Smarty_Pants

Great Depression Not Imminent, But Inevitable

"I've abandoned free-market principles to save the free-market system," [GW] Bush told CNN television.

Should we expect any different from our walking oxymoron of a President?

Be afraid. Be very afraid.

The Right Kind of Bailout

"What's really needed here -- and what we obviously aren't going to get before January -- is a clearly explained and internally consistent government fiscal policy"

Ummm ... they're winging it?

They are also in something of a catch 22 situation.

When the only policy tool you have is a hammer, every problem looks like a nail.

10 More Notes for the Current Crisis

"My initial thoughts are that the sale of the foreclosed house will be a wash with regard to deflation since a FRB loan will likely be created to buy it." - moonbat

True enough. Perhaps modestly deflationary then, as the new loan will be for less than the old loan.

I still believe that an underwater foreclosure puts some of the bank's capital into other hands (original seller of the house), but that doesn't increase or decrease the money supply, simply change ownership for that amount.

However, enough underwater foreclosures will bankrupt the lender eventually (without a bailout that is) as all their operating capital will be transferred to other hands.

'Tis a very tangley subject to analyze. Difficult to say if any line of thought is heading the right direction.

10 More Notes for the Current Crisis

"people with cash can scoop up bargains but why should the bankers be rewarded with the auction proceeds" - moonbat

I think the banks need to offset the phantom liability on their balance sheet with the foreclosure. Otherwise their balance sheet liabilities would grow without end and without offsetting assets. Seems like that must violate some sort of accounting rule.

Not sure I'm 100% on all the technicalities on this, but here's a stab at it.

1) Banks 'create' money to lend for a mortgage.
2) Bank balance sheet adds the IOU (mortgage) as asset, cash issued as a liability.
3) Mortgage defaults, bank forecloses, house replaces IOU as asset
4) Bank sells house at market price (less than mortgage amount)
5) Bank must take a loss on balance sheet so the numbers come out even, thereby eroding their equity capital.

Two things I can think of on this issue:

If the bank forecloses on enough underwater properties their capital base (reserves) will erode to nothing and put them out of business.

The money originally loaned out and spent to buy the house is still circulating, but the bank has received less money in settlement via foreclosure. Doesn't this increase the money supply?

It seems to me that the foreclosure process, when done with underwater mortgages, removes capital from a bank's balance sheet and puts it into circulation, though it doesn't "create" any new money after everything is settled.

Am I missing something?

Still, the issuing of the loan did increase the money supply and that's (temporarily) inflationary, just as the foreclosure and offsetting of the loan is deflationary.

10 More Notes for the Current Crisis

"cursory work [leading] to a bad result that ... [gets] worse."


That's gub'mint in a nutshell. You also forgot to mention that the taxpayers always wind up holding the bag.

Couldn't the New AIG Bailout Have Waited Until January?

ONLY $24.5 Billion? sheesh! That's a lot of guacamole!!

AIG Bailout 2: Why?

Anyone want to guess how much of this bailout money finds its way to Goldman Sachs' pockets? That's the only reason I could think of off the top of my head.

Dear Fed: What Do You Have to Hide?

e) All of the above.

The FED and USTreasury are in "wing it" mode. Legal technicalities are ignored and Congressional oversight doesn't understand or care.

Unfortunately the steps taken will only alleviate the symptoms while spreading the disease. You can't borrow your way out of debt.

Market Overview: Set for Fresh Market Lows?

Wow! FNM with losses of $20 Billion for one quarter?

What does that say about the business model of relying on "implicit" gub'mint guarantees?

Note to posterity: If the gub'mint gives you a 'sure thing' you should take your money and run away as fast as possible because some insider is trying to steal it.

How AIG Failed

Cardinal rule of Trading is to never establish any position which, if wrong, leads to your complete ruin. Same applies to business, or sports for that matter.

There's a reason why football teams punt on 4th and long. The risk of failure is too large to try for the first down. AIG figured it had a "can't lose" 4th down play only to find their quarterback sacked in their own endzone.

Only the gub'mint would be foolish enough to subsidize this sort of market behavior.

US, UK, and Germany Compete to Nationalize the Most Banks

I see news of the imminent bailout package is having a wonderful effect on the markets this morning. Perhaps the Cramer effect is overwhelming the smart money.

Sadly for most, the time to sell the market was November 2007 or June 2008. On the upside, selling now will probably get you the best price you'll see for quite some time, unless you hold assets based on precious metals.

AIG: Closing My Long Position

It would seem to me that any company where the US Government has majority voting rights is one, as a rule of thumb, whose shares it would be wise to avoid owning.

One need only look at FNM and FRE to see that the government won't hesitate to change the rules on a moment's notice and leave the other shareholders with next to nothing for their troubles.

The Greatest Short Sale in History

Regardless what Congress authorizes it will be a bumpy ride.

If they don't pass "the bailout" the financial house of cards will topple, led by the big banks.

If they do pass the bailout, in nearly any form, the market will rally near term, the dollar will continue to fall, long interest rates increase, inflation grow, profits fall, and market soften long term.

The second option will take much longer to unfold, but the bumpy ride will still occur, just more slowly.

The economic patient has a sucking chest wound and Paulson is suggesting a very expensive band-aid will cure everything.

Long term prognosis isn't very pretty for the next few years, possibly longer. The only difference will be the severity and duration of the resulting symptoms.

Prepare accordingly.

AIG: The CDS Market Bailout

Not to worry. AIG had over $600 million in preferred stock in FNM and FRE. So the FED has that going for them.

My understanding was that a CDS was basically an insurance contract on the MBS's that were sold to "investors".

The counter parties to the FED/USTreasury (formerly AIG) on these failed CDS's don't have a "profit", they simply have avoided taking a nominal loss on the garbage MBS insured via the AIG CDS. They will receive their 'insurance' payoff in freshly printed (read: watered down) dollars.

The 'loss' resulting from the decreased value of the money so printed and received in payment is as yet unkown, but we're all in that boat.

A Turning Point for Financials

From what I've been able to find, the new "Plan" won't be much help to shareholders.

Essentially the FED will post a fixed amount of money and all the desperate financial firms will 'bid' an amount of MBS to exchange for the cash. The firm who is willing to take the biggest bath on their 'asset' will get the cash.

So the most desperate firms will likely 'bid' to the point where the money they get will just offset their outstanding debts. ie. trade all their non-performing assets for just enough cash to stay afloat.

Net result: Financials will trade everything for the chance to start over at ZERO. I fail to see how this is very good for the stock values of these firms. After all, they will have to post losses to write down the original investments on these assets.

Meanwhile, the FED will be picking up assets at pennies on the dollar which will likely return a trickle of cash flow until the foreclosed houses can be sold off at rock bottom prices.

The only people who will make money on this deal will be the FED, if they're lucky.

Anyone who still owns stock in these firms should sell while the price is being run up simply from mis-placed euphoria. Once the market has a chance to think this through prices will start falling again to reflect the reality of all the losses yet to be taken for the bailout.

My two cents worth anyway.