The market is spelling armageddon for financial firms

I guess we'll all be getting federal home loans!

Are the banks insolvent? I'm not a finance person, but I keep reading that they are.
If they are insolvent, what are the implications?

dwell, Lehman Brothers is an example of a bank that was insolvent. Those are the implications. Citibank customers will soon become Facebook friends with the FDIC.

let's not use the term insolvent, per se. maybe a more accurate term would be very leveraged. many of the banks, even today are 15-20x leveraged (and even more). in layman terms, that's like you buying a nyc condo with 5-7% down. so if you have that small of an equity cushion, what happens when asset prices (i.e., your condo price) falls by 10%? you are wiped out.

We will have nationalized banks if this continues. That would spell government wages for finance people and huge downward pressure on manhattan real estate prices.

I think this is front and center the most important topic of conversation with regards to what will happen to NYC real estate over the next 12-24 months. I think there will be massive layoffs and an eventual return to profitability for most banks. Perhaps we will lose another player to bankruptcy or outright nationalization (Citigroup or BofA). For those that maintain jobs, they will see their pay increases stalled for this year and next with relatively no bonus in sight until end of 2010.

All of the big banks would be insolvent by a significant margin if they marked all their assets to market. Prime and prime-backed assets are kept on their balance sheets at valuations that can only be described as fantasy. That's why they got Markit to delay the release of the Prime MBS indices, so they don't have to mark them to market. Add CRE to the mix and you have a serious balance sheet clusterfuck.

Private capital as a plug to depleted balance sheets are no longer an option for these banks. The only source of capital is the government. So i agree with PMG on the nationalization comment. I don't think many have factored in what that means to compensation/career path if and when that starts to happen. Wall Street comp will come to a grinding halt, and not just for a year or two. I mean, in 2007, 3rd year associates were making more than the President of the United States!

So, are we headed here?

UK faces 'possibility of national bankruptcy'

http://www.telegraph.co.uk/comment/columnists/iainmartin/4295219/Gordon-Brown-brings-Britain-to-the-edge-of-bankruptcy.html

I told Steve not to say the market was going up!

Can I protest the use of the name "eastvillager"? And "evnyc" too while I'm at it. I know I don't post very often anymore, but I was here first!

Sorry, evillager, you have to share. I don't think anyone is getting us mixed up. ;)

From what I have read so far, I think I am most in favor of a bailout plan for the banks using the Swedish model. Anyone have thoughts on this? Also, anything they see that could be better?

Waverly, I thought that was what TARP part 1 was, and it doesn't seem to be working, hence the flailing to find another path.

nyc10022: "I told Steve not to say the market was going up!"

I don't think I made any predictions about which way the market was going.

EastVillager is likely correct - no one really knows - about what would happen if assets were marked to market. But as I have always stated, it is stupid to mark long-term assets to short-term values, which is what that rule does. Just because something does not have a market does not mean it has no value.

Two things will change this instantly: bring back the uptick rule to prevent 40% declines in stock markets in a single day through bear runs, and change mark-to-market accounting to a discounted cash flow model.

The banks would be solvent again.

There you have my prediction about what will be done. It needs to be done. Unfortunately the Republicans want to hold up nominations for no reason, while Rome burns.

40% declines in stock markets = 40% declines in stock prices

Dow 6500... f .. I got killed on HRP today...

Like isaid.. tarp 2.0 and then tarp 3.0... wait for GM bks and 11% unemployment ... keep your powder dry till then...

Oh BTW... I'm typing this while wearing a t-shirt that says "I'm Short Oldbuyers/Exit2 House."

dwell.. yes the banks are all insolvent. banks job is to be at the forefront of capital intermediation.... take from savers and lend it to users with a higher rate of return which should signify a net benefit to society (new drugs, bigger dildos (for AR) etc) while at the same time ensuring failed investments are limited. For this job the shareholders take a risk and earn a profit.

Apparently.... the only thing banks did was lend to mariachi players and no matter how many gigs they do.. they just can't pay the $20K/month nut... So adios... amigos.. .here are my keys I'm gonna go back to Mexico where the tacos are $.20 and the cervezas are $.50.

People are clueless as to how dire the situation is.... and I just saw the sound of music with my daughter last nite... so I'm pretty darn happy right now... but the financial system is a total green mucus diarrhea mess that I wouldn't want to touch with a 10 foot plunger.

evnyc - No, TARP 1 was basically:

Step 1: hand banks billions of dollars

Step 2: banks put billions of dollars into reserves

Step 3: banks continue to writedown billions and lend to no one

Step 4: banks lend money to loosen the credit markets....oh s***, we forget to get this agreement from the banks BEFORE we gave them all of the money...boy, are we f****** stupid!

The Swedish model, if I understand it correctly, would require a bank to write down all of their Level 3 garbage before they got any money. The government would then give them money similar to the way that AIG was given their loan (at an onerous rate that would encourage a speedy rapayment). The banks could lend money to loosen the credit markets and would not have the crap on their balance sheets anymore. When they paid off the loans they would be "privatized" again and it would be much less burdensome on the taxpayers.

