Jan VanDenBerg_

To Monetize or Not to Monetize: Who Cares?

Our monetization will not work the same as Japan's because Japan has a huge trade surplus, is a creditor nation and is exporting capital to the world.

We have a huge trade deficit and must borrow massively every day just to pay our bills.

Also, Japan started the era with a grossly undervalued currency which had suddenly appreciated, quite against the wishes of the Japanese government (remember Plaza?). The monetization was largely an attempt to slow that appreciation.

Our situation is almost exactly the opposite.

Jan VanDenBerg

Mixed Regulatory Messages Slowing Community Bank Lending

I think this is happening, except on the FHA front.

I just had the buttend of WaMu, which holds my commercial loan of $2.9 mn, assumable, that if I want to sell my property, the buyer must come in at 40% down.

This is for a solid, cashflowing property whose value has GONE UP during the credit crisis due to the fact that the closest thing to government bonds in safe income in a recession is a well-located affordable apartment complex.

Now, if you're not into commercial property, you may not know what a STUPID requirement like that does, but I can tell you that it cost me at least $200,000 that instant.

These geniuses are destroying the value of their own collateral.

This problem needs fixed.

Jan VanDenBerg

Leverage: The Primary Cause of the Economic Problem

Leverage should be regulated in all financial institutions, just as it is regulated in banks.

The required reserve ratio for all assets should average about 5% and this for ALL financial institutions.

The required reserve ratio is now a regulatory constraint placed on lenders.

There is no equivalent ratio laid on borrowers, such as hedge funds. The lenders are supposed to have the good sense not to lend so much money to such risky borrowers.

If the required reserve ratio is demanded of all lenders, greater lender caution will prevail due to the lack of endless funds to lend and the riskier borrowers will be turned away. The higher reserve ratio would limit money supply growth.

The central bank should target, or at least watch, not just the monetary base, but also broad money growth, including all derivative products and that data should be published.

The Fed's stopping publication of broad money data a few years ago was a bad idea.

It would theoretically be possible to also regulate borrowers who are investing others' money, but this has never been done.

Jan VanDenBerg

Financial Stability and the Fed

These bubbles are best prevented using regulation of the banking/broker/insuran... system, not with changes in monetary policy, such as interest rates.

Isn't that what the Fed is supposed to do -- regulation of the financial system?

We need a more centralized bureaucracy for financial market regulation gathering together all the regulating agencies and it needs to be charged with promoting financial stability, exactly as Mark Thoma suggests.

If leverage throughout the financial system had been adequately regulated, much of the explosion in the broad money supply -- totally ignored by the Fed, who focusses quite incorrectly on narrow money aggregates -- could have been avoided.

Global leverage should be held to reasonable levels.

All financial institutions making loans (so, including brokerages offering sales on margin and not including hedge funds, which receive loans) should be required to maintain reserves of at least 5%. That implies leverage of no more than 20 throughout the entire system. That is quite unlike the 40s and 50s we have been dealing with.

Overleverage must be targetted.

Raising interest rates or tightening monetary policy is not the tool to use. Just regulate leverage.

We also need central registry of the ownership of all derivative products.

Jan VanDenBerg

Financial Crisis and the Need for Reliable Information

The government could pass legistlation requiring that the ownership of a list of questionable assets -- CDSs, certain tranches of CDOs -- be registered with the Treasury within a set period of time, say 14 days. Any unregistered assets would be declared worthless, null and void.

Then, the Treasury should release that information to the marketplace.

That way, everyone would know who owns these things.

On the credit rating agencies' culpability, see my related article at:

seekingalpha.com/artic...

I think the credit rating agencies should be nationalized and/or disbanded entirely. They are a failed institution.

One serious problem is that the credit rating agencies have used the bundling of CDSs with their underlying asset to raise the rating of those assets for reserve requirement calculation purposes. This means that if the CDSs were to disappear or be rendered worthless in a bankruptcy of, say, AIG, many banks would become insolvent because the rating of their assets would be suddenly downgraded due to the disappearance of the CDS figleaf. That would require them to post substantial increases in required reserves with the central bank which would require cash they don't have.

This is why AIG had to be saved.

And other institutions which have issued these meaningless CDSs, also, must be saved, or dozens of other banks would be required to post large sums in additional required reserves.

I say, let them fail, but at the same time, grant a period of 5 to 10 years for the banks to post the implied required additional reserves. The CDSs are worthless already, anyway. This would require amendments to Basel II, as required reserves are regulated internationally.


