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"Never believe anything until it has been officially denied."
 - Otto Von Bismark

 Otto may have been one of history's great bastards, but he was also a Machiavellian genius when it came to modern politics.
 For instance, on March 10, Bear Stearns denied rumors that they were having a liquidity problem. On March 15, Bear Stearns was effectively bankrupt.
 On February 7, 2002, WorldCom denied rumors that it was about to go bankrupt. On July 19, WorldCom went bankrupt.

 This pattern gets repeated almost every single year like clockwork. Which is why the news today is more worrying than normal.

 The chairperson of the FDIC was all over the news today reassuring us poor, uneducated saps that the banking system was nothing to worry about.

"There will be more bank failures, but nothing compared with previous cycles, such as the savings-and-loans days," Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., said in an interview.

 That may be comforting news if the FDIC didn't have such a horrible track record at predicting market trends. For instance, this blog pulled up an old FDIC report from late 2004 in which they basically encouraged borrowers to extract every last cent of their equity from their homes through home equity loans. What makes this particularly notable is that negative equity is the leading cause of foreclosures in America today, and the FDIC recognized this risk in the report and yet still encouraged the practice.

 At the very last minute, a taxpayer bailout of HELOCs was added to the housing bailout bill which just got approved by Congress. In other words, a bailout for the banks who lent to people who used their homes like an ATM. More on that below.

 But let's not stop there. There are plenty more examples.

  1. Paulson appears on Face the Nation and says "Our banking system is a safe and a sound one." If the banking system were sound, everyone would know it (or at least believe it). There'd be no need to say it.
  1. Paulson asked for "Congressional authority to buy unlimited stakes in and lend to Fannie Mae (FNM) and Freddie Mac (FRE)" just days after saying "Financial institutions must be allowed to fail."
  1. Former Fed Governor William Poole says Fannie Mae and Freddie Mac losses make them insolvent.
  1. The Fed has implemented an alphabet soup of pawnshop lending facilities, whereby the Fed accepts garbage as collateral in exchange for Treasury bonds. Those new Fed lending facilities are called the Term Auction Facility (TAF), the Term Security Lending Facility (TSLF), and the Primary Dealer Credit Facility (PDCF).
  1. Bank of America agreed to take over Countywide Financial and twice insisted that Countrywide will add profits. Inquiring minds ask: "How the hell can Countrywide add to Bank of America earnings?" Here's how: Bank of America just announced it won't guarantee $38.1 billion in Countrywide debt. Questions over "fraudulent conveyance" are now surfacing.
  1. Shares of Ambac (ABK) fell from $90 to $2.50. Shared of MBIA (MBI) fell from $70 to $5. Sadly, the top three rating agencies kept their rating on the pair at AAA nearly all the way down.
  1. Of the $6.84 Trillion in bank deposits, the total cash on hand at banks is a mere $273.7 Billion. Where's the rest of the loot? The answer is: In off-balance-sheet SIVs, imploding commercial real estate deals, Alt-A liar loans, Fannie Mae and Freddie Mac bonds, toggle bonds (where, amazingly, debt's paid back with more debt) and in all sorts of other silly (and arguably fraudulent) financial wizardry schemes that have bank and brokerage firms leveraged at 30 to 1 or more. Those loans can't be paid back.
  1. Washington Mutual (WM), another troubled bank, refused to honor Indymac cashier's checks.

 Washington Mutual is an interesting example. It was only yesterday that Washington Mutual lost $3.3 Billion. It's extremely interesting that WaMu initially refused to honor checks from a bank seized by the FDIC, supposedly with the full backing of the federal government. They later agreed to accept them, but only with an "extended hold period". Wells Fargo has also used a similar policy.
 That begs the question: if major banks don't trust the FDIC guarantee, why should you?

 But let's take this a step further. Recently WaMu announced "We have no plans to raise capital." On the surface that sounds like a good thing. But when you dig beneath the surface you find something else entirely.

 Three months ago, with Washington Mutual's shares at $13.15, a group of investors led by Forth Worth, Texas-based TPG agreed to buy $7 billion of stock at $8.75, a 33 percent discount.

As losses mount, a clause in the TPG agreement makes it more costly for WaMu to raise capital or be acquired. If WaMu is sold for less than $8.75 a share or is forced to raise more than $500 million in equity, it must compensate TPG for the difference, according to filings with the U.S. Securities and Exchange Commission.

"We don't know how their investment plays out, but we also don't know how this affects WaMu to the extent they need to raise more capital," said Steven Davidoff, law professor at Wayne State University Law School in Detroit. "They really can't raise equity."

 Consider a major bank that is losing billions of dollar and can't raise equity? The terms "rock" and "hard place" come to mind.

 WaMu isn't alone in this regard. Merrill Lynch also agreed to the same limitation on equity issues when they accepted capital from Temasek (the Singapore sovereign wealth fund)  earlier this year. Speaking of Merrill Lynch, they lost nearly $4.7 Billion this past quarter and nearly $19 Billion over the past year.
 Citigroup is in a similar situation with penalties for issuing new equities, but also suffering massive losses.
  Of course the big loser of the week is Wachovia, which lost nearly $9 Billion this past quarter.

  Remember when losing a few million dollars got people excited? Now people get excited when a company doesn't lose as many billions as expected. Someone is in denial, and that someone is on Wall Street.

 Why are these banks losing money hand over fist? The housing bust, of course. The problem is that the housing bust is far from over.

 Foreclosures may be "nearing a plateau," he said, but it could also mean that lenders are "swamped and can't handle processing any paperwork."

Sean O'Toole, founder of the data tracking firm ForeclosureRadar, thinks the leveling off may mean that defaults on subprime mortgages -- loans made to poorly qualified buyers -- are nearing a peak.