The banks are only "insolvent" on an accounting basis. Change the accounting and they have plenty of cash.

Here's the issue: you have an asset with a nominal value of $100. You can't find anyone to buy it. What's it worth?

According to the new accounting rules, it's worth $0. But is it if you have no intention of selling it?

No.

This inanity causes a vicious downward spiral that can't be stopped. Literally cannot be stopped. The way it's set up. If no one will buy the assets then, according to the rules, they're worth $0. Well, if they're worth $0, then the entity holding them - banks - have no capital. But they can't get new capital, either, because no one knows what assets in the future will have to be written down to $0 because no one wants to buy them. Which causes the financial system to collapse.

That is the fundamental problem - if you don't want to sell an asset, and plan to hold it to maturity, and it is performing at least to some degree, then it's worth what it's performing at. And if you know that you have a mortgage-backed security where 95% of the loans are performing, you write down 5%.

Not 100%, which is what is currently happening.

Then, you prevent bear runs on the securities by forcing short sellers to wait until someone is buying before they can sell short. Selling short is very easy - do it enough, and you will quickly bid the price down to $0 because, by definition, you don't own the stock you're selling, so if enough people sell stock that they don't own it will drive the price down, and then they can buy it back at the lower price.

These are fundamentally ridiculous policies that are driving the economy into a tailspin. They need to be changed tomorrow - and they can be.

w67, I agree with you. At this point every major bank would be insolvent if the government enforced any semblance of rational asset valuation. Lehman's CDO assets were valued at something like $0.09 per $1.00. Every major bank holds the same paper. That was in September. Those same assets are probably worth even less today.

As for what Wall Street does? Help wealthy individuals/corporations avoid paying taxes and take money out of the pockets of retail/institutional customers. It's nice work, if you can get it.

Interestingly enough, credit is loosening, even today. Interbank rates are down....

Steve -
The uptick rule hubbub is a joke.. if these banks were really worth something shorting them wouldn't be profitable. The short sellers have been absolutely correct about the banks.. just look at how much bailout money they have needed merely to stay afloat. My boss is an economist who used to be a regulator at the SEC and nothing gets him madder than hearing this talk blaming the uptick rule. I can see the argument for eliminating naked shorting, but the uptick rule is indefensible from an economic perspective. It just reduces liquidity.
There are many more legitimate places to lay blame - the myopic nature of quarterly earnings and annual cash bonuses, leverage, the revolving door between the SEC and Wall Street, ratings agency models that don't even consider negative HPA, etc. The uptick rule isn't even worth thinking about.

Credit is loosening, but to whom? Who is getting the rates that are down? Rates are meaningless if other conditions prevent lending.

eastvillager, i'm with you on the attribution of blame. steve, look at the large UK banks. there, short sellers have to disclose their positins, so we can see exactly who is short and how much. Look at RBS, which was down 70% today (includes yesterday's decline since US mkts were closed yesterday). There is only 1 short seller among the top 300 long/short positions of the company! One! And the stock is down 70% today. Longs capitulating and massive dilutive capital raises are to blame for the decline, and certainly not short sellers.

The rates may be down, but are they actually lending the money?

stevejhx - agree with all your comments. it will be silly to imagine that the new administration would not want to change these policies at the risk of continued defaults in the financial system. should these policies be reversed it would seem wise to be owning bank stocks. imo.

eastvillager - as to the revolving door between the SEC and WS, this will be changed and it is simple to fix. All you have to do is not allow anyone from the SEC to work for a firm that had intereactions with for a set period (1 year, 2 years?).

This type of change occurred previously with the public accounting firms when Enron imploded. You had Andersen consultants working at Enron and Andersen external auditors there, as well half of Enron's accounting and finance people worked on Enron when they were at Andersen...it was a nightmare and it was fairly common at that time. They stopped this double-dipping (cannot consult at companies you audit) and would not allow people to go directly work at their clients when they left public. This cooling-off period should have been common-sense then...and now.

stevie... come on now... if these loan on their books were performing at anywhere near an acceptable level there would be buyers including myself...as a wise finance prof once said... capital for all intents and purposes is limitless for the right investments.

If these are money good loans, then I'm a buyer... but what the entire financial market can't seem to get their little pencil neck heads around is how many more defaults will there be in the next 2-5 years as the deleveraging process continues... so absent this information the asset = 0, therefore banks are insolvent. If I had confidence that even 50% of a portfolio would be whole then... I'd bid 30% and do the dirty work of kicking out families and rehabilitating the walk-away units etc... but for the life of me... I can't say for certain a 70% discount would be sufficient for me to take this risk... and I'm a vulture :)

"The uptick rule hubbub is a joke"

No it's not. In the long-term it likely has no effect, in the short-term it stops stock from falling 50% in a day. It is a significant brake against what is the easiest thing to do in the world: sell something you don't own.

"just look at how much bailout money they have needed merely to stay afloat."

That's because they've had to mark long-term securities to short-term prices. It's a stupid thing to do. Mark-to-market was initially instituted in the mid-80's for trading portfolios, where it makes sense. If I put my house on the market today & no one buys it, it's not worth $0. It may not be worth what I want for it, but it most certainly isn't worth $0.