Jan VanDenBerg

Further Evidence of TARP Error

I have long held that the Treasury needs to get legal authority to locate and disaggregate the CDOs, then redistribute the underlying mortgages on a pro-rata basis back to current owners of shares of the CDO.

The underlying mortgages can be, individually, priced quite easily. There is good existing software to spit out the discounted present value of a stream of payments, with appropriate demerits for late payments, etc. This is easy. It is done daily by banks and dealers in Deeds of Trust.

There is a robust market for these individual mortgages.

They are worth far more disaggregated than bundled in the CDO.

It is the packaging which makes the CDOs difficult to value.

I have suspected that the Treasury may have decided to let private actors have a go at attempting to gather all bonds of a given CDO back together so they can legally sign off, as the sole owner, on a disaggregation, thereby making a pile of money.

The value of all the underlying mortgages in a CDO, disaggregated and priced individually, is far higher than the value of all the bonds in a CDO, as the CDO bonds are an opaque, illiquid instrument.

However, maybe this is turning out to be harder than anticipated.

The government should require that ownership of all bonds sold in a given CDO be registered with the government within a few days, and any unregistered bond be worthless. That would flush out the locations of these things and make private or public accumulation and disaggregation more feasible.

Most of the underlying mortgages are OK and have good value. We just need to get off them the toxic wrapping put on by Wall Street.

Jan VanDenBerg

The Next Bull Market Could Be Rentals

So what does everyone see happening in the commercial apartment complex market in your area?

Fannie and Freddie Did Not Cause This Crisis

Excuse the typo in my post above -- the CDS market is $45 TRILLION to $62 TRILLION.

Fannie and Freddie Did Not Cause This Crisis

Lord Darley, above, is the only comment in this entire thread which is correct.

The decline in home values would not have touched off this global financial crisis if unbacked Credit Default Swaps had not been accepted by regulators as sufficient to upgrade the credit rating of banks' housing-backed assets. This is what allowed the huge increase in outstanding credits/debts. This is what allowed the entire chain of agency problems outlined above to occur.

The CDS market is reportedly $45 to $62. Compare that to a total US mortgage outstanding of $10 trn traditional and $10 trn non-traditional. There is clearly something wrong here.

All of Japan's prodigous savings are only $14trn. And these baseless CDSs are $62?

These CDSs are merely a type of braggard's bet, an unbacked, reserve-free, unregulated gamble. But regulators apparently accepted the mere purchase of this bit of frippery sufficient to allow the upgrade of a risky asset -- requiring a reserve of, say, 8% -- to a safe asset -- requiring a reserve of, say, only 0.59%.

This was clearly regulatory failure.

This failure occured globally. European banks bought these things and used them to reduce their reserves and increase their lending also.

Since these CDSs cheaply enabled the "improvement" of asset grade, they allowed massive increases in credit by reducing the required reserves banks and non-banks were required to hold.

These massive increases in available credit were going to go somewhere and they just happened to flow to sub-prime housing.

Before that, it was tech stocks, remember? VC, remember?

It's as though 5 guys, each with a buck to his name, play poker all night and run up huge gains and losses -- some lose thousands of dollars and some win as much -- but when any one of them stands up and says he's cashing in his chips to go home, all hell breaks lose -- because none of the losers can pay what they owe and none of the winners can collect.

This is what happens when the banker hands out chips for free.


Jan VanDenBerg

Wanted: Price Transparency in the Splurge

Disaggregate the MBSs and all their derivitive products.

It is the packaging -- the bundling and slicing -- which is ruining the value of a good asset. Most US mortgages are sound.

Pass a law which would unbundle these packages of bonds down to their constituent mortgages, then distribute the underlying mortgages to the current owners of these products on a prorata basis using guesses at the value of their current holdings based on these wacky models.

All current holders of these products -- a specified list of troubled bonds compiled by Treasury -- would be given a week to report exactly what they have to Treasury, so the ownership of everything would be of record.

The underlying mortgages are easily valued using standard software for calculating the discounted present value of a Deed of Trust. Missed payments take a specified nick from the value of the DoT. Mortgages near or in foreclosure can be valued at the independently appraised value of the underlying real estate. (Hire 3 local real estate appraisers, get three values and average them. Duh.)

Even the sickest real estate in the sickest parts of California and Florida is selling to vultures. It has a price.

