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[markusmaximus]

Originally Posted by glwilson

Wow! I had to read this twice Markus because there were a few thing in here I agreed with.

I understand your point on tax-cuts -- thanks for the additional clarification.

I do have to say one thing about the tax-checks sent out by Bush -- a bad idea -- one that I was not for then either. I personally thought that was nothing more than Washington's way of trying to "wash" the problem away. I wouldn't dispute the ineffectiveness of such a tactic -- however "checks" are not what I propose.

Regarding the ineffectivenes of "checks": that is one of the "things" the stim-plan provides; thus doubt they do much at all... much like spitting on a fire.

Regarding toxic-assets; I don't disagree with Roubini (you know I read his material). In fact; much of what he has said I agree with (not all; but most).

We will see a "nationalization" of the banks soon -- this year likely. This will be required since they hold trillions of bad-debt and are likely to fail which would be castostropic to the economy -- causing a complete collapse of the likes no one wants to see.

My fear is that the government would not sell it back to private enterprise to own and manage again ever. That would be dangerous in my book.

I will wait to see what the "Pres" offers as a plan for the banks and mortgage abatement -- then regroup on that subject again later.

We agreed on a few points! Here's another agreement. I too do not like the government nationalizing the banks. I don't mind lifting the bad debt as an interim measure, but as the banks return to solvency, I think these bad debts should be returned slowly. Can you explain why it would be dangerous for the gov to sell these assets back to banks? Or did I mis-understand that point.

My opposition to nationalizing the banks is not based on socialistic ideology, but the simple reason that it absolves the banks of their actions complicit in this crisis to begin with. Keeping the bad assets disturbs the "natural order" of economics and dilutes the "survival of the fittest" concept. {pardon the cheesy yet effective nod to another 200 year-old birthday boy... Darwin}.

More common ground. Should we stop here?

[blowndodge]

Markus! your not that Liberal after all ! Pulling each other to the middle ground is what politics is all about. I agree the bad debt should slowly be reabsorbed back to the banks. The only danger I see in selling back to the banks is the value of those assets valued correctly. Greg would know more about that I believe.

Bad assets are a function of the "natural order". Sh*t happens in the finance world and sometimes when they correct themselves "natural order" its a painful time. All part of intrinsic value (what sh*t is really worth).

[glwilson]

Originally Posted by Markus Maximus

We agreed on a few points! Here's another agreement. I too do not like the government nationalizing the banks. I don't mind lifting the bad debt as an interim measure, but as the banks return to solvency, I think these bad debts should be returned slowly. Can you explain why it would be dangerous for the gov to sell these assets back to banks? Or did I mis-understand that point.

My opposition to nationalizing the banks is not based on socialistic ideology, but the simple reason that it absolves the banks of their actions complicit in this crisis to begin with. Keeping the bad assets disturbs the "natural order" of economics and dilutes the "survival of the fittest" concept. {pardon the cheesy yet effective nod to another 200 year-old birthday boy... Darwin}.

More common ground. Should we stop here?

This is LONG -- I apologize but it provides what may be the inevitable for nationalization. By the way... I don't like it either. Wish there was another way.

(This is Noureil Roubini's commentary on this subject)

A year ago I predicted that losses by US financial institutions would be at least $1 trillion and possibly as high as $2 trillion. At that time the consensus such estimates as being grossly exaggerated as the naïve optimists had in mind about $200 billion of expected subprime mortgage losses. But, as I pointed out then, losses would rapidly mount well beyond subprime mortgages as the US and global economy would spin into a most severe financial crisis and an ugly recession. I then argued that we would then see rising losses on subprime, near prime and prime mortgages; commercial real estate; credit cards, auto loans, student loans; industrial and commercial loans; corporate bonds; sovereign bonds and state and local government bonds; and massive losses on all of the assets (CDOs, CLOs, ABS, and the entire alphabet of credit derivatives) that had securitized such loans. By now writedowns by US banks have already passed the $1 trillion mark (my floor estimate of losses) and now institutions such as the IMF and Goldman Sachs predict losses of over $2 trillion (close to my original expected ceiling for such losses).

