From Bloomberg: Senators Ask Fannie, Freddie to Freeze Foreclosures
U.S. Senate Banking Committee members urged Fannie Mae and Freddie Mac, the mortgage lenders placed under federal control this week, to freeze foreclosures on loans in their portfolios for at least 90 days.
Anybody else a little peeved at the notion that your hard earned money might go to people living an extra 90 days in a house for free? The majority of people who are in homes that are foreclosing will not be able to work out modifications. The main reason they are in foreclosure is because they couldn't afford the home under normal loan standards in the first place. Now that the initial discounted payments are over, they are stuck or can't afford the loan. Only an increase in income can fix that problem. UNLESS, the government decides to give a haircut to the loan balance in the modification. Each haircut would come directly out of the pocket of a tax payer for the sole purpose of bailing out a homeowner. Nice sign to send to all the renters out there who are doing the right thing by saving up for a house they can afford. That's only 50% of the citizens in this country thank you very much.
Baaaack in the U S S R...you don't know how lucky you aren't boy.
Thursday, September 11, 2008
No where to run, no where to hide
As the storm cloud called deflation begins to set in across the globe, there is one truth that will hold true..."no where to run, no where to hide". Just ask anyone who piled onto the foreign markets, anti-US dollar and commodity bandwagon. They've been getting clobbered lately as the dollar rebounds, commodities crash and foreign stock markets continue to plummet. Hell, about a year ago I was ready to jump ship as well, but took my time to analyze the whole picture. I was close to calling Peter Schiff's investment company Euro Pacific and have him move all my investments into foreign stocks and diversified currencies. Something didn't seem right though, so I started breaking down the numbers. It pretty quickly became evident that the extreme money flows causing surges in those other markets was just a symptom of loose money trying to find large returns to keep their leveraged positions afloat. The fundamentals just didn't support the extremes that we were seeing. Sure emerging markets are a great story, but their exponential growth is completely dependent upon debt driven consumption from foreign economies. As deflation sets in and the global economies contract, the unwind of these positions creates a massive problem for leveraged models. We are just starting to see the beginning of this process.
Liquidity vs. Solvency
Ever since the Fed started intervening with their alphabet-soup lending facilities, I've been ranting that the Fed is helpless to solve the banks' problems because this is a solvency issue and not a liquidity issue. The Fed is providing liquidity to the banks by swapping cash for non-liquid assets like MBS. The Fed is not monetizing this debt. These are short-term repo loans that must be repaid. They do nothing to raise or prop-up the price of the underlying asset (mostly MBS). Eventually the undelying asset needs to be put back on the bank's balance sheet and marked-to-market. Therein lies the solvency issue. If the banks actually marked to market all of the existing assets on their balance sheets, you'd be hard pressed to find a bank that wasn't technically insolvent. Through Tier 2 and Tier 3 capital tricks, Fed alphabet-soup lending, off sheet vehicles like SIVs, the banks have been able to delay marking these assets to market. This has proven to be a big mistake.
From Bloomberg:
``Liquidity tools by definition can only have so much impact,'' said Dino Kos, former head of financial markets at the New York Fed and now a managing director at Portales Partners LLC, a New York research firm.
The Fed ``can alleviate the problem by helping institutions finance these bad assets,'' Kos said. ``But by itself, that doesn't lift the price of these assets. You still have an underlying solvency problem.''
The need for cash is exacerbated by rising credit losses and difficulty in obtaining capital to offset them.
The hope was that eventually this crisis would turn around and that the banks could wait out the bottoming process. This would allow the asset prices to rise again and produce more liquidity in the true marketplace. This was a false hope. Eventually these assets will need to be marked to market and slowly they have been. That is why you keep seeing the banks going to the confessional each quarter as they slowly mark those assets down. The problem is, evertime they mark down assets, they need to increase their capital base or sell those assets to stay within banking ratio regulations. Because they waited so long, the stock prices have collapsed and equity raises have become highly dilutive. Banks are now almost forced to either borrow at unsustainable rates (8-11%) in the bond market, sell assets at rock bottom prices, offload garbage for short term repo loans from the Fed (limited amount) or continue to hide the bad assets. These are all shell games that will eventually erode the banks long term sustainability, some quicker than others. The real differentiator in the financial arena is which companies contain the most bad assets (real-estate backed) and which companies were most highly levered. It's not too hard to tell that from financial statements and the results can be seen in which companies move to the front of the line in the ever growing domino effect of failing institutions.
