So when your financial advisor tells you the financial crisis is well behind us, you'll know better.

Housing aside, despite repeated injections of taxpayer money, the financial system continues to teeter on the brink of disaster. And while hope abounds for Obama's new approach, described as a "fundamental reform of the $700 billion rescue plan," it may still require trillions more dollars, putting added pressure on our unstable economy.

And if you thought we were in bad shape... look no further than across the pond.

The UK, just like the U.S., consumed more than it could pay for in what's amounted to one massive liquidity bubble. The UK economy shrank 1.5% (vs. 1.2% estimates) in Q4, and the government announced it was in recession.

A House of Cards.

It was in February 2008 that British consumers owed $2.7 trillion on credit cards... when debt per capita was at a higher level even than for U.S. households... when British household debt stood at 164% of disposable income, as compared to 138% in the U.S... and when research suggested that one in four people were either struggling with debt or felt their debt was unmanageable.

Here in America, we're still wondering how it is that no one sounded the bell. Will we actually learn from our mistakes?

As the "sage of Baltimore" H.L. Mencken once said... "... the common people know what they want, and deserve to get it good and hard."

Thursday, December 11, 2008

Current Markets

It has been said by others, but the massive contraction of credit and concomitant equity is generating one of those brief eras of wealth creation that come along every generation or so. The good news is that this period of assemblage will last a good five years as good assets are marked down enough to attract shrewd buyers.

It is even a good time to buy a house and if you like been a landlord to buy a second property. If you are sophisticated you can do much better than that, but if you have just arrived on the last pumpkin truck, you too will live to be a winner. The inventory is out there looking for a home, and the folks who need to sell are desperate or certainly no longer delusional as to value. The next three years will see the banks sort out their mortgage portfolios and their strong reentry into mortgage lending If you have a smell of equity they will need you.

The stock market is also sorting itself out and this credit contraction is smashing up balance sheets around the globe. It will take a full year for the damage to be recognized and fully reported. This opens the door for selective buys were value investing precepts hold up and the prices are depressed enough. You will not go far wrong in following Buffet if you lack ideas of your own.

Avoid mutual funds for now because redemptions are forcing the sale of the good and down grading the longer term potential of these portfolios. They lack the freedom of a closed fund that Buffet has. The hedge funds are typically in even worse position.

There will also be incipient winners out there that good research will flush out. There is always a place for a punt on an incipient ten bagger, and there will be a lot of good ones out there making money today.

Thursday, November 27, 2008

Aube Balten on Interest rates

For those who like their financial news grim, I am serving up a further dose of Aubie Baltin. He is worth supporting, if only to prevent one from ever getting too exuberant.

He is quite right about the direct consequences of low interest rates on the global financial system. It has promoted reckless lending simply because it gave the lenders no other choice other than exiting the business. This way they postponed it for about five years and now they are all gone. I remember wondering where the portfolio managers were getting their returns from with interest rates so low. We now know it was from thin air and based on the unreasonable proposition that a third of the population was going to double their incomes in a couple of years.

My own experience has informed me that when everything is working fine, bright young rookies are allowed free rein because they simply do not understand the limits. These guys go full out producing crummier and crummier product. They barely know better. And once the genie is out of the bottle, only a market downswing can end it, usually by busting the tyros.

The banks need to start lending and to accept that they must now charge their best clients perhaps six percent while forgetting about apparent unlimited access to cheap money. They need the real income because their real cost of money is no longer tied strictly to the nominal interest rate. It is tied to a ballooning loss rate that is certainly no longer 0.5% but likely closer to 3%. That means that even at zero interest for money that their cost of money is too high. Therefore, if they project a 3% loss ratio on their portfolios and place the funds at 6% they will be fine. At the portfolios improve, this cost structure will return to historic levels fairly quickly.

