US gasping, the world collapsing

The US is obviously in the midst of a nasty recession. We were out in the lead for awhile, but the rest of the world is catching up quickly and in many instances is zooming right by us on the train to despair.

In a small but telling move, New Zealand has capitulated to the their own oncoming recession and against their mandate have lowered rates even in the face of very high inflation. You can add them to the following list of countries that have come to the realization they are in trouble:

US
UK
EU

Get ready for Australia and Canada to join the list when the commodities boom collapses in the face of lowering demand from the BRICs. The world is heading for a very rough ride in the coming years.

WSJ on state budget problems

Main street media is starting to pick up on one of my favorite rants.

States Slammed by Tax Shortfalls
By Conor Dougherty, Amy Merrick and Anton Troianovski
Word Count: 1,247 Companies Featured in This Article: Costco Wholesale
The stumbling U.S. economy is forcing states to slash spending and cut jobs in order to close a projected $40 billion shortfall in the current fiscal year.
That gap -- identified Wednesday in a survey by the National Conference of State Legislatures -- is more than triple the size of the previous year's. It is the result of broad economic weakness at the state and local levels that could cause pain throughout this year and into 2010. Sales-tax collections, for example, have been hurt by the housing slump and high gasoline prices, which are prompting cutbacks in consumer spending. Personal ...

As I've said before, this is just the beginning for states. Across the board, bureacrats are either underestimating or flat out lying about budgets and projections. States will need to do far more than they are currently to avoid disasters.

Bloomberg article

You really need to read the Bloomberg article I quoted in my previous post.

Fannie Mae Unsold $5 Billion Homes Bring Peril to Shareholders

Once you've read it, please tell me that it doesn't reek of socialist housing already implemented. One of the biggest problems of foreclosed homes is that nobody is paying the property tax and upkeep. When Fannie and Freddie step in and purchase these mortgages that foreclose, they continue to pay the taxes and other expenses.

It costs creditors such as Fannie Mae 2 percent of the value of the property every month in taxes, insurance, utilities, lost revenue, maintenance, management and cleanup after vandalism, Williams estimates.

That money is just flowing through to states and local goverments, probably at the artificially inflated peak home prices. There is no way these companies can continue this without taxpayer support.

This article subtly points out some things about Fannie and Freddie that are just outrageous to me.

I can just see Ogre from Revenge of the Nerds now...

You may be wondering why there is so much concern regarding Fannie and Freddie. In the immortal words of Ogre..."THIS WHY!"

From an article in Bloomberg today:

Together, Fannie Mae and Freddie Mac, the two biggest U.S. mortgage finance companies, owned a record $6.9 billion of foreclosed homes on March 31, compared with $8.56 billion held by all 8,500 U.S. commercial banks and savings and loans. Foreclosed houses sell at an average discount of about 20 percent, according to economists Ethan Harris and Michelle Meyer at New York-based Lehman Brothers Holdings Inc. At that rate, the two mortgage companies stand to lose $1.39 billion on the foreclosed houses they currently own.

I think 20% is extremely optimistic in this environment. One of the homes that Fannie Mae is holding is a home in Flint Michigan that sold for $110,000 in 2005. It's been lowered to $5,000 and still can't be sold. Houses in distressed areas that are populated with low income people have almost zero chance of being sold. The only buyers will be investors who may rent and they will require atleast a 40%-70% haircut on the peak price. The exact market that Fannie and Freddie are supposed to back are the most dangerous. This is a lethal combination.

Foreclosures will continue to mount and the losses will be much greater than 20%. Not a pretty picture for taxpayers if the bailout passes.

You know the banking system is unsound when...

This is the latest from Mish. Classsic stuff:

http://globaleconomicanalysis.blogspot.com/2008/07/you-know-banking-system-is-unsound-when.html

1. Paulson appears on Face The Nation and says "Our banking system is a safe and a sound one." If the banking system was safe and sound, everyone would know it (or at least think it). There would be no need to say it.

