Reinko

Are Big Banks Too Big to Fail?

The FDIC cannot be 'brought down' because a bank is 'too big'.

The FDIC 'insurance fund' has no real money in it; it is only an accountancy vehicle that measures how much 'insurance premiums' the banks have paid and how much is withdrawn from that 'fund'.

In the fund are only Treasuries, even the coupon is paid with more Treasuries. The money the banks paid over the last decades is long gone and spend on everything from military stuff to whatever what.

Each and every bank failure is paid by enlarging the US Federal deficit.

Don't forget: If you add up all those fake funds in the US government (it is so called hidden debt that brings down the official deficit) and add the official deficit you are over 100% of the US gross domestic product...

Paulson and Bernanke: A Conspiracy of Dunces

Your step 3 makes some sense; the banks complain that accountancy rule 157 is pro cyclical in nature.

But first the healing of rule 157 needs to set in.

Don't forget that a lot of banks used rule 157 in their benifit; they wrote down about 200 billion of their own debt obligations...

That is about the same size of the reported down writings in the first year of this credit crisis, of course it is rather strange to write down your own debt obligations. This lays the axe at the roots of your credit ratings but the banks did it anyway.

Furthermore, all attention is now on the normal bank balances. There is a large shadow bank system behind it where the Basel 1 rules for bank reserves simply do not apply.

The real shit is of course nicely parked in the shadow bank system...

Where's the Bottom? Still Anybody's Guess

A fiat money system like we can can survive a long time if the money supply is under control. There even are some simple laws that guide what money growth should be:

M3 money growth = GDP growth + inflation growth.

But the US Federal Reserve stopped publishing M3 money growths years ago with the weird argument 'This number gives no additional economical insight' (or words like that).

Of course a fiat money system can blow itself up if it is too far in the debt, this is called a Ponzi financial unit.
In a Ponzi financial unit the debt is so high that even for the interest more borrowing is needed.

As soon as the debtors find this out, the plug will be pulled.

An example of such a Ponzi unit is the combined US financial sector;

Even this last year when the credit crisis started they borrowed over 1500 billion more, now the total debt is over 16,500 billion US$ and is growing 10% a year.

The whole problem only emerges when the speed of borrowing is far above GDP growth, this is the case for many years in the USA.

And that is simple to explain: Alan Greenspan never did see the dangers coming with entire sectors borrowing themselves to death...

Prepare to Sell Monday - Cramer's Mad Money (9/19/08)

For me, as a guy from Europe, the Cramer guy is a very interesting study in the social sciences. Any air time to that guy is the same as giving air time to Paris Hilton or Britney Spears.

That part of the USA I still do not understand: Why are celebrities so important? May be they play some role like the knights and dukes did in Europe centuries ago; they had the power and in the USA the people 'famous for being famous' have a lot of power in the sense they get air time every time they burp some silly stuff.

Like Barry Ritholtz lately pointed out: Cramer is part of the entertainment industry and not part of serious financial analysis.

Bailouts Slope: Slippery, and Expensive

Good article: In about Oct Nov 2007 I did see a large bank crisis coming because I am a big fan of the next FED table (total debt):

www.federalreserve.gov...

Me estimations pointed to the estimation that the US financial sector needed 2.5 trillion (or 2500 billion) more debt in order to do 'business as usual'.

Of course such a mountain of fresh debt was simply not available, hence large stuff would happen.

But if you would have asked me in Oct or Nov last year why it would go so slow slow slow; I would never have believed that banks could postpone for so long the 'mark to market value'.

Don't forget: Here in Europe the write downs at the banks are far higher compared to the USA so there is a whole lot of delay in the USA banking system. That is evident!

US Dollar Remains Strong in Spite of Negative Data

The US$ is indeed surprisingly strong while all fundamentals point against the US$. There is lots of evidence that the present momentum is a fake one so after the US$ tops out we will have two scenario's:

1) A swift bounce back to 1.60 on the Euro/US$ pair, or
2) A slow one just like in 2005 and so.

I estimate it will be scenario 1 but you never know it on the currency markets; if the Chigaco cowboys do not like scenario 1 in that case stuff could be different.

Bond Expert: Historic Day Wraps

Now after this perfect weekend where Frannie was capable of hooking herself on the mouth of the US Treasury I can only say this:

Maturing Treasury coupon securities, or bonds, can only be replaced by new 'coupon securities'.

Most folks inside the USA do not understand how much house prices will decline further and so even more folks do not understand the future price tag on tax payers.

Yet replacing old bonds for new ones is well understood: If there is no other way for replacement it is called a 'Ponzi scheme'.

The USA folks are blessed because the Chinese, Japanese and Indian folks do not know what a so called 'Ponzi scheme' is.

Therefore US bonds will live forever, do you agree or disagree with me???

And what about Federal Agency debt? Will that joke seize to exist or will the Europeans cat copy that wisdom in the future decades?

Fannie/Freddie Bailout 'Disastrous Fiasco'

A long time back (before World War II in those depression days) it made sense to create Frannie stuff.

But in the present days this US government thinks it is important to keep up with 'cheap mortgages'.

Yet elementary economy says that when mortgages are 10% cheaper, house prices will rise 11% because people, by definition, will max out their mortgages.

For me, since I want to destroy the US military power, this could not have been more perfect. It is hard to say how costly it will be to the US tax payer but the US military has to suck from that same tax pool and this was the most perfect financial weekend in years...

I can tell you that with grace my beloved Grace!

And the financials going up big time around the world? In the first place I laugh about their sheepish reaction and in the second place we will have 'lower lows' for financials in the future.