But if you think that $2 trillion is already huge, our latest estimates RGE Monitor (available in a paper for our clients) suggest that total losses on loans made by U.S. financial firms and the fall in the market value of the assets they are holding will be at their peak about $3.6 trillion. The U.S. banks and broker dealers are exposed to half of this figure, or $1.8 trillion; the rest is borne by other financial institutions in the US and abroad. The capital backing the banks assets was last fall only $1.4 trillion, leaving the U.S. banking system some $400 billion in the hole, or close to zero even after the government and private sector recapitalization of such banks. Thus, another $1.4 trillion will be needed to brink back the capital of banks to the level they had before the crisis; and such massive additional recapitalization is needed to resolve the credit crunch and restore lending to the private sector. So these figures suggests that the US banking system is effectively insolvent in the aggregate; most of the UK banking system looks insolvent too; and many other banks in continental Europe are also insolvent.

There are four basic approaches to a clean-up of a banking system that is facing a systemic crisis:


1. recapitalization together with the purchase by a government “bad bank” of the toxic assets;

2. recapitalization together with government guarantees – after a first loss by the banks – of the toxic assets;

3. private purchase of toxic assets with a government guarantee and/or – semi-equivalently - provision of public capital to set up a public-private bad bank where private investors participate in the purchase of such assets (something similar to the US government plan presented by Tim Geithner today for a Public-Private Investment Fund);

4. outright government takeover (call it nationalization or “receivership" if you don’t like the dirty N-word) of insolvent banks to be cleaned after takeover and then resold to the private sector.

Of the four options the first three have serious flaws: in the bad bank model the government may overpay for the bad assets – at a high cost for the taxpayer - as the true value of them is uncertain; and if it does not overpay for the assets many banks are bust as the mark-to-market haircut they need to recognize is too large for them to bear.

Even in the guarantee (after first loss) model there are massive valuation problems and there can be very expensive risk for the tax-payer (an excessive guarantee that is not properly priced by the first loss of the bank, the fees paid and the value of equity that that the government receives for the guarantee) as the true value of the assets is as uncertain as in the purchase of bas assets model. The shady guarantee deals recently done with Citi and Bank of America were even less transparent than an outright government purchase of bad asset as the bad asset purchase model at least has the advantage of transparency of the price paid for toxic assets.

In the bad bank model the government has the additional problem of having to manage all the bad assets it purchased, something that the government does not have much expertise in. At least in the guarantee model the assets stay with the banks and the banks know better how to manage and have a greater incentive than the government to eventually work out such bad assets.

The very cumbersome U.S. Treasury proposal to dispose of toxic assets - that was presented by Treasury Secretary Tim Geithner today - can be best understood (subject to the large fog of uncertainty about its many details) as combining taking the toxic asset off the banks’ balance sheet with providing government guarantees to those private investors that will purchase them (and/or public capital provision to fund a public-private bad bank that would purchase such assets). But this plan is so non-transparent and complicated that it received a thumbs down by the markets as soon as it was announced today as all major US equity indices went sharply down.

The main problem with the Treasury plan – that in some ways it may resemble the deal between Merrill Lynch (ML) and Lone Star (LS) - is the following: Merrill sold its CDOs to Lone Star for 22 cents on the dollar; and even in that case ML remained on the hook in case the value of the assets were to fall below 22 as LS paid initially only 11 cents (i.e. ML guaranteed the LS downside risk). But today a bank like Citi has similar CDOs that, until recently, were still sitting on its books, at a deluded and fake value of 60 cents. So, since the government knows that no one in the private sector would buy those most toxic assets at 60 cents it may have to promise a guarantee (formally or informally by putting capital into a public-private bad bank that will receive extra lending from the private sector) to limit the downside risk to private investors from purchasing such assets. But that implicit or explicit guarantee would be hugely expensive if you need to induce private folks to buy at 60 what is worth only 20 or even 11. So the new Treasury plan may end up being again a royal rip-off of the taxpayer if the guarantee is excessive given the true value of the underlying assets. And if instead the implicit or explicit guarantee is not excessive (if the public-private bank truly tries to discover the value of such assets as in the formal Treasury proposal) the banks need to sell the toxic assets at their true underlying value that implies massive writedowns that will uncover the insolvency of such banks. I.e. the emperor has no clothes and a true valuation of the bad assets – without a huge taxpayers’ bailout of the shareholders and unsecured creditors of banks – implies that banks are bankrupt and should be taken over by the government.

