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The Big Banking Emperors' New Clothes

RE is coming back this year, or soon; don’t doubt it.

With the new FASB mark to fantasy ruling, the following changes to key statistics is under way:

1. Banks capital ratio is now fantasy ratio, and will allow them to lend.
2. Banks can now hold onto REOs, indefinitely. There’s no incentive to sell at market. By holding REOs, banks can rate that REO asset at 2007 level. Sure they’ll have to put taxes and maintenance, but that’s going to be like a cost of business to keep 2007-model alive.
3. Similarly, Banks can now DRAGGG ON the NOD and foreclosure process. Expect things like allowing people to stay, semi-permantly (as in for months and years at a time), rent free; without any foreclosure NODs or auctions or what not. Next few months you’ll see a sharp decline in new foreclosures as the banks adapt.
4. Commercial RE (CRE) was going to be a bomb in 2009, because all those commercial loans are due and the market valuation means no bank will refi them. Well no more, we’re not using market valuation anymore, so those model all says these CREs are awesome profits, so there’ll be increased refi of CREs and the crisis averted.
5. With the new model, HELOCs may even be a viable source of credit for consumers now; Those on the margin may find banks offering HELOC now, the home ATM is now open!
6. Ditto to Credit Card ABSs, the model says much better profitability; In fact, there’ll be more solicitations for people to own more cards; coz the model says it’s such good business, plus the customer can use one card to pay off another — further enhancing default rate for their model!
7. The obvious is that all the bank’s financial releases for the rest of 2009 will beat expectation now. So now permabulls have ammunition to say recession is over.

Bears are fighting a losing cause with the deck to heavily stacked against them.

Are these going to be a permanent solution, or actually save us from impending doom? Heck no. It’s the same playbook from Japan that pretty much sealed their fate to the 20 year economic decline. *BUT* it’ll drag everything into SLOW MOTION decline.

Kinda like treating an acute disease that *MAY* kill you, by taking a poison that kills the bacteria and the short term disease problem, but guarantees you will die SLOWLY. We just did that.

I thought I could time the market and buy a house in 2010 or 2011; I can see my folly now. The govt will make it a money losing proposition to own a house for 20 years. The govt will stretch it out so long, so maximum number of people are bearing the housing decline and nobody can “time” and get “out” — in the end you need a place to stay, and that is their trump card.

I think I’m so depressed I’ll go jump off a bridge somewhere now.

Rethinking Subsidized Finance

"I challenge readers to make the case that banking, in its long centuries, has ever been a profitable industry, net of the costs it extracts from governments, counterparties, and investors during its low frequency, high amplitude breakdowns. Banking is lucrative for bankers, and during quiescent periods it has served a useful role in financial intermediation."

I agree. Banks exist to serve the bankers primarily, and the society second (and only the surrounding environment serves to further bonus of the bankers themselves). As for investors of banks, they must possess balls of steel and be willing to play a known bubble blower industry and risk being the last great fool in their investment scheme.

This absurd behavior would never be acceptable for any other industry: Imagine if the medical industry somehow sells "medical credits" that represents a unit of doctor work; and create a crisis that ultimately crashes the medical credit system -- and then turn around and refuse medical work because of credit shortage or needing bailout. Or that the electricity industry setup kilowatt banking and it crashed; which threaten to shutdown our entire electric grid?

In any of the two cases, the govt will nationalize the "grid" if any catastrophe of the like blows up and harms lives, almost without a thought. Why won't we do the same to banking industry?

I want to emphasize that we're back to 1997 DOW people!!! And still going back! Talk about time travel backwards economically, sheesh!

With such destruction (more than a decade of destruction in the USA; more than TWO decades of financial wasteland in Japan) wrought, why do we still want to do the same thing?

I agree with the author that banking seems to be a net, capital, money and sanity losing proposition for the whole economic system.

I disagree that the way to manage it is to keep banking alive, esp to keep it alive in the private world.

Fire Fighters, Police, Schools and Public Water are some examples of net money losing ventures; that doesn't work well in a private setting; but can exist under govt controlled settings.

BASIC banking should be almost fully govt controlled. It should be risk minimized and heavily regulated. It should also be completely govt backed and insured.

The maverick and risk financial sector should be completely unregulated and completely NOT INSURED by the govt. It must also be periodically disassembled to prevent "too big to fail" syndrome; something akin to our anti-monopoly regulations; but this will apply to anti accumulation of market cap and size.