2. Paulson says the list of troubled banks "is a very manageable situation". The reality is there are 90 banks on the list of problem banks. Indymac was not one of them until a month before it collapsed. How many other banks will magically appear on the list a month before they collapse?

3. In a Northern Rock moment, depositors at Indymac pull out their cash. Police had to be called in to ensure order.

4. Washington Mutual (WM), another troubled bank, refused to honor Indymac cashier's checks. The irony is it makes no sense for customers to pull insured deposits out of Indymac after it went into receivership. The second irony is the last place one would want to put those funds would be Washington Mutual. Eventually Washington Mutual decided it would take those checks but with an 8 week hold. Will Washington Mutual even be around 8 weeks from now?

5. Paulson asked for "Congressional authority to buy unlimited stakes in and lend to Fannie Mae (FNM) and Freddie Mac (FRE)" just days after he said "Financial Institutions Must Be Allowed To Fail". Obviously Paulson is reporting from the 5th dimension. In some alternate universe, his statements just might make sense.

6. Former Fed Governor William Poole says "Fannie Mae, Freddie Losses Makes Them Insolvent".

7. Paulson says Fannie Mae and Freddie Mac are "essential" because they represent the only "functioning" part of the home loan market. The firms own or guarantee about half of the $12 trillion in U.S. mortgages. Is it possible to have a sound banking system when the only "functioning" part of the mortgage market is insolvent?

8. Bernanke testified before Congress on monetary policy but did not comment on either money supply or interest rates. The word "money" did not appear at all in his testimony. The only time "interest rate" appeared in his testimony was in relation to consumer credit card rates. How can you have any reasonable economic policy when the Fed chairman is scared half to death to discuss interest rates and money supply?

9. The SEC issued a protective order to protect those most responsible for naked short selling. As long as the investment banks and brokers were making money engaging in naked shorting of stocks, there was no problem. However, when the bears began using the tactic against the big financials, it became time to selectively enforce the existing regulation.

10. The Fed takes emergency actions twice during options expirations week in regards to the discount window and rate cuts.

11. The SEC takes emergency action during options expirations week regarding short sales.

12. The Fed has implemented an alphabet soup of pawn shop lending facilities whereby the Fed accepts garbage as collateral in exchange for treasuries. 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).

13. Citigroup (C), Lehman (LEH), Morgan Stanley(MS), Goldman Sachs (GS) and Merrill Lynch (MER) all have a huge percentage of level 3 assets. Level 3 assets are commonly known as "marked to fantasy" assets. In other words, the value of those assets is significantly if not ridiculously overvalued in comparison to what those assets would fetch on the open market. It is debatable if any of the above firms survive in their present firm. Some may not survive in any form.

14. Bernanke openly solicits private equity firms to invest in banks. Is this even close to a remotely normal action for Fed chairman to take?

15. Bear Stearns was taken over by JPMorgan (JPM) days after insuring investors it had plenty of capital. Fears are high that Lehman will suffer the same fate. Worse yet, the Fed had to guarantee the shotgun marriage between Bear Stearns and JP Morgan by providing as much as $30 billion in capital. JPMorgan is responsible for only the first 1/2 billion. Taxpayers are on the hook for all the rest. Was this a legal action for the Fed to take? Does the Fed care?

16. Citigroup needed a cash injection from Abu Dhabi and a second one elsewhere. Then after announcing it would not need more capital is raising still more. The latest news is Citigroup will sell $500 billion in assets. To who? At what price?

17. Merrill Lynch raised $6.6 billion in capital from Kuwait Mizuho, announced it did not need to raise more capital, then raised more capital a few week later.

18. Morgan Stanley sold a 9.9% equity stake to China International Corp. CEO John Mack compensated by not taking his bonus. How generous. Morgan Stanley fell from $72 to $37. Did CEO John Mack deserve a paycheck at all?