"It just reduces liquidity."

No it doesn't. It reduces volatility. You contradict yourself when on the one hand you say it's a joke, and on the other you say it reduces liquidity. Which is it?

I agree with you on the other aspects, for the most part.

"Look at RBS, which was down 70% today"

They just eliminated the short-sell ban on banks in the UK last week.

Moreover, the UK only has a few banks, we have many. RBS is in a bad position because besides all the illiquid assets, it has an enormous amount of goodwill from its takeover of Amro, which will have to be written down through an impairment charge. Nothing of that sort exists here.

"if these loan on their books were performing at anywhere near an acceptable level there would be buyers including myself."

No you wouldn't. You're buying based on what the stock is doing. Bank of America, which now trades at about $5, has a guarantee from the federal government against future losses. What then justifies what happened today?

It's a bear raid pure and simple. Watch to see if a new, reinvigorated SEC undertakes an investigation into collusion among short sellers.

This is a vicious cycle, and if there's any message in what happened today, it's that the market wants a fast solution to the problem. We can't have 2 of our 4 largest banks trading below $5, with the other 2 on their way down.

This is precisely the sort of thing that forced all the quickie mergers in September.

Hey.... no It can't be... r u patient09? WTF... his mouse just froze up too and he posted serially 4 times..... OMG!

"No you wouldn't. You're buying based on what the stock is doing. Bank of America, which now trades at about $5, has a guarantee from the federal government against future losses. What then justifies what happened today"

In the real world.. .if I gave you that kind of a back-stop.. I'd own you.... and guess what? the US Gov't for all intents and purposes owns all of the banks... it's just starting to sink into the market... hell when Enron was going under the equity still traded :) Just b/c there are fools doesn't mean you have to trade like them.

Bear raids, call them what you will.... it's a culling process.. when a person had the black plague... the entire building and all the neighboring buildings and its occupants were burned to the ground... look at how many people got burned buying in the dips in Nov 08 to now... even me... this gonna leave a nice welt..

BTW.. son's feeling much better but got the case of the runs from the antibiotic :)

stevejhx: why dont we need downtick rules when buying stocks to avoid bull raids?

lack of a downtick rule is FASCISM

"his mouse just froze up too"

That's a streeteasy database problem. I hit "reply" once.

"why dont we need downtick rules when buying stocks to avoid bull raids"

Because you're actually buying something and own it. When you sell short, you don't own anything, simply borrow a security or identify someone willing to lend you a security (if you do it legally) and sell it, and buy it back at the lower price. You never actually have to receive the security on loan, and there's currently an investigation underway to identify how many broken trades occurred in September. There's always a temptation to sell when prices are going up, rarely a temptation to buy when prices are going down.

"it's a culling process"

No it's not. 50% in one day is not a "culling" process. It's a massacre.

S... depends on if you r the cullee or culler :)

w67, I'm not sure you see the damage being done right now. We can't exist as an economy with no banks. Wipe out the common equity, who will buy bank stocks ever again?

This is an accounting issue gone awry. No bank can survive, or even make a loan, if it is forced to mark all its illiquid long-term assets to $0. If you have a nonperforming loan, after 90 days you make a provision for it, but don't write it off until you know it's unrecoverable. Then you execute the collateral and get loan-loss recovery.

Here you have a different scenario - you have securities backed by thousands of mortgages, some of which might be bad. No one knows how many, so know one will buy the securities. Since the loans themselves are no longer held on the bank's books they can't make a loan-loss provision for the individual loans that go bad. Rather, what they must do take a loss for every single mortgage or part of a mortgage underlying the security. If you mark the securities down to 20 cents on a dollar, you are effectively saying that 80% of all mortgages will go bad.

That's not going to happen. Unless, of course, they keep this rule in effect, because it is causing banks to bleed capital. Of course they won't lend, and forcing them to lend won't work, just as wage and price controls won't work.

FAS 157 took effect in September 2006. The market was going up. It doesn't work in an environment like this. It takes short-term market irrationalities and magnifies them. Within 2 years of its institution we have had the worst stock market crash since 1933. The economy was and is not in the condition of 1933. But it may yet get there.

Combine the effect of this, the elimination of the uptick rule, and credit-default swaps where basically you can bet that someone else will go bankrupt and issue insurance without retaining capital to support potential losses, and you will see why we are where we are today.

We have created this mess. The solution is staring us in the face, and everyone knows it but no one in the last administration did anything about it. Perhaps that will change tomorrow.

The SEC has the authority to suspend it, just as it has the authority to reinstitute the uptick rules.

Just to give you some idea: "State Street reported earning 15 cents, or $65 million, in its fourth quarter, compared with 57 cents, or $223 million in the period a year ago. The results beat analysts expectations by 4 cents."

"Shares of the Boston-based company declined by almost half as investors worried the company might need to raise more capital after reporting a 71 percent drop in fourth-quarter profit. State Street will take unrealized losses of $10 billion after tax on its commercial paper program and investment portfolio. Shortly after 2 p.m., shares were $16.88, down 53.5 percent."