The mismanagement of the mortgage portfolio is already under control, except that they have yet to restructure the loans as per my suggestions. The overhang is so large that the underling real estate will continue to sink in value putting all mortgages underwater. The price drop in the USA was an astounding 20% this past quarter. This process is the equivalent of approaching every mortgage holder and effectively demanding immediate repayment.

We must set a mark to market day against which all mortgages can be automatically be restructured by the lenders.

Otherwise we will go to a price structure that taps only folks able to pay mostly cash.

The truth is that this is all pretty depressing to dwell on since ye and thee can do naught.

This crisis or collapse of confidence has exposed all the weak sisters for what they are and they will now be either fixed or rooted out. It is difficult and will require time.

Two things are happening or need to happen.

First of and well underway, the financial industry has had its capital replaced to make up present losses and thus permitting them to stay in the business of trying to fix their portfolios. All this money has already been lost into the economy over the past five years and cannot be recovered. It prevents fire sale liquidation of the banking industry as occurred in the, and was the real cause of the Great Depression. It is one thing for half the financial system to disappear into thin air, it is quite another for half the real economy to disappear as a direct result.

Second and not yet beginning we need a massive encouragement of investment in the energy business with guarantees and related contracts. This should include a massive switch over to electric cars ASAP. These will all repatriate cash flow into the domestic energy business. The Middle East needs to be put on notice that we are withdrawing from the oil business permanently.

If this were all happening, the USA balance of payments would quickly right itself and we would enter rapid growth. But as Aubie Balten laments, who is listening?



Dec 1st Issue

UNCOMMON COMMON SENSE
For People Who Think


THE PERILS OF PAULINE

THE DANGER AND PITFALLS OF LOW INTEREST RATES
The world, as well as all the experts, are witnessing in utter shock and disbelief the potential break down of the world’s financial system. They still can’t figure out why this is happening and therefore do not know what they should or could do about it.

UNINTENDED CONSEQUENCES are the main reason why free markets work and managed markets (Socialism) must eventually break down; nobody ever even thinks about the potential seemingly unrelated unintended consequences. Even if there were a few smart people who do think about such things, it is impossible to conjure up all the possible permutations and combinations that over time only a Free Market can factor in while giving the exact right amount of weight to each factor and come up with the exact right price and solutions.

ARTIFICALLY LOW (ZERO) INTEREST RATES

That’s enough of generalities; the main topic is ZERO interest rates and the unintended consequences of the FED maintaining artificially LOW interest rates. On numerous occasions, I have pointed out and explained the functions of interest rates, such as determining the marginal propensity to consume vs. save. and the most efficient allocation of scarce savings among investment projects. But theses are well known factors even though they have been ignored and are the main causes behind the business cycle.

LEVERAGE has become the main unintended consequence of artificially low interest rates. With a real inflation rate of 3% and yield spread of only 2%, it is impossible for Banks to make money and therefore no lending will take place unless a way could be found to increase the rate of return on their capital: Low and behold, LEVERAGE was discovered. If you could leverage your capital at 10 to 1, a 1% profit becomes a 10% profit. At 40 to 1, 1% becomes 40% and at a 100 to 1 you double your money every year. Not to bad, AY? But alas, there is a catch; leverage is a two edged sword. A 1% loss on a 100 to 1 leverage wipes out your capital completely. Among the first highly leveraged deals was the carry trade; buying US Treasuries with borrowed Yen. And what a deal that turned out to be. Initially, not only did they make money on the interest rate spread but they made even more as the Dollar began increasing 5% to 8% a year against the Yen. This gave rise to the Hedge Fund Industry as they convinced everyone how smart they were. Of course they did not warn anyone about the risks involved or of the possibility that the Yen would reverse and go up against all currencies. Therefore the only safe thing to do was to move the business offshore, limiting the investors to exempt investors and institutions: Low and behold, no Government rules or oversight and no SEC approved audited prospectus requirement: After all, exempt individuals and institutions are supposed to be smart enough to protect themselves, right? Too bad they had to ignore all the little suckers but never mind, there were enough rich suckers with a lot more money to go around. What they never expected was that after a few years of 40%+ returns, the biggest suckers of all, the major Pension and Endowment Funds, after 10 years of no gain in stocks, would jump into the quicksand with both feet.. PARADISE FOUND.

