Libor

nice JuiceMan......let's hope banks start borrowing and lending out that trillion dollars.

many ARM resets are tied to the LIBOR. This is good news. One of my units had an ARM reset downward this year. Hopefully the LIBOR will stay low on average for the next year and that mortgage will reset down again!

JuiceMan: Interbank lending is an important link in the credit food chain, so unfreezing Libor is a helpful toward opening the taps. I'm not sure the Libor drop has a big direct affect locally, since more ARM programs in NYC seem to be linked to T-Bills than Libor.

Certainly, homeowners across the country who have Libor ARMs should be breathing a big sigh of relief (assuming they understand the importance of index values, which many borrowers don't seem to grasp until the first reset hits).

I'll keep the doom going..do you think LIBOR easing will make more buyers come to this market now? So everything is all good now? Its nice to see easing in credit markets, and a stock market bounce, but lets at least acknowledge that the effect of this credit deflation are yet to trickle down to the real world.

we are in the very early stages of the mainstreet blues resulting from this credit tsunami, peak credit, rising unemployment, contracting wall street, negative wealth effect, declining gdp, a dying auto industry, record debt levels, etc..

The ARM reset argument must be put into place. How many Manhattanites used these ARMS to stretch and buy more home? How many went beyond their incomes? How many may lose their jobs? How many lost 30% of their wealth in stock market selloff? What was the initial rate? What will rate reset to after LIBOR eased? What if LIBOR gets worse again? Will the reset be higher, but not that much higher? Does falling LIBOR really make new loans that much more attractive?

This means very little in terms of direct impact on our market, IMHO. We got bigger fish to fry.

urbandigs - some people have ARMs who actually qualify for a prime loan. For example if you buy in a building that has a high percentage of rentals, you may have had to take an ARM because many banks won't offer fixed loans on such a property.

Nothing is wrong with the finances of the building or the buyer. That was actually the case on my unit with an ARM.

"I'll keep the doom going..do you think LIBOR easing will make more buyers come to this market now?"

No, but I do think it is a positive and important sign of recovery for the financial markets which is a critical first step to economic recovery. This is good news for the markets, lending, and for folks with ARM resets.

"This means very little in terms of direct impact on our market, IMHO. We got bigger fish to fry."

I'm quite surprised to hear you say this digs. For months we’ve been hearing about credit market seizure and how this will cause an apocalypse of epic proportions. Now, we are starting to see some recovery and it doesn't matter anymore. I'm not saying that this is going to help sell that $1600 psft new dev in Brooklyn, but to say it doesn't matter is a load of crap.

Another right-on post by JuiceMan:

NYC Commercial Property Sales Plunge in Credit Freeze (Update1)

Nov. 4 (Bloomberg) -- New York City commercial real estate transactions plunged 61 percent in 2008 through October as the global credit crisis roiled lending and sidelined buyers.

About $17 billion of transactions have closed so far and the market is headed for its worst year since 2004, according to data from Real Capital Analytics Inc. of New York. Sellers have made 237 deals of $5 million or more, a four-year low in a market that posted a record $51 billion in sales in 2007.

``The banks are not lending, and most of them are saying we're done for the year,'' said Scott Latham, executive vice president for New York investment sales at Cushman & Wakefield Inc., the largest closely held commercial brokerage. ``In all likelihood, you will see next to no transactions between now and the end of the year.''

http://www.bloomberg.com/apps/news?pid=20601087&sid=aEJwkP6e4q8U&refer=home

The commercial market includes residential rental units.

Now then, JuiceMan, LIBOR is only a valid measure of interest rates for ARM's. It is not indicative of long-term mortgage rates. That's first. Second is that the issue isn't the interest rate - it's the availability of credit (at any rate) and incomes - which are falling thanks to the Wall Street massacre, and won't be recovering anytime soon. (Look at BofA's offer to Merrill Lynch's financial advisors.) And the ongoing disconnect between purchase prices and free-market rentals, which are falling at a much faster pace.