But the housing market still could face a new wave of defaults from other loans that will adjust to higher rates, including pay-option adjustable-rate mortgages and so-called Alt-A loans, which are a step between subprime and high-quality prime loans.

"Most resets on those products are still in front of us," O'Toole said.

UCLA economist Edward Leamer agreed that the default rate on Alt-A loans, a specialty of failed Pasadena lender IndyMac Bank, could be pivotal.

O'Toole said that even if foreclosures do level off, it probably will take years for the market to absorb all the homes that are being resold by lenders at steep discounts.

Credit quality is deteriorating everywhere according the latest Moody's report. Which brings us to the topic de jour - the taxpayer bailout of Fannie Mae and Freddie Mac.

 ``It sounds like the GSEs got what they wanted again,'' said Paul Miller, an analyst with Friedman Billings Ramsey & Co. in Arlington, Virginia. ``They got a big backstop and they got language that the Treasury doesn't necessarily have to stop them from paying dividends or cap compensation."

 Yep, the taxpayer is going to pick up the bill without any real reforms of these institutions at all. The Democratic Congress has stabbed us all in the back.
 How much will this bailout cost us? No one knows! This is a blank check because the numbers have been pulled out of thin air.

 The budget office, while acknowledging that the $25 billion was, at best, a rough estimate, did not explain fully how it came up with the figure. The office said it analyzed the companies’ financial statements and consulted with regulators, analysts, market participants and the companies themselves to estimate possible future losses and the amount of any cash injection that might be needed from the Treasury.

 Senator Jim DeMint, Republican of South Carolina, said lawmakers were generally supportive of the overall rescue plan, but he added that he had doubts about the $25 billion estimate. "Everyone knows it’s just a wild guess," Mr. DeMint said. "We are either going to spend zero or we’re going to spend a whole lot more than they are talking about."

 You better believe that the number isn't "zero", and the $25 Billion number only covers to the end of 2009.
  The fact that they raised the national debt limit by $800 Billion as a mandatory part in this same exact bill should give you a hint.

 The funniest part of this bailout bill is the fact that the FHA is supposed to take part. But the FHA is already losing billions of dollars from their previous bailout efforts.

 "Let me repeat: F.H.A. is solvent," Mr. Montgomery said on Monday in a speech at the National Press Club. "However, no insurance company can sustain that amount of additional costs year after year and still survive. Unless we take action to mitigate these losses, F.H.A. will soon either have to shut down or rely on appropriations to operate."

 We are looking at a bailout that has the potential of rivaling the costs of the Iraq War, but no one here seems to care. You should be outraged now, because you will be outraged eventually.

Originally posted to gjohnsit on Wed Jul 23, 2008 at 01:19 PM PDT.

Poll

What should Congress do?

24%35 votes
2%3 votes
16%24 votes
25%36 votes
10%15 votes
11%17 votes
9%13 votes

| 143 votes | Vote | Results

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Comment Preferences

  •  Great post (6+ / 0-)

    Wamu is not going to make it, it is only a matter of when not if. the banking bailout being passed today is an expensive bandaid, by the fall we will be looking at many more bank failures.

    My idea of an agreeable person is a person who agrees with me. Benjamin Disraeli

    by pvmuse on Wed Jul 23, 2008 at 01:23:47 PM PDT

    •  So I should move to another bank? (2+ / 0-)
      Recommended by:
      Cliss, Ronald Singleterry

      And which one is reliable now?

      "Life is a tragedy for those who feel, a comedy for those who think" - Jean de la Bruyere

      by Tinuviel on Wed Jul 23, 2008 at 01:38:28 PM PDT

      [ Parent ]

      •  The only ones that haven't been in the news (4+ / 0-)
        Recommended by:
        jmart, Cliss, SciVo, Ronald Singleterry

        of late are ... US Bank and Wells Fargo.

        Personally, I don't trust most banks, though locally-owned banks, which are smaller, tend to be more consumer friendly.

        Check out credit unions; they are your best bet, other than your own personal safe.

        But the tongue can no man tame; it is an unruly evil, full of deadly poison. James 3:8

        by 99 Percent Pure on Wed Jul 23, 2008 at 01:50:42 PM PDT

        [ Parent ]

      •  Go to a local credit union if you can (3+ / 0-)
        Recommended by:
        jmart, SciVo, Ronald Singleterry

        My idea of an agreeable person is a person who agrees with me. Benjamin Disraeli

        by pvmuse on Wed Jul 23, 2008 at 02:01:56 PM PDT

        [ Parent ]

      •  The number of banks at risk of failing is very (2+ / 0-)
        Recommended by:
        Pluto, New Deal democrat

        small, due to FDIC.  Commercial banks have to keep much larger reserves than non-banks.  Probably 95% of them are sound, and if you have less than $100,000 of deposits in any one bank (there are actually loopholes that allow more if you also have retirement accounts at a bank) you have nothing to lose.

        What has hurt WaMu and the banks that have failed (IndyMac being the most notable) is that they have all their eggs in one basket, residential mortgages, and that basket has done poorly.  Even depositors with more than the FDIC insured amount at IndyMac were given an immediate 50% credit by the FDIC of the uninsured amount when the bank was taken over and are likely to get more in the long run.  The average amount uninsured held by the 10,000 customers in that situation at IndyMac was $100,000.

        Many local banks, FirstBank of Colorado, for example, that didn't engage in risky underwriting of residential mortgages when their competitors did, are now sitting pretty.

        Any bank with diversified investments is likewise unlikely to fail, although its stock may take a hit.

        Bear Sterns was an investment bank, not subject to FDIC regulation.  FreddieMac and FannieMae are likewise not commercial banks and by definition have 100% of their investments (or very nearly all of them) in the hard hit residential mortgage market.