There is always an element of self preservation at work at all times and now that they had found a license to print money, they looked for a way to both increase their leverage and more importantly, protect themselves against risks. Low and behold, Credit Default Swaps (CDS) and other insurance derivatives against other types of risks (interest rates, currency, etc.) were invented, which allowed leverage to be increased to unimagined levels. But it didn’t stop there. Whatever the Market was looking for Wall St. created. The one thing Pension, Insurance and other big Investors were looking for was AAA Bonds that paid a high enough rate of return (since Treasuries were no longer paying enough) to allow them to stay in business without taking undue risk. Sure enough, the experts on Wall St. provided that using sub-prime mortgages packaged and repackaged using CDS’S as they coerced the credit rating agencies into give them AAA ratings on junk sub-prime MBS’S and they were snapped up like crazy. The real professionals knew that the stock market was way overpriced and all they wanted was a reasonable 5% to 7% return on AAA no risk Bonds. Ask and you shall receive. Wall St. couldn’t package them fast enough. But they should have known better because any time you are offered something that is too good to be true, it usually is not true, especially not in the volumes that were involved. They were making so much money that Wall St. began to believe their own B.S. and so when Yen started to appreciate and the carry trade was no longer so hot they loaded up on their own junk. After all they had to put their ill gotten gains somewhere. Everything was going fine as long as the real estate market, the ultimate insurer, that was backing all this pie in the sky, was appreciating at a compound annual rate of 15% to 25% plus. But alas, all good things must come to an end as reality eventually sets in and all bubbles and Ponzi schemes must also eventually blow-up.

We are now living through and witnessing what happens when government interferes with the free markets and no matter how good the intentions, their inability to identify all of the unintended consequences of artificially low interest rates, came back to bite us all in the neck.

WONDER OF WONDERS

It is hard for me to understand why Economists (left & Right) still want to continue doing what got them into trouble in the first place. Hasn’t the last 20 years of Japan’s, zero interest rate, recession, taught them anything?

As far back as 2004, I began writing essay after essay, trying to explain what the functions of interest rates are and how they worked, but nobody was listening and nobody took any interest. In letter after letter there was often a paragraph that pointed out the perils of excessively low interest rates. What about the savers I screamed as the nation’s saving rate dropped from a high of 15% to zero and then -1%? What about the retired seniors who had their life savings in12% and 15% CD’S and Treasuries that were now maturing and could only be replaced with 3% or 4% CD”S - how will they be able to pay their bills?. Let them buy Stock Mutual Funds that have returned an average of 8% over the last 75 years (the BIG lie). Besides, what are they complaining about? We just gave them free prescription drugs didn’t we? But who cared, the party was a blast and the champagne (money) was flowing like water. Besides, who wants to listen to a kill-joy when you’re having fun? Unfortunately, even the best of parties must come to an end as the sun always rises and every party must be paid for by someone. The bigger the party, the bigger the bill. This party was so big that the whole world will end up paying a far higher price than anyone could possibly have imagined. (say unintended consequences?)

If history is any guide, World War III is near at hand. GOD I hope I’m wrong this time.

GOLD

They've been dumping Gold for a couple of reasons: 1) prices are falling; 2) credit lines are either being pulled back or completely taken away. 3) In many cases, investors have no choice but to liquidate their gold positions as they are their only positions that have a decent bid and or are their only positions in which they are still showing a profit. ( Great Idea; cut your profits short, so you can pay taxes on them, while letting your losses run; Is that how its supposed to go?)

During the heyday of the commodity bubble, I cautioned all investors that there would be a major supply response to continued high prices. The Laws of Supply and Demand may be asleep but they are not Dead.
What could keep Gold prices down?