There is no fundamental reason why property prices should be so high in Manhattan. It's not "doom and gloom." It's free-market economics.

no Juice you misunderstand my point. The damage is done and we are yet to really see it. LIBOR easing has a lot to do with aggressive rate cuts here and abroad, the CP facility which I discussed was great and largely anticipated and that I wanted to be long before its launch, and the upcoming TARP program and bank injections, and other 15 facilities. These are massive stimuli, which will have side effects down the road.

The goal was to ease the credit markets with everything they got, and it seems to be working. yay. Does it mean the end is over, hells no. Does it mean as LIBOR comes in, confidence is restored amongst home buyers, hells no. Does it mean that distressed homeowner who is going to adjust to a lower rate, can now safely get by, hells no. You cant quantify its affect on buyer confidence, or seller distress! Its like you cant quantify that with every penny the dollar loses against the Euro, X number of foreign buyers come into our market; which is what many led us to believe.

Ive been discussing credit markets in depth for 15 months, so you know my feelings on the crisis. I respect it.

but what I mean is, this slowdown will be in stages, and the fact that LIBOR came in as a result of massive stimulus and new facilities, wont stop the next phase of this slowdown that is about to hit mainstreet! And easing libor rates and spreads to treasuries wont do a thing to stop it! Those are signs of confidence amongst banks and told us that banks didnt want to lend to each other and were hoarding cash, for reasons Im sure we will find out! Maybe they needed that money because they know a new wave of downgrades is coming, and they will need to raise $$$. Alt-A, prime, credit cards, cmbs, etc..we know for a fact the downgrades are not over!

What I mean by "We have bigger fish to fry", I mean local dynamics that have a more direct impact on Manhattan real estate:

1) unemployment rising; especially on wall street
2) negative wealth effect of portfolios and confidence
3) foreign demand falling very fast and hard; forced sales to those who bought?
4) city/state budget crisis; service cuts?
5) no more investment banking, structured credit business and bonuses vastly reduced going forward; even after this $125Bln TARP re-capitalization which Congress is attempting to make sure doesnt go to bonuses or retention of talent
6) heavy regulation coming for our wall street, banks, derivatives industry, cds, etc..
7) very early stages of finding who is swimming naked here in Manhattan
8) as mergers close, massive layoffs loom on restructuring/cost cuts
9) higher property, cap gains, other taxes???
10) potential for higher treasury yields down the road? Higher rates?
11) Still tight lending standards that dont go down with easing in LIBOR
12) Credit deflation in general

and on and on and on. Im saying the worst for Manhattan is ahead of us, not behind us, in terms of mainstreet. The credit crisis will yield a prolonged and deep slowdown and lead to the next few stages of the slowdown, and easing libor wont do a thing to stop this from progressing to the next stage. I actually discussed how I thought the worst of the credit crisis is likely behind us due to all the stimulus. But that doesnt mean the recovery road begins (read Mish's discussion today - http://globaleconomicanalysis.blogspot.com/2008/11/unrelenting-bullishness.html)! It means the credit markets are easing out of paralysis mode, for now, which was priority #1. TED SPREAD still well above 2 and look at corporate bond yields to treasuries! Hopefully that comes in alot from current levels. Wait until we see the real effects of this!

OCT 17th - "CREDIT DISTRESS EASING": http://www.urbandigs.com/2008/10/credit_distress_easing_spreads.html

"But I must say, after 15 months or so since the credit crisis began, I am getting more and more bullish. That doesn't mean stocks will fly, although I am long at these levels and out of my short positions, but it may mean we have seen the worst of the credit distress."

The earthquake's worst shocks may be beyond us, but now we have to sift through the rubble and deal with aftershocks! We still have more securities ratings downgrades coming, end result of commercial mbs holdings, and more deleveraging to go to get down to the new 10-12:1 from 30-40:1. Capital raising will have to result with more selling just as the fed is running close to out of bullets.

There are 17 lending facilities since late 2007 addressed to ease this crisis. What happens when we start to scale these down? Im just saying there is way more to this story than most like to consider and I do not see a DIRECT IMPACT ON OUR MARKET BECAUSE LIBOR CAME IN. Thats all.

with all due respect of course!