So the company exceeded expectations, made money, and though it reported a significant drop in profit that drop is based on realizing unrealized losses. In other words, an accounting entry.

Stock prices do not fall 54% when the company is still making money and is in no danger of going under.

s... aren't you the one arguing that markets are efficient and tax benefits are already baked into home prices? So if the mkt knew that the "true" markdowns of a portfolio of Las Vegas loans was going to be 90%, you'd take the hit and get on with your life... but thats' the rub.. bc of the toxicity of these loans (esp. NINJAs) non one can say for sure what the final cash payout will be... yeah they can foreclose on all the units they want... but the last time I checked banks are in the business of lending and not home ownership... which they effectively are by owning all these loans on their balance sheet. They bleed bc people are not paying back their loans not bc of FAS 157

FAS 157 if it went away tomorrow wont' stop the bleeding... CNBC's got it wrong. Don't even get me started on CDS... like i said my former boss couldn't tell me what happens if our counterparty went under... I think his exact words were "but they are Goldman sachs."

Dude worst case scenario... we'll barter :)... Some of your jokes for some of my wife's medical treatment. :)

"Doh a deer, a female deer, fa a long long way to run...."

one other thing.. .CDS are contracts... so are you suggesting that all contract law be suspended until next year? So people can walk away from anything they've signed in the last 5 years... if that happens... I'm buying a glock for real and moving into a bomb shelter out west :)

Better to let the process work itself out... equity gets wiped.... banks gets recapitalized and re-floated in 5 yrs - after all the safeguards are in place to not let this happen again (we needs lots of breakages in the financial system) and all "derivatives" must have ample and significant capital allocated for this... enough so that it's economically unfeasible to create a synthetic "hedge" to is so out of wack with reality.

"aren't you the one arguing that markets are efficient"

Markets are efficient in the long-term, not in the short-term. Hence bubbles and busts.

"bc of the toxicity of these loans (esp. NINJAs) non one can say for sure what the final cash payout will be"

Unquestionably true. The problem is that in the past, the loans were kept on banks' books and written off one by one. Now that they are packaged into securities, because no one knows how those securities will perform, no one will buy them. In effect, banks are being forced to write off most all mortgages when the problem is nowhere near that bad.

"FAS 157 if it went away tomorrow wont' stop the bleeding... CNBC's got it wrong."

It's not CNBC. Some on CNBC support removing it, others don't. Just as it's a bad idea to take a short-term loan on a long-term asset, so it's a bad idea to mark a long-term asset to its short-term price. Especially the way these things are written.

Counterparty risk is one problem with CDS's - just their concept is abhorrent: imagine if I were allowed to take out insurance that your house will burn down. What's my incentive?

And that's what's happening with shorting and CDS's: short enough and the price of (also illiquid) CDS's goes up, causing ratings to go down, causing prices to fall. What is wrong here - and it has always been my argument - is the design of the system doesn't work. The reinsurance model of risk distribution does not work for retail banking projects where there are no actuarial data to support the risk assessment. You should not be able to bet that my house will burn down, as you have no interest in it. You should not be able to cause a massive run on the stock market.

Which is what is being engineered. Mark my words, what is going on now in the stock market is nothing less than a run on the market. It will be investigated, and people will be jailed.

"Some of your jokes for some of my wife's medical treatment."

We'll talk after my first comedy central special. K?

retail banking projects = retail banking products

"CDS are contracts... so are you suggesting that all contract law be suspended until next year?"

If they must exist - and that's a BIG IF - I am saying that as they are insurance contracts they should require reserves to back them up, which they don't.

And they should be made liquid by being made uniform, and by clearing through a central counterparty clearinghouse.

"Better to let the process work itself out... equity gets wiped.... banks gets recapitalized and re-floated in 5 yrs"

It would be disastrous. That's what happened in the great depression.

Best to admit the problem, remove toxic assets from their balance sheets, and move on.

"So the company exceeded expectations, made money, and though it reported a significant drop in profit that drop is based on realizing unrealized losses. In other words, an accounting entry.

Stock prices do not fall 54% when the company is still making money and is in no danger of going under."

Do you know State Street is not going under? The mkts may be saying that's the last $50MM+ quarter you'll have for the next 10 years... or maybe w/o all the liquidity that was sloshing around like cheap beer at a keg party... State Street's equilibrium price should never have been over $16/share... just a thought.....

Hmmm... unrealized losses... I've got a car that I bought for $8$K it's worth $40K (in 2 yrs porsches... +WTF?) so is my net worth $85K or $40K? Accounting in its purest form matches revenue to the true costs of generating that revenue.. and corrects for mis-priced assets and liabilities... so should state street just keep the liabilities at origination cost or reflect in a timely manner the balloning of that liability? All of this of course is linked by cash flow... so if I sold my car would I get $85K or $40K?