The total of the discounted present value of the constituent mortgages and foreclosed-on real estate underpinning a given bond tranche is the value of that bond tranche and all its derivitives.

The underlying mortgages in each bond should be ranked by quality (determined by payment history) and distributed to the holders of the various "slices" of the bundle based on the risk level of the crap they bought.

The bozos who bought "equity slices," for instance, should get the stuff now in foreclosure.

As for the most exotic products, something which cannot be valued is essentially worthless and should be treated accordingly. Those who produce and buy this garbage should deal with the consequences of their own actions.

Unbundling would release significant increases in value, possibly enough to re-capitalize most holders of the products.

Those who end up with the mortgages in foreclosure should simply foreclose and market the underlying real estate as soon as possible.

Re-do corporate books with these new values. THEN, Paulsen can use taxpayer money to buy newly-issued stock in those banks which are still short of capital and too big to fail, at current stock prices (without releasing the results of the revaluation). Taxpayers would almost certainly make money over 5 years.

Remember, the point of this exercise is to preserve the flow of loans to Main Street. Investment banks and hedge funds don't make loans, so let them fail.

Even at 8% unemployment, something like 95% of US mortgage payments will continue to be made. The vast majority of US mortgages are still solid.

The problem is the way Wall Street has bundled the bonds and then sliced up the bundles to make these toxic products.

The individual Deeds of Trust or Mortgages inside these ugly wraps are going to continue to produce payment income in the vast majority of cases, even in a depression.

You're getting your monthly payment. You will continue to. Your rate of return is competitive with any other investment. There is no problem with this asset.

It is the packaging, slapped on by Wall Street, which is destroying the value of these DoTs.

Wall Street has created a mess, building something they don't understand and which doesn't work.

Looking forward, let's not package mortgages. They are too diverse and need closer management.

Jan VanDenBerg

Where Will Treasury Find Its Model?

Disaggregate the MBSs and all their derivitive products.

Pass a law which would unbundle these packages of bonds down to their constituent mortgages, then distribute the underlying mortgages to the current owners of these products on a prorata basis using guesses at the value of their current holdings based on these wacky models.

All current holders of these products -- a specified list of troubled bonds compiled by Treasury -- would be given a week to report exactly what they have to Treasury, so the ownership of everything would be of record.

The underlying mortgages are easily valued using standard software for calculating the discounted present value of a Deed of Trust discounted. Missed payments take a specified nick from the value of the DoT. Mortgages near or in foreclosure can be valued at the independently appraised value of the underlying real estate. (Hire 3 local real estate appraisers, get three values and average them.)

Even the sickest real estate in the sickest parts of California and Florida is selling to vultures. It has a price.

The total of the discounted present value of the constituent mortgages and foreclosed-on real estate in the entire bond tranche is the value of the bond tranche and all its derivitives.

The underlying mortgages in each bond should be ranked by quality (determined by payment history) and distributed to the holders of the various "slices" of the bundle based on the risk level of the crap they bought.

The bozos who bought "equity slices," for instance, should get the stuff now in foreclosure.

As for the most exotic products, something which cannot be valued is essentially worthless and should be treated accordingly. Those who produce and buy this garbage should deal with the consequences of their own actions.

Unbundling would release significant increases in value, possibly enough to re-capitalize most holders of the products.

Those who end up with the mortgages in foreclosure should simply foreclose and market the underlying real estate as soon as possible.

Re-do corporate books with these new values. THEN, Paulsen can use taxpayer money to buy newly-issued stock in those banks which are still short of capital and too big to fail, at current stock prices (without releasing the results of the revaluation). Taxpayers would almost certainly make money over 5 years.

Remember, the point of this exercise is to preserve the flow of loans to Main Street. Investment banks and hedge funds don't make loans, so let them fail.

Even at 8% unemployment, something like 95% of US mortgage payments will continue to be made. The vast majority of US mortgages are still solid.

The problem is the way Wall Street has bundled the bonds and then sliced up the bundles to make these toxic products.

The individual Deeds of Trust or Mortgages inside these ugly wraps are going to continue to produce payment income in the vast majority of cases, even in a depression.

You're getting your monthly payment. You will continue to. Your rate of return is competitive with any other investment. There is no problem with this asset.

It is the packaging, slapped on by Wall Street, which is destroying the value of these DoTs.

Wall Street has created a mess, building something they don't understand and which doesn't work.

Looking forward, let's not package mortgages. They are too diverse and need closer management.