I agree with UD.

petrfitz - ok, Ill agree to that. So lets look into this.

Let me ask you.

WHAT WAS YOUR ORIGINAL ARM RATE? WHEN WAS IT LOCKED?

did it adjust yet? Are you still in lock in?

If not, when it adjusts:

1) What will it adjust to with 3-MTH libor at 2.7%
2) What would it have adjusted to with 3-MTH libor at 3.5%?

I assume after the lock in that your rate will rise, and not fall, correct? So the question is, how much more will it rise, compared to how much more it would have rose with higher libor that it is indexed to?

Lets run some numbers. Im saying that the rise itself is going to hurt no matter what. A few hundred here or there is nice to save, but it wont prevent those that are distressed from not having to liquidate if they cant make ends meet. I dont think adjustments will make payments lower, thats for sure.

"That was actually the case on my unit with an ARM."

Funny, petrfitz said I was stupid to have an ARM.

Petrfitz, do you have an ARM on your chauffeur-driven Prius?

Steve you obviously cannot read. Some units by their nature could only get ARMs. You had an INTEREST ONLY ARM. There is a big difference. Are you bitter because you lost money on both your real estate and your stocks?

urbandigs - the original ARM was at 5% and it reset to 4.75%. It is locked for a year and will reset again next year based on the average of the Libor for the year. At this rate the LIBOR may be even lower next year. I may make the decision not to lock in and try for another year at a lower rate.

My risk is hedged by the terms of the loan in that my rate cannot increase more than 2% per year. That would make my next years worst case scenario 6.75% and todays rates are at 6.5%.

right the reset has a cap annually. Thanks for sharing, guess I was wrong!

most loans i have seen are based on the 1 year average not the 3 month average. Most caps are 2.75% over Libor average and can only adjust upwards or downwards 2% from the previous year. So the risk of sitting in a Libor based ARM right now and for the next 3 years is pretty good with the chances of having a below market loan as well.

"You had an INTEREST ONLY ARM. There is a big difference."

Not if you pay it off like an amortizing mortgage there isn't.

"At this rate the LIBOR may be even lower next year."

Gee - then my interest-only ARM should go down even more!

"Are you bitter because you lost money on both your real estate and your stocks?"

I've not lost money on my real estate, and I am quickly recovering what I lost on stocks. Perchance I am the only person in the world who lost money on stocks recently?

Steve - I thought that you Sold your co-op on fire island??? That you were getting out of RE completely a few weeks ago?

Did you lie?

I find it humorous that an article that reflects any improvement on anything is met with such resistance. steve reverts to a post on commercial real estate and then attempts to give a lecture on Libor. steve, I suggest you read the article again, I know you cannot physically process positive information but read it again anyway.

“The ARM reset argument must be put into place. How many Manhattanites used these ARMS to stretch and buy more home? How many went beyond their incomes? How many may lose their jobs? How many lost 30% of their wealth in stock market selloff? What was the initial rate? What will rate reset to after LIBOR eased? What if LIBOR gets worse again? Will the reset be higher, but not that much higher? Does falling LIBOR really make new loans that much more attractive?
This means very little in terms of direct impact on our market, IMHO. We got bigger fish to fry.”

This is the exact argument that steve was using (before Bear & Lehman) for what was going to CRASH the Manhattan market. Digs says these things don’t matter now. Which is it boys? Why did these things matter before the meltdown and they don’t matter now?

Digs, did I mention in the OP something that said BUY BUY BUY? Did I insinuate that any of your 12 items above didn't still exist? Do you have some pent up aggression that you want to tell us about?

“But I must say, after 15 months or so since the credit crisis began, I am getting more and more bullish. That doesn't mean stocks will fly, although I am long at these levels and out of my short positions, but it may mean we have seen the worst of the credit distress."

To be clear this is what the OP represented to me, but I guess streeteasy land has been reduced to the land of the hyper-reactionary bear.

