Crocodilian

Charlie Gasparino: Another Crash 'Has to Happen Again'

Oh woe is us, "another crash has to come".

Sure.

"I don’t know when it’s going to happen, but if history is any guide, it has to happen again"

It will. So what?

Amid all the people being blamed, I don't see the feckless and ignorant American voter, who has consistently made clear to the people that he elects that he wants "more stuff, and someone else should pay for it, some other time, but no, not me, not now".

The root of our trouble was the collusion of voters and leaders in the biggest fudge of them all, the "implicit guarantee". What is an implicit guaranty? You think anyone would let you sign for a loan with an "implicit guarantee"?

Has President Obama's Mortgage Modification Plan Failed?

@BradJohnson
" If the government really wants to put a clamp on home foreclosures, they should make it more painful for borrowers when they foreclose. In my state, all that can happen when someone defaults is the bank takes the house. "
----------------------...

Very few people are aware of the enormous state-to-state variation in rules surrounding foreclosures. Most of the states with the worst problem (but not all) are "non-recourse" states, meaning that the lender can't look to the borrower for anything more than the title to the property. California, Arizona & Florida are all non-recourse states and comprise a big part of the problem

The only full recourse state that ranks high in foreclosures is Nevada.

These rules are state rules-- whether or not it would be a good thing to create national rules, particularly when mortgages are sold into national markets which don't necessarily appropriately distinguish between the various states, is an open question.

Revisiting the MBS Debate (Which We Should Already Be Past)

There's a lot of interesting argument here. Let's take the "initial premise fail" -- the question of whether the large MBS positions at ML etc, indicate that they were "eating their own dog food".

My impression is that author is correct in discounting that assertion. My interpretation of the large MBS inventories carried by the firms was that it was seen as part of the "MBS manufacturing process"-- that is, you buy up mortgages, slice them into tranches and mark them up, and sell them on, and get paid your bonuses.

My guess is that the banks got stuck with "slower-moving" inventory as the price of putting these deals together. That is, they didn't carry the inventory because they _wanted_ it, they carried it because these were the parts that they were having a hard time selling.

The End of the Credit Crisis

[correction] in the above post I'm referring to oil in early 2008, not gold as is stated.

The End of the Credit Crisis

@WillL
On Mar 02 07:09 AM WillL wrote:

> While I enjoyed the article and was grateful for a unique perspective,
> I agree with the tenuous sentiment on a "skyrocket"

> As far as I can tell, there is almost zero chance that shorting traders
> will drive a recovery in banking stock prices, though write ups would
> certainly improve the incredibly negative sentiment on bank stocks
> and could be the beginning of a longer term recovery.

----------------------...

Just go back and look at the price action of oil in 2008-- we've seen enormous leverage and excesses in speculation come crashing down not six months ago, with the shorts getting bombed in the process.

Some portion of the financials' collapse has been genuine longs selling, but its only a portion. There's been mountains of speculative selling.

The commodities longs of early 2008 were, in many cases, the financials shorts of early 2009. Notice the similarity in the _pace_ of the movement in stocks. GE's stock graph over the last four months is, inverted, Gold's chart from April to July 2008.

So I'm going to say that the author has something here, and he's picked up something clever and logical. If you were a market-savvy economic team (which the Summers-Rubin crowd is), and you could put in place policies which have no cash cost, but which refloat the balance sheet, and the lending -- all using market appetites, you'd do that, right?

And the next sweet piece of the plan is that as this happens, you start nailing the shorts . . . who are not patient holders of anything. They stampede into a position to drive it down, and they stampede out. Take a look at when oil broke-- the speculative shorts came undone just as fast as they were put on.

No guarantees here, but kudos to author Trias for pointing out something quite ingenious.

Rethinking Subsidized Finance

"But in aggregate, has banking ever been a successful industry for capital providers?"

----------------------...

It would depend on the unit of analysis. Banking is to the economy as airlines are to aircraft construction and aviation services-- a highly levered and disastrously volatile business, which supports much better businesses and useful services which enhance the public good. You want the former to run as well as it can, accepting that its a lousy business, so that the latter can function.

Think about the names of early American banks: "Farmers", "Merchants", "Corn" . . . these all reflect the very real businesses that require a bank to operate. Until recently, financial institutions tended to evolve out of other services to meet business demand (eg early paper currency were "goldsmith's certificates" -- paper reflecting gold on deposit at a goldsmith).

What has occurred with "financial innovation" is that bankers cooked up products no one actually asked for, and then marketed them to earn fees. The story of AIG Financial Products and JP Morgan -- who cooked up the idea of using AIG's balance sheet to earn a little extra by selling CDS -- is an egregious example.

We need banking, but we need banking that serves the business needs of their customers -- not their speculative appetites,

AND . . . this is a big "AND"

does NOT introduce systemic risk by writing an "implicit put" to the taxpayer (eg "you don't have to bail us out if this blows up, so long as you don't mind cratering the system")

AIG Bailout: Initial Cynicism Justified Now More than Ever

On Feb 25 02:24 PM endoftheworld wrote:

> This government can pride itself on the greatest ever re-distribution
> of wealth - from those that win and earn to those that risk &
> lose. This exemplifies the curious foundation for American society
> - capitalism when things are good, socialism when things are bad.
> And people wonder why we're hypocrites.

You might ask the question: Who is the Government bailing out when it "bails out AIG"?

