Econ 2009

[ewmayer]

Whoops, forgot to post my lunchtime-assembled econo-summary:

GM Bankruptcy Is Considered `Inevitable' as Bondholders Reject Swap Offer: A General Motors Corp. bankruptcy filing became almost certain after the 100-year-old automaker failed to persuade enough bondholders to take equity in a streamlined company in exchange for $27 billion of debt.


`Problem' U.S. Banks Rise to 15-Year High as FDIC's Insurance Fund Erodes: U.S. “problem” banks climbed 21 percent to the highest total in 15 years in the first quarter, and provisions set aside for loan losses weighed on industry earnings, the Federal Deposit Insurance Corp. said.


But wait - not a day goes by anymore without at least a couple of eternally-hopeful "green shoots" stories, which the mass media (and Wall Street gambling addicts) seize upon like drowning men grasping at scraps of flotsam - well, here ya go:

Home resales inch up in April: The residential real estate market picked up slightly in April, as increasingly affordable home prices drew in hesitant buyers.

The National Association of Realtors reported that existing home sales ticked up 2.9% last month to a seasonally adjusted annual rate of 4.68 million units compared to the revised rate of 4.55 million in March.

The sales came in slightly ahead of expert forecasts of 4.66 million annual units, according to a consensus estimate of analysts compiled by Briefing.com, but are still off 3.5% from the 4.85 sold 12 months ago.

First-time homebuyers continued to drive sales, according to Lawrence Yun, NAR`s chief economist, but there was also a seasonal rise of repeat buyers.

"Most of the sales are taking place in lower price ranges and activity is beginning to pickup in the mid-price ranges, but high-end home sales remain sluggish," he said.

The median price of homes sold in April was just $170,200, a 15.4% year-over-year drop.

Sounds pretty "hopier than expected", don't it? Not so fast - a later-in-the-day CNN market-summary article gives the above numbers in a more revealing context, as

"Sales of existing homes increased 2.9% in April to 4.86 million homes sold, up from a downwardly revised pace of 4.55 million in March, according to the National Association of Realtors."

So it`s the same monthly statistical fakery the BLS has been using with jobless numbers, to wit:

1. Give an initial "headline" number which you know is likely on the rosy side, thus garnering loud "better than expected!" spin from the mainstream media;

2. The following month, quietly revise the previous month`s figure downward - The press will dutifully note the downward revision, but in the small print.

3. The downward revision of last month`s numbers will thus make the new numbers (not yet revised) look relatively better, so all the loud "headline" news looks eternally "better than expected", even though the true numbers may not be improving one bit, or may in fact be deteriorating further. Lather, rinse, repeat.

4. Augment the above unrevised-apples-versus-revised-oranges comparison scam with a bit of seasonality-based trickery: In parts of the year (mainly Spring) where home sales tend to rise month-over-month, compare month-over-month sales figures in the media releases, without taking account of seasonality. "April sales up 4%!" looks far better than "April sales down 10% year-over-year", don`t you think? Then, in parts of the year where sales typically drop month-over-month (Fall and Winter), you give whichever of the month-over-month or year-over-year comparison happens to looks "better than expected". If both figures look really bad, you attribute the downturn to "seasonality" and/or cry that the government needs to do more to lower mortgage rates. Actually doing so (e.g. by way of the Fed using its limitless electronic checking account to buy up billions of dollars in agency debt from Fannie and Freddie at below-market rates) of course amounts to a huge taxpayer subsidy of the realty industry, but 99% of Americans would have switched back to watching American Idol long before reaching the phrase "agency debt" in the above sentence anyway, so shhh! - let`s not tell them, they're already quite broken up at seeing Adam robbed of his deserved Idol crown, and only because he wears more eyeliner than the benighted folks in [insert names of neighboring states which the folks in your own state look down upon] can handle.

Of course it is beginning to appear as though the Fed's ability to force mortgage rates below market may be more limited than its ability to print money out of thin air. Karl Denninger points out that today`s brutal bond market smackdown caused a popular real-time rate quote on a 30-year fixed-rate mortgage to jump 30% percent in a matter of a few hours - it will surely settle back down a bit, but if rates can`t be kept artificially low, then the shit is going to hit the fan big-time all over again as borrowing rates on everything - including the tsunami of Uncle Sam`s newly-printed IOUs - explode.

But back to the housing green-shoots theme...

