endoftheworld

'Too Big to Exist' Bill Would Impose Market Discipline

Liz - no - we never let the free market decide.

The reason why the "free market" failed, was because the Government, Fed and the like FAILED it. The free market calls for failure from time to time. If the Goverment keeps butting in an prevents failure, how is that "free market?"

The reason why we got no doc loans, NINJA, interest and all those other products was because everyone knew in the end, if they passed the hot potato along fast enough, there would be no consequences. And they did - to Uncle Sam, and they were and are right - there are no consequences and nor will there be, for them. For the rest of us, all these losses will be subsidised by eventually higher taxes or the printing of money, i.e. a social bane on us all. Thank your senators and congresspeople.

'Too Big to Exist' Bill Would Impose Market Discipline

Trying to mandate how the shareholders & creditholders should evaluate risk is not an efficient way for assessing risk. Dollar for dollar or .9 for 1 or whatever way is right should be up to the free market to decide. One can game every statute in the book, and every directive can be evaded e.g. who's going to decide what "secured" means and at what value? who's going to come up with how the actual "dollars" are calculated? What happens with market values change?

'Too Big to Exist' Bill Would Impose Market Discipline

Its even simpler for the government to enforce market discipline. It should do nothing to save any bank. Re-impose Glass-Stegall (separate the risky investment banking/trading from the traditional loan based banking), and declare as a policy, that after a specific date, no further assistance to any bank will be rendered.

That declaration itself would put creditors and equity holders on notice and force them to rethink about risk. After a brief period, if there was going to be any run, the government would be there to handle it, but going forward the market would enforce its own discipline. This talk of a systemic market breakdown, financial armageddon, is a laughable load of tripe if there was any. Utter manipulation by a few ultra rich bankers hell bent on using the government resources and people's ignorance to further their own ends.

The Bounce in Financials: Will it Last?

Some stats:
Mortgage debt in 2000 - ~5trillion
Mortgage debt in 2008 - > 10 trillion
Total mk cap of financial stocks in sp500 in March 2007 - $2.7 trillion
Total mkt cap of financial stocks in sp500 in March 08 - $1.9 trillion
in 2009 - 500billion

Stock market is back at mid/late 90s levels. Is unemployment? consumer earning power? confidence? How can the same consumer service more than twice the debt being far worse off on almost all measures?

To date banks banks have written off only a fraction of the bad debt on their books. That's why the market has reduced their stocks down so much. House prices will go back to pre-bubble times - the write-downs will continue. Mind you, we're only considering residential real-estate right now. Take into account commericial assets that have gone down, we're off even worse. Don't believe the hype that everything is hunky dory now in the financial wonderland. The bond holders know better about the mark downs coming. Economic value has been destroyed - whether or not banks "mark-to-market",fair value is less than the debt on the books, and first equity holders will take their lumps, and then the preferred, and then the subordinated etc. One by one they will all regress to fair value.

A Look at Banks' Tangible Book / Asset Ratio

btw- March 7, 2007 SP500 Financials were worth - $2.7trillion

on March 7, 2008, SP500 Financials were worth $1.9trillion

on March 7, 2009, SP500 Financials were worth $511 billion

A Look at Banks' Tangible Book / Asset Ratio

We had $5trillion of mortgage debt in 2000. In 2008, the figure was over $10trillion. With house prices and earnings power of the consumer less than or equal to that in the late 90s, we're going to have over $5trillion of write-offs by debt holders. Guess who owns this debt? What do you think the entire banking sector's market cap was in 2008? and now? And this is only mortgage debt. We're not even considering the commericial real-estate, which along with residential real-estate backs up most of the loans, i.e. assets on the banks books.