From Bloomberg:
``Liquidity tools by definition can only have so much impact,'' said Dino Kos, former head of financial markets at the New York Fed and now a managing director at Portales Partners LLC, a New York research firm.
The Fed ``can alleviate the problem by helping institutions finance these bad assets,'' Kos said. ``But by itself, that doesn't lift the price of these assets. You still have an underlying solvency problem.''
The need for cash is exacerbated by rising credit losses and difficulty in obtaining capital to offset them.
The hope was that eventually this crisis would turn around and that the banks could wait out the bottoming process. This would allow the asset prices to rise again and produce more liquidity in the true marketplace. This was a false hope. Eventually these assets will need to be marked to market and slowly they have been. That is why you keep seeing the banks going to the confessional each quarter as they slowly mark those assets down. The problem is, evertime they mark down assets, they need to increase their capital base or sell those assets to stay within banking ratio regulations. Because they waited so long, the stock prices have collapsed and equity raises have become highly dilutive. Banks are now almost forced to either borrow at unsustainable rates (8-11%) in the bond market, sell assets at rock bottom prices, offload garbage for short term repo loans from the Fed (limited amount) or continue to hide the bad assets. These are all shell games that will eventually erode the banks long term sustainability, some quicker than others. The real differentiator in the financial arena is which companies contain the most bad assets (real-estate backed) and which companies were most highly levered. It's not too hard to tell that from financial statements and the results can be seen in which companies move to the front of the line in the ever growing domino effect of failing institutions.
The Next Bubble: Pessimism
The Next Bubble: Pessimism by Paul R. La Monica (CNN).
Personally, I think Paul is an idiot. He's been a headline permabull for CNN through this whole debacle and hasn't been right once. I do like this article though. If pessimism is the next bubble, then I got in at a great value. His point is valid, but attitudes as much as fundamentals drive markets. Pessimism has reached a true "top" when all the calls for a bottom have been flushed from the market. We're no where near that yet. Bulls will get crushed, bottom feeders will get crushed and anyone who tries to catch falling knives will get crushed (skewered...whatever). C'mon over Paul, the bandwagon is waiting for you. I will call a top to the pessimism bubble once every ounce of bs permabull cheerleading has been sucked from your clueless articles.
Personally, I think Paul is an idiot. He's been a headline permabull for CNN through this whole debacle and hasn't been right once. I do like this article though. If pessimism is the next bubble, then I got in at a great value. His point is valid, but attitudes as much as fundamentals drive markets. Pessimism has reached a true "top" when all the calls for a bottom have been flushed from the market. We're no where near that yet. Bulls will get crushed, bottom feeders will get crushed and anyone who tries to catch falling knives will get crushed (skewered...whatever). C'mon over Paul, the bandwagon is waiting for you. I will call a top to the pessimism bubble once every ounce of bs permabull cheerleading has been sucked from your clueless articles.
Goldman to swallow Lehman?
Don't be surprised if Goldman swallows up Lehman within the week. Lehman is dead and they will not be allowed to "fail". Shotgun weddings seem to be the choice de jour for failed financial institutions.
By the way, I have no idea who will swallow WaMu and eventually Merrill. The next on the list of zombie financials waiting for their fate.
Update: Seems that Golman threw-up when attempting to swallow Lehman. No worries though, the government is stepping in to save the day. Yippeeeee...hoooorrraaaaay. Nothing to see here, move along.
By the way, I have no idea who will swallow WaMu and eventually Merrill. The next on the list of zombie financials waiting for their fate.
Update: Seems that Golman threw-up when attempting to swallow Lehman. No worries though, the government is stepping in to save the day. Yippeeeee...hoooorrraaaaay. Nothing to see here, move along.
Pension Time Bomb
Hat tip to Dileep on pointing this article out to me. George Will writes an interesting piece on a favorite rant of mine.
Pension Time Bomb by George Will
Here's a good excerpt but the entire piece is well worth reading.