Sorry I'm sort of rambling today.. :)

gota go... but always enjoy your point of view :)

"Here you have a different scenario - you have securities backed by thousands of mortgages, some of which might be bad. No one knows how many, so know one will buy the securities. Since the loans themselves are no longer held on the bank's books they can't make a loan-loss provision for the individual loans that go bad. Rather, what they must do take a loss for every single mortgage or part of a mortgage underlying the security. If you mark the securities down to 20 cents on a dollar, you are effectively saying that 80% of all mortgages will go bad."

wrong- subprime backed bonds are 40%+ over 60 days delinquent. if you take a 50% loss on those loans its 20%, which creates losses up to senior parts of the capital structure. prime deal have approx 3-6% over 60 day delinquent loans, but have much, much less enhancement (approx 3% to senior). Alt A is performing as bad as subprime again with much lower credit enhancement (approx 15% to senior).

In your example even if only agree that 20% of th loans will go bad, would YOU buy a mortgage backed bond at $80, effectively a negative yield. Due to deleverging and lack of lending, you have to buy securities to 20%+ yields to hit any risk adjusted yield bogeys.

I understand that there's this thing called the "Net Capital Rule", which was changed in 2004 to allow the big 5 investment banks to over-leverage. Shouldn't that change be reversed? Wouldn't that make a difference, or is it too late?

Subprime loan default rates peaked at about 25% and are currently falling.

http://www.nytimes.com/imagepages/2008/08/04/business/20080804_Lend_Graphic.html

Although that is likely to rise given what happened after Lehman.

That means that 75% of loans were performing, the inverse of what is being written off.

"would YOU buy a mortgage backed bond at $80, effectively a negative yield."

I don't know what you mean about a "negative yield," but I do know that I wouldn't buy a bond if I didn't have a reasonable expectation of how it would perform. Which is precisely the problem. But if they hold the bonds to maturity - they are not part of a trading portfolio - then a 20% write-off rate can be managed as subprime loans represent a small portion of any bank's portfolio. An 80% write-off rate can't be managed.

As I said, in the olden days loans were written off one by one. The attempt to spread the risk and make them less risky - the reinsurance model - had the opposite effect. Because with non-facultative reinsurance you have actuarial calculations of what your risks are. That's what's not known in today's environment.

"Shouldn't that change be reversed?"

How many of those 5 investment banks exist today as investment banks?

None. No rule to rewrite.

"Do you know State Street is not going under?"

Yes. The government said that no systemically important bank would be allowed to fail.

This is a bear run, pure and simple.

OH... god... why can't i stop this.... I need therapy for my SE addiction.

If you dilute the current equity holders by 99.99999%, yes technically they haven't failed :) but you as a current shareholder have .000001% vote and net profits.... and the "new" equity holders.. .i.e. taxpayers may forgo any economic benefits for like the next 100 yrs....

You can't pick and choose the timing of market efficiencies...10 mintues, 10 days, 10 months, 10 yrs? The funny thing is markets are efficient but people seldom are... but that is part and parcel to our system... but so is humanity's proclivity to kill each other... so we need a higher being and rules.... OMG... I just invented Shiva :)

"Subprime loan default rates peaked at about 25% and are currently falling."

old data and not true- the re-default rate on modifiied loans in 50%.

"a 20% write-off rate can be managed as subprime loans represent a small portion of any bank's portfolio"

loans true. securities is another story. losses on RMBS and CDO backed by subprime brought down AIG, ML, Citi, UBS, etc...

what about accounting for cramdown? how do you propese future losses should be factored in?

Here's an interesting look at the State Street experience:

http://www.breakingviews.com/2009/01/20/State%20Street.aspx?sg=nytimes

The only thing that people looked at was the worst case scenario - not the likely scenario.

The purpose of the uptick rule was to prevent downward pressure on stock prices. It was specifically designed to stop what happened to State Street today. It works. It needs to be reinstated.

There needs to be a better way of valuing securities that are not liquid other than valuing them at zero. Expected future cash flows will give you a more accurate reflection of a security's value than its potential sale price if it's not for sale.

With the "Net Capital Rule" discussed above, all these changes in the financial system were designed to magnify results: excess leverage, no uptick rule, mark-to-market accounting, CDS's. They all have that effect. When things are going great it's great - bubble time. When things are going badly - bust time. That's what the Depression-era reforms were about. Greed got the best of us.

so ante148... you're in the business or were (I'm hoping you are on SE... bc you like to troll for homes on your time off and not a forced troll :)), let me ask you... what's the deal? Is there any plans afoot to "re-constitute" these tranches and sell actual assets (one offs) to individual vultures?

It seems to me the old adage of know thy counterparty went completely out the window and here we are with the inability to price a simple home in OKC much less NYC RE :)

Using DCF's as the basis for fair value accounting is even more silly than the present mark-to-market. We've already seen the ramifications of mark-to-model, (pick any I-bank you'd like), and it's easy to see how reversion to MORE level-2 valuations or level-3 models gets us in even deeper. How do you think the markets will react when we start seeing huge increases in Level-3 assets yet again and an already opaque financial system slips further into darkness? DCF's derive the majority of their values from out-year assessments and are wildly sensitive to user-generated assumed growth rates and multiples, NOT from a market-based consensus, nor from any connection to any reality of today or years into the future. The aggravated pro-cyclical nature of the whole financial system is the real problem here, and efforts to resolve this problem should address this in the form of varying capital requirements across a cycle and lower leverage ratios, coupled with a very different incentive structure. This problem was sown years ago when a bunch of academics and academic theorems took over Wall Street and figured out that selling Miller-Modigliani precepts on indifference to capital structure balance could force more and more leverage into our whole system. Grossly mis-aligned incentives were thrown in with old-fashioned greed and the rest is history...

scratch that ante148.... i hadz me a brain fart... let me stick to my guns and let the service agreement run its course... no need to muck it up anymore than it already is... I'm assuming these were big boys and should take their lumps :)

aj202: "the re-default rate on modifiied loans in 50%."