        "Those who can make you believe absurdities can make you commit atrocities" -- Voltaire

        by ohwilleke on Wed Jul 23, 2008 at 03:56:50 PM PDT

        [ Parent ]

    •  So, what does that mean for my mortgage that is (0+ / 0-)

      being 'serviced' by WaMu??

  •  asdf (6+ / 0-)

    You are right.  The stock market has risen on assurances that there is no bank problems.  What is happening is they are keeping everything afloat to give all the executives and CEOs time to remove all of their money.  Then they will let the bottom drop out leaving all the saps that believed them holding the bag.  Happens all the time.

    If you are in DC see Man of La Mancha at the Church Street Theater opening 7/10/08

    by BDA in VA on Wed Jul 23, 2008 at 01:28:13 PM PDT

  •  Ummm... (6+ / 0-)

    That begs the question: if major banks don't trust the FDIC guarantee, why should you?

    Well, the guarantee says that everyone covered will get their money. It doesn't mean they'll get their money immediately; often it takes months or years to sort things out.

    •  There seems to be no time limit (1+ / 0-)
      Recommended by:
      jmart

      The rumors are FDIC has upto 99 years to pay out the insured deposits. However, this page at FDIC, while noting the rumor, does not disclose the time limit, or if there is indeed one.

      During times of universal deceit, telling the truth becomes a revolutionary act. - Orwell

      by MAORCA on Wed Jul 23, 2008 at 02:05:43 PM PDT

      [ Parent ]

      •  Where does the 99 year rumor come from? (0+ / 0-)

        The FDIC isn't even that old, and it has no cases even remotely that old.

        Simply to take an easy example, all of the Resolution Trust Corporation depositor cases (from the S&L crash, complicated because it was pre-FDIC involvement in S&Ls) were settled long ago.

        It isn't unusual for cases to be resolved in full in a matter of months, usually through a sale of the institution in full to another bank.

        "Those who can make you believe absurdities can make you commit atrocities" -- Voltaire

        by ohwilleke on Wed Jul 23, 2008 at 04:01:34 PM PDT

        [ Parent ]

    •  Major banks don't get the FDIC guarantee. (1+ / 0-)
      Recommended by:
      New Deal democrat

      Only depositors do.  So, of course, major banks don't trust it.  Insured depositors typically get access to their insured funds in days, and even uninsured deposits (i.e. amounts in excess of $100,000) are typically partially honored right away.

      "Those who can make you believe absurdities can make you commit atrocities" -- Voltaire

      by ohwilleke on Wed Jul 23, 2008 at 03:58:44 PM PDT

      [ Parent ]

  •  "The FHA is solvent" (8+ / 0-)

    Wow, to think that someone would have to repeat that.  It does make you wonder.

    This is starting to look like the run-up to the Great Depression.

    The sleep of reason brings forth monsters. --Goya

    by MadScientist on Wed Jul 23, 2008 at 01:29:55 PM PDT

  •  I care, and I've written (3+ / 0-)

    a half dozen diaries against the foreclosure bill.  Funny that I had the same poll on several of them, and by about 3-1 we liberal dems, oppose this.  And it was Our Guys who pushed this through.

    Good analysis, but one thing you missed.  The FDIC, or the taxpayers, make us partners in the downside of everybank, while the upside is the shareholders.

    So, banking is profitable because of the FDID and thier analogues at other institutions.  It is a fiction that this is paid for by fees.  If so, let them try to get a trillion dollars on the open market.

    So, those banks that weather this, will be back in business.  And I agree with everything you say about the moral hazard (an inadequate phrase if ever there was one) but as everyone is now saying, what is the option.

    We have build our house on this quicksand, and there is no choice but to perpetuate the moral corruption.
    As someone who was soon to lose his job as a TV weatherman once said, "If you are about to be raped, you may as well lie back and enjoy it"

    I voted for hanging the members of congress, but only if we do worse for A. Greenspan.  O.K. hang by their earlobes for a few hours is enough.

    •  My idea (4+ / 0-)

      So, those banks that weather this, will be back in business.  And I agree with everything you say about the moral hazard (an inadequate phrase if ever there was one) but as everyone is now saying, what is the option.

      It may be rough for awhile but I say let them fail. As long as everyone is convinced that preserving the wealth and status quo of the very same criminals that profit in these times, nothing ever changes.
      The American dream will ONLY be for those connected and insiders. Nobody will ever be able to make the upward move from one class to the next because the fix is in, the game is rigged .... the playing field is not level.
      They broke this by their own stupidity and greed and they should fail because of it ... not profit from it by having those who can least afford it bail their sorry asses out.  

      We don't neeed, no mor troubles - Bob Marley

      by joeshwingding on Wed Jul 23, 2008 at 02:02:58 PM PDT

      [ Parent ]

      •  JWD, the words, message and connotation... (2+ / 0-)

        are exactly what I have felt and written here many times.  But I have been beaten down.  I lost.  

        McCain for a while was being the hard nosed conservative.  No Bailout he said.  Then without a word of explanation he simple proposed a wider bailout than the Dems on April 15th.

        So little attention that the Editoral writer of my paper (circ. 300K) missed it for me to correct in a letter to the editor.

        The consequences of this bailout will do exactly what you say.  

        I can only address this by metaphor:

        The Titanic has hit the iceberg.  The captain is given a choice, that if half the passengers are thrown overboard, just maybe the ship can stay afloat.  

        Now, do they allow the crew that let the ship hit the ice stay alive, or do they capture them and their abettors and destroy them.

        Metaphor is imperfect, but not in degree of hobson's choice.

  •  Your poll needs another option (3+ / 0-)
    Recommended by:
    3goldens, AntKat, nzanne

    Bail out the Banks by guaranteeing deposits even above the 100K limit and then after the crisis has passed, prosecute the Bankers who got us into this mess, and create a truly independent regulatory system.

