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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.

America's Banks: Are They Really Insolvent?

We don't have the luxury of a lost decade.

Japanese are furious savers. Their govt can exploit that and use their behavior / savings to eventually plug the hole. That gives them the ability to maintain economic status quo statically without growth nor catastrophe.

US Citizens are the furthest thing from a saver. As a result there's no funding behavior that the govt can exploit to eventually plug the hole. Right now we're muddling through by Fed's carrying of debts, but that's clearly not sustainable. You can't run a 10 year fed bailout. In fact, with our huge, govt debt and running deficit, our debts run a natural course to crush the economy unless we can grow / increase enough cash flow to service it. A static economy doesn't work in our case.

So don't think for a second that the current "relative" calm in the market can be sustained for long. The Govt has to decide: Default, Nationalize or hyper inflate; soon or the market will decide for us.