19. Bank of America (BAC) agreed to take over Countywide Financial (CFC) and twice announced Countrywide will add profits to B of A. Inquiring minds were asking "How the hell can Countrywide add to Bank of America earnings?" Here's how. Bank of America just announced it will not guarantee $38.1 billion in Countrywide debt. Questions over "Fraudulent Conveyance" are now surfacing.

20. Washington Mutual agreed to a death spiral cash infusion of $7 billion accepting an offer at $7.85 when the stock was over $13 at the time. Washington Mutual has since fallen in waterfall fashion from $40 and is now trading near $5.00 after a huge rally.

21. 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. No one can believe anything the government sponsored rating agencies say.

22. In a panic set of moves, the Fed slashed interest rates from 5.25% to 2%. This was the fastest, steepest drop on record. Ironically, the Fed chairman spoke of inflation concerns the entire drop down. Bernanke clearly cannot tell the truth. He does not have to. Actions speak louder than words.

23. FDIC Chairman Sheila Bair said the FDIC is looking for ways to shore up its depleted deposit fund, including charging higher premiums on riskier brokered deposits.

24. There is roughly $6.84 Trillion in bank deposits. $2.60 Trillion of that is uninsured. There is only $53 billion in FDIC insurance to cover $6.84 Trillion in bank deposits. Indymac will eat up roughly $8 billion of that.

25. Of the $6.84 Trillion in bank deposits, the total cash on hand at banks is a mere $273.7 Billion. Where is 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 debt is amazingly paid back with more debt, and all sorts of other silly (and arguably fraudulent) financial wizardry schemes that have bank and brokerage firms leveraged at 30-1 or more. Those loans cannot be paid back.What cannot be paid back will be defaulted on.

If you did not know it before, you do now. The entire US banking system is insolvent.

Wall Street Got Drunk?

If Wall Street got drunk, who served it the drinks? Who let the village idiot get behind the wheel drunk? Who let a recovering alcoholic into the bar?

F'ing pathetic statement from the leader of the "so called" free world.

Two Fed myths that need debunking...and an editor who needs an education

Two Fed myths that need debunking

The above is an article in Fortune today. It discusses what the writer (editor at large), considers are two Fed myths.

1) The Fed controls interest rates
2) The Fed will run out of money for bailouts

This article is full of half truths and observations which completely fail to enlighted the reader as to what really is happening.

His main points are that the Fed controls only short-term rates and not long-term rates. In essence this is true, but the fact is the short-term rates often determines the long-term rate UNLESS the market becomes concerned with fundamentals underlying loans (as we are seeing now). The real issue is whether the Fed sets "artificially" low rates which cause market distortions (it does) and whether the Fed should be in the business at all of
"guessing" what the real rate should be. Isn't this a capitalist market? Won't banks ultimately determine what the best rates are best on risk/reward analysis?

On the second question, he comments that the Fed is able to "print" money at will, therefore can't run out of money. He doesn't mention, however, the consequences or repercussions of that action. The Fed in reality has NOT been printing money during this crisis, contrary to popular opinion. It has merely been providing "liquidity" in the form of short-term loans tied to dicey collateral. It has not monetized these loans or losses as of yet. If they had, you would have seen a collapse of the bond markets and US dollar as investors ran for the hills. When the Fed starts monetizing (as this writer alludes to it being able to do) faith in the US dollar will collapse. In essence, the Fed does has a limited amount of funds and it is running low. To print would in essence signal the beginnings of a Banana Republic regime and foreign countries would force the rates on borrowing to skyrocket. This is a checkmate scenario for the Fed.

Dangerous markets

Interesting excerpt from a book called "The Great Crash: 1929". Something to keep in mind as the market continues to fluctuate.

The singular feature of the great crash of 1929 was that the worst continued to worsen. What looked one day like the end proved on the next day to have been only the beginning. Nothing could have been more ingeniously designed to maximize the suffering, and also to ensure that as few as possible escaped the common misfortune. The fortunate speculator who had funds to answer the first margin call presently got another and equally urgent one, and if he met that there would still be another. In the end all the money he had was extracted from him and lost.