By the way; I love it you are mad at this deal. It proofs you have brains!

U.S. Government Is Heading for a Slippery Slope

At the moment of writing, Freddie is down 14% and Fannie was 7% down but is flat again. So upswings are not expected if today's mood prevails over the long run.

By the way, isn't it a famous American saying that 'There is no such thing as a free lunch'?

So why did they create mortgage companies like Freddie and Fannie in the first place? It is true that they made mortgages cheeper for many years but that only generates higher house prices and in the end you are not cheaper. But you have to pay the bill for all those extra cheap mortgage years.

And what about all those foreign investors who bought stuff like that (debt, stock and securities)? It looks like a bunch of fools with too much money and too little brains! Back in 2004 I already warned against this stupid business model and it is nice to observe my insights coming out in sharp detail.....

The 'Canary in the Coalmine' for Fannie, Freddie

This is a case where risks have been regulated fairly well?????

If they were banks, they would have gone broke a long time ago. The absurd low reserves these companies have by law is a joke, in the past the regulaters & law makers never did foresee the present situation.

Just one more detail that proofs that the US government does not understand her own economy.

What Kind of Government Support Will Fannie and Freddie Get?

I do not agree with the statement that Fannie (FNM) and Freddie (FRE) need government support is very low.

Freddie is leveraged above 50 if you define leverage in the next way:

X = total amount of what Freddie is responsible for,
Y = total market cap.

Suppose X/Y = 50, in that case a decline of just 2% in X wipes out all market cap Y. Of course you can delay a bit with derivatives or other tricks but in the end every 2% decline in X wipes out one Y.

Furthermore, the last 16 months did see ever increasing decreases of house values so we are not even halfway with house price declines.

And if you compare median family income to median house prices over the period 1996 to 2006 (the top of the housing market) you arrive at the conclusion that house prices could decline over 50% of the top prices from mid 2006.

In order to ensure that the beloved FED, lender of last resort, simply had no clue what was going on in 2006, at the end of 2006 FED chairman Bernanke stated that 'house prices are just a reflection of a strong US economy'. This implies they did not understand the historical relation between median income and median house prices was broken for a long time.

Just read some old minutes from the FED from a few years back, it is very refreshing stuff to read: they muzzle around completely irrelevant details and the big stuff is never mentioned.

Weekend Thinking: An Agency Recapitalization Proposal

This is the second time that I read that foreign central banks should come to the rescue of Freddie & Fannie; an analyst from Deutsche Bank said yesterday that foreign central banks take over debt from these two houses.

It beats me why foreign central banks would do such a thing, back in the Spring of 2004 I already explained that companies like this only pick up a very special kind of risk and accumulate it beyond belief.
It is true that Freddie & Fanny have taken care of lower mortgage costs for a number of years but this was done at the price of larger systematic risk. This is obvious when you study the absurd leverages they have.

At a leverage of 50 there is only a 2% decline in the borrowed assets needed to wipe out all market cap. And this is happening right now: They need new capital similar to their market cap.

And after that it is only waiting for a new market cap in refi; and so on and so on.

It beats me that foreign central bankers cannot make such easy calcualtions for themselves... Let alone other banks and/or financial institutions.

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And what about the next easy calculation? Find the details for yourself on our beloved internet:

Compare median income to median house prices for the period 1996 to 2006 (the top of the housing market). Gather the information and calculate that house prices could decline over 50% from the top from mid 2006. Use the Case Shiller index because the government info is not completely reliable...

I still do not understand why this easy to understand calculation never pops up in the media files, the UK people are far better in this detail strange enough.

To Have and To Hold: Why a Bailout Would Weaken the Dollar

To user 118015:

Did you know that the US Federal Reserve stopped publishing the M3 money growth? Here is the link in the H6 release:

www.federalreserve.gov.../

It is always funny to observe that when the ECB publishes her M3 money growth, there are always some Americans shouting that the dollar should go up because the Europeans have such tremendous large M3 money growth.

To understand how terribly far the Federal Reserve has gone from just normal economical reasoning let me quote the reason for stopping M3 money growth publications, quote from the link above:

M3 does not appear to convey any additional information about economic activity that is not already embodied in M2 and has not played a role in the monetary policy process for many years. Consequently, the Board judged that the costs of collecting the underlying data and publishing M3 outweigh the benefits.

Needless to say: This was under the Alan Greenspan watch of the FED... Ever in your life seen such a bunch of fools?

Fannie and Freddie: Let’s Call the Whole Thing Off

In the spring of 2004 I already warned against weird business models like Freddie and Fanny have; they only pick up one kind of risk and after that accumulate gigantic amounts of that.

Same thing for the bond insurers; also a nutty business model in a price driven competition environment.

It was only waiting until the thing blew up, it was a long wait but I am very satisfied to see my insights coming out in detail...

Fannie and Freddie Breathe Easy: Capital Rule Relaxed

Strange that this article has only one comment.

It is obvious now that Freddie and Fanny are doomed, that's for sure but why don't we have folks here that decry victory now the DOW surged that much today?

And what about those bond insurers? You never hear from them these days and weeks and where are the folks that cry victory?

I have done some elementary calculations around Freddie and it says they now only have to have one US$ in reserve for every 79 US$ outstanding in mortgages. This is far below 2% of the outstanding stuff while as a comparison commercial banks need 8% in reserves.

But banks devercify, Freddie and Fanny do only a few things so in fact they should have something like 15 to 18% of the outstanding mortgages on the balance as reserves for when the hard times hit.

In the year 2004 any idiot could see that hard times could hit anytime?

Where are the folks that cry victory???????????????...