    I add this, not because I want to let bankers get off, but the fact is that we cannot allow the baking system to collapse, even if that means momentarily bailing out some bad characters.  We have to make sure that the system stays afloat and then clean up the problems afterwards.

    Non, je ne regrette rien

    by alexnovo on Wed Jul 23, 2008 at 01:41:35 PM PDT

  •  The problems in the (4+ / 0-)

    banking and financial services sectors are far worse than these folks will ever let on.

    The federal reserve is now saying that raising interest rates is far more important than low rates to support growth.

    When housing is tanking, real credit availability is negative and real savings of individuals is in the toilet and the fed is getting ready to increase rates tells us all we need to know.

    We are toast..

    •  except (2+ / 0-)
      Recommended by:
      Pluto, New Deal democrat

      I don't think the FED can raise rates. The FED is stuck.

      If they do raise rates the housing crises becomes a death spiral .... the feedback loops back on itself.

      We don't neeed, no mor troubles - Bob Marley

      by joeshwingding on Wed Jul 23, 2008 at 02:06:24 PM PDT

      [ Parent ]

      •  Note treasury rates since the GSE trouble (1+ / 0-)
        Recommended by:
        paul94611

        Treasury yields have climbed significantly. Thus off-setting any good news for the housing market from the GSE bailout.

        The forest precedes man, the desert follows him

        by gjohnsit on Wed Jul 23, 2008 at 02:18:16 PM PDT

        [ Parent ]

      •  The language is changing (3+ / 0-)
        Recommended by:
        Pluto, joeshwingding, SciVo

        I refer you to this article from a speech given today by Fed Governor Plosser as the Fed released its "Beige Book".

        http://www.bloomberg.com/...

        Thoughts?

        •  Read it this morning (4+ / 0-)

          And I think he is correct that to reign in inflation the FED needs to raise rates and strengthen the greenback.
          At the same time it is a well known fact that raising rates in a time of economic weekness will kill any growth and the economy.

          The problem remains the FED has baked this into the cake long ago under Greenspan.
          Bernanke got his job because of his stance on how he would have handled the Great Depression differently .... there's the playbook. Bankers/Economists think they are so much smarter these days.

          The problem comes that he brought the wrong playbook to the game. The Great Depression was a deflationary depression, this time we are most likely going to experience a inflationary depression, or even a hyper-inflationary depression

          We don't neeed, no mor troubles - Bob Marley

          by joeshwingding on Wed Jul 23, 2008 at 02:29:17 PM PDT

          [ Parent ]

          •  Inflationary in terms (3+ / 0-)
            Recommended by:
            Pluto, SciVo, Ronald Singleterry

            of commodities pricing.  Yep.

            Commodities peaked in 1921 and were in steady decline from then through the mid 1930's.
            Things are different this time, big time.
            We are and will continue to see asset deflation here in the US & the Euro zone while we see asset inflation in Africa & Asia.
            This is the key difference this time and why this banking/financial services conundrum is so different.

            •  As a matter for discussion (1+ / 0-)
              Recommended by:
              paul94611

              Paul... define "inflation" if you would please.

              We don't neeed, no mor troubles - Bob Marley

              by joeshwingding on Wed Jul 23, 2008 at 02:51:51 PM PDT

              [ Parent ]

              •  For the purposes (3+ / 0-)

                of this discussion the standard definition "an increase in prices compared to an index" I would like to add the following.

                1. Ensure that the effects of the inflationary/deflationary effects effecting the currency in which the price of commodities is measured.
                1. Ensure that the cost of real wages is not limited to the domestic rate.  I say this because so much of what we, and many others consume is manufactured in other countries which is a major change from the '73-'74, '78-'81 and of course the '29-'40.  Doing this would require an assessment of the effects of heightened inflation in the areas that manufacture the goods we consume
                1. The net change in retail credit availability during the current period of fed policy easing in comparison to other main era's of comparison and the spread of interest rates from the fed and lenders.  Last time I looked this has changed from a +12% per annum in January '07 to a + 3.5%-4% today in the basic sense and I have no idea as to these rates on a comparative basis.
                1.  The effects and number of consumer & business loans & lines of credit that are adjusted periodically based upon indexing to LIBOR or some other generally accepted index.

                I could go on, but in my non professional assessment any discussion concerning inflation/deflation in the current environment must consider these and other key areas that effect the "classic" view & calculation of these items.

                I hope I have provided clarity..

                Thoughts?  

                •  Well thought out, but .. (1+ / 0-)
                  Recommended by:
                  Pluto

                  I prefer

                  Austrian economists define inflation as the aggregate expansion of total money and credit. This definition has no mention of purchasing power or prices. The majority of economists define inflation as the rate of increase in the general level of prices of goods and services. So which definition is correct? Clearly, they are talking about two completely different things. The widely used inflation definition addresses increasing price levels only, which means the erosion of purchasing power. The Austrian definition concerns the expansion of the money supply.

                  Of course we are talking theory now. (disclaimer- I am not an economist... but it is interesting to debate)
                  #1. - I believe the price of commodities to be a symptom of too many dollars chasing to few goods. That would define increased prices.
                  #2. - Wage/price spiral is chasing increased costs in a basket of goods. If goods were held constant there would be no need for increased wage.
                  #3. - This would be true but you would have to consider the entire period of FED easing and not the latest slashing of interest rates. In 2002 Greenspan cut rates to 1% ... this act effected where we are at today. Benanke's cuts are only a reaction to what preceeded it.
                  #4. - Loose credit is part of inflation ..no doubt. It has the same effect as printing money.

                  Of course supply/demand plays a roll in commodity prices as well .... however, when demand rises prices will rise until supply is brought on line or demand wanes. Prices will stabilize at that point. Excess supply will effect prices negatively. Excess currency only increases prices.