Thus all the schemes that have been so far proposed to deal with the toxic assets of the banks may be a big fudge that either does not work or works only if the government bails out shareholders and unsecured creditors of the banks.

Thus, paradoxically nationalization may be a more market friendly solution of a banking crisis: it creates the biggest hit for common and preferred shareholders of clearly insolvent institutions and – most certainly – even the unsecured creditors in case the bank insolvency hole is too large; it provides a fair upside to the tax-payer. It can also resolve the problem of avoiding having the government manage the bad assets: if you selling back all of the assets and deposits of the bank to new private shareholders after a clean-up of the bank together with a partial government guarantee of the bad assets (as it was done in the resolution of the Indy Mac bank failure) you avoid having the government managing the bad assets. Alternatively, if the bad assets are kept by the government after a takeover of the banks and only the good ones are sold back in a re-privatization scheme, the government could outsource the job of managing and working out such assets to private asset managers if it does not want to create its own RTC bank to work out such bad assets.

Nationalization also resolves the too-big-too-fail problem of banks that are systemically important and that thus need to be rescued by the government at a high cost to the taxpayer. This too-big-to-fail problem has now become an even-bigger-to-fail problem as the current approach has lead weak banks to take over even weaker banks. Merging two zombie banks is like have two drunks trying to help each other to stand up. The JPMorgan takeover of insolvent Bear Stearns and WaMu; the Bank of America takeover of insolvent Countrywide and Merrill Lynch; and the Wells Fargo takeover of insolvent Wachovia show that the too-big-to-fail monster has become even bigger. In the Wachovia case you had two wounded institutions (Citi and Wells Fargo) bidding for a zombie insolvent one. Why? Because they both knew that becoming even bigger-to-fail was the right strategy to extract an even larger bailout from the government. Instead, with nationalization approach the government can break-up these financial supermarket monstrosities into smaller pieces to be sold to private investors as smaller good banks.

This “nationalization” approach was the one successfully taken by Sweden while the current US and UK approach may end up looking like the zombie banks of Japan that were never properly restructured and ended up perpetuating the credit crunch and credit freeze. Japan ended up having a decade long near-depression because of its failure to clean up the banks and the bad debts. The US, the UK and other economies risk a similar near depression and stag-deflation (multi-year recession and price deflation) if they fail to appropriately tackle this most severe banking crisis.

So why is the US government temporizing and avoiding doing the right thing, i.e. take over the insolvent banks? There are two reasons. First, there is still some small hope and a small probability that the economy will recover sooner than expected, that expected credit losses will be smaller than expected and that the current approach of recapping the banks and somehow working out the bad assets will work in due time. Second, taking over the banks – call is nationalization or, in a more politically correct way, “receivership” – is a radical action that requires most banks be clearly beyond pale and insolvent to be undertaken. Today Citi and Bank of America clearly look like near-insolvent and ready to be taken over but JPMorgan and Wells Fargo do not yet. But with the sharp rise in delinquencies and charge-off rates that we are experiencing now on mortgages, commercial real estate and consumer credit in a matter of six to twelve months even JPMorgan and Wells will likely look as near-insolvent (as suggested by Chris Whalen, one of the leading independent analysts of the banking system).

