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Start Aggregating Already!

I think the thing you are missing is the degree of disparity between the bidder and the asker. If the last "trade" of a subprime MBS is 22 cents per dollar, but Citigroup still has it listed at almost 70 cents per dollar. We are talking about huge differences in value. I like the solution where the government pays market value, plus whatever else the bank asks for. However, this excess requires common stock dilution. Then, there should be an opportunity for the bank to "undilute" the stock if the actual asset is sold for more the price the negotiated.

This is essentially, the insurance "ring fence" solution without actually taking the asset of the books (which really shouldn't make a difference if enough transparency is present).

What Does a Bonus Really Cost?

I don't think you would like the outcome of following your logic. So, since most of these banks are insolvent, shouldn't all the bonuses be clawed back since they ended up losing the "game" at the end of the day? Banking is a "team" sport, and if your "team" loses, like most US banks and investment companies, why should the "team" receive ANY bonus. I think there are plenty of individuals that will play less risky, make less returns in the short term but not blow up the entire system during the process. These are the people that should have been hired to begin with. I wouldn't really argue that any single institution including GS or JPM did well.

Nationalizing Bank Losses

I think there is a basic assumption that is wrong. Banks simply DO NOT have additional capital to lend. Any excess will easily go to loan losses as a result of the home price decline. Yes, this does further exacerbate the problem because they are now hurting the private sector for leveraged companies. But, telling a bank to lend more is like telling someone to eat all the rations on a raft lost at sea!

So, the domino has fallen from the house price bubble, to the banks residential real estate portfolio, to the private sector businesses. If we don't stop it, it will domino into hitting the commercial loans then back the banks balance sheets and certainly cripple the banks in a Depression style insolvency.

I think the core issue needs to be addressed, but this is actually a bit hard to identify (esp. for the government). The core issue is that our financial system is flawed and that our model allows, perhaps encourages, executives to take on excessive risk for excessive short term return and compensation. Trusting a banker to act for the greater good, is a little naive on Greenspan's part.

I think the best idea I've finally heard suggested is increasing capital requirements on a sliding scale based on profits. A variation of this was suggested at Davos. This stifles excessive growth and could well prevent bubbles. Bubbles are the banks worst enemies and the regulation needs to be put in place to prevent it in the real estate sector at least.

Now, the only way to fix the system is to capitalize the banks, stop the job losses, and smooth the home prices at the same time. Easier said than done, especially while not inflating one's currency like Argentina.

On Jan 31 01:08 PM johnny g wrote:

> I have an idea that can help resolve the problems facing both our
> economy and financial industry. Front lines reports from academia,
> government, and the media explain in good measure that banking industries
> uncertainties and fears regarding asset viability on their own and
> others balance sheets have created immovable road blocks to reasonable
> distribution and capital access.
>
> The idea seeks to collapse the period of time to which a more predictable
> and reliable flow of capital through our system can be arrive at;
> it cannot in and of itself resolve all systemic problems. The limited
> and uncertain access to capital has in large measure hobbled our
> collective economic system; interested parties to productive assets
> have been beset by a vicious cycle of pessimism and diminishing valuations,
> many times leading to a complete loss to owners and counter parties.
> The recommendation is designed to impose upon the banking system
> requirements to fully deploy their capital, with the aim of arresting
> this downward cycle and arriving at the nexus where collateral valuations
> are affirmed and once again become a measure of strength and not
> weakness.
>
> The basic tool and in this solution is taxation. A new piece of legislation
> is to be formed in which banks are taxed when not meeting the required
> leveraging minimums, and somehow rewarded when they demonstrate full
> leveraging deployment. Despite the cajoling of the Feds and Treasury
> after massive capital injections and asset swaps, the banking industries
> collective uncertainties are preventing their raison d'être, banks
> continue to under deploy and hoard capital, this is where we are
> collectively bogging down.
>
> As commercial banks comply with new leveraging requirements, they
> deploy capital to the most favorable credit risk. A new competitive
> lending environment will spring forth; banks will compete with other
> banks to actively seek out the best risk reward borrowers for their
> offerings, or be subject to this new Federal tax or penalty. This
> new velocity of money will energize our economy, restore asset predictability
> and grow balance sheet valuations without further deficit spending.
>
>
> This novel catalyst along with other primers will reduce the distance
> and time that the wheels of Capitalism need to travel before growth
> and optimism is restored; preventing unneeded failures, losses, and
> human hardship due to degrading asset valuations and capital deprivation.
>
>
> Let the chip fall where they may there after. A forced renew will
> have begun.