                  Thoughts?

                  We don't neeed, no mor troubles - Bob Marley

                  by joeshwingding on Wed Jul 23, 2008 at 04:08:33 PM PDT

                  [ Parent ]

  •  Can we handle the truth about our economy? (6+ / 0-)

    We have become indebted to countries that may not have our nation's best interest in mind.

  •  I have my mortgage through a very small bank. (4+ / 0-)

    If it fails, will I be able to stop paying the mortgage and own the house?  Or will the FDIC have the paper on my home?

    I know this question is probably really dumb, but hey--I have never had more than a couple dimes to rub together, I know nothing about banking laws--but I am really, really good at what I actually do.  Too bad it is honest work and doesn't pay much . . . .

    To say my fate is not tied to your fate is like saying, "Your end of the boat is sinking."--Hugh Downs

    by Dar Nirron on Wed Jul 23, 2008 at 01:53:31 PM PDT

  •  Some comments ~ (7+ / 0-)

    First of all, kudos to "Dr." Gjohnsit for diagnosing the sickly patient months ago.  I recall reading with increasing horror the graphs, blood-chilling bar graphs and an assortment of diagnoses as the patient lay in the ICU ward.

    The situation has played itself out, in a sickening day-by-day growing crisis, just as was observed a long time ago.

    Now?
    I would say the reality is slowly seeping in to the average person's consciousness: "the banks are in trouble".  "They are all in trouble".  "In fact, they are probably insolvent" Every last one of them.

    It's a scary prospect because if anyone is hoping for some solutions, some minor shreds of hope, none is forthcoming.

    Take a look at Henry Paulson.  Watch him as he talks, look at the big beads of sweat on his forehead as he reassures everyone, "the banking industry is sound, it really is".  He knows, as well as every banker in the country, that maybe they should plan on folding SOONER rather than LATER while there is still some money to distribute.  There is no way the FDIC can liquidate all the banks that are going to fail.
    Henry Paulson ~ the Fox guarding the Hen House.
    Problem is, the chickens have all been eaten, and he's deciding what to do next. Paulson personally made $1,000,000,000 1 billion in the subprime mortgage market.  Personally.  You better believe he is looking for some safe havens for his money, and it ain't in good Ole Greenbacks.

    He's probably looking in Singapore, doubtful Swiss francs because UBS is teetering on the brink.
    It's tough Hank aint it?  When you're sitting on a melting Ice Berg there just aint no port in a storm.

  •  John, This Might Interest You... (9+ / 0-)

    Just happened today. A tad tangential:

    San Diego sues Bank of America over foreclosures

    SAN DIEGO (Reuters) - San Diego City Attorney Michael Aguirre said on Wednesday he had filed a lawsuit against Bank of America Corp (BAC.N) and its Countrywide unit to prevent the mortgage lenders from foreclosing on homes in his city, which he aims to make a "foreclosure sanctuary."

    Aguirre said he plans to file similar lawsuits against Washington Mutual Inc (WM.N), Wells Fargo & Co (WFC.N) and Wachovia Corp (WB.N) in an effort to make the lenders negotiate with mortgage borrowers facing foreclosure.

    "We would like to see San Diego become a foreclosure sanctuary," Aguirre said.

    "We haven't seen the lawsuit and can't comment," said Bank of America spokeswoman Shirley Norton.

    Pluto now orbits Overnight News Digest ʍou sʇıqɹo oʇnld

    by Pluto on Wed Jul 23, 2008 at 02:05:58 PM PDT

    •  Haha, what nonsense. (0+ / 0-)

      If this is actually happening, I might have to categorize it as the stupidest thing I've seen yet. San Diego is making a mockery of itself.

    •  Brilliant (2+ / 0-)
      Recommended by:
      gjohnsit, Pluto

      "We would like to see San Diego become a foreclosure sanctuary," Aguirre said.

      perhaps you should stick to practicing law and not play at understanding economics.

      We don't neeed, no mor troubles - Bob Marley

      by joeshwingding on Wed Jul 23, 2008 at 02:14:57 PM PDT

      [ Parent ]

      •  It Will be on the Evening News Tonight (4+ / 0-)

        Aguirre sets his sights on Countrywide

        1:43 p.m. July 23, 2008 -- San Diego City Attorney Mike Aguirre is taking on the lending industry, filing suit Wednesday against Countrywide Financial, which he accuses of engaging in unlawful and fraudulent predatory lending that victimized numerous San Diego home buyers.

        His suit, which follows similar litigation filed against Calabasas-based Countrywide last month by State Attorney General Jerry Brown, seeks to halt foreclosures that are tied to risky, adjustable-rate loans made by the lender. It also seeks civil penalties of $2,500 per violation against each of the named defendants.

        Also targeted in the suit is Bank of America, which recently purchased Countrywide.

        ....Aguirre said he hopes his suit will be a way to bring other lenders together to work out settlements with borrowers who are about to lose their homes or who already have been foreclosed on.

        "We are asking that any additional foreclosures be stopped and that the parties come together and work out a reasonable alternative based on the values of these properties today so we can stop the spread of this foreclosure disease," said Aguirre, flanked by Assemblywoman Lori Saldana, San Diego police officers and other members of his office. "We want San Diego to be a foreclosure sanctuary."

        While Aguirre said he also plans litigation against other lenders, including Washington Mutual, Wells Fargo and Wachovia Corp., he said his main goal is to resolve the issue of growing foreclosures "in an orderly way."

        http://www.signonsandiego.com/...

        Pluto now orbits Overnight News Digest ʍou sʇıqɹo oʇnld

        by Pluto on Wed Jul 23, 2008 at 02:22:14 PM PDT

        [ Parent ]

        •  By creating (3+ / 0-)
          Recommended by:
          Pluto, Cliss, Ronald Singleterry

          artificial elevated prices?