That's because they're not really "modified" at all: the banks temporarily lower the interest rate, capitalize the difference and add it to the principal, and then reset the mortgage with an even higher principal amount. It's not a modification at all - it's a system designed to fail.

The subprime default rate in general - the last data I could find in the short-term - indicates around 25% and falling. Most of those loans were issued a long time ago, and new ones aren't being issued.

Your points are, however, well taken for the other arcane types of products you're discussing. I was limiting myself to MBS's. Level 3 assets are what turned Lehman into mush, and many of them are so complex that no one knows what they're worth.

But that's a different issue from what I was discussing. That said, there will be massive write-ups in the future on these assets. Remember Brady Bonds? Once the fear was gone you could have made a fortune back then....

You're right about risk assessment - it's not possible to quantify under stressful conditions like today's, and for once-in-a-lifetime events, such as Lehman. What I think you'll hear Obama say tomorrow is that it's going to take some time for them to analyze the situation and come up with a plan, deflecting the criticisms (rightfully) levied against Paulson. They'll look at the financial sector as a whole, at each bank individually, and at each product.

It took us a long time to get here, but there are things that can be done in the short-term to alleviate some of the stresses. Mortgage-backed bonds can be valued using discounted cash flow fairly easily - recalculated based on the performance of each security. That would take a huge stress off the market. The uptick rule would take a huge stress off the market.

Level 3 assets - don't know what can be done about them because I don't know much about them. Neither does anybody else.

So here we are with the same old rent vs. purchase argument again... you can rent for $4K/month (DCF) or buy for $2MM (mark to market).

I guess all you bulls can suck on this...Roubini: U.S. Banking System Insolvent, Another $2.5T of Losses Coming.
http://finance.yahoo.com/tech-ticker/article/160553/Roubini-U.S.-Banking-System-Insolvent-Another-2.5T-of-Losses-Coming?tickers=XLF,C,BAC,JPM,MS,WFC,^DJI

Report: Thousands of BofA layoffs coming this week
Bank of America Corp. is expected to cut thousands of jobs in its capital markets business starting this week, and many will likely come from New York, a report says.
Print Email Add a comment Andrew Coen, InvestmentNews.com
Buck Ennis
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Bank of America , Banking , Human Resources , Merrill Lynch

Bank of America Corp. is expected to cut thousands of employees in its capital market businesses starting this week, the Financial Times reported Tuesday, citing executives familiar with the matter.

Most of the Charlotte, N.C.-based bank’s cuts are expected to be in its New York office, according to the article.

New York to lead U.S. in job losses

BY PHYLLIS FURMAN
DAILY NEWS BUSINESS WRITER

Tuesday, January 20th 2009, 3:35 AM
Warga/News
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New York is No. 1 again - this time, unfortunately, in job losses.

The city is projected to shed more jobs than any other metro area in the country this year, with 181,000 people likely find themselves without a paycheck.

The grim forecast can be traced to turmoil in the finance industry, which will account for more than 50,000 of the jobs lost, according to IHS Global Insight, which researched employment trends nationwide for the U.S. Conference of Mayors.

And New Yorkers will find the ripple effect to be painful.

"Financial jobs are crucial, they are high paying, they generate income spent on law firms, restaurants and ad agencies," said Jim Diffley, managing director of at IHS Global Insight. "There will be spill-over that will be pretty broad."

The unemployment rate in the New York area is expected to jump to 7.6% in the fourth quarter of 2009 from an estimated 6.1% in the same period last year.

The dark forecast could mark a turning point for the city, which until recently, had been faring better than the rest of the country. The city's housing market has held up relatively well because there has been relatively less new construction here.

Acknowledging the tough circumstances, Mayor Bloomberg outlined a jobs plan last week that he said could create 400,000 new jobs over six years.

"We are going to do as much as we can in this city," Bloomberg said Monday, before going to the conference of mayors.

While the incoming Obama administration aims to create construction jobs through investments in infrastructure, that will have less of an immediate impact helping jobless New Yorkers.

"The people [who] are going to get laid off in this city ... worked in offices, they worked in stores, they worked in restaurants," Bloomberg said.

Despite the tough times, the mayor expressed confidence that Wall Street will rebound and its capital will remain New York.