You would really have to get back to a place where the economic, political and financial situations are no longer worrisome ... before you see people sell gold and jump back into stock and bonds. That's the only likely scenario for lower gold prices that I can come up with In the gold mining equity market or any other mining market, even Oil and Gas, you saw that the price of the equities were pushed much higher by the momentum players (hedge Funds) than what could be considered a reasonable value. Now, the prices of a lot of equities are far below what you could consider a reasonable value for the enterprise. The rules of the game never changes but they do masquerade in an attempt to fool the majority; the lazy and the gullible: It’s the way the world works, I guess.

WHERE TO NOW DOW?

If you can recall my Jan. 2008 article “GOLD AND A KONDRIETIFF WINTER” If you can’t then I strongly suggest you go back in to my archives and read it again. By the S & P breaking down below its 2002 Bear Market lows; we now have confirmation that we are in multi-generational Bear Market of Grand Super-cycle proportions. If it is to be only a Wave {IV} down, correcting Wave {III} of the Bull Market that began in the mid 1700’s as Prechter, Hughs and some other well know Elliott Wave Theoreticians, believe and not the fifth and final WAVE {5} then the good news is “The World is Not Coming To an End” The BAD NEWS is that we will most likely see significant NEW lows that will probably go much lower than Thursdays lows (maybe as low as DJII 4000) before this Bear Market is over. We have only seen the first wave (Wave A) of the Tsunami and the devastating second Wave (Wave C) is yet to come. Luckily things are not all bad and the good news is we are about to enter a period of relative calm, Wave B of the Forth Wave {which is usually an a,b,c,d,e, Diagonal Triangle; with the a wave being the longest} is often only a sideways type phase- to this three phase Bear market. This Grand Super-cycle wave {IV} down is correcting centuries of Bull Markets and it will seem fast, and furious. But time-wise, it may be relatively short compared to other Grand Super-cycle waves, but damage-wise, this Bear Market could change the world. The next 4 years and the election of 2012 could be the most important election since 1776 as it will determine whether we regress into the Demagoguery of Communism - Fascism or explode into a new era of FREEDOM.

HAS THE BOTTOM BEEN MADE?.
We are at or near the end of the first phase; Wave {A} down. That bottom is imminent. In fact it may have been made Thursday, November 20th, 2008, Or, it may need one more declining wave to complete this wave {A} down move from October 2007, a Super-cycle wave that has wiped out a decade of stock market gains, over 50 percent of the market's value, in just one year!

Wave {B} up which may have started Friday, November 21st, or will within a week or so ( I will be able to get a better picture once I am sure that the Wave {A} bottom has been made)

.WARNING DO NOT CHASE A 1000 POINT BOUNCE:

Wave {B} up is a gift. It is for short term Traders only use it to BUILD YOUR CASH POSITIONS AND GET OUT OF DEBT. It is like the eye of a level 5 hurricane. Your last chance to raise cash at higher prices. Because, once it completes, the devastating plunge will resume and take prices far lower than anyone - even Bears can - now imagine, wave C’s down behave like Wave 3’s, They are usually the longest and strongest of the waves and therefore Wave {B‘s} are the best time to accumulate GOLD.
The Industrials are down 2,204 points, or 22.8 percent since Election Day. The S&P 500 is down 266 points, or 26.5 percent since Election Day.

What bothers me is that Thursday did not see a DJII closing low below the Bear Market low of 2002. But since Friday closed 5 percent higher, I cannot rule out a bottom but I am still a bit hesitant in calling a bottom because (a) my Elliott wave Declining pattern does not look complete and (b) the 10 day average Advance/Decline Line Indicator actually got worse Friday for both the S&P 500 and for the NDX, on a day when prices rose 5 percent. That is odd for the start of a rally phase after such a strong sell-off - Call it a minor Bearish Divergence. (c) New Lows were also way too high again on Friday, (d) 47 percent of total issues traded on the NYSE were down. And Advances were only 63 percent of total issues traded. The start of major rally phases normally do better than that. We also did not get a 90 percent up day Friday, which is something I would like to see at the start of a major rally. And finally Friday was options expiration day which is usually a rally day, anyway: And last but far from least The rally according to all the media talking heads was tied to the big news that Obama is tapping the popular New York Fed's President to be the next Secretary of the Treasury in 2010, really?. Rallies on news often can't really be trusted, especially when the big new is really no news at all.