Notice also the vague blurb (unsupported by any data) from chief NAR shill Yun about "activity ... beginning to pickup in the mid-price ranges". Uh, If most of the sales are at the low end (read: Foreclosure/Distress sales) where prices have allegedly stabilized and multiple bids are once again all the rage, but activity is "beginning to pick up" in the mid-range, then how did the median price still manage to plunge? Oh, I see: Yun probably considers some blip like "two mid-price homes sold in April 2009, versus just one in April 2008" a sing that things are "picking up". Anyway, Mish promptly throws cold water (or more appropriately for our extended gardening metaphor, Roundup weed killer) on that:

California Stats

* There has been no increase in organic house sales in California in 18 months.
* Foreclosure-related resale market at the point of maximum demand.
* Total sales vs. foreclosure supply is heavily imbalanced.

"Over 50% of all sales are foreclosure related and that is snuffing out demand from other sectors."

I had to laugh at the end of the above CNN/Money article, which gives a Realtor`s perspective on consumers` irrational hesitancy to jump both feet first into the housing market:

The market has failed to move ahead despite several factors helping to drive sales. On the plus side: Prices have sunk nearly 20% during the past 12 months; mortgage rates are historically low; and the first-time homebuyers tax credit effectively discounts homes by up to $8,000 for qualified buyers. Offsetting those positives are the troubles in the overall economy, including the jump in unemployment from about 5% 12 months ago to 8.9% in April.

...and the fact that in many regions of the country, despite the huge price drops in the past year, houses are *still* overpriced with respect to historical price/income ratios.

The gloomy economic news discourages potential buyers, according to Tom Kunz, CEO of real estate broker Century 21. "Look at the average consumers," he said. "They come home and turn on the news and hear about another large corporation laying off workers. They`re saying, `Oh my gosh. What do I do?`"

Why, buy one of them thar "bargain-priced" homes with no money down (thanks to Government Mortgage Bubble Reflation Plan 9(x)), of course. Unless you`re one of these irrational nervous-nelly types and are actually worried about possibly losing your job, or taking on too much debt. It`s downright un-American to think that way, BTW.

Mostly, they`re not buying. Even falling prices, usually a stimulus for potential homebuyers, is currently a double-edged sword. Lower prices encourages some to buy while simultaneously convincing others to wait because they think prices will drop further.

Kunz said timing the market that way is often a mistake. Not only can buyers miss the bottom but mortgage rates can rise from the current low rates and the increase could wind up costing consumers money.

My Comment: That`s right, in the mind of a realtor (who obviously has your best interest at heart, not their bottom line) the best time to buy is "now, now, now!" After all, it is inevitable that the economy will come roaring back any day now, housing prices will quickly return to Greenspanian bubblicious levels, and all will be rosy in Realty World once again ... except for those fraidycats who missed The Bottom. After all, economic bottoms are always narrowly V-shaped ... protracted recessions were banished back after World War 2 by an act of congress, or something.

[AES]

Originally Posted by ewmayer

[...]
Of course it is beginning to appear as though the Fed's ability to force mortgage rates below market may be more limited than its ability to print money out of thin air. Karl Denninger points out that today`s brutal bond market smackdown caused a popular real-time rate quote on a 30-year fixed-rate mortgage to jump 30% percent in a matter of a few hours - it will surely settle back down a bit, but if rates can`t be kept artificially low, then the shit is going to hit the fan big-time all over again as borrowing rates on everything - including the tsunami of Uncle Sam`s newly-printed IOUs - explode.
[...]

An interest rate hike now will make some big waves.

http://www.cnbc.com/id/30968861

The stock market is watching the bond market, wary a spike in interest rates will derail a fragile economic recovery and snuff the market's rally.

[ewmayer]

Originally Posted by ewmayer

4. Augment the above unrevised-apples-versus-revised-oranges comparison scam with a bit of seasonality-based trickery: In parts of the year (mainly Spring) where home sales tend to rise month-over-month, compare month-over-month sales figures in the media releases, without taking account of seasonality. "April sales up 4%!" looks far better than "April sales down 10% year-over-year", don`t you think?

Yet another perfect example of this described here: MoM sales are statistically unchanged at +0.3% ±14.5% - but note the green-shooty positive *sign* on the 0.3%! This is great news!!! YoY are down hugely (and stat-significantly) at -34.0% ±11.0%. Guess which of the 2 figures the mainstream media trumpet? Here, I`ll give you a clue:

• Bloomberg: New-Home Sales in U.S. Climbed 0.3% to 352,000 Pace

• Marketwatch: Home sales up a paltry 0.3%

• Reuters: US new home sales rose 0.3 percent in April

• Associated Press: April new home sales inch upward

• WSJ: New-Home Sales Rise as Prices Tumble

Oh no, there`s no bullish bias in the MSM at all...whatever might have given you *that* idea?