Thus, if the government were to take over only Citi and Bank of America today (and wipe out common and preferred shareholders and also force unsecured creditors to take a haircut) a panic may ensue for other banks and the Lehman fallout that resulted from having unsecured creditors taking losses on their bonds will be repeated again. Instead if, as likely, the current fudging strategy - of temporizing and hoping that things will improve for the economy and the banks - does not work and in 6-12 months most banks (the major four and the a good part of the remaining regional banks) all look like clearly insolvent you can then take them all over, wipe out common shareholders and preferred shareholders and even force unsecured creditors to accept losses ( in the form of a conversion of debt into equity and/or haircut on the face value of their bond claims) as the losses will be so large that not treating such unsecured creditors would be fiscally too expensive.

So, the current strategy – Plan A - may not work and the Plan B (or better Plan N for nationalization) may end up the way to go later this year. Wasting another 6-12 months to do the right thing may be a mistake but the political constrains facing the new administration – and the remaining small probability that the current strategy may by some miracle or luck work – suggest that Plan A should be first exhausted before there is a move to Plan N. Wasting another 6-12 months may risk turning a U-shaped recession into an L-shaped near depression but currently Plan N is not yet politically feasible.

But with the government forcing Citi to shed some of its units/assets and the government starting stress tests to figure out which institutions are so massively undercapitalized that they need to be taken over by the FDIC the administration is putting in place the steps for the eventual and necessary takeover of the insolvent banks.

You can expect a similar path and an eventual government takeover of most financial institutions in other countries – such as the UK – where many banks are effectively insolvent.

So while Plan A is now underway today’s very negative market response to this Treasury plan suggest that it will not fly. Markets were expecting a more clear plan but also a plan that would bail out shareholders and creditors of insolvent banks. Unfortunately that is not politically and fiscally feasible. It is thus time to start to think and plan ahead for for Plan N (“nationalization” of insolvent banks).

[jamiep24]

Too much doom on these political threads. Hey, lighten up, everybody! The World's not coming to an end. My life hasn't changed one bit in the last 8 years. My family and I have a construction company (home building) and I haven't had a slow day in 20 years. Houses are still going up. I'm by no means rich and not poor, either. I don't gamble my hard-earned money on the stock market. And I don't borrow money I can't pay back. If you work hard, make wise decisions, save a little money here and there, and don't throw money away on bad habits, there's still hope for ya. Next week I'm going to pay cash for a new "08 Nomad I've been saving for since last summer. Life's good! And if anyone thinks one person is to blame, he or she isn't that intelligent.

[glwilson]

Originally Posted by jamiep24

Too much doom on these political threads. Hey, lighten up, everybody! The World's not coming to an end. My life hasn't changed one bit in the last 8 years. My family and I have a construction company (home building) and I haven't had a slow day in 20 years. Houses are still going up. I'm by no means rich and not poor, either. I don't gamble my hard-earned money on the stock market. And I don't borrow money I can't pay back. If you work hard, make wise decisions, save a little money here and there, and don't throw money away on bad habits, there's still hope for ya. Next week I'm going to pay cash for a new "08 Nomad I've been saving for since last summer. Life's good! And if anyone thinks one person is to blame, he or she isn't that intelligent.

Good point; and glad to hear things are working out for you. Things are fine for myself also.

Unfortunately -- there are some where it is not. I am not a dooms-dayer; however I am in the business of finance and economics -- therefore I have some passion for the subject. And I personally believe (and advise) before things get better -- they are going to get worse.

If we would have had a nation of individuals like you -- we would not have this subject to talk about. Unfortunately we did not. Many have borrowed to much and lived beyond their means -- thus as of today you have been enlisted to contribute to the resolution of the problem by your President -- whether you like it or not -- or whether you care to do so or not. To some... paying for other people's mistakes cuts-deep. To some... paying out some of their hard-earned money to help-out others that have made extremely poor financial decisions is not acceptable.

Please put me on the list of both of the above.

[Idaho]

Damn, Wilson and Markus are passionate about banking and politics. All I know is that my gut tells me that our gov't has screwed us big time and, as Wilson say, it is going to get worse before it gets better. I'm afraid a LOT worse.