The man with the smart money, who was safely out of the market when the first crash came, naturally went back in to pick up bargains. (Not only were a recorded 12,894,650 shares sold on 24 October; precisely the same number were bought.) The bargains then suffered a ruiness fall.

Even the man who waited out all of October and all of November, who saw the volume of trading return to normal and saw Wall Street become as placid as a produce market, and who then bought common stocks would see their value drop to a third or a fourth of the purchase price in the next twenty-four months.

Vallejo Woes...spreading

USA Today has an article discussing the problems facing Vallejo, CA which went into bankruptcy earlier this year. The forces that inflicted the damage on Vallejo are being felt across the country. Here's an excerpt.

A convergence of forces — the housing bust and credit crunch, tax revenue shortfalls, pension fund costs for public employees and the shaky economy and financial markets — are making it increasingly hard for municipalities to balance their budgets.
"We're seeing a lot of governments around the country entering a period of flat or declining revenues," says Gabriel Petek, a municipal-bond analyst at Standard & Poor's. "I don't expect this to turn into an avalanche, but there may be isolated instances of distress."

I agree with the assessment, right up until his prediction this won't be an avalanche. I think local and state governments are going to get slaughtered. They will be forced to downsize budgets across the board and will still need to borrow to maintain spending. This will be a short-term fix with long-term repercussions that won't be good. States have already started to raid rainyu day funds and borrow against future "income". The estimates and numbers will be way off and in the wrong direction. This will get ugly.

Politicians and poker

Politicians would make lousy poker players, but they can be read with the same queues. In poker, you can generally make the assumption that someone who acts strong is bluffing and somebody who acts weak has the nuts. Pay close attention to the lip service coming from various government officials. Here are some typical tells that something is really, really bad.

Our blank is fundmentally sound.
Our blank is fundamentally strong.
The foundation of our blank is good.

Never before has so many reassurances from men of so little character made me so queasy.

Desperate collusion

I'm astonished at how overtly the government and financial institutions are colluding to try and bail out a systemic collapse. They really must think that the general population is blatantly ignorant and stupid. Sadly, they are right as they are getting away with murder before our eyes.

The recent short-squeeze put on financials has been classicly coordinated. The SEC cherry-picks 19 institutions to place restrictions on short-selling. This is done exactly at a time where financials are tanking (rightly so) and desperately need to raise money. At the exact same time, these financial companies are releasing quarterly earnings reports that are remarkably up beat. Or so it seems. If you peak under the covers, the banks are playing lots of funny games to push losses out to future quarters. This is all working out nicely to give banks a "timely" boost in share prices as they go cap in hand to the market to raise more money.

While hard to prove, it's clear that the timing of this and these moves were NOT a coincidence. This is a clearly concerted effort to force shorts out of the market causing covers to boost share prices at the same time the earning reports miraculously spur the bulltards on.

The sad thing is, any fools who jump on this recent run-up or any coming equity sale are going to get murdered. What's occurring recently is criminal in my opinion across the board. The government in the last 6 months has trampled on the constitution and tax payers and is quickly moving towards a socialist bailout of massive proportions. This is one tax payer who might make quarterly withholdings take on a new literal meaning.

Exploding poverty

I found some interesting facts in a recent article discussing poverty in the US.

According to the U.S. Census Bureau, approximately 37 million people, or 12.3 percent of the population, were in poverty at the end of 2006. For a family of four, that meant an annual housefold income below $20,614. (as a matter of reference, one person working a 40-hour week and getting paid the current minimum wage, $6.55 per hour, would earn a total of $13,624 over the course of a year).

I'm standing by my prediction that in 3-5 years close to 30-40% of the US will be teetering on the poverty line. I don't think I'd be going out on a limb to extrapolate the above census numbers to estimate that we currently have over 15%. With current inflation, that number is growing exponentially.

