Update; The Recession of 2008
Every time I sit down to write a post, more significant news on the economy is breaking. Events are unfolding rather rapidly and it’s been difficult to focus on any one event, as they are all related. So in this post, I will post links to stories that have significant meaning to the mortgage industry and the economy. One thing is for sure, if the public isn’t being lied to, it is definitely being deceived.
I am going to start with the apparent insolvency of the United States banking system. Since November of 2007, assets used to meet the required reserve levels by banks has plummeted 150%. Yes you read that correctly, they lost 50% more than what they originally had.
Check out the chart and article at Financial Sense University. Here is a snippet.
Clearly the situation has deteriorated at a rapid pace and is much more serious than the credit scare last August. US banks have no reserves; they are for all intents and purposes, broke. In fact they are beyond broke and as I suggested last year banks are now sub-prime. 150% of the reserves at depository institutions are borrowed. That can only mean one thing, the banks have “lost” 1.5 times their original non borrowed reserves. Not only have they lost what they had, they went on and lost half as much again. If you or I did that, we would be bankrupted and probably arrested for attempting to defraud the lender.
The last sentence of the above quote gives you a sense of the “special” treatment the banks are receiving from regulators.
Moving on…
Bank of America is in secret talks with Congress for the purpose of obtaining a three quarter trillion dollar bailout, courtesy of the U.S. taxpayer. Here is the original article from the New York Times but I believe you will find Mish’s dissection the article much more informative. Here is a link to Mish’s Global Economic Trend Analysis and another snippet.
From the NYT…
If the government pays too much for the mortgages or the market declines even more than it has already, Washington — read, taxpayers — could be stuck with hundreds of billions of dollars in defaulted loans.
Mish’s Comment: Taxpayers could be stuck or would be stuck? I think the latter. No one entity or agency can value these things, certainly not Moody’s Fitch, and the S&P. For recent evidence, please see Evidence of “Walking Away” In WaMu Mortgage Pool.
The only proper way of establishing the worth of these securities is by the free market, not guesstimates by bureaucrats who cannot find their asses with both hands at one time, nor by banks willing to sell the government a bill of goods at taxpayer expense.
Mish’s piece is a very good read, stop over there if you get a chance.
CommodityOnline has an interesting article about the Fed, why you shouldn’t expect interest rates to trend lower and why the banking system is beyond repair. Here is a small excerpt from ‘US Fed is playing a risky, secretive game’
The solution requires more price inflation, asset inflation, wage inflation, and spillover, all of which contribute to rising long-term interest rates. Already, we see the rub in higher mortgage fixed rates, higher jumbo mortgage rates, higher corporate bond yield spreads, higher junk bond yield spreads, higher fixed rate swaps.
To support my statement that the public is at the very least, being deceived, let’s take a look at Standard and Poors’ (S&P) recent ratings actions with regard bond insurer MBIA. Bloomberg sums it up nicely. Emphasis is mine.
Treasuries fell for a second day as Standard & Poor’s said it’s unlikely to reduce the credit rating of bond insurer MBIA Inc. soon, reducing demand for the relative safety of U.S. government debt.
The bond insurers are insuring the credit worthiness of portfolios exposed to defaulting mortgages. If they get downgraded, as they should, it puts even more pressure on bank reserves, further weakening bank financials. It appears S&P mindlessly rubber stamped MBIA’s AAA rating.
Mish, once again, makes a strong case for S&P’s lack of objectivity. He contrasts S&P’s actions on Pfizer and MBIA. Below are some numbers on both companies. Guess which company is MBIA that retained a AAA rating.
Compare Financials
- Profit margin -61.76% vs. +17.07%
- Return on Equity -35.54% vs. +12.13%
- Revenue $3.12 Billion vs. $48.61 Billion
- Earnings Per Share -$15.22 vs. +$1.20
- Total Cash $5.73 Billion vs. $20.30 Billion
- Total Debt $17.44 Billion vs. $8.69 Billion
The “bad” numbers belong to MBIA, which maintained it’s AAA rating. The “good” numbers belong to Pfizer. S&P saw fit to downgrade Pfizer by one notch. To prove how absurd the S&P rating is, given a choice, which company would you rather lend money to? It’s not rocket science. They make it rocket science to hide their ineptitude, incompetence and lack of objectivity.
First we have the mainstream omission of the state of U.S. banking. Now you see outright deception with regard to the ratings agencies. These are the same agencies that rubber stamped subprime mortgage backed securities AAA. Which of course allowed for the pandemic spread of the toxic paper.
The investment bankers, with their accomplices the ratings agencies, are perhaps directly responsible for the economic woe felt around the globe. To think that we are supposed to believe in and trust these ratings companies is ridiculous. Only one question comes to my mind, why aren’t people going to jail?
Banking woes aren’t unique to the United States. Jim’s post on The Great Depression of 2006, shed some light into the banking crisis overseas. In his piece titled, The New Deutsch Mark, he points out two overseas banking flash points.
It looks like the German banking system is starting to unravel. Here is a link from Der Spiegel to the article. A hat tip to Patrick.net
The German government has had to bail out state-owned banks with taxpayers’ money after their managements recklessly gambled away billions on sub-prime investments. But if a state-owned bank were to go under, the consequences could be disastrous for the whole economy.
In England, Northern Rock just got nationalized by the government.
Nationalization of banks… Hmmm.
I’ll end this list/post of “should read” articles with strongest and perhaps the most disturbing post from The Common Sense Forecaster. CSF digs into Dr. Nouriel Roubini’s article, The 12 Step Program to a Financial Crisis. Emphasis is mine.
Why did the Fed ease the Fed Funds rate by a whopping 125bps in eight days this past January? It is true that most macro indicators are heading south and suggesting a deep and severe recession that has already started. But the flow of bad macro news in mid-January did not justify, by itself, such a radical inter-meeting emergency Fed action followed by another cut at the formal FOMC meeting.
To understand the Fed actions one has to realize that there is now a rising probability of a “catastrophic” financial and economic outcome, i.e. a vicious circle where a deep recession makes the financial losses more severe and where, in turn, large and growing financial losses and a financial meltdown make the recession even more severe. The Fed is seriously worried about this vicious circle and about the risks of a systemic financial meltdown.
That is the reason the Fed had thrown all caution to the wind – after a year in which it was behind the curve and underplaying the economic and financial risks – and has taken a very aggressive approach to risk management; this is a much more aggressive approach than the Greenspan one in spite of the initial views that the Bernanke Fed would be more cautious than Greenspan in reacting to economic and financial vulnerabilities.To understand the risks that the financial system is facing today I present the “nightmare” or “catastrophic” scenario that the Fed and financial officials around the world are now worried about. Such a scenario – however extreme – has a rising and significant probability of occurring. Thus, it does not describe a very low probability event but rather an outcome that is quite possible.
Roubini’s article is a must read if one would like to assess a “worst case” scenario. With each passing day, Roubini’s scenario becomes more probable. It’s a long but very informative article. The one mistake I made was reading this article at 11:30 in the evening. I ended up falling asleep around 3 o’clock in the morning. Here is a link to Roubini’s “About Us” page of his highly regarded website.
There is a lot of “kool aid” being served up in the media. Try not to get a belly full of it and keep your eyes on what is really happening. Then get your financial affairs in order, while you still have the time.
Since the Federal Reserve cut the Fed Funds rate by .50% on January 30, mortgage rates are up at least .75% on the thirty year fixed rate mortgage. For example, our 30 year fixed rate,