          Zimbabwe here we come ...

          We don't neeed, no mor troubles - Bob Marley

          by joeshwingding on Wed Jul 23, 2008 at 02:34:27 PM PDT

          [ Parent ]

          •  I Guess it Would Stop Property Value Loss (2+ / 0-)
            Recommended by:
            SciVo, Ronald Singleterry

            I imagine that the banks would have to ammortize the loans for a longer period (40 years), so that everyone gets their money (plus extra interest for the banks).

            Michael Aguirre took on Blackwater last month. He's pretty bold.

            San Diego appeals new Blackwater training facility

            July 3, 2008 -- The city of San Diego is appealing a judge's decision to allow military contractor Blackwater Worldwide to open a counterterrorism training facility along the Mexican border.

            In a brief filed Thursday with the 9th U.S. Circuit Court of Appeals, City Attorney Michael Aguirre (AG'-eer-ay) argues the city can demand a public review of the facility for Navy sailors, which includes an indoor firing range and a mock warship built out of cargo containers.

            Pluto now orbits Overnight News Digest ʍou sʇıqɹo oʇnld

            by Pluto on Wed Jul 23, 2008 at 02:45:12 PM PDT

            [ Parent ]

            •  It may ... for a time (0+ / 0-)

              but at the same time it would literally freeze the real estate market.
              Think about it. Prices frozen at elevated levels? Who would be able to buy? Even an entry level houe would be out of reach. Not to mention those homeowners that got their mortgage values frozen .... how would they be able to sell and move up ... etc., etc.

              The real estate market would seize up and create a worse problem than there is now.

              No, I'm afraid that all the bad debt needs to be washed out. Which means that the housing has to come back in line with what the average salary can afford. Anybody that converts to a 40 year mortgage not only has been screwed once, but gets screwed twice.

              We don't neeed, no mor troubles - Bob Marley

              by joeshwingding on Wed Jul 23, 2008 at 02:58:02 PM PDT

              [ Parent ]

              •  A Freeze is Preferable... (0+ / 0-)

                ...to the cascading collapse of schools, city services, small busnesses, social services, and widespread of property neglect.

                Pluto now orbits Overnight News Digest ʍou sʇıqɹo oʇnld

                by Pluto on Wed Jul 23, 2008 at 03:00:25 PM PDT

                [ Parent ]

                •  disagree (2+ / 0-)
                  Recommended by:
                  gjohnsit, Pluto

                  you're still my hero Pluto and we have agreed on many issues. Including economic.

                  Living within ones means if preferable ... you know like the average person has to. A freeze is not, it is a temporary fix that will would require ever increasing bailouts and will eventually fail anyway.

                  How could you ask a 20 something to pay an inflated house price and now you have to live there until you retire. What will the neighborhood look like in that amount of time? How will the economy have changed?
                  People purchased houses farther out because in town was too expensive. Now you're saddled with a 40 year mortgage that you can't sell ... gas prices are $5, $6, $9 gallon and you are commuting 40 miles to work. Hmmmm.

                  How is that freeze looking now?

                  We don't neeed, no mor troubles - Bob Marley

                  by joeshwingding on Wed Jul 23, 2008 at 03:08:55 PM PDT

                  [ Parent ]

                  •  All Good Points. (0+ / 0-)

                    I imagine the forclosure freeze would go on for a year or two, until the markets recovered.

                    (THis has only to do with banks, not with the market.)

                    The alternative unnecessarily destroys neighborhoods and people's lives.)

                    Plus, anyone can sell a home anytime they want. All they have to do is sell it for what the market will bear.

                    Or they can buy a home at the market price, as well. Nothing else changes except for the quality of a city without vacant houses and homeless families.

                    It's about forcing banks to extend loans a bit longer, which reduces the size of the payments and prevents foreclosure. The bank still gets all their money back. (Plus extra interest.)

                    Again, this does not affect the rest of the real estate market.

                    Pluto now orbits Overnight News Digest ʍou sʇıqɹo oʇnld

                    by Pluto on Wed Jul 23, 2008 at 03:19:56 PM PDT

                    [ Parent ]

                    •  Except ... (1+ / 0-)
                      Recommended by:
                      Pluto

                      Plus, anyone can sell a home anytime they want. All they have to do is sell it for what the market will bear.

                      Under your scenario prices have been artificially frozen at elevated rates. If they sold it for that price ....great. Except salaries have not kept up with housing prices ... who do they sell to? And if they sell at market rate do they take that excess debt with them? Who absorbs that loss?

                      Also, it should be noted that foreclosure does not necessarily mean homeless. Jobless may lead to homeless ... foreclosure means you go rent somewhere.  

                      We don't neeed, no mor troubles - Bob Marley

                      by joeshwingding on Wed Jul 23, 2008 at 03:30:17 PM PDT

                      [ Parent ]

                      •  Joe, I think we're talking about... (1+ / 0-)
                        Recommended by:
                        joeshwingding

                        ...two different things.

                        Real estate prices will continue to drop in San Diego exactly as they are. And people will continue to lose equity. And continue to occupy this homes.

                        This only refers to the few people who want to stay in their homes but, when the loans reset, they couldn't afford the new payments.

                        They are still free to walk away and the bank is free to foreclose.

                        But, if they want to stay, it forces the bank to negotiate with them -- and perhaps extend the length of their loans, to reduce the payments. No one is getting away with anything at all. The bank makes more money. The homeowner stays in their home. The banks don't need bailouts. The banks don't lose money on foreclosures.

                        It does not affect the rest of the plunging real estate market.