With a rapidly deteriroating infrastructure, a flood of new retirees with marginal savings and a full blown recession picking up steam, we're well on our way to hitting my numbers.

Adequately capitalized?

Does anybody else find a problem with Bernanke's statement today regarding the GSE's?

The two mortgage giants are "adequately capitalized," Bernanke said. However, "weakness of market confidence is having an effect" on the companies, making it difficult for them to raise capital.

If the companies are adequately capitalized, then why does it matter if they are having a difficult time raising capital? Why do they need to raise capital at all? This is classic ponzi scheme economics at work and Bernanke is so buried in the pile of shit he spews, he doesn't even realize the absurdity of what he is saying. Basically, these companies need to continue to make loans at the artificial spreads they receive being an implicitly backed government agency. Without that protection the model fails. These companies could never survive if they were true private companies and were exposed to actual market forces in the loan market. It's just absurd to come out and say they are adequately capitalized under that scenario.

Wells Fargo raises dividend...hmmmm

So Wells Fargo quarter came in better then expected, although down from last year and they go ahead and raise their dividend from .31 cents to .34 cents. I'm not at all convinced that this is a smart move. At a time when banks need to be reserving capital and shoring up their balance sheets, to increase a payout seems to be a strange way to flex your muscle as a strong financial. In addition, any bank that has adequate capital should be able to make a killer return for investors by providing loans at the extremely beneficial spreads that the negative interest rates are creating. At a time when loans need to be made (good loans that is), it's strange that a bank would be paying out to shareholders. I'll have to look into this more, but I don't like it one bit.

Bernanke, Hanky Panky

No post yet, I just thought this up and liked the title. Plenty of fodder once I have the time.

CHECKMATE!!!

If you read through the standard double-talk by Bernanke, you can clearly hear the desperate roar of a whisper. No, it's not "Freeeeeeedommmmmm!" from William Wallace. It's "Checkkkkkkmaaaaaaaate". The Fed is all out of options and room to maneuver. The rediculous duel mandate they carry is now causing them to be in a no-win situation. The Fed is running out of bullets and unfortunately, the last one will be pointed directly at their heads.

Today could be really bad...

Update (10:05am) - Indexes are off more than 2% already. Today is ugly. Get ready for some whipsaw action though. Bears tend to buck more than bulls when it comes to markets.

Update (11:15am) - Market rebounding. This market is not for the feint of heart.

Update (1:00pm) - Almost back to yesterday's close. Other than short's covering, I can't possibly figure out what has people bullish right now. Oil is down, but it will take oil going under $100 before there is any positive impact to companies bottom lines. Just a strange and dangerous market.

GM Suspends Dividend

GM will be "suspending" its dividend temporarily. Look for that to be a long suspension. I called for this in my June 3rd post titled "What do GM and married men have in common?".

"Look for GM's dividend to be non-exisitent within the year. "

Well, it only took a little over a month. The auto industry is bleeding cash like a hemophiliac with a severed artery. In my opinion, the US auto industry is toast. There will have to be massive consolidations and massive layoffs or a federal bailout. The changes are coming fast, but they are too little and too late.

Depositor blunders

For over nine months I've been telling anyone who will listen to diversify account holdings and double check that all deposits are well below the $100k FDIC limit. It amazes me that with all the turmoil the economy is experiencing, people still got caught off-guard at IndyMac and will lose money that exceeded that limit.

Again, I repeat...DIVERSIFY and VERIFY. There will be a long list of failed banks over the next couple of years. It can happen quickly and once it does, you will be at the mercy of a continually weakening FDIC. As the losses mount, the FDIC will be strained and you may even lose quick access to funds below the $100k mark. That is why I say diversify. Also, keep cash at hand. A months worth of expenses minimum.

You've been warned...again.

Long and distinguished

The list of failing companies is growing longer and longer as this crisis goes on. Bear Stearns and IndyMac are the two most prominent to fail already. A number of other companies are right on their tails.