Jan VanDenBerg

Wall Street Bailout: Congressional Cover-Up, or Sarbanes-Oxley?

Disaggregate the MBSs. Disaggregate the bad bonds.

The individual Deeds of Trust or Mortgages inside these ugly wraps are 95% fine.

It is the packaging, slapped on by Wall Street, which is destroying the value of these DoTs, which are a type of bond.

All the bonds need to be aggregated by a government entity -- collected from everyone who has one in exchange for something of value to their capital and accounting -- and laws passed to disaggregate the MSBs to leave the underlying mortgages.

These Mortgages, or DoTs are highly marketable.

The individual, underlying Deeds of Trust (Mortgages) could be readily valued using standard DoT valuing software now used by thousands of DoT traders and investors. Thousands of these are sold every month.

95% of them would price out and sell just fine.

You're getting your monthly payment. You will continue to. Your rate of return is competitive with any other investment. There is no problem with this asset.

Some of the remaining 5% would have to be "worked out" with the owner/occupier, giving them a new loan on better terms, and some could be sold to private investors who would foreclose on the property and manage it. I don't see any reason why the government should ever have to actually own any real estate.

The key is to get back onto the ground where the individual mortgages -- 95% of which are FINE thank you -- and the houses are.

Wall Street has created a mess, building something they don't understand and which doesn't work.

Let's not package mortgages. They are too diverse and need closer management.

Jan VanDenBerg

Why Did the Mortgage Market Go Out of Control?

On this bailout -- do we really need to pay $700bn to large financial institutions to buy these packages of mortgages?

Or, do we may need regulatory change to make clear which owner/custodian has the right to work out or foreclose and dispose of the underlying asset. Such costodians must be properly incentivized and indemnified so they can act.

These mortgages have been bundled, then sold in "slices." I understand that that means that the holders of the "equity slice" lose everything before the holders of the next "slice" start to lose capital . . . so who has the right/responsibility to decide whether to "work out" or foreclose and sell, and to decide on the sale price?

Each bond has hundreds of owners. And each mortgage has slices in more than one bond. Who has been authorized to handle the foreclosure-workout? Some custodian institution?

Ha.

I am currently trying to buy a house out of foreclosure from Wells Fargo and the bank is incapable of making a decision. Most offers to buy real estate expire in 48 hours. Buyers, even little old ladies with Alzheimers, are quite reasonably expected to make up their minds in 48 hrs or see the offer die. My offer to Wells Fargo has been on their desks for 2 months and they can't seem to make up their minds. They think they need that long to make a decision.

I've kept the offer alive mostly out of perversity, just to see how long this pack of bozos will drag this out.

This is absurd. They are surely not the final owners of this mortgage, but are merely handling it for the bond-owners. Hence, total incompetence.

This issue must be addressed.

In Japan, the primary obstacle to proper disposal of bad loans was multiple liens on one property, with the law unclear as to which had the right to foreclose and sell and unclear as to how the proceeds of the sale were to be split between multiple leinholders.

We have that problem in spades -- instead of two or three leinholders, we have HUNDREDS.

These issues must be addressed. Lienholders must be free to and also capable of doing work-outs, of seizing and selling or seizing and renting, of doing renovations. winterizations (frozen pipes, anyone? It's getting cold.), roof repair, locking up and otherwise handling these properties as would a competent individual owner.


And you want to send in the government???

We need legal changes which will, as quickly as possible, get these properties into capable, local hands and get the proceeds of the sales back into the coffers of the financial system.

The government is not my nominee for this job. There needs to be a legal entity created to commandeer and disagregate these bonds, with a right to future proceeds issued to their current holders (not cold hard cash but something which would have a specific, fixed value, so no money needed here), then the individual, intact mortgage to each specific underlying property should be sold at whatever price it would command to whoever is willing to buy it. That private lienholder could then proceed to manage the property as would any responsible Deed of Trust owner -- work out, foreclose, clean up, winterize, repair, rent or sell. Or move in. Money should be lent by the government to those who buy these notes. Those who are currently living in the houses should be first in line to buy these notes. These notes should be 30-year fixed rate notes.

Proceeds from these notes -- either total cash-outs as the properties are sold or monthly payments to the government entity financing these notes -- should be remitted on a pro-rata basis to the holders of the rights -- the banks who now own the mortgage bonds.

Thus, the government would be doing a huge accounting job but no actual money would be required to make it work, beyond substantial administrative costs.