"I'll keep the doom going.."

but of course

"I'll keep the doom going.."

but of course

"I'll keep the doom going.."

but of course

"I'll keep the doom going.."

but of course

"I'll keep the doom going.."

but of course

"I'll keep the doom going.."

but of course

"I thought that you Sold your co-op on fire island???"

Not closed yet.

"I find it humorous that an article that reflects any improvement on anything is met with such resistance."

Not true. If it did reflect what you claim it does, then people would side with you. Your logic is similar to:

If A = B
and B = C

What does D equal?

Who knows?

"steve reverts to a post on commercial real estate"

Read it - it's about credit.

"and then attempts to give a lecture on Libor."

What "lecture"? LIBOR affects only a small part of mortgages. Is that untrue?

"steve, I suggest you read the article again, I know you cannot physically process positive information but read it again anyway."

I did read the article. And nowhere does the word "mortgage" appear, nor the term "real estate," nor the proper noun "Manhattan."

I have no doubt that the reduction in LIBOR is a good thing. I've known what LIBOR is for decades - unlike most people. But it is not in and of itself a positive sign for Manhattan real estate, as the bad news is just starting to filter in:

Wall Street Banks Bracing For a Big Round of Layoffs

The big broker-banks are preparing to lay off as much as 15 percent of their workforce as the economic slowdown continues to pound Wall Street, CNBC has learned.
CNBC.com

As the remaining investment banking companies look to clean up the damage from the credit crisis, thousands of employees will pay the price through pink slips that could come before the end of the year, senior sources on Wall Street said.

Some of the biggest hits will come at Merrill Lynch, where 10,000 employees could be jettisoned as a result of the merger with Bank of America. Barclay's purchase of Lehman Brothers' investment banking unit also will mean layoffs, while lack of merger and acquisitions and initial public offerings is hitting Morgan Stanley hard. Morgan could lay off 15 percent of its work force.

Even the more stable companies, including Goldman Sachs and JPMorgan Chase will get hit. Goldman is looking at at least 10 percent and maybe 15 percent of its workforce, with similar numbers likely at JPMorgan.

Wall Street bonus backlash brewing

Big banks face a difficult decision over bonuses this year. Some experts claim that the old way of compensating workers may soon have to change.

NEW YORK (CNNMoney.com) -- Wall Street now has a new worry: bonus season.

There are already rumblings that the notoriously lavish payments for bankers and traders could be cut in half from a year ago following what has been an abysmal year for the securities industry.

Just a year ago, the bonus pie was worth about $33.2 billion, which broke down to an average of $180,420 for the more than 180,000 individuals employed by Wall Street firms at the time, according to the New York State Comptroller's office.

At the same time, opposition to big bonuses has snowballed in recent weeks after Congress effectively saved some of the country's biggest financial firms from certain disaster.

Lawmakers on both sides of the aisle -- including House Republican Leader John Boehner, R-Ohio, and House Financial Services Committee Chairman Barney Frank, D-Mass., -- put the first nine banks and securities firms that received a government capital injection on notice that they will not tolerate companies using the money to pay bonuses.

http://money.cnn.com/2008/11/04/news/companies/wall_street_bonuses/index.htm?postversion=2008110414

Let's see: which is more important, JuiceMan, those two stories, or LIBOR, which is the rate that banks lend each other money in London, and it is merely a reference rate ofttimes completely unrelated to the actual rate the money is lent?

Come on, JuiceMan. Be real. When there's real good news on the real estate front, I'll be the first to admit it. But the bad news hasn't even begun to fight.
http://www.cnbc.com/id/27537794

hey I never got aggressive here? Just talkin out loud. That is what forums are for, arent they? Just gave my two cents.

"I did read the article. And nowhere does the word "mortgage" appear, nor the term "real estate," nor the proper noun "Manhattan."

Since when has that stopped you from making massive inferences on the Manhattan real estate market? If this article was negative, you would have posted it first. Why don't you answer my question about how ARM's don't matter in Manhattan?

"hey I never got aggressive here? Just talkin out loud."

Who said you were aggressive? I was tired of reading streeteasy topics about Chicago, the election, and job losses and hoping to spur some intelligent conversation about real estate for a change.