The list includes:

Wachovia
Washington Mutual
Lehman Brothers
Fannie Mae
Freddie Mac
GM (possibly other automotives)
Airlines (u-pick-em)
Merill Lynch

I anticipate most if not all of the above will fail or "merge"before this is all over. This list will get bigger and it will include bankrupt local governments as well.

Ugly indeed.

RIP

My wife isn't happy that we're renting now because she wants to "own" a home. Well, she'll be ecstatic now. Other than the formalities, every taxpayer now owns MILLIONS of homes. Fannie and Freddie are done. This shouldn't come as any surprise to readers of this blog or people on the end of my rants. The government should never have dipped it's foot into the housing industry and now it's gonna drown. $5 TRILLION worth of mortgages are on these two companies books. They've been swallowing more garbage lately than Oscar the Grouch. When will these idiots in office wake-up and realize you CANNOT try and contain this meltdown. It's too big and too deep to offset. Any money flowing in that isn't discounted up front by 30-40% is likely to be good money after bad. The GSE's have been taking bad loans at the start for the last 6-12 months. This is a massive blunder of historical proportions.

Hidden gem in CNN article on Fannie Mae (May 7th)

That'll leave stains! (June 12th)

Nationalization of industries (July 9th)

Perfect follow-up to my previous post.

Life after losing your home

http://money.cnn.com/2008/07/10/news/economy/rios/index.htm?postversion=2008071014

This article is the perfect follow-up to my previous post. This is an example of someone who should have never bought a house in the first place. Not that she doesn't deserve a home, she just is not in a situation to afford to buy a house. Realistically, there is no difference between what she was doing and renting the equivalent home. The transaction costs and ownership costs are just too great a burden on the average family living on tight salaries. A home is what you make of it, not whether you carry a title with a banks name on it.

Home "Ownership"

John McCain made a statement today that is worth breaking down, as it is core to an argument about home "ownership" that I often make. In regards to the GSEs (Fannie and Freddie):

"They will not fail. We cannot allow them to fail. They are vital to Americans' ability to own their own homes and we will do what's necessary to make sure that they continue that function."

Who really owns a home when a bank holds a loan equal to the value of the home? Why is the government pushing home ownership so hard? Does it really benefit the average home owner? If you really look at home ownership and the costs associated with it over historical averages, the costs of renting vs. owning are basically a wash. When you factor in transaction costs, interest, taxes, insurance, maintenance, etc... it barely outpeforms the historical 4% increase in the value of the home each year. And that's IF and a big IF you stay in the home for at a minimum of 5-10 years. The transaction costs of buying and selling a home is about 20% of the value of the home which takes almost 4-5 years in a typical stable market to earn. That doesn't include additional costs of maintenance, etc... That's a pretty big risk to take for an average middle-class american considering most are living paycheck to paycheck and any significant life change (loss of job, injury, health problem, kids, etc...) would jeopardize their ability to make payments. If on the other hand, that same person was renting a less costly home and saving the difference, this person (family) would be much better prepared to adjust to life changes.

Just a thought when you step back and really think about what's best for "we the people". We the people need to start living within our means, saving money for retirement, saving money for emergencies and generally taking better care fiscally. Cramming homeownership down consumer's throats through relentless promotion and easy access to credit has only caused homes to become less affordable and more of a financial risk to the general public. In my opinion, this will go down as one of the greatest tradgedies to ever take place in the US. In many ways this will far surpass the Great Depression in the pure level of destruction of home ownership in the US.