"One of the most important things is that it's here, not in London, not in Chicago, not in Berlin, not in Hong Kong. We want to make sure [financial firms] stay in business ... and see the future as right here."With Erin Einhorn

pfurman@nydailynews.com

Rubini is claiming they're insolvent: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aS0yBnMR3USk

“I’ve found that credit losses could peak at a level of $3.6 trillion for U.S. institutions, half of them by banks and broker dealers,” Roubini said at a conference in Dubai today. “If that’s true, it means the U.S. banking system is effectively insolvent because it starts with a capital of $1.4 trillion. This is a systemic banking crisis.”

98% of all banks are well capitalized, representing 99% of all assets. Roubini loves publicity.

There is a crisis of confidence - no one is certain what will come next. It started with Lehman. Yes, there was a problem with bank assets before that, but it was greatly exacerbated by Lehman. O/N LIBOR is back up to .18%; it should be 1/3 of that.

There are many easy ways to fix the things that are wrong with banks - and there are things that are wrong. But to go around saying that they are insolvent when they're plainly not, is just stupid.

"Mortgage-backed bonds can be valued using discounted cash flow fairly easily - recalculated based on the performance of each security."

there are a LOT of assumptions that go into these cashflows. so yes its easy to do, but your inputs are more important than outputs. Everyone has a different view which creates trading and levels of $20 price bonds. securitization will have to come back (at some point). Banks cannot hold everyone’s mortgage in their hold to maturity book.

W67 - still in the game (barely). on SE originally to look to buy and now addicted to reading the boards. My wife wanted to buy in 05, then 06... while I was shorting subprime at work. I just thought the rent/buy ratio back then was out whack, and then it got worse. Home price appreciating was an assumption I would put in my model at 0 and the cost of owning was stupid to renting on Manhattan in 2005. Now I casually look at apartments, but unless they come down significantly we will probably rent until we move out.

Doesn't everyone understand that steve is all knowing? You must respect his authoritay!

I don't understand how someone like him who has ALL the answers hasn't been tapped yet as CEO of C or BAC, or nominated for Fed chair or Treasury secretary.

Well, evillager, I correctly predicted what would happen to the price of the apartment you overpaid for.

ante, you're right, there are a lot of assumptions. There are a lot of assumptions in everything. That's the nature of predictions, which is what banks do.

The fact is that even the worst subprime-backed securities have a delinquency rate of about 20% right now (according to the FDIC). Which means that losses are likely to be less than that. The market price for the securities, however, is about 37 cents on the dollar, which implies a 63% default rate.

That's the problem with mark-to-market. It assumes that the market price is rational, which it isn't necessarily. If there is no intention to sell the security, there is no need to value it at that price.

I wasn't aware that you are privy to what apartment I own and how much I paid for it. But of course, I forgot that you are all knowing! All hail steve!

You were saying the other day you'd buy Bank of America at $8, right? Did you do it? Or were you just bullshitting on an anonymous message board again?

evillager - please remember that Steve is the only person that did not overpay for his crappy ass condo and whose per word translation income has not decreased. he is also the only one who understands banking, commercial real estate and the global economy.

"98% of all banks are well capitalized, representing 99% of all assets. Roubini loves publicity."

steve, at least quote FDIC Chairman Sheila Bair when you use her statements.

JM - failing to cite a source here on SE could cause problems for Steve during his cabinet position confirmation hearing.

"You were saying the other day you'd buy Bank of America at $8, right? Did you do it?"

I said that I would buy it at that price, but no, I didn't. I also said that I wasn't going to buy it at that price.

Didn't I mention that it was Sheila, JuiceMan? Sorry.

"The fact is that even the worst subprime-backed securities have a delinquency rate of about 20% right now (according to the FDIC)"

thats just wrong its 50-60% for the worst deals.

steve, you are well read and take a position based on information you absorb, I don't have a problem with that. I happen to agree with you (and Sheila) on this issue. Roubini is a very smart man but has serious conflicts of interest in drumming up revenue for RGE Monitor. That said, Sheila frightens me as well because what else is she going to say? An FDIC chair has to exude confidence in the banking system, it would be disastrous to say otherwise.

JM confidence for confidence sake... nope..

Ante148... yeh.. I gotz me one of those "I'm Short your home" shirt... gotta love these I-banks... telling only their "real" buddies how crappy MBS were back then... but I played that game awhile ago... taxes.. .we don't need to pay no stinking taxes... now where's the petty cash for the nudie bars... LMAO... those were the days... ignorant and stupid :)

"JM confidence for confidence sake... nope"

You disagree w67th? You think the head of the FDIC will visit CNBC and say "we are really fucked" in any situation?

Actually, every time I hear someone say they are 'well capitalized,' I feel like selling. It's been the phrase of doom of late.

The FDIC is hard to believe as it has been wrong on many calls lately.

For example, on Aug last year, its "Watch List" of banks FAILED to include Washington Mutual, the LARGEST S&L in the entire country. Such a huge oversight is a clear sign that the FDIC does not really know in detail what's going on internally within these banks.

If it did, how could it have missed the LARGEST S&L before it went under?

So, I give much higher credibility to Roubini, who has been quite accurate in many of his forward-looking analysis.

type3 - yeah, it's like when a sports team's owner says, "We are not going to fire our manager/head coach. I have complete confidence in him and the job he is doing." Then a week later the axe-man cometh...