THANKSGIVING DAY SPECIAL
I am offering a Special two year subscription for only $339. The one year subscription is still a reasonable $199 until the end of the year at which time prices will increase to $269.00 and $469: Extend your subscription Now “PROCRASTINATION IS THE THIEF OF LIFE”

If you have been enjoying these letters and have found them to be useful please tell your friends

HAPPY THANKSGIVING GOOD LUCK AND GOD BLESS


UNCOMMON COMMON SENSE November 24, 2008
Aubie Baltin CFA, CTA, CFP, PhD.
2078 Bonisle Circle
Palm Beach Gardens FL. 33418
aubiebat@yahoo.com
561-840-9767

Please Note: This article is for education purposes only and is designed to help you make up your own mind, not for me to make it up for you. Only you know your own personal circumstances so only you can decide the best places to invest your money and the degree of risk that you are prepared to take. The Information on data included here has been gleaned from sources deemed to be reliable, but is not guaranteed by me. Nothing stated in here should be taken as a recommendation for you to buy or sell securities.

Tuesday, October 28, 2008

Home Ownership and Minimum Wage

Lending practices represent hundreds of years of bitter experience. Shifting them for political gain is now providing another bitter lesson and giving us the second great global financial panic.

The solution to the lack of growth in the housing market could never come from changing the lending rules. It has to come from a proper reorganization of the relationship between government and the labor market itself.

Let me spell this out. The labor market is a market that is currently structured with a deliberate built in inefficiency. A minimum wage is established by fiat that is arbitrary, but makes it impossible for a lot of useful activity to work around the edges and promotes the existence of a large cadre of idle workers who are in no position to support debt.

Grant that individuals who are limited by health or other issues cannot work and must become wards of the state.
Everyone else is available to do either light or heavy work at minimum wage with a premium provided for heavy work.

This work is provided by the state automatically the moment that an individual is laid off from other work. This is not work fare. It is temporary to even permanent work provided by the state at minimum wage to pursue goals understood to serve the common good. A classic example is tree planting and historically waste cleanup got a lot of attention. Once the government knew it was in the business of deploying temporary human capital, it could get very good at it.

Most importantly, the minimum wage is tied directly to the monthly cost of supporting the standard mortgage on say five hundred feet of living space per earner with the appropriate multipliers.

This makes every working person a qualified buyer of a home or condo and the linkage between this wage and measured cost of built space will make it hard for the system to become distorted. If housing prices drop then wages drop, attracting more buyers and more demand for the workers and the opposite is also true.

By linking this wage directly to the capital cost of space and thus directly to the real cost of producing that space, we have created a firm floor for both the housing industry and the labor market that should result in home ownership maximizing and producing a compensatory increase in tax revenue since everyone is either working or living off his savings.

Quite simply we make the customers good so that the banks can do what they do best. This may not sound like a scheme that is revenue neutral but I suspect that it can be fairly quickly once we learn how to properly deploy the temporary labour pool to proper economic effect.

It could turn out that many folks enjoy working on farm projects and that then permits farm operators to entertain value added enterprises that requires the availability of labour.

We will be surprised at what we want to do once labor is readily available for normally labor intensive tasks.
And you will be quite sure that a lot of high end employers will grab available talent just to take on projects that have lacked priority in the normal course of business once a system like this is set up and it will not be life or death to either party.

By establishing a real floor for the labor market, mobility will naturally improve, unwilling unemployment will disappear and an efficient job brokering system will also emerge.

And since everyone qualifies fairly quickly to have a mortgage, home ownership should approach ninety percent which is the objective.