"Why don't you answer my question about how ARM's don't matter in Manhattan?"

Who said they "don't matter"? That's an absolute. If the ARM is linked to LIBOR and it resets tomorrow, it matters. If (as with most Manhattan ARM's that I'm aware of) it's linked to the prime or fed funds rate, or doesn't reset for 3 years, then it makes no difference whatsoever.

Does that make you happy?

Because it still doesn't even make a minor dent in what's coming down the pike, as can be seen from the articles I posted. Someday I will post something positive on Manhattan real estate, as I have about Los Angeles real estate. Just not yet because the time is not ripe.

Where LIBOR will matter is in the economy in general, which isn't nearly as bad as people think, I think, except for housing and finance. It would have been fine if the idiots (thankfully) about to be kicked out of office didn't let Lehman fail, which exacerbated the credit crunch. I think that except for finance and real estate, we'll do just fine. Unfortunately, finance and real estate define Manhattan's property market.

"finance and real estate define Manhattan's property market."

Did I really write that? I mean "Manhattan's economy."

Oops!

My company is currently saving about $200K per month on LIBOR based lines of credit. Our payments have decreased monthly and increased our cash flow allowing us to invest more this year or move those savings into earnings.

Either way - Steve lied about being out of "real estate completely by Friday" which he told us in September.

"Does that make you happy?"

Not really. Digs was inferring that there aren't enough ARM's in Manhattan for LIBOR to have an impact on the market. This is counter to what you and a lot of other folks said regarding the role ARM's would have in dragging Manhattan down. I don't understand what happened in the last six months to make ARM's less impactful in Manhattan. Please explain.

“Where LIBOR will matter is in the economy in general, which isn't nearly as bad as people think”

This was my point, that things are slowly getting better. One small step can be very big indeed.

I was more saying that the dollar amount that easing LIBOR will result in for homeowners, is not going to make or break their situation. If they are forced to sell because they are in financial dire straits, easing LIBOR and saving a few bucks is not going to stop that inevitable end result.

That was my main point.

"Steve lied about being out of "real estate completely by Friday" which he told us in September."

Co-ops take time to close, dude. If you were who you said you were, you'd know that.

"Digs was inferring"

Or was he "implying"?

"This is counter to what you and a lot of other folks said regarding the role ARM's would have in dragging Manhattan down. I don't understand what happened in the last six months to make ARM's less impactful in Manhattan. Please explain."

I believe that 60% of recent jumbo mortgages in Manhattan were ARM's. I have said all along that the bulk of them won't reset for 3 years, just about the time you would expect Wall Street to be improving, which will exacerbate the problem. I don't know what rate they are pegged to, and I don't know what interest rates will be in 3 years. Do you?

LIBOR has come down. I did not make any comment on it that I remember since the anomalous situation commencing on September 17, more or less, when these morons let Lehman go under to save a few billion, necessitating the expenditure of several hundred trillion the world over to recover from the biggest fiscal policy blunder since Smoot-Hawley. Just because it is now down to where it was in August, more or less, does not mean that we are all saved.

"that things are slowly getting better." I fully agree, and I never thought they were so bad until Lehman, which is how I got stuck in that trap. Nonetheless, that does not mean a happy outlook for Manhattan real estate.

I agree with digs' main point.

"If they are forced to sell because they are in financial dire straits, easing LIBOR and saving a few bucks is not going to stop that inevitable end result."

Ok. That makes sense.

"Digs was inferring"

Or was he "implying"?

I'm not sure, but I'll trust the guy with the masters in creative writing. Can Digs not infer something or are you suggesting "imply" because I could not possibly know what Digs' inferred?

No question falling LIBOR is constructive for real estate overall. But I think UD nailed it - there are just many more important factors influencing demand for real estate that cheaper debt is just not enough to move the needle. It probably does help those who can qualify for a refi and are about to have ARMs reset. So on the margin, maybe it keeps more people in their homes. But considering the fact that fed funds is at 1% and that being at 1% was a huge contributor to this bubble to begin with, i think any relief on the cost of financing will be short lived.

sorry, should have been more clear originally without going into the detail

On balance falling interest rates is a plus for real estate.