Coming to a city near you

I've discussed the impact that would be felt at local and state governments and we're just starting to see the tip of the iceberg. Local and state governments will be absolutely devastated over the next couple of years. This will result in massive deficits, furlows, layoffs and decreased public services. This will happen in every single state, some much worse than others though. Nobody is ready to make the sacrifices necessary to correct these budget shortfalls. There will be brutal and often ugly fights between parties. In the end, both will fail miserably at their stated goals and you can expect unintended consequences and calls for federal support. Things are quickly unraveling on all fronts at the exact worst time.

http://news.cincinnati.com/apps/pbcs.dll/article?AID=/20080709/NEWS0108/807090303/1055/NEWS

Why the rich get richer

If I had the money and liquidity, I'd have been all over the shorting of the financials and GSE's. As it stands, I blab and blab and have to basically sit on the sidelines while I watch the inevitable happen. Life can be frustrating at times. Lots of money to be made in this market if you just know the fundamentals.

Blatant moral hazard, but maybe fraud

Have you ever taken the time to notice that the most distressed banks are the ones that offer rediculously high rates of return on CD's? It's true, if you listed all the banks in order of highest return to lowest return, you would see the most distressed banks at the top of the list. Just look at IndyMac. This is basically a dead company. There is ZERO, zippee, no way this bank survives the next 12 months. They're done, but yet they are offering 4.45% rates on 6 month CD's when most "sound" banks are offering closer to 2%. How can they do this? By touting FDIC insurance, IndyMac can hide behind taxpayer dollars to basically lure good money into their cesspool of a money pit. Why in the fuck the regulators, congress and anyone with half a brain allows this to happen is a complete f'ing mystery. Why should taxpayers bailout any fools that throw their money towards IndyMac? FDIC was put in place to protect assets, not to provide a vehicle by which banks can offer rediculous returns on cash that will most likely never be paid back (by the bank). It's a travesty.

UPDATE: That didn't take long. Anyone who jumped in on those CD's will be bailed out by the public as predicted. Well, that is, if they stayed under $100k. Amazingly, not everyone did and they will suffer a shave and a hair cut on their savings.

Jumping into the Poole

Looks like one of the former Fed members agrees with my post from yesterday. Not that I respect the opinions of members of one of the most crooked organizations in the history of the world.

Chances are increasing that the U.S. may need to bail out Fannie Mae and the smaller Freddie Mac, former St. Louis Federal Reserve President William Poole said in an interview. Freddie Mac owed $5.2 billion more than its assets were worth in the first quarter, making it insolvent under fair value accounting rules, he said. The fair value of Fannie Mae's assets fell 66 percent to $12.2 billion, data provided by the Washington-based company show, and may be negative next quarter, Poole said."

This is what I call a major conundrum. Without the GSE's backing mortgages, the housing industry will completely collapse. But, the GSE's can't afford to continue taking loans and remain solvent in the current conditions, regardless if things get worse, which they will and everyone knows. This is what happens when you recklessly allow banks and financial institutions to take on risk without regard to consequences. This is squarely the blame of the Fed, Congress, Big Business, Democrats, Republicans and the list goes on and on. There aren't enough fingers to point at all the people to blame for this mess and the sad thing is the only people who are in position to try and alleviate this mess are exactly the people who are responsible. Do you really think there is any chance that any sensible policies or decisions will be made to help this fiasco? If you do, I want some of that blissful ignorance to be implanted in my head.

Too many fools, too many shoes and way to late in the game to stop it. As I've said before. Protect your assets, eliminate debt, stay liquid and mobile and be prepared for the worst. Things are gonna happen over the next 3 years that nobody is ready for.

Nationalization of industries

I'm convinced that at least one and probably all three of the following will need to be nationalized in some form or fashion before this crisis is over.

1) Housing: GSE's in particular Fannie and Freddie
2) Airline Industry
3) Auto Industry

NONE of these three have nearly enough capital (money or brains) to make it through the nasty recession/depression that we are going to experience. In particular, by any sane calculations the GSE's are already dead. It's just a formality before the small percentage of loans that need to fail to drain their remaining capital reserves does just that. It's a certainty. It will only take approximately 1% of the loans to go bad for there to be a mortal wound. 1% would be a gift of the gods.