One thing that seriously concerns me is that we have set aside laws for some and ignored rules for others and given special privledges to many so that everyone now expects some kind of gratuity. My question now is, how do we enforce ANY laws? Illegals are ignored, tax cheats are given political appointments, bankers are bailed out; do we now go after 'common' citizens for dodging a few hundred dollars of taxes? My point is where do we draw the line? We are headed down a giant slide to total chaos. Hate to be a dooms dayer but that is the way I see it.

[NRiderUSA]

We survived Carter... we can survive this too. Tomorrow, Tomorrow, its only a day away............

[glwilson]

Originally Posted by Idaho (High Plains Drifter)

Damn, Wilson and Markus are passionate about banking and politics. All I know is that my gut tells me that our gov't has screwed us big time and, as Wilson say, it is going to get worse before it gets better. I'm afraid a LOT worse.

One thing that seriously concerns me is that we have set aside laws for some and ignored rules for others and given special privileges to many so that everyone now expects some kind of gratuity. My question now is, how do we enforce ANY laws? Illegals are ignored, tax cheats are given political appointments, bankers are bailed out; do we now go after 'common' citizens for dodging a few hundred dollars of taxes? My point is where do we draw the line? We are headed down a giant slide to total chaos. Hate to be a dooms dayer but that is the way I see it.

Idaho; I share your concern. Unfortunately; much of what you have stated is true.

My problem is that I am "knee-deep" in this because it is my job -- daily. At the age of 53; I have never seen such chaos in this nation before -- or the global economy for that matter.)

My job is to know how this situation came to be and to provide guidance as to where areas of future opportunity and uncertainty exist. (Please note that none of my clients were directly involved in any of the last two decades of leveraged/derivatives nonsense.)

My disappointment lays mostly in those individuals that caused this problem (blatantly); and the innocent and upstanding individuals that are now going to pay for years and years to solve this problem.

When one looks at the "mechanics and engineering" of this crisis -- there is only one place to look first -- and that is with our government -- all parties.

This period of time should be a "wake-up" call for Americans to pay attention to what is happening and to take action with regard to who is responsible. Vote this time around to remove those that have had a stake in causing this problem -- including some of your present-day representatives responsible for the most recent legislative mistakes made. Look around you and refuse to take excuses from those citizens that have infringed on your rights and money -- costing you directly.

This is a serious situation; and no one should pass it off as something other than that. Doing so makes one a part of the problem rather than a part of the solution.

[markusmaximus]

It's very scary when Roubini states that the US banking industry in aggregate is effectively insolvent and argues that nationalizing the banking industry may be the only way out. His comments are echoed by Nobel winning economist Paul Krugman. I'm certainly not astute enough to evaluate the merits of the 4 options discussed by Roubini, but it's clear the government is waiting as long as possible before pulling the trigger on option "N". We're in for a bumpy ride.

[markusmaximus]

Originally Posted by glwilson

Idaho; I share your concern. Unfortunately; much of what you have stated is true.

My problem is that I am "knee-deep" in this because it is my job -- daily. At the age of 53; I have never seen such chaos in this nation before -- or the global economy for that matter.)

My job is to know how this situation came to be and to provide guidance as to where areas of future opportunity and uncertainty exist. (Please note that none of my clients were directly involved in any of the last two decades of leveraged/derivatives nonsense.)

My disappointment lays mostly in those individuals that caused this problem (blatantly); and the innocent and upstanding individuals that are now going to pay for years and years to solve this problem.

When one looks at the "mechanics and engineering" of this crisis -- there is only one place to look first -- and that is with our government -- all parties.

This period of time should be a "wake-up" call for Americans to pay attention to what is happening and to take action with regard to who is responsible. Vote this time around to remove those that have had a stake in causing this problem -- including some of your present-day representatives responsible for the most recent legislative mistakes made. Look around you and refuse to take excuses from those citizens that have infringed on your rights and money -- costing you directly.

This is a serious situation; and no one should pass it off as something other than that. Doing so makes one a part of the problem rather than a part of the solution.

I can't agree more with your call to action Greg. You and I have our disagreements on economic matters, but I share your frustration with the inertia of government, regardless of party. Too bad we can't vote out of office all the greedy lenders, bankers and investors like Madoff of the world.