But real estate still tanked in the great depression.

"masters in creative writing"

Wrong. Masters in Spanish literature, bachelors in Economics. Graduate certificate in creative writing.

"But real estate still tanked in the great depression."

This is not the Great Depression. Not even close. I can still pay all my bills, though I did drive my car to Florida to keep it there for free for a few months, to cut costs. Plus I just got another American Express card with 0% interest for a year, just in case there is a Great Depression. :)

Couldn't resist, could you?

Ok, whatever your educational background steve, you chose to correct my grammar. Can you tell me what was wrong with infer?

"though I did drive my car to Florida to keep it there for free for a few months, to cut costs."

Man, you really did get your ass handed to you in the market eh?

"Can you tell me what was wrong with infer?"

I don't know. Did he infer, or did he imply? The former is passive, the latter active. You tell me.

"though I did drive my car to Florida to keep it there for free for a few months, to cut costs."

"Man, you really did get your ass handed to you in the market eh?"

It wasn't pretty, but if I don't need the car till the summer, why pay for parking?

Libor's Biggest Drop Fails to Match Fed, Spur Loans (Update3)

Nov. 5 (Bloomberg) -- Credit markets are still creaking even after the biggest decline on record in the rate banks say they charge each other to borrow dollars.

The London interbank offered rate, or Libor, for three- month loans fell to 2.51 percent today, from 4.82 percent on Oct. 10. The rate is still 151 basis points more than the Federal Reserve's target interest rate for overnight bank loans, compared with an average of 22 basis points in the five years before the global credit crisis began in August 2007.

``Banks are cutting back, the economy is in a deepening recession and in that environment, I don't think banks are going to become a lot more willing to extend credit soon,'' said Jan Hatzius, chief U.S. economist in New York at Goldman Sachs Group Inc., the world's biggest securities firm.

http://www.bloomberg.com/apps/news?pid=20601087&sid=azojeJ8lsGfg&refer=home

Another JuiceMan theory down the drain.

all it took was 3 trillion of funds pumped into the system, 375 bps of rate cuts, 17 lending facilities, bailouts of Bear, AIG, Fannie, Freddie, and who knows who else, co-ordinated global cuts, 700Bln TARP program, 1.3 trillion CP facility, etc..

worth every penny! Nah, I dont see any unintended consequences from all this, do you guys?

Alas, UD, there was no choice. Had Lehman not been allowed to go under we could have done it a lot cheaper, but those idiots were kicked out of office yesterday. But the underlying cause had been accruing for years: "financial engineering," a fancy way of saying snake oil - give yourself a huge short-term bonus for a long-term risk that later collapses.

Then there was outright fraud and incompetence (credit ratings) that was, in essence, identical to the fake research that caused the dot.com bust. And a complete misunderstanding of the risk of securitizations.

What needs to happen now is re-regulation, and it will. Though I was not originally an Obama supporter I believe his campaign showed extreme discipline, vision, and execution. With those skills - even Jack Welch commended him on them - we may be able to get out of this.

Not without a deflation of Manhattan real estate, however, to levels in line with incomes and (falling) market rents.

this was supposed to be a free market capitalism system!

You mess up, you take on risks, you take HUGE profits, the bets turn bad, YOU FAIL! They only allowed one firm to fail, and saved 4 other very big ones, much larger than the one they allowed to fail. Then they arranged some marriages.

WHY ARE DIVIDENDS STILL BE PAID OUT AT THESE FIRMS IF THEY ARE TAKING TAXPAYER MONEY!

The is simply not a free market system

"The is simply not a free market system"

There is no such thing as a purely free-market system, especially in banking because of the risk of systemic failure. It has been known since the Great Depression - when banks were allowed to go bankrupt all the time - that bank's CAN'T go bankrupt because it causes a crisis of confidence, and counterparties' monies are locked up, and if I can't settle with you you can't settle with JuiceMan and JuiceMan can't settle with spunky, and the whole thing falls apart.