                        Pluto now orbits Overnight News Digest ʍou sʇıqɹo oʇnld

                        by Pluto on Wed Jul 23, 2008 at 03:36:34 PM PDT

                        [ Parent ]

                        •  Fair enough Pluto (1+ / 0-)
                          Recommended by:
                          Pluto

                          Consider though ... the family that bought the over priced house. (been hosed part 1).
                          Renegotiated home loan to 40 - 50 year mortgage. Payments affordable, but asset is still depreciating (been hosed part 2).

                          Banks like it, but where is the incentive to the borrower to accept those terms? You don't have to make money on the house other than paying it off .... but if you are upside down $100K - $200K ... paying off the mortgage doesn't put you in the black.

                          We don't neeed, no mor troubles - Bob Marley

                          by joeshwingding on Wed Jul 23, 2008 at 03:47:48 PM PDT

                          [ Parent ]

                        •  The Day the Deflation died (4+ / 0-)
                          Recommended by:
                          Pluto, joeshwingding, Cliss, xaxado

                          This is a really good discussion, but I think the taxpayer bailout is now a given.

                           The silver-lining is that my investment strategy is now clear - short the dollar long-term.
                            We have full-scale monetization of bad debt now. For the moment it is being put on the taxpayer's account, but that won't last very long because the taxpayer has no savings and no income.
                            Therefore the next step is for the Fed to start ramping up the printing presses and monetizing bad debt on a massive scale. Even before this happens the dollar is toast.
                            After it happens the dollar is worthless. How long will our foreign creditors go on before they finally kick the dollar to the curb? The only thing that has kept them from doing it so far is a complete lack of leadership from their politicians.

                           I might do a diary expanding on this idea.

                          The forest precedes man, the desert follows him

                          by gjohnsit on Wed Jul 23, 2008 at 03:48:32 PM PDT

                          [ Parent ]

    •  How ironic (3+ / 0-)
      Recommended by:
      Pluto, Cliss, Ronald Singleterry

      San Diego city and county is almost broke too.

      The forest precedes man, the desert follows him

      by gjohnsit on Wed Jul 23, 2008 at 02:22:55 PM PDT

      [ Parent ]

  •  Bailing out to save the system is a big lie (7+ / 0-)

    If the financial system is so weak that it needs to be bailed out, there is no evidence that bailing out the system would save it.  The system can just as easily crash after a bail out by trashing the value of the  dollar.

    The people that claim we need to bail out Bear Stearns and Fannie mae and Freddie Mac to save the system are either lying or ignorant.

    The bail out does not create wealth it merely transfers wealth.  For the most part it transfers wealth from the People to the bankers.  If taxes are not raised people just pay the tax by increased prices at the grocery store.

    The present bailout also really screws over poor people.  Housing is by far are the most subsidized industry.  This creates a homeowning class recieving government subsidies and another class of people paying for these subsidies at the  grocery store.  But even worse the subsidies have made housing so unrealistically expensive that even many of those that borrowed to own a home are so badly in debt that they are also suffering.

    Adding more subsidies and  bailouts to a system that is sick  because it is too overly subsidized is just plain nuts.

    •  Rec'd (1+ / 0-)
      Recommended by:
      Ronald Singleterry

      If you could see me I am standing on a soap box and applauding.  :o)

      We don't neeed, no mor troubles - Bob Marley

      by joeshwingding on Wed Jul 23, 2008 at 02:44:41 PM PDT

      [ Parent ]

    •  penguinsong, Everything You Say is True (2+ / 0-)
      Recommended by:
      smellybeast, SciVo

      Now tell me what America would look like if we allowed all of our banks and investment houses to collapse like a line of dominos -- along with all the businesses in America that rely on bank loans and investments.

      What would everyday life look like?

      Pluto now orbits Overnight News Digest ʍou sʇıqɹo oʇnld

      by Pluto on Wed Jul 23, 2008 at 02:48:28 PM PDT

      [ Parent ]

    •  Fannie & Freddie need saving (0+ / 0-)

      Without them, the mortgage industry disappears overnight, since mortgage originators mostly need to move on the debt so they have money for new loans. Without Freddie & Fannie, the housing market shrinks to near-zero.

      They should simply be repossessed by the government though - after all, Fannie started out as a publicly owned entity. If they're insolvent, their value is zero, so why give them money for nothing?

      •  Banks will always lend money for a reasonable (2+ / 0-)
        Recommended by:
        gjohnsit, Pluto

        rate of return on good collateral.  Why do we need riskier loans especially with the taxpayer(especially poor people) taking the risk?

        Banks only need 10% in reserve to make a loan.  We have a fractional reserve currency.

        •  One would think so, but it isn't obviously true. (1+ / 0-)
          Recommended by:
          Cliss

          Prior to FannieMae, FreddieMac and the GI Bill, banks were extremely risk averse.  Thirty year mortgages were virtually impossible to get.  Down payment requirements were at least as high as conventional mortgages (20% down) and often higher.

          When Colorado was becoming a state, a five year mortgage was pretty typical.

          The experience of fifty years of conventional fixed rate thirty year mortgage lending that has shown it to be an extremely low risk kind of debt might change how banks act now, but only if they kind find enough investors to finance these investments.  If confidence in the mortgage lending industry, even the safe parts, dies, risk averse investors may end up favoring government debt over mortgage lending, which would force up mortgage interest rates and further tighten underwriting standards.

          Experience has also taught us that thirty year fixed rate loans with 5% down to a borrower with prime credit and mortgage insurance are very, very safe.  But that market is threatened a great deal by FannieMae and FreddieMac's troubles, because many for profit lenders are afraid of anything but conventional proime mortgages now.  

          Meanwhile the subprime and alt-A market have virtually ceased to exist (they have a single digit percentage of their prior volume) and the adjustable rate mortgage market has taken a real beating.

