Bank Bailouts
First a few words on the bank bailout bill, or more accurately the bank handout bill as that is what it really is. Morally and personally I, like most of my fellow Americans, am absolutely outraged as this crises was not only preventable but also aided and abetted by the government largely since 2000. However if we don’t recapitalize the banks they will fail in large numbers and as the experience with Lehman Brothers has shown the economic side effects of allowing that to happen is something that none of us wants-believe me. As for the rest, the majority of the proposals to come out of Washington over the last 8-years have proven poorly considered and this one is certainly no different. The proposal centers around buying asset backed securities (ABS), mostly mortgage backed bonds (MBS), at face value or par when in reality they are worth about half of face value. Though to be honest nobody really knows what they are actually worth. The SEC and other regulators have actually gone out of their way through the suspension of FASB (Federal Accounting Standards Board) Rule 157 which would have required mark to market pricing instead of mark to model pricing and actively encouraging the use of mark to model pricing of late directly to the finance sector. How they figure this aides market confidence I’ll never know and it is exactly shenanigans like this that were instrumental in precipitating the current crises, the recent sale of Wachovia for roughly 15 billion to Wells Fargo when the bank had a book value of 75 billion being just the latest example. Further the bill allows the executives to keep most of their pay and bonus packages and rewards them not only for their ineptitude but also in many cases their criminal behavior as well. If that wasn’t bad enough there is no ownership interest taken by the Fed in the institutions asking for help, though this seems to be shifting with talk of late about equity stakes, so perhaps we as taxpayers have some hope of getting a percentage of the funds back one day, though I won’t be holding my breath on that one. There is little oversight or accountability on this bill as well so it is doubtful that we will ever really know how the money was ultimately spent. True to form the Senate managed to tack on some 120 billion in extra pork-barrel spending to this bill bringing it’s total cost to 820 odd billion, that’s on top of the 200-300 billion for Fannie Mae and Freddie Mac, 85 billion for AIG and god knows how much more and for whom else by the time this is all over.
Financial Crises and Fear
With the US financial crises rapidly morphing into a global one the rush for central bank financed bailouts and guarantees is growing ever popular by the day. Here at home the Volatility Index, sometimes called the fear index hit an intra-day high of 74.46 on October 10, to put that in perspective it is 29.38 points or 39.5% higher than the record of 45.08 set during the depths, of the dot-com meltdown. With credit becoming ever tighter the inflationary pressures of the last 12 months are going south in a hurry along with commodities prices themselves following the sharp declines witnessed over the summer. In fact even the mainstream media is beginning to mention the possibility of deflation of late. All of which more or less follows the expected script.
Inflation?
Despite calls of hyper-inflation from the metals crowd triggered by the Fed’s liquidity pumping through the various credit facilities, it should be noted that swapping Treasuries for other assets in an attempt to re capitalize the banks is just that, a swap, not the creation of shiny new credit. According to a study by Paul Kasriel of the Northern Trust commercial bank lending fell by the most since 1973 during the 13-weeks ended June 18th, dropping 9.14%. Additional data compiled by Lombard Street Research shows that the re-constituted M-3 or broad money supply growth rate has fallen from 19% to just 2.1% annualized in the May-July period a level below that of inflation, which means that the money supply actually shrank. While the pundits were fixated on the false flag of inflation the economy has tipped into recession, 3rd quarter GDP is almost certain to be negative based on consumer spending trends. A combination of falling employment, we’ve had 9 consecutive months of job losses. A lack of credit and near record levels of debt everywhere you look and the outlook is sadly far from pretty.
Alt-A Loan’s?
Meanwhile the second wave of the mortgage debacle continues to draw closer though you would never guess from listening to the news as they almost universally insist that real estate will begin to recover late next year. The only material change is that the Alt-A reset wave has gone from a triangle shape to a rectangle shape due to the reset provisions triggered by real estate depreciation that is forcing the loan resets to occur sooner compliments of the mortgage exceeding the value of the property by 10-25% depending on the particulars of the contract. A study done by Barclay’s Capital found that up to 45% of the Option ARM Loans issued in 2006-2007 could end up in default. UBS AG estimated that the 2006 vintage ARM’s would experience default rates as high as 48%, a figure slightly higher than its sub-prime default estimate. Fitch’s Ratings conducted their own study and concluded 100 billion in option ARM’s, a subset of the Alt-A universe, would reset in the next 2-years, 29 billion next year and 67 billion in 2010. Some other details of the Fitch study, about ½ or 53 billion would reset early due to home price depreciation triggering negative amortization caps. The study also concluded that the average payment would increase 63% or $1,053 per month. Adding insult to injury will be less employment, the LIBOR (London Inter Bank Offered Rate) spread has blown out to a record 4+%, significant as many an Alt-A loan’s interest rate is benchmarked of this index. Meaning higher rates and payments for mortgage holders despite falling interest rates should the spread hold, incidentally the spread is a reflection of credit market turmoil.
I try to avoid discussion’s of a political nature but having come across the following quote on Barry Ritholtz’s fine blog The Big Picture, I’ll leave you with the following in light of all the various Fed handouts, bailouts and financial institution nationalization popularized of late…
“The Bush administration, which took office as social conservatives, is now leaving as conservative socialists.”
-Allan Mendelowitz
Hi and welcome to The Profit Motive, I’m your host Caleb Lawrence. Once upon a time in America the media acted as the watchdog of the corporations and the state. In the modern era it’s all about ratings and profits, opinion has been substituted for news and frequently is presented as fact. Much like my daily radio show on KPIG 107.5 FM in Santa Cruz California and KPYG FM 94.9 Cayucos/San Luis Obispo California. A thousand Blogs were able to spot the current problems and many began discussing it years before it reached crises proportions. While there were exceptions, and these exceptions are becoming more common, the mainstream media failed to get it and largely continue to do so.
