Monday, December 15, 2008
Stock market collapse and bailout proposals considered
LOOKING AHEAD by Wally Dobelis
In this scary market and credit collapse situation, I do not know how to judge our economy, except by pouring out the facts, putting them down and looking at them. Bear with me and think along, because that’s what you are getting here.
It seems like pre-history already, but there was the subprime mortgage crash, Bear-Sterns a major broker went broke in March, Treasury/Fed Reserve interfered and it was bought by Chase, saved because Bear is also a credit transfer agent..
June saw Countrywide Financial’s takeover, after its spin-off IndyMacBank collapsed.. and Lehman went broke and the Fed let it happen,
Then Fanny Mae and Freddie Mac, mortgage giants had to be bailed out by the Fed, costing the taxpayer beaucoup, say 4100B. They hold $5.2T in mortgages, .
AIG, insurance giant, was brought down when the mortgage tranches it has insured by swaps become unredeemable, and the Fed will bail it out with $85B taxpayer money guarantees.
Then Merrill Lynch went down, and again, The Bank of America picked it up for a song. Hmmm, like Countrywide…Now WaMu , the number Four bank, lost it, and Chase again was the buyer.
Wachovia now disclosed that it is overextended with $330B toxic mortgages – it had bought Golden State with $68B of the same in 2006. Citigroup bought a fraction of W’s losses, but Wachovia reneged and let Wells Fargo buy the whole, at seven times the price Now Citi, a dangerously overleveraged case itself is suing for having lost a steal.
Moving right along, investment banks Goldman Sachs and MorganStanley ran under the protection of FDIC. End of Big Wall Street.
In Europe Benelux giant Fortis was nationalized, by three national treasuries buying shares, same in Britain.
The world of commerce is going down, it is evident, when depositors start fleeing, and bank reserves with loans on a $30 to $1 leverage become insufficient, The credit system on which the working world lives is has shut down, banks cannot give daily operations cash for commercial paper and companies cannot meet payroll, in extreme cases. The economy is sound, only the commerce and daily operations money is not available.
At this point Paulsen and Bernanke decided that buying up to $700B worth of toxic mortgage tranches will restore customer confidence and save the credit system. After seesaw battle in Congress the compromise was written with an escape, to let government inject cash by buying bank shares. Surprise, Bush bought it
Suppose this will be accepted . Now the questions: How to ratio it? Presumably take the book value and mark-to-market value and first bolster the banks with the worst ratio?? How about if loss is 80%, cut the CEOs golden parachute also by 80% ?Hmmm.
Suppose the banks just raise the distress ratio and suck up the taxpayers’ money without doing anything to restore depositors’ confidence? That’s not rational behavior:, the banks will go broke and stockholder lawyers will kill the CEO’s assets.
Why not just buy up all defaulted mortgages, and save the poor schnooks’ lives, McCain’s social service solution, and let the banks fend for themselves? Yeah, but credit needs to be restored or else we all will be poor schnooks.
Why did the US not learn from the Great Depression? FDR did, and the 1933 Glass-Steagall Act separated bankers, brokers and insurers. But in 1982 decontrol-happy Pres. Reagan’s Depository Institution Act created the Savings & Loan bubble, mortgage sales rampant by uncontrolled S&Ls, while banks remained controlled, until the S&Ls collapsed in 1989, costing the US, as Resolution Trust Corp, $125B. James Keating, McCain’s benefactor, ignored a Home Loan Bank Board controls edict (Greenspan supported him).
Next, the Gramm-Leach-Bliley Financial Services Modernization Act of 1999 that permitted retail banking, investment banking and insurance in one entity, further destroyed Glass-Steagall, now freeing regular banks from the restrictions that limited leverage during the S&L rampage. McCain voted for it, Clinton signed it. This act is deemed to be the real villain in creating uncontrolled operations. Then, Sen. Phil Gramm in Commodity Futures Modernization Act in Oct. 2000 set up nontransparent trading tools – the Enron loophole decontrolling energy trading cost CA $13B; Greenspan liked the credit default swaps in 2002, despite Arthur Lewitt’s (SEC) 1999 warnings of Congress against lack of transparency.
What’s the solution? . Well, writing it clears the mind, somewhat.. First, the market has to bottom out, as soon as possible, a 936 Dow points day is not enough. Second,. we need the bailout, in stages, controlled, with a triage to help potential survivors first, by buying bank shares. We need transparency, suspending mark-to-value calculations for fear of irrational dips would slow down bottoming. Above all, restore credit.