"thats just wrong its 50-60% for the worst deals."

Show your evidence. It's nothing like that rate. It peaked last year at about 25%. The performance of each individual bond will be different, but that's the average.

JM, Roubini loves spreading doom and gloom. He's about as happy as Henry Kissinger.

"Sheila frightens me as well because what else is she going to say?"

That's true to a point, but she also has to set the deposit insurance fee, which must cover future losses as they currently forecast them. There is an increase planned, but not a major one.

Personally, of the ones in the last administration she's the only one I trust. She seems like she knows what she's doing.

"It's been the phrase of doom of late."

It has been, but not that many surviving institutions beyond Citigroup have the very toxic assets on their balance sheets. Bear, WaMu, Merrill, Wachovia were absorbed; Lehman went under; AIG is in receivership, along with Freddie and Fannie.

MMAfia, WaMu was primarily regulated by the Office of Thrift Supervision, which is known to be more inept than the SEC.

"Roubini loves spreading doom and gloom. He's about as happy as Henry Kissinger."

That's a pretty good line, Steve.

I figured waverly would catch the irony.

stevejhx, you are right, but at the end of the day, the FDIC maintains a "Watch List" which in one form or another, should have included WaMu due to it huge size.

Whether it be through its own ineptitude or its dependence on other inept agencies for data, ultimately the FDIC has not been reliable and something I would caution others to be wary of.

I don't blame the FDIC as even the banks themselves aren't sure about themselves to begin with. We are already seeing a second wave of skeletons coming out of the closet from the banks.

If the banks are so capitalized, why are they not lending out the money they've received from the all the injections? Why would they fear lending? If they are 98% capitalized representing 99% of all assets, where is all this fear to lend coming from? Heck, they're capitalized so lend already!!

Answer: they banks themselves aren't sure that they are in fact capitalized.

So if the Banks aren't sure, how on earth could the FDIC be?

"why are they not lending out the money they've received from the all the injections?"

Because they don't know the risk. When you have to mark a long-term asset to a short-term market price, you magnify the ups and downs, vastly increasing risks.

That said, bank lending now is, in fact, higher than it was last year at this time.

"the banks themselves aren't sure that they are in fact capitalized."

Because of mark-to-market, which makes sense for short-term assets held for trading, but not for long-term ones held to maturity. When property prices were rising it made the profits look astronomical; now that they're falling....

banks don't lend b/c they see the writing on the wall... they know any money good loans out the door today will not be in 6 months... and at the rate they would charge to still make a profit in 7 out of 10 loans that do pay back would be usury... has nothing to do with capitalization rate (IMHO).. .the entire system is geared (credit officers, back office, mgmt, compensation) to lending... but woe be the MD who signs off on a loan that comes back in 6 months... it's called job security... why be the hero?

For what's it's worth... the gov't can stop wasting my money trying to "force" banks to lend... let time pass so everyone can get their priorities straightened and clean their balance sheet.. .that means homes you can afford, no credit cards vacations, keeping your cars for more than 3 years and f'n saving! AHHHHHHHHHHH.... I am naked and standing on my desk! Like I used to as a banker... .just not the naked part...... It's so simple... my three legged chihuahua gets it.. don't you boy :)

Unfortunately, w67, that's not how it worked. Even in the darkest days at BofA when I worked there, when the FDIC & Fed forced the chairman out, they still made loans.

The way banks can't make money is by not lending.

stevie.. .we are arguing over degrees... I believe the last serious downturn was 1987-91'? That's a cakewalk compared to what we need to go through now... especially b/c of how housing permeated every orifice of our economy.

As an analogy.. it's like a GM dealer saying he's going under because he doesn't have enough inventory... or that his mix of inventory is incorrect... if I only had 1MM cars that ran on dog poop... I'll be fine... even I with a dog wouldn't buy another car.. cause I am full up on it and gas is $1.5/gallon again... and so is the rest of the country... 3 cars, 3 homes, 50 pairs of shoes, 25 ipods, 17 winter coats, 85 pairs of victoria secret underwear, 7 flat screen tvs, netflix/DVR/Satellite cable/blockbuster card.... good grief, it's no wonder China owns us :)

The demand has completely evaporated... and the greatest source of that demand (the contagion called green envy of my colleagues and neighbors) is completely gone and won't come back for a long long time (hopefully :)).

One other thing, went to return Sound of Music and looked at my receipt... attached was a "pre-approved" credit card from Citibank offer.... yep... give more capital for Citibank and the rest to "reflate" our way to prosperity... LMAO.... a credit card offer with my movie rental.... What will they think of next... toilet paper with a credit application printed on it :)

OMG.. .I'm laughing at my own funny :)

OJ "You disagree w67th? You think the head of the FDIC will visit CNBC and say "we are really fucked" in any situation?"

Completely misread your original quote about Sheila... yes she is just a talking head... a product of a bureaucracy (damn I couldn't spell that and had to wikipedia it... I'm losing it) competition... you know... if I get in 5 minutes bf the boss and leave 5 minutes after... after 10 yrs I get his job :)