Both the airline industry and the auto industry will need multiple miracles for them to survive as well. Somehow, the energy crisis will miraculously need to resolve itself and take oil to under $100 for a sustainable period. Oil will go down in my opinion unless some foolish attack takes place, but it will be too little, too late to salvage these industries.

Taxpayers will need to step in to save these failures and it won't be pretty. In fact, it could possibly cause the dollar to weaken to the point of a near collapse of faith from our foreign loan sharks. And believe me, they don't want the US to die as a consumer, but when it's clear they are, then they will turn on us with a vengeance. A parasite lives simbiotically with it's host until that host no longer provides what it needs and then it moves on. It has to. A systemic collapse of multiple industries in the US combined with the current obligations on the books for social, security, medicare, medicaid, federal pensions, etc... will render the US federal government insolvent for all intents and purposes. Obviously they can try to print their way out of this, but the repercussions of that action will be the death blow to the dollar and the economy.

The only way out of this mess will be a sustained and dramatic decrease in federal spending, increase in taxes, restructuring of all social obligations and legitimate effort to strengthen the dollar. In other words a massive depression and a big dose of "we fucked up for too long". We're gonna suffer regardless, the question is whether we control our destiny or our destiny is set upon us in a long wave of failed bailouts and undesired consequences.

Testing the strength of the FDIC

For all intents and purposes, IndyMac is done as an ongoing concern. The current administration desperately wants to kick the collateral damage of this blow-up down the road to the next regime, so you will see a slow and painful winding down. Of bigger concern are a couple of fundamental issues that are affecting this blow-up which are pervasive across all the financials. There is little capital to be raised and mortgage assets can only be sold at a loss. In the current environment of deflation, this is a death-blow to balance sheet impaired banks. This is and will not be contained to IndyMac. They are large, but not too large to fail and there are others like them out there. This will ultimately get unwound through the FDIC and the FDIC is woefully under-capitalized to handle the significant amount of loss that is headed its way. This administration knows this and does not want any semblance of a public funded bail-out on its watch and in a worse case, a panic on teetering banks.

Look for a significant number of bank failures beginning this year and accelerating into next. FDIC will be overwhelmed by the sheer numbers of banks and the size of the losses. The next administration has a hell-storm on its hands. There's no difference between the levee's in New Orleans and the FDIC. Both were built to contain disasters and neither was adequately built. We'll be testing that statement over the next two years.

Why history repeats itself

Here is an excerpt from an article that discusses the economic problems in Las Vegas. This is a typical statement from somebody who is destined to continually make the same mistakes over and over. I've bolded the telling statement.

"This is the map of Vegas," he said. "Inside that circle is the city. Outside it, everything is owned by the Bureau of Land Management. So there's really nowhere else for the city to expand. And yet, the census bureau has forecast that the population of Vegas will grow from two million now to three million by 2016. There's nowhere for those people to go. So this town is another Tokyo, with land as a commodity. You fly in here and you see desert and you think, 'Building, building, building'. But it can't be built on, so prices must go up. And all those Harvard economists are missing that key component when doing their prognosis of our market. The way I see it, we have been in check, and are now aligned for the next spurt, and I'm talking a power arc that's got between seven and 10 years to run."

Anybody who compares a recovering real estate industry to the age old adage of Tokyo, Japan and limited real-estate is showing their absolute ignorance when it comes to real estate. Does he even realize that real estate prices in Japan went down for almost 20 years straight and are still in the crapper comparatively? Real estate can and will go down on an island, in a city, on a train, in a house, on a mouse...sorry I have kids. Point being, anyone who thinks that the Sin City will recover in any meaningful fashion in the next 5 years and probably 10 is on a one way trip to bankruptcy. The sins of our past economic failures are coming back to roost and they won't be roosting or spending in Las Vegas.

Absurdly funny and so sad

The Economy? Words Fail Me

Read the article and watch the video. It wouldn't be so terrifying if it wasn't real.