          "Those who can make you believe absurdities can make you commit atrocities" -- Voltaire

          by ohwilleke on Wed Jul 23, 2008 at 04:20:15 PM PDT

          [ Parent ]

          •  Uh hmmm (1+ / 0-)
            Recommended by:
            penguinsong

            Down payment requirements were at least as high as conventional mortgages (20% down) and often higher.

            20% is a very reasonable number. The only reason why this would not be considered reasonable is if the housing market was totally inflated. And the only reason the housing market would be totally inflated would be because too much easy money caused by government subsidies like Fannie and Freddie.

            The forest precedes man, the desert follows him

            by gjohnsit on Wed Jul 23, 2008 at 04:23:37 PM PDT

            [ Parent ]

            •  We know that lots of (0+ / 0-)

              loans with far less than 20% collateral, and long amortizations have low default rates.  Yet banks didn't make them until the government intervened.

              Will they lend without government intervention now?  Who knows?

              "Those who can make you believe absurdities can make you commit atrocities" -- Voltaire

              by ohwilleke on Wed Jul 23, 2008 at 04:43:38 PM PDT

              [ Parent ]

              •  You are implying (3+ / 0-)

                that banks won't make money-making loans without government assistance, At the same time we know they will make speculative, money-losing loans when government assistance is there.
                  Maybe capitalism in the loan market doesn't work. But I'm willing to give it a try until I've seen otherwise. I get the feeling that America got settled without Fannie and Freddie.

                The forest precedes man, the desert follows him

                by gjohnsit on Wed Jul 23, 2008 at 05:03:20 PM PDT

                [ Parent ]

        •  Mortgage originators need money (1+ / 0-)
          Recommended by:
          Cliss

          to lend money.

          The way the market works now, the vast majority of mortgage originators simply do not have the cash positions to hold on to the mortgages they sell. They depend on reselling the loans to allow them to make more loans.

          The main buyers of mortgage debt until the current crisis were hedge funds. Except now that the funds have realized that being 30* leveraged on instruments that noone really know the value of was a really, really bad idea, they're selling off their positions. Since the leveraging was so excessive, rewinding it has flooded the market. That leaves originators with no chance of selling new loans to hedge funds (unwinding), or the banks (more interested in buying up the hedge funds' positions on the cheap).

          That's where Fannie & Freddie come in... they'll sweep up conforming loans.

          When some sense of sanity has returned to the market, Fannie & Freddie's role won't be quite so crucial, but right now, they're difference between it being difficult to get a mortgage and it being impossible.

    •  FWIW (1+ / 0-)
      Recommended by:
      Pluto

      the Bear Sterns affair, at this stage, involves a loan that has not been written off and has considerable collateral.

      Securitized mortgages, which are the collateral, have uncertain value and that value is certainly less than the face value of the mortgages given the large number of foreclosures.  But, those mortgages are backed by real houses that are rarely worth dramatically less than the purchase price (appraisal fraud was real but most cases nudged values rather than totally making them up), by mortgage insurance and/or borrow downpayments, by contractual claims against the originating mortgage companies, and by the fact that a majority of people paying those mortgages are not in default.  Securitized mortgages aren't as safe as they were sold as being, mostly because the risk of default isn't really independent from one borrower to another -- in bad times everybody whose vulnerable defaults.  But, they are also nowhere near as risky, in percentage terms, as junk bonds.

      It is not beyond the realm of possiblity that all of the Bear Sterns loan will be repaid, and this collateral makes it extremely likely that at least 80% or more of it will be repaid, even if the housing market gets worse.  The gamble was bigger than Wall Street was willing to make, but Wall Street is only going to make a gamble if available information makes clear tht there will be an expected return positive.  

      The Bear Sterns loans will probably produce some loss, but but only a small fraction of what was loaned.  The likely loss in the low single digit billions, will be a lot smaller in absolute terms than annual expenditures on various housing subsidies and tax expenditures for housing currently in place, which is in the low hundreds of billions.

      At this stage, we haven't bailed out Fannie Mae or Freddie Mac at all, it is just a possibility.

      "Those who can make you believe absurdities can make you commit atrocities" -- Voltaire

      by ohwilleke on Wed Jul 23, 2008 at 04:13:24 PM PDT

      [ Parent ]

  •  God I wish I understood this stuff better NT (2+ / 0-)
    Recommended by:
    SciVo, Ronald Singleterry

    My political compass: Economic: -7.38 Social: -5.79

    by musicalhair on Wed Jul 23, 2008 at 02:39:20 PM PDT

    •  Book rec (3+ / 0-)
      Recommended by:
      musicalhair, gjohnsit, Cliss

      An absorbing, well-written, somewhat lengthy read to get you started is William Greider's Secrets of the Temple.

      You'll understand our addiction to debt a lot better, why tax cuts that grossly favor the risk soak everyone else (even if they also get tax cuts) and are ultimately destructive, what inflation is, what money is, how the Reagan revolution got us into this mess. You'll wonder why people are still calling our crisis a credit crisis when it's clearly an insolvency crisis, how we let people get away with "supply side economics", why we notice when Paulson talks about bailing out Fannie and Freddie but not when Paulson directed them to take on more leverage. Good read.

  •  The FDIC protects depositors (1+ / 0-)
    Recommended by:
    New Deal democrat

    not banks in the payment system.

    Banks routinely hold checks until they are finally cleared, subject to limitations on duing so under Regulations issued by the Federal Reserve.

    The general rule, subject to limitations under regulations for small amounts, is that banks don't have to honor a check and let their customer spend the money, until the check clears.

    If the customer spends the money and the check is dishonored by the failed bank, the honoring bank is screwed, and gets only a share of the final payout in liquidation proceedings much later.

    "Those who can make you believe absurdities can make you commit atrocities" -- Voltaire

    by ohwilleke on Wed Jul 23, 2008 at 03:50:09 PM PDT

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