Over at the ZeroHedge blog, Tyler welcomes a new contributor:

Despite all my efforts, Zero Hedge keeps growing. Like a tumor. I always said if I had a tumor I would name it "Marla." So now we are stuck with Marla. Marla Singer, to be precise. In addition to stealing from laundromats, chain smoking and attending testicular cancer support groups, Marla brings to Zero Hedge a bitter blend of confrontational, thought-provoking prose, and razor sharp insight. Forgive her if her reporting resembles an expletive-laced stream of consciousness. She constantly has a stomach-full of Xanax. I won`t bore you with the details of her background in finance. Suffice it to say that, as tumors go, she is a Zero Hedge level tumor. She pisses me off on a regular basis, but, as the only way to truly grow is through conflict, we all will benefit from her (twisted) perspectives. Zero Hedge, I give you, Marla Singer.

...and Marla does not disappoint, beginning her ZH tenure with a cracking article on the sordid insider-fraud story within the recent BankUnited failure:

Like A BankUnited Sex Crime: In the annals of rank regulatory intercourse there isn`t much more severe debauchery than the distant history that is the BankUnited story.

Picking through some of BankUnited`s public filings we discovered some interesting details.

From BankUnited's 2007 10-K:

For the 2007, 2006 and 2005 fiscal years, BankUnited retained the law firm of Camner, Lipsitz and Poller, Professional Association ("CLP"), as general counsel. Alfred R. Camner, Chief Executive Officer and Chairman of the Board of Directors of BankUnited, is the Senior Managing Director of CLP. For the 2007, 2006 and 2005 fiscal years, BankUnited paid CLP approximately $4.9 million, $3.6 million, and $3.5 million, respectively, in legal fees allocable to loan closings, foreclosures, litigation, corporate and other matters. Errin Camner, Managing Director of CLP, is the daughter of Alfred R. Camner.

In fiscal 2005, CLP subleased approximately 2,223 square feet of office space from BankUnited in Coral Gables, Florida. The sublease extends through January 31, 2014 and may be renewed for up to four additional five-year terms, subject to BankUnited's exercising its right to renew under the master lease. Under the terms of the sublease the minimum annual rent for the property is $61,249. Payments from CLP to BankUnited during the fiscal year 2007 totaled $79,026 consisting of rental payments and $12,533 paid to BankUnited as reimbursements for tenant improvements for the fiscal year 2006 and $87,161 consisting of rental payments and $22,598 paid to BankUnited as reimbursements for tenant improvements for the fiscal year 2006 and in fiscal year 2005 BankUnited was paid $52,265 in rent. BankUnited believes that the terms of the sublease reflect market rates comparable to those prevailing in the area for similar transactions involving non-affiliated parties at the time the sublease was made. (emphasis added)

Camner, Lipsitz and Poller and its predecessor Stuzin and Camner prior to 1998 seem to be no more than single-client (or nearly single client) firms designed to extract fees from a public institution. This has, unsurprisingly, been going on for a long time. Going back through 10-Ks and DEF 14As we find the following amounts paid to Camner, Lipsitz and Poller:

2007: $4.9 million
2006: $3.6 million
2005: $3.5 million
2004: $3.6 million
2003: $3.7 million
2002: $2.3 million
2001: $2.1 million
2000: $2.5 million
1999: $2.7 million
1998: $2.2 million

We run out of data on specific payments to Camner, Lipsitz and Poller in 1998 not because we run out of 10-Ks or DEF-14As, but rather because these disclosures are not made prior to the 1998 DEF-14A. We do have disclosures on the overall professional fees paid by BankUnited to parties unknown, which are in the 10-Ks:

1997: $1.6 million
1996: $0.9 million

Of course, it is claimed that a substantial portion of these fees are "rebated back," but it is not clear what portion that is, exactly, how long the rebating takes (this would constiute an interest free loan after all) or how those payments are structured, exactly.

Forgetting this for a moment, we have about $31 million in inflation-unadjusted cash flowing from the bank into a small, dedicated law firm run by the Bank's Chairman and CEO. Coincidentally, it is not clear from the filings what portion of these fees went to the principals of Camner Lipsitz and Poller or its predecessor Stuzin and Camner.

Is it possible that Camner Lipsitz and Poller and/or Stuzin and Camner have been charging above market rates as a means to supplement the incomes of senior bank executives and circumvent reporting requirements? If so it certainly wouldn't be the first time this tactic was used to avoid disclosure.