[pagemastr]

Originally Posted by NriderUSA

We survived Carter... we can survive this too. Tomorrow, Tomorrow, its only a day away............

+1 on surviving Carter, can we blame it on him?

[Idaho]

Voting the bums out of office sounds good but the reality of that is it's easier said than done. People don't like change and will hang onto what they are familiar with or what the media scares them into believing. It is impossible to change out 535 members of congress. Even if we did nothing would change because Congress has exceeded it's constitutional boundaries (IMHO), in other words the genie is out of the bottle. The only way to put it back is going to be a total breakdown, possibly downright revolution and restructuring. I'm afraid that the United States may not survive in its present form. We must get back to the vision of the Founding Fathers of strong States rights with a very limited federal government.

[glwilson]

Ha! Carter... that poor man. Not sure how he can live with his legacy.

Markus: regarding nationalization of the banks; I would prefer that wasn't the choice -- and maybe it won't happen. My biggest fear isn't how the "gov" will "run" the banks under receivership; but more that I am worried they won't sell it back to the private-sector. If they do not -- then as Idaho stated... our form of government as it was intended is over.

I did run across some information within the last few days where our current situation was compared to other periods of time in the world. The information and research centers on whether we are in fact in "unprecedented" times.

I will try to post the "shorts" of the info so others can see that some of the evidence indicates we are in fact NOT experiencing unprecedented times. Interesting reading... at least it was for me.

Idaho: I hear you; but unfortunately voting is the only tool we have to help ourselves out of this mess -- unless someone is successful in promoting anarchy -- and that will not be a good experience for certain.

Here is a link that I thought was interesting to watch that helps explain our form of government in relation to others forms of governments; and what happens when one transcends to another.

http://www.flixxy.com/political-systems.htm

If anyone has 10-minutes I believe it will either enlighten them to something they may not have known previously -- or at least will be a good reminder. Again... I thought is was pretty good.

[Idaho]

Very good video. Chaos occurs when we set aside our rules and regulations and laws in favor of men. We are there now. Federal immigration laws are ignored, even trampled upon openly by misguided cities who wish to call themselves "sanctuary" cities to right some wrong in a percieved noble cause. At the same time millions of illegal aliens who hold this great country in contempt demand and recieve more rights and financial assistance than our own citizens who have worked a lifetime to build this great nation.

The rule of law concerning property ownership and banking laws are being set aside. It is now suggested that judges be given the authority to re-write contracts in order to help save some poor schmucks house. The only thing is that idea ignores the losses that will be incurred by the bank that loaned the money to buy the property in the first place. Losses that us taxpayers will have to make up for. Tax laws are, seemingly, being enforced with clear double standards. I must admit that it gauls me to no end when I hear our government announce a new program to save peoples homes knowing full well that because I have played by the rules and am 5 years away from owning my home that not only will I not get any help (don't want any in the first place) but I will have to pay exhorbitant taxes to help deadbeats and pay for this new program.

Criminals are being let out of prison at alarming rates because there are too many of them and we the people can not afford to house them so they are prioritized and sorted and freed to prey upon the good citizens again.

We are entering a period of growing deflation and our misguided government fools are printing paper money to try to prop up a failing GLOBAL economy. They do this even as governments around the world are telling them to stop.

The anti gun crowd now has a clear majority and they are chomping at the bit to serialize every single bullet and register every gun and owner. The cowboys and ex-servicemen amoung us will never stand for it and law enforcement officers in many communities will not enforce those laws even as police in larger cities will do just that.

Our enemies who rely on us for food grain and supply us with oil to lubricate our economy will teach us a lesson for causing the collapse of the world economy and stop the flow of oil.

In short, random - inconsistent enforcement of laws and attempts to deny basic rights will create a populace that is drisgruntled, disenfrancished and armed to the teeth.

Next step, anarchy. I do not want to see it, I don't see any way around it.

[NRiderUSA]

VIVA LA REVOLUTION!!!!!!!!!!!!