Tag: banks

The Market Ticker notices that German banks are threatening the liquidity of the global financial markets as a result of the Greek situation:

The curve blowout this morning in Greek debt has been cataclysmic; of course CNBS is only mentioning it in passing, and so far the European market isn’t reacting “too badly.”

We’ll see about that – how much of their debt is now sitting on bank balance sheets with a mark-to-market loss of how many billions due to the coupon shift upward? Oh no, we better not talk about the black hole opening up on bank balance sheets (again)….. that might be a problem eh?

Just remember that right up until Lehman blew up the market, while it had its ups and downs, didn’t react “too badly” either.

42% worthless assets. Keep that number in mind. It’s going to blow up sooner or later; the market can’t be pumped far enough or fast enough to refloat those underwater properties.

A presumed Friedmanite named Luigi condemns indebted homeowners for doing exactly what the banks who wrote their mortgage contracts do whenever they make a bad real estate investment:

Homeowners who walk away from their mortgages undermine our financial system….Undermining the social norm to repay mortgages, as Lowenstein and White do, is thus a very bad idea. You might just as well say that when a theater is going up in flames, it’s “rational” to trample other people in rushing to the exits.

It is rational… for the person trying to escape. And the person to blame isn’t the poor guy trying to avoid being burned to death, but the people who set the fire in the first place!

The contracts are clear, even if the consequences vary from state to state. If your mortgage is worth significantly more than your house, you have the right to walk away. The bank has the right to take the house. There is no moral question involved.

Karl Denninger correctly points out the obvious about the latest Obama sleight of hand on housing:

Absolutely none of the attempts made thus far have had a damn thing to do with helping Americans, and this “new program” is no exception. They have all – each and every one – been aimed at one and only one thing – allowing banks and the GSEs to lie about the “value” of the home loans they hold.

The essence of this economic mess was a credit bubble. Nowhere was it bigger in the impact on the common American than in residential real estate.

Every action since this crisis began related to housing has acted to prevent the market from clearing. Holding loans and houses above market value – the price where they will clear in a free and open market – has been done for one and only one purpose – to allow banks and GSEs that are radically underwater – that is, INSOLVENT – to pretend they are not.

This latest plan to use TARP money to subsidize those who own homes with mortgages that exceed the value of their homes is actually nothing more than another bank subsidy. Washington is giving the banks something for nothing; the “cuts” envisioned on the second mortgages will actually have the net effect of temporarily creating some value in an otherwise worthless unsecured loan. As Denninger points out, the plan does not represent a cut in loan value from 100% to 15%, but rather an increase from 0% to 15%.

It’s just more extend-and-pretend. And like all the previous efforts to prop things up, it’s going to fail too. Remember, the primary reason banks so desperately want to prevent foreclosures is because they want to avoid being forced to revalue the loans presently inflating their assets.

On a tangential note, consider the intriguing implications of the following comparison of interest rates:

4.78% 30-year Treasury Note
4.99% 30-year mortgage

In other words, Federal Debt is priced as being nearly as risky as a home mortgage in a market where a significant number of mortgages are underwater or in default.

And time is fast running out:

The war over mark-to-market accounting is about to get hot, again. In coming weeks, the Financial Accounting Standards Board is likely to propose that banks expand their use of market values for financial assets such as loans, according to people familiar with the matter. That departs from current practices in which banks hold loans at their original cost and create a reserve based on their own view of potential losses.

This has to be done, but the banks are going to fight it with everything they’ve got. The reason is because, by my estimate, the values of those loans, as well as the securities and derivatives based on those loans, are around 41% overvalued. That means that marking to market rather than marking to fantasy will eradicate about $15.6 trillion from the credit markets.

Even in an economy with a $14 trillion GDP, this is likely to have an impact.

Congress, led by Barney Frank, forced the FASB to permit what has been little more than legalized accounting fraud in order to keep the banks out of bankruptcy. But because the so-called financial rescue plan has failed, the important question now is whether the politicians are determined to go down fighting alongside the banks or whether they will finally break ranks and try to save themselves by sacrificing the banksters to the vengeance of an angry public.

It’s a “gimmick” when banksters do it. It’s criminal fraud whenever anyone else does:

Lehman Brothers Holdings Inc used accounting gimmicks and had been insolvent for weeks before it filed for bankruptcy in September 2008, but there was not extensive wrongdoing, a court-appointed examiner has found.

In a 2,200-page report made public on Thursday, examiner Anton Valukas, chairman of law firm Jenner & Block, reported the results of his more than year-long investigation into who could be blamed for the firm’s collapse, which deepened the global financial crisis.

The examiner said that while some of Lehman’s management’s decisions “can be questioned in retrospect” and the firm’s valuation procedures for its assets “may have been wanting,” those responsible for the firm had used their business judgment and were largely not liable for the firm’s collapse.