I was confident on that September day that they'd find a solution for Lehman, and went out and had a Starbucks. By the time I got back it was too late to bail, and by Monday it was all over.

"You mess up, you take on risks, you take HUGE profits, the bets turn bad, YOU FAIL!"

Unfortunately, because of the fact that banks can't go bankrupt (at least the major ones), the taxpayer is ALWAYS on the hook for their risks. Somebody forgot to tell Alan Greenspan that.

well that was the basis for setting up the federal reserve cartel, no?

You would enjoy this book:

http://www.amazon.com/Creature-Jekyll-Island-Federal-Reserve/dp/0912986212

Im reading it now. Are you familiar with the 1910 meeting at Jekyll Island?

I'm vaguely familiar with Jekyll Island - I remember reading about it in college, I think, but that was a gazillion years ago.

There was no choice but to set up the Federal Reserve, even though Ron Paul thinks it's ridiculous. The option, of course, is the Scottish way of doing it - have each bank print its own currency, and hope that every other bank accepts it.

The sea change was the establishment of the FOMC in the 30's, and coming off the gold standard through WWII, and then again in 1970(ish). The gold standard works great until it doesn't, and it doesn't in times like the 30's (deflation) and the 70's (inflation) and it wouldn't work today. Far better is to control the money supply (as opposed to Greenspan's pegging interest rates - a dismal failure).

There is a cartel formed now: BAC, JPM, WFC - a triumvirate of banks, perhaps C to be added by taking over other banks. That concentration is both good and bad: good because it provides stability, bad because it gives them price control as they control 40% of banking in the country. I don't know if there is another solution, however, but to have banks too big to fail, to ensure regulators do their job properly.

what sort of gets me is how taxpayers are footing these gargantuan bills and making these ridiculous capital injections (and therefore taking on risk) while the banks are still paying billions upon billions of comp. not to mention the fact that by injecting this money, we save the franchise and prop up the stock. i'm not sure there is much they could have done otherwise, to not buy pref stakes would have meant another bank going under, which given the chaos that Lehman caused, would have been even more disastrous. but do they still need to accrue such exorbitant comp?

special - well you must take into account the terms of the 125bln capital injection and I have my own thoughts on WHY it was done:

It gets perpetual preferred stock that receives dividends plus warrants to buy some stock. Specifically, the perpetual preferred earns a 5% interest rate that will rise to 9% after five years. The warrants will be worth 15% of the face value of the preferred -- e.g., a $25 billion investment, will grant the government $3.75 billion in warrants (although it's not clear at what price those warrants would be exercised). If the stock goes up, taxpayers can profit.

Now lets think for a moment, the problem has clearly infiltrated alt-a in a big way, and prime which is getting hairy too. There are TONS of securities held for these higher quality debt classes. There are also ratings downgrades to come as the process is going on right now to determine if a downgrade is needed; I think it is. When that happens, the banks would have to raise mroe capital to meet requirements. In this environment, thats not good!

So, inject the banks with capital THEN bring on the downgrades and the TARP purchase program where price discovery is coming and you know that many marks would still have to come down. This is the big ? with TARP. What will be the price pad for these distressed illiquid assets? If the plan was to recapitalize and strengthen the banks, the marks would have to be good, or at least above the past distressed Merrill CDO sale. ABS CDOs were highly toxic though, so these sales were super low around 6 cents on the dollar (http://bigpicture.typepad.com/comments/2008/07/merrill-writedo.html)

Then we need to know if previous marks were marked down enough, which we know they were not for higher quality debt classes. So, the marks are likely to be generous, not good enough to start an outrage, not bad enough to cripple the banks, but just enough so that the banks downside is limited and absorbable, especially now that they have a bunch of new money to cushion this event when it takes place! No new writedown needed, until the next wave hits and more downgrades come and the process repeats itself.

Citi has tons of off balance sheet crap. I think 1Trillion worth by last years standards. Who knows what this is worth now. Citi can NOT fail, so Im quite sure they are in constant talks with treasury/fed about how they will unwind these holdings.

Sorry didnt mean "No new writedown needed"

meant, no new capital raise needed...