My Comment: A.k.a. "How Wall Street works", Chapter 119.6, section H17, subparagraph 93464(c).

[ewmayer]

GM Will File for Bankruptcy June 1; Accord Reached With Some Bondholders: General Motors Corp., the world’s largest automaker until its 77-year reign ended in 2008, plans to file for bankruptcy protection on June 1 and sell most of its assets to a new company, people familiar with the matter said.

Mortgage Delinquencies, Foreclosures in U.S. Rise to Records Amid Job Cuts: Mortgage delinquencies and foreclosures rose to records in the first quarter and home-loan rates jumped to the highest since March as the government’s effort to revive the housing market lost momentum.

Still only 20% of GM bondholders onboard with this "new, improved" proposal ... but methamphetamine-fueled Wall Street casino addicts loving this fabulous news. Who cares about the largest corporate bankruptcy in U.S. history and possibly a half-million job losses up and down the GM food chain, when some Russian money outfit just decided that that pillar of economic growth and industrial production Facebook is worth $10 Billion by buying a 1% stake for $100 million? (Down a mere $5 Billion from what Microsoft decided it was worth last year). Millions of people "friending" each other and obsessively clicking AdPorn on Facebook is obviously the key to a robust economic recovery! FDR had World War 2 to help pull America out of the Great Depression ... BHO has Facebook. I wonder if 50 years from now they`ll be referring to the legions of Facebook users in similarly glowing terms as the WW2 veterans, as "the greatest generation". I mean, can you really put a value of Saving the Entire World, then from Hitler, this time around from economic collapse?

[__HRB__]

U.S. Expected to Own 70% of Restructured G.M. (NY-Times):

"There are cultural challenges, too. Can the government help turn around a company known for its bureaucratic approach to business?"



If journalists fail to spot the irony in statements like this, the Gleichschaltung has already happened.


.

[ewmayer]

Originally Posted by AES

An interest rate hike now will make some big waves.

http://www.cnbc.com/id/30968861

The fallout from this rate instability is potentially much larger than has been reported in the mainstream media (MSM) - Mish has a nice piece on the ripple effects:

Mortage Market Locks Up: Yesterday 10 year treasury yields went soaring and the mortgage market literally seized up. Mark Hanson at the Field Check Group has this report that I can share.

The negative consequences of 5.5% rates are enormous. Because of capacity issues and the long timeline to actually fund a loan very few borrowers ever got the 4.25% to 4.75% perceived to be the prevailing rate range for everyone A significant percentage of loan applications (refis particularly) in the pipeline are submitted to the lender without a rate lock. This is because consumers are incented by much better pricing to lock for a short period of time…12-15 day rate locks carry the best rates by a long shot. But to get this short-term rate lock, the loan has to be complete enough to draw loan documents, which has been taking 45-75 days over the past several months depending upon the lender’s timeline. Therefore, millions of refi applications presently in the pipeline, on which lenders already spent a considerably amount of time and money processing, will never fund.

Furthermore, many of these ‘applicants’ with loans in process were awaiting the magical 4.5% rate before they lock -- a large percentage of these suddenly died yesterday. To make matters worse, after 90-days much of the paperwork (much taken at the date of application) within the file becomes stale-dated and has to be re-done with new dates -- if rates don’t come down quickly many will have to be cancelled out of the lender’s system. To add insult to mortal injury, unless this spike in rates corrects quickly, a large percentage of unlocked purchases and refis will have to be denied because at the higher interest rate level, borrowers do not qualify any longer. For the final groin kicker, a 5.5% rate just does not benefit nearly as many people as a 4.5%-5% rate does. Millions already have 5.25% to 5.75% fixed rates left over from 2002-2006.

My Comment: This is why the MSM obsessing about the monthly "mortgage applications surge!" green-shoots data is incredibly misleading - unless all those mortgage apps actually fund, and do so at the ballyhooed `low, low, rates` it`s just a huge waste of time and paperwork, and every would-be buyer or refinancer who goes through the process only to be denied or "please resubmit"ted may think long and hard about doing business with a mortgage banker again anytime soon, `low government-sponsored teaser rate` or not.

For those who want a really detailed, gory CMBS-market-insider`s explication of Wednesday`s rate-spike shock, MortgageNewsDaily.com has a good one: I give only a telling macroeconomic/market-psychology snip therefrom (underlines are mine; boldface highlighting is theirs):

Wait..isn`t the market always right? Allegedly...unless you consider that "crisis exhaustion" (swine flu) has