In this scary market and credit collapse situation, I do not know how to judge our economy, except by pouring out the facts, putting them down and looking at them. Bear with me and think along, because that’s what you are getting here.
It seems like pre-history already, but there was the subprime mortgage crash, Bear-Sterns a major broker went broke in March, Treasury/Fed Reserve interfered and it was bought by Chase, saved because Bear is also a credit transfer agent..
June saw Countrywide Financial’s takeover, after its spin-off IndyMacBank collapsed.. and Lehman went broke and the Fed let it happen,
Then Fanny Mae and Freddie Mac, mortgage giants had to be bailed out by the Fed, costing the taxpayer beaucoup, say 4100B. They hold $5.2T in mortgages, .
AIG, insurance giant, was brought down when the mortgage tranches it has insured by swaps become unredeemable, and the Fed will bail it out with $85B taxpayer money guarantees.
Then Merrill Lynch went down, and again, The Bank of America picked it up for a song. Hmmm, like Countrywide…Now WaMu , the number Four bank, lost it, and Chase again was the buyer.
Wachovia now disclosed that it is overextended with $330B toxic mortgages – it had bought Golden State with $68B of the same in 2006. Citigroup bought a fraction of W’s losses, but Wachovia reneged and let Wells Fargo buy the whole, at seven times the price Now Citi, a dangerously overleveraged case itself is suing for having lost a steal.
Moving right along, investment banks Goldman Sachs and MorganStanley ran under the protection of FDIC. End of Big Wall Street.
In Europe Benelux giant Fortis was nationalized, by three national treasuries buying shares, same in Britain.
The world of commerce is going down, it is evident, when depositors start fleeing, and bank reserves with loans on a $30 to $1 leverage become insufficient, The credit system on which the working world lives is has shut down, banks cannot give daily operations cash for commercial paper and companies cannot meet payroll, in extreme cases. The economy is sound, only the commerce and daily operations money is not available.
At this point Paulsen and Bernanke decided that buying up to $700B worth of toxic mortgage tranches will restore customer confidence and save the credit system. After seesaw battle in Congress the compromise was written with an escape, to let government inject cash by buying bank shares. Surprise, Bush bought it
Suppose this will be accepted . Now the questions: How to ratio it? Presumably take the book value and mark-to-market value and first bolster the banks with the worst ratio?? How about if loss is 80%, cut the CEOs golden parachute also by 80% ?Hmmm.
Suppose the banks just raise the distress ratio and suck up the taxpayers’ money without doing anything to restore depositors’ confidence? That’s not rational behavior:, the banks will go broke and stockholder lawyers will kill the CEO’s assets.
Why not just buy up all defaulted mortgages, and save the poor schnooks’ lives, McCain’s social service solution, and let the banks fend for themselves? Yeah, but credit needs to be restored or else we all will be poor schnooks.
Why did the US not learn from the Great Depression? FDR did, and the 1933 Glass-Steagall Act separated bankers, brokers and insurers. But in 1982 decontrol-happy Pres. Reagan’s Depository Institution Act created the Savings & Loan bubble, mortgage sales rampant by uncontrolled S&Ls, while banks remained controlled, until the S&Ls collapsed in 1989, costing the US, as Resolution Trust Corp, $125B. James Keating, McCain’s benefactor, ignored a Home Loan Bank Board controls edict (Greenspan supported him).
Next, the Gramm-Leach-Bliley Financial Services Modernization Act of 1999 that permitted retail banking, investment banking and insurance in one entity, further destroyed Glass-Steagall, now freeing regular banks from the restrictions that limited leverage during the S&L rampage. McCain voted for it, Clinton signed it. This act is deemed to be the real villain in creating uncontrolled operations. Then, Sen. Phil Gramm in Commodity Futures Modernization Act in Oct. 2000 set up nontransparent trading tools – the Enron loophole decontrolling energy trading cost CA $13B; Greenspan liked the credit default swaps in 2002, despite Arthur Lewitt’s (SEC) 1999 warnings of Congress against lack of transparency.
What’s the solution? . Well, writing it clears the mind, somewhat.. First, the market has to bottom out, as soon as possible, a 936 Dow points day is not enough. Second,. we need the bailout, in stages, controlled, with a triage to help potential survivors first, by buying bank shares. We need transparency, suspending mark-to-value calculations for fear of irrational dips would slow down bottoming. Above all, restore credit.
# posted by Wally Dobelis @ 12:07 PM 