Vallejo is an ominous portent for other cities, and some states, few of which are accumulating financial resources sufficient to fulfill pension promises they have made to employees. Are you weary of the crisis du jour -- subprime mortgages and all that? Get a head start on worrying about the next debacle by reading Roger Lowenstein's new book, "While America Aged: How Pension Debts Ruined General Motors, Stopped the NYC Subways, Bankrupted San Diego, and Loom as the Next Financial Crisis."
I've discussed this very topic in the past, because I think it is one of the most under-mentioned and potentially dangerous aspects of the economy moving forward.
Past posts...
Vallejo Woes...spreading
State pensions...tick...tock...tick
Pension Time Bomb by George Will
Here's a good excerpt but the entire piece is well worth reading.
Vallejo is an ominous portent for other cities, and some states, few of which are accumulating financial resources sufficient to fulfill pension promises they have made to employees. Are you weary of the crisis du jour -- subprime mortgages and all that? Get a head start on worrying about the next debacle by reading Roger Lowenstein's new book, "While America Aged: How Pension Debts Ruined General Motors, Stopped the NYC Subways, Bankrupted San Diego, and Loom as the Next Financial Crisis."
I've discussed this very topic in the past, because I think it is one of the most under-mentioned and potentially dangerous aspects of the economy moving forward.
Past posts...
Vallejo Woes...spreading
State pensions...tick...tock...tick
Unintended consequences
Fannie, Freddie Takeover Jolts Preferred Stock
Treasury Secretary Henry Paulson's takeover of Fannie Mae and Freddie Mac is roiling the market for preferred securities.
This is exactly what I talked about in yesterday's rants. Paulson's mixed signals destroy the financial system. By chopping the legs out from the preferred shareholders at Fannie and Freddie, Paulson has signaled to the markets that NO equity investment in a troubled bank (or any company) is safe. This will result in lowered preferred prices (as we are seeing) and an unwillingness from investors to take an EQUITY stake in these companies. This is happening at just the time these companies most need to raise capital. If you cut-off access to capital through equity investment, you are now looking at the bond market and those rates will be unsustainable under any of these models. You can't continue to borrow money at 8-11% while only making 5-6%. That is ponzi scheme financing. The unintended consequences of Bernanke and Paulson's lies, fudgery and poorly planned moves are having and will have a massive effect on companies ability to recapitalize. This is happening at the most innopportune time. There is no possible way that the government can step in and bailout all the companies that need to raise capital to survive. If you want the ultimate doomsday scenario, that is it. Private equity must be a part of the equation and it won't if the government continues with their current shenanigans. You can't continue to bailout failing companies without fundamentally changing the business models. That is akin to subsidizing not bailing. Subsidizing a failed model will only cause smart private equity to run for the hills. Especially if there is the risk that they lose all of their investment in a susbequent government bailout. What a mess.
Treasury Secretary Henry Paulson's takeover of Fannie Mae and Freddie Mac is roiling the market for preferred securities.
This is exactly what I talked about in yesterday's rants. Paulson's mixed signals destroy the financial system. By chopping the legs out from the preferred shareholders at Fannie and Freddie, Paulson has signaled to the markets that NO equity investment in a troubled bank (or any company) is safe. This will result in lowered preferred prices (as we are seeing) and an unwillingness from investors to take an EQUITY stake in these companies. This is happening at just the time these companies most need to raise capital. If you cut-off access to capital through equity investment, you are now looking at the bond market and those rates will be unsustainable under any of these models. You can't continue to borrow money at 8-11% while only making 5-6%. That is ponzi scheme financing. The unintended consequences of Bernanke and Paulson's lies, fudgery and poorly planned moves are having and will have a massive effect on companies ability to recapitalize. This is happening at the most innopportune time. There is no possible way that the government can step in and bailout all the companies that need to raise capital to survive. If you want the ultimate doomsday scenario, that is it. Private equity must be a part of the equation and it won't if the government continues with their current shenanigans. You can't continue to bailout failing companies without fundamentally changing the business models. That is akin to subsidizing not bailing. Subsidizing a failed model will only cause smart private equity to run for the hills. Especially if there is the risk that they lose all of their investment in a susbequent government bailout. What a mess.
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