So, Lehman’s management ran the company into insolvency, then committed weeks of fraud to hide that fact, but somehow they “were largely not liable” for the collapse of the company? How is that even remotely credible? Especially in light of how the FDIC has made it perfectly clear that most banks are fraudulently hiding their present insolvency by assigning hugely exaggerated values to their assets. Even by the FDIC’s overly conservative measure of “estimated losses”, it is obvious that there is a huge gap between reported assets and actual assets.

This can be computed by subtracting the average FDIC-seized bank’s deposit liabilities from its reported assets, then adding the estimated losses. In 2009, this average asset gap was $505 million against reported assets of $1,229 million, or 41.1%. In 2010, the average asset gap is presently running $272 million against reported assets of $638 million, or 43.7%. This indicates that the smaller banks are every bit as insolvent as the bigger banks. As are the giant banks; Karl Denninger explained the probable extent of their balance sheet fraud a few days ago:

So let’s be generous and assume that the “big banks” are over-valuing their assets by 25% – the lower end of the range of what the FDIC says is, through actual experience, what’s going on, and add it all up.

Bank of America shows $2.25 trillion in assets.

Citibank shows $1.89 trillion in assets.

JP Morgan/Chase shows $2.04 trillion in assets.

And Wells Fargo shows $1.31 trillion in assets.

This totals $7.49 trillion smackers.

The FDIC’s experience with seizing banks thus far suggests quite strongly that all four of these entities are lying about these valuations, and that were they to be seized the loss embedded in them (and for which you, the taxpayer would be responsible) is somewhere between $1.49 and $2.99 trillion dollars.

Based on the last two years of data, the actual gap between the assets and liabilities of the Big Four is actually more like $3.2 trillion, or roughly the size of Citibank and Wells Fargo put together. Despite their failure to act, the FDIC obviously knows about this. By way of evidence, here was the FDIC’s response to one of the Market Ticker’s readers who asked about the difference between bank-reported assets and FDIC-reported estimated losses: “That’s the value the bank had them on their books on their year-end financials, but the true value is much less. It is similar to someone in Las Vegas saying that their house is worth $300,000 because that’s what they paid for it three years ago, but the reality is, if they had to sell it in today’s market, they’d only get $250,000 for it. The FDIC has to sell assets in today’s market.”

At this point in the depressionary spiral, I’d just about be willing to settle for the “stop” sense of the word. Karl Denninger correctly points out that the American people absolutely will not accept another AIG bailout, this time of sovereign debt of European countries:

Yes, I know all about the stock market rally from last March. I know all about the claimed GDP “improvement.” But I also know that we got both by adding more than $2 trillion in debt to the United States – or roughly 14% of GDP – over the space of the last 18 months. That’s about 10% of GDP annualized, and incidentally, a 10% GDP contraction is the common economist’s definition of an Economic Depression.

So let’s cut the crap – we are in a Depression right now. We are pretending we are not, just like you can pretend you didn’t really lose your job so long as your credit card does not reach its limit. We have been in that depression for about 18 months and there is no evidence that we will exit it, as we have yet to find a way to pull back the deficit spending without an instantaneous collapse in the economy.

Yet at some point we must and will stop. We will either do so of our own volition, or we will do so when the cost of borrowing skyrockets, as others get tired of funding our profligacy. If we attempt to “print” our way out of it the cost of petroleum products will shoot the moon and destroy our economy anyway.

You haven’t seen the half of what happened though – not yet. It appears that AIG – the company we have bailed out (thus far) to the tune of some $100 billion plus, in fact isn’t done. It appears they may have written credit protection on Greece. If this allegation by the German equivalent to The New York Times is true Americans are going to be asked to pay billions of dollars – or more likely, hundreds of billions (since Greece is almost certainly not the only place – try Spain, Portugal, Ireland, etc) to bail out a bunch of FOREIGN NATIONS.

Do you both think Americans can and will pay that bill? A bill that has been forced on us, and yet benefits not The United States economy, but foreigners?

Wars – big wars – start over much less, my friends.

It’s time for the federal government to start arresting and jailing the banksters, now, because I suspect the alternative to being prosecuted for their criminal financial rape of America is going to be even less pleasant . The sense of popular fury is palpably building even though Washington is still managing to hold things together through this last-ditch gigantic spending spree. Once it becomes obvious that it has failed – just to give one example, the FDIC reported today that in Q409 it managed to lose nearly half the $45 billion in three years of pre-paid fees it collected – it is likely to get very ugly indeed.

This isn’t rocket science. It really isn’t. Because it is simply not possible to shift from a manufacturing economy to a “service” economy wherein the services consist of little more than gambling with imaginary numbers and still expect a society to remain stable. The apparent failure to understand that bread and circuses requires not screwing around with the reliable delivery of bread and circuses is really astonishing. The Romans understood this; the one place they didn’t let the provincial governors use as a tool for personal enrichment was Egypt, for the very good reason was that it was Rome’s granary.

I’m not a fan of unaccountable ruling elites, but as long as we’re stuck with one, is it really too much to expect them to be at least a somewhat competent?