They are clearly NOT bailing out AIG itself -- AIG shareholders will end up with zero.

The people who are being bailed out are AIG's counterparties on the derivatives contracts they wrote. So if, say, John Paulson bought a CDO on some toxic MBS security, underwritten by AIG-- and that MBS has collapsed . . . its payday for John Paulson.

Would be really interesting to know who who took the other side of the derivatives book that AIG wrote: they're getting 100 cents on the dollar of what AIG wrote, paid for by you and me.

AIG Bailout: Initial Cynicism Justified Now More than Ever

On Feb 25 11:58 AM FORMERclient wrote:
> Sell it
> NOW before it becomes worthless!!!!!

It actually _is_ worthless. I'm not sure why the stock trades for anything (44 cents, giving a market cap of $1 billion) , but the government explicitly owns %80, and are going to have to come up with tens of billions to keep it from going bankrupt.

There is no one who will buy the company-- Liddy has been trying to sell bits of the company since the fall, most recently, there were no takers for their Asian insurance unit-- see the WSJ story
" Any Takers for AIG's Asian Arm?
Auction of a Crown Jewel Generates Scant Interest; More Fed Headaches" (WSJ: 2/25/09)

AIG Bailout: Initial Cynicism Justified Now More than Ever

On Feb 25 11:35 AM ecliptix543 wrote:

> Absolutely brilliant. Why create a bad bank when we already have
> the largest and worst one in world history at our doorstep?!?!?<br/&g...

My point was that the AIG derivative book, and the AIG Insurance company don't belong together. AIG Insurance company is profitable, can have a future, and its operationally, legally, and functionally distinct from the derivatives book (AIG Financial Products)

The "Bad Bank" model, as it applies to AIG, means separating the derivatives from the insurance business.

Something very much like this will happen if, as rumored, they file for bankruptcy.

AIG Bailout: Initial Cynicism Justified Now More than Ever

We need a new term for AIG at this point. "Bailout" implies that there's something that might float, if you "bailed" enough water. This doesn't apply to AIG.

AIG appears to be an (historically) attractive insurance business, to which a ruinously (criminally?) bad set of bets were attached.

The "bad bet book" dwarfs the insurance company, to the extent that the insurance company doesn't really matter; of all the cases for a "bad bank" solution, AIG is among the most compelling.

U.S. Debt Watch: Paths to Repudiation

Its worth observing that this article has lots of words, lots of opinions, but no numbers. Not a single one. That's a remarkable achievement in an essay about a subject for which lots of numbers are available, and where no meaningful discussion is held without reference to data, ever.

When I read an essay about macroeconomic issues, I expect to find relevant _data_. "House of cards" isn't data. Its an assertion. Might be true, might not be. There's no data to support it, so how would anyone know?

In a basic macroeconomics class, an answer without reference to any facts might, charitably, get you a D.

"Show your work".

Time to Buy Bank Stocks

On Feb 12 05:03 PM klarsolo wrote:

> Wouldn't preferred stock ETFs be a smarter bet than common stocks?
> At least you'd be ranked pari passu with the government TARP money
> and don't have to worry about additional dilution.

You got it. There are all kinds of preferreds, converts, and bonds which are ranked ahead of common, and which sport attractive yields. Common is probably the worst way to play a dodgy bank. Bank of America debt has to be paid, B of A, preferred stock still pays its dividends. . . and the common? Worth anything? Who knows . . .

Thinking the Impossible: Could Bank of America Go to Zero?

On Jan 29 05:33 AM Sentinel wrote:
>
> Remember all you Cornucopians....we have been, since the Reagan administration,
> an ultra leveraged, ultra high debt load society. Debt cannot be
> piled up forever. Particularly, since our percentage gains year
> over year for the last 20+ year has been shrinking.

Sentinel, I agree with your points generally except this one.

While Reagan put us on the path to more leverage, leverage in the US was actually at its post-war low when he took office (Debt as % of GDP reached a post-WWII low of %30 during the Carter years)

Reagan's budget deficits actually probably made economic sense-- with a young country (average age was nearly a decade younger than it is today) and not much debt, adding a little more debt to the mix was both fun and good policy.

Trouble is: it was way too much fun, and we got hooked on the drug. When Cheney said "Reagan proved deficits don't matter" he didn't stop to add "but only if your national debt is small"

Shock and Awe: Government Raises Citi Warrants' Strike Price to $20

"Disclosures: Author is long AIG, BAC, C, FNM and FRE."

Um. Gosh. No RBS?

At this point whether the common of any of these issues ever has any value is really a question of whether or not the government wants the common to have any value-- these common issues are "Tsarist Bonds" -- they look to the political winds, not financial strength, for whatever value they will have.

I don't know what an investor can do in these stocks . . . its a political speculation, and at some price its an attractive gamble, but its not for an investor.

Banks: The Final Countdown?

> Nationalization is coming no matter what. Either it is a stealth
> nationalization like the one we have now but larger, or outright
> nationalization or it will be the nationalization of the toxic waste
> through a Resolution Trust style Corporation.
>
> But Nationalization is either way is coming.

To a great extent, the banking system already _has_ been nationalized. Not on the management side, whether we're speaking of Citi, of B of A, of Morgan . . . but in all these cases, people who do business with these banks look to the credit of the United States, not of the bank, for their security.

The question is more " how will the banking system eventually be de-nationalized? " at this point.