S&P 500 Fifty Day Historical Volatility May Have Just Peaked

Bill,

You might be on to something. I think we've run out of companies that could fail to push the VIX to new highs. This news is comforting. Buyers should slowly trickle in as the VIX returns to normal levels. Once the VIX is down to the 20s, where do you see the S&P? I would have to estimate 1100 as a ballpark. Great, quantitative article.

Bank of America's Acquisitions: What Was Ken Lewis Thinking?

Reggie, I sure hope a "lowly blogger" doesn't know the intricate inner workings of BAC, but I fear you may be right. I think BAC is completely depended on the Fed mortgage bailout and at the mercy of whatever price they offer. However, if they negotiate a decent price it will make many of your points moot as that are no longer a real estate company...that would now be the responsibility of the Fed and and private equity guys that get in on the deal. Best of luck, I love your posts!

What's the BofA / Merrill Synergy?

I don't think a purchase of $29 is a ridiculous premium at all. All the analysts seem to believe that the fair value is at least 40. If BAC is right they will have a huge market share over its competators and it seems like it is going to become the new Citigroup.

What’s Going on with Sirius XM Stock?

Your information can not be correct. I'm long SIRI as well but there is no way that the combined company has positive equity at this point. It's book value has to still be negative (although it may be positive very soon). Please double check your number on assets, you may be adding zero.

The 20 Highest of the High-Yield Dividend Aristocrats

I think BAC has too much pride to cut their dividend. The credit spreads are really coming into a more normal range. If BAC can really make $4/share in the next 12 months, I think they will be able to afford their dividend with breathing room.

Homebuilder Values Overshot to the Downside?

CHCI is not the symbol for California Costal Homes. Otherwise, I enjoyed the article.

Dividend Analysis: Bank of America Corp.

Norman, no offense, but it is because of people's fear that other's are able to get the stock at such a low price. Frankly, BAC and JPM or almost identical stocks and JPM is trading a quite a premium (based on projected EPS).

Don't believe Paulson: S&L 2.0, the Bank Failure Redux

Reggie, your articles are by far the most informative (data-packed) that I've seen relating to housing / banking. I do have one question. You seem to imply that inflation is going to get out of control in the near future. Does this also apply to home prices? If so, we would have inflated our way out of the crisis; if not, then we really don't have terrible inflation if home prices continue to drop. I would like to know what your thoughts are on home prices, because inflation may be the reason folks are jumping into homebuilders (myself being one of them). Thanks, Reggie.

-Jack

Dangerous Optimism in Homebuilders

How do you parse this data: Even with the sales rate more than 50% it's highs, inventory is still going down in terms of volume (granted each home is sold at a lower price). This could signal that home prices are done going down. This could mean that the writedowns are over and it is no longer to price in further writedowns.

Libor Jump Means More Pain for Financials

2.7% to 2.9% is not that dramatic. Just a few months ago Libor was above 4%. I think banks can easily handle this rate. Homebuilders were really struggling when Libor was a lot higher, but this rate is near inflation. I don't see where the panic is. Plus, why would you single out big bank financials and not something more specific like mortgage companies?

Closer Look At The ARMs Reset Problem

This is a very thorough article. I enjoyed it, but I believe that the 2011 problem may be overstated. I believe home equity should be built up by this point (home values may be near all time highs 3 years from now). This would only require a market stabilizing and perhaps increases in value 2-4% from 2009-2011.

Even if home prices remain at their current levels, the Fed understands the problem so well, that they will jump in again and be more accurate with their actions.

Upside to Falling Prices: Housing Affordabilty Index Reaches 4-Year High

Finally an article showing that the housing market isn't trending like the Japanese asset bubble. If mortgage rates stay low, home prices are clearly more affordable. However, this is exactly how we got into this mess to begin with. As inventory is reduced, interest rates will be allowed to climb. Hopefully, this time around, speculators won't jump in and homebuilders will be reasonable with their new home development.