Only by doing that will we remove the threat and choke hold that bankers have over our economies.

Note that what I described is NOT nationalizing the banks; it is instead recognizing the author's point that society is already subsidizing; and using that fact to SPLIT THE INDUSTRY INTO 2 -- low risk, subsidized and high risk, unsubsidized, vegas style.

U.S. Debt Watch: Paths to Repudiation

What I say applies to countries as well:

China should spend more, heck a LOT more, if it has the reserves to do so. Ditto to any country that still have capacity to do so on the balance sheets.

Anyone with excess resource, companies included, should buy and acquire resources, other companies, assets.

Not blindly, but buy if the need is there and the affordability is justified. Trying to time the bottom is NOT the way out of this. The bottom will form when there's enough buyers, not when there's enough waiters.

We need to FORM the bottom, not TIME the bottom.

U.S. Debt Watch: Paths to Repudiation

The key element I agree with this article is this:

"The process is already underway."

What makes you think that repudiation, either the process of, or the threat of, either gradual, or sudden, isn't the reason for the crisis we're witnessing? I on the one hand, believe it is one of the key reason for the behavior we see in the market.

Everyone knows repudiation is coming, and is trying to do trades to "escape" it -- whether by shorting, or by buying gold, or by stuffing money in mattress or by NOT LENDING or by not employing, by not spending, etc. These actions exacerbate the situation and is creates a self fulfilling prophecy in some ways.

So the key question is whether repudiation will actually solve the problem, or actually be the straw that breaks the camel back and crashes the system?

How can anyone be so sure that this is the "right" action to do?

I implore everything to think deeply about this. For if this is right, then the correct means to solve the jam is to fight the perception.

Remember, USA was on the brink of collapse in 1930's, and a true leadership call by the President to NOT withdraw money from the bank; and trust the recovery is one of the key actions that helped restore stability. People queued up to deposit money, and it really helped to unjam banks.

Perception is everything in an economy. In some ways, if everyone decides to hoard, no system can survive, not even gold, not even *RICE BASED* economies (Ancient China, trades rice as a currency.). It's a deadly spiral that punishes people who's NOT hoarding, so it seems to justify hoarding, which worsens the situation.

It's akin to society competing with each other to see who can starve the most. If I can starve more than you and you die, I laugh at the ones who died and feel morally justified to do so?!

I have savings, heck I'm one of the biggest savers in everyone I know in my circle, but I also realize this is not a crisis that can be averted by saving or being miser, or being "prudent" or being thrifty. For someone can always out thrift me, outlast me, and if this is the criteria and the trend, even my formidable savings will be exhausted one day.

Despite everything I disagree with Keynesian economics, one thing is true. Price is sticky on the way down (witness houses, salaries, pensions, benefits), which means trusting supply and demand curve to self adjust is a fallacy (you'll have to wait a LONG LONG time for prices to adjust, possibly longer than what you can survive through or what the system can survive through); for it can turn into a self fulfilling prophecy that wrecks the whole system.

Unfortunately, improvement in technology is making this worse: panic happen much faster, and more importantly: Employment and costs can be reduced ad nauseum, esp on the way down in terms of capacity. (Automating everything, don't even need to upgrade systems as output is down. You'll be surprised how little workforce you need to keep things running.) Computers and robots *can* do majority of work, esp if you reduce the need to upgrade and stay ahead.

Recognizing this is half the battle. I'm not trying to preach reckless spending and wild gifting; but we need to recognize the miser craziness going the other way too.

I want everyone to realize that we all play a part in making this WORSE, with every bit of action we do. If you postponed buying something you need and can afford today, it may cascade in a way that you may not be able to afford that thing you need soon.

The key is to draw a line in the sand, and spend anyway -- not recklessly, but also not give in to thinking you can save on a need and get yourself out of the crisis. It makes it worse.

Nationalization: What Does Treasury Really Think?

At least this administration has the intelligence and knowledge that what is says could end up being taken for future action.

Recall last time when Paulson tried to allay fears that takeover simulations with Fannie Mae is only posturing. Since the leak, FNM stock crashed. Less than a fortnight after that, Fannie Mae is in conservatorship.

That was an utterly foolish way of doing it if they hadn't planned on doing it.