wonder when you were going to get around to an update... glad to see it....
an aside for all you bloggers..... finally got my adds installed and made my first paycheck already...... KACHINGO....
nothing like blogging about what I love: trading and getting paid for it....
I follow your blog case... thanks....
We've been a guns & bubble economy now since the 80's.
If you were Obama, Geithner, Bernanke, or anyone in a position to materially affect the financial system, markets, monetary system & face the collapse of the global economy on your watch, wouldn't you kick the can down the road, hoping to buy more time to sort things out in a more orderly way later? This is exactly what is unfolding.
As a Socialist, I see leveraged crazy-capitalism imploding - I don't see any alternative to re-inflating this bubble, trying to create additional bubbles as an offshoot (re-inflating assets, commodities & perhaps add alternative energy, as we haven't gone full-bore on that yet).
Sure, moving the insane liabilities off of company balance sheets onto leveraged government balance sheets is morally corrupt, anti-free market, (I don't know that I'd call it Socialism as government is not controlling the means of production or distribution -if you can call our financial system a product-, rather insolvent corporations are dictating our government's actions.. call it little-f fascism if you like.
PLEASE someone tell me what the alternative is to kicking the can down the road & creating another bubble?
Treasury reports Q4 2008 - $200 trillion in outstanding derivatives (4x WORLD GDP), 96%+ of it held by 5 US Banks, all basically insolvent TARP recipients. (98% of the derivatives are credit default swaps)
$200 trillion in CDS's alone, not to mention all other forms of leverage that are unwinding.
If you actually look at the US Government's books from a generational accounting perspective and include future off-balance sheet obligations of Social Security & Medicare, we're already on the hook for $60+ Trillion in debt:
Check out the Federal Reserve Bank of St. Louis white paper by Laurence Kotlikoff titled "Is the US Bankrupt?":
Weigh it for yourself if you're Geithner or Obama - what are the options? Certain implosion of the world economy on your own watch if we swallow our bitter pill now, likely implosion of the world economy down the road on someone else's watch?
When it comes to putting food on the table, whether you're a Democrat, Republican, Socialist, Capitalist, Libertarian, Free Market worshipper, you can't eat your ideals & you will find a way to justify bending them as far as need be.
Now we're using non-existant FDIC funds, plus a meager 7% from Treasury & 7% from the Fed to allow "private investors" to buy toxic assets with the PPIP plan. There is nothing to prevent banks from buying eachothers toxic assets at inflated prices & shifting 93% of the liability to the US Government. Banks have said they're looking into it & even Sheila Blair FDIC Chairman has said she's open to it. They will have done it before anyone can cry wolf.
Forget your ideals, forget what action the US Government SHOULD take or what YOU would do, or how sure you are that XYZ plan is doomed to fail eventually - what action will the US Government take? So far every step they have taken has been towards re-inflating bubbles through massive leverage and some damn creative accounting.
I don't see big banks going broke left and right - we're doing everything we can to create another bubble. We're betting the farm on it - we'll all go together when they go..
If you think the US is going to do anything different than what I've laid out, I am earnestly interested in your view and whatever data you may have to support it.
The issue here is "what is the proper markdown"?
You are saying that it should be purely based on the decrease in the value of the collateral.
I disagree. THe scenario you represent would be the case if 100% of the loans went into a default and all properties ahd to foreclose.
A loan is still good as long as the payments are being made, and the fact that the collateral have decreased in value should be refleced only PARTLY in the value of the loan (e.g., by the current default rates).
>> "So M2M is talking about the trading of these mortgage backed securities, for which there is little or no market, not the underlying collateral on the loans themselves."
I have not been clear here (1) yes, I have been talking about loans and how they are affected by the value of the underlying collateral, but (2) the same argument can be extended to MBS's, except here, the "collateral" is now the loans themselves.
>> "Obviously, the declining collateral is the whole reason these things became toxic. In reality, what you're talking about isn't the main issue."
When you talk about WFC or BAC, the bigger issues are the loans, rather than MBS's. For GS, MBS is a non issue.
>> "But these banks screwed up the models in the first place because they assumed that home values would go up forever, so they overpriced these securities when they were originally sold."
Sorry, but this sounds like stuff from the "House of Cards," (CNBC) and general media blather.
So, what IS the model, exactly? Secondly, how much of MBS is owned by WFC, BAC, and GS? On this, I already posted my positition above.
>> "But now, we're going to tell these same banks that valued the CDS according to complicated bull sh!t models to do it again. It's not about today's cash flow, but what the banks are going to get tomorrow."
Although the model is more complex, at the core, the issues are the same as the one I explained in the previous post. It just involves more layers.
Given the drop in real estate prices in the US, it is unrealistic to think that banks have taken all the write downs reflected in the asset values. Mark to market was actually a green light from the accounting authorities to allow this to continue. On a pure operating business it is hard for banks to not make a lot of money. Wells fargo bought Wachovia, who unfortunately bought Indymac. Indymac loans are underwater, and the day of reckoning is only delayed. Wachovia was insolvent, but somehow WF can say that they are 50% more profitable because of Wachovia and Indymac? It does not make sense in the long run.
Over the past ten days the market has rallied, I belive around 8% . In that same time, 2009 earning projections for the S and P have dropped by 18% , and a further 15% for 2010. Stock prices are only based on long term earnings, and inflating stock prices and deflating earnings do not mix. Bank write offs on CRE, residential mortgages and credit cards are going to go up at some time, when they decide to pay the piper is at their discretion given the relaxation of M2M.
I think that you're confused, when they say mark to market, they are actually valuing the securities at mark to market, not the houses. These instruments are bundled mortgages and that's the issue. So M2M is talking about the trading of these mortgage backed securities, for which there is little or no market, not the underlying collateral on the loans themselves. Obviously, the declining collateral is the whole reason these things became toxic. In reality, what you're talking about isn't the main issue. But these banks screwed up the models in the first place because they assumed that home values would go up forever, so they overpriced these securities when they were originally sold. But now, we're going to tell these same banks that valued the CDS according to complicated bull sh!t models to do it again. It's not about today's cash flow, but what the banks are going to get tomorrow.
Alright, you sort of addressed the issue I brought up, but I think you are being less than genuine in your answer.
My hypothetical to you was the following: A loan has been made on an asset that goes down in value by 50%. How should that loan be valued, given that the house value has declined but the homeowners are making good on their loans?
There are two sides to the story of course. On one hand, to mark down the loan value by 50% (as M2M says) is stupid. The banks are not actually experiencing 50% decrease in revenue -- so, it does not reflect reality. On the other hand, to let banks mark those at 100% doesn't somehow seem right, because there IS increased chance of default.
To me it is most reasonable to mark down those loans, by simply multiplying by the existing default rate. To borrow from Probability and Statistics, this is nothing more than calculating the EXPECTED value of the loans. This provides much more accurate evaluation of their loans.
Under this scenario, it is pretty darn clear that banks are not going to be "insolvent." It is not even close.
Again, you are not answering a simple question.
Before you start going off on some abstract idea in the sky to support your thesis, you need to start with something concrete and explain what the real problem is, step by step. What you are doing is akin to screaming "fire," yet, when you are asked where is the fire, you say "it is everywhere."
Stop the nonsense. Describe to us, to me, a detailed explanation of a concrete problem. Then, explain to this board WHY that probelm is systemic.
Then, I will tell you why I think M2M is problematic, and why M2M is screwed up, step by step. If you can explain and prove to me why I am wrong, then, hey, I tip my hat.
And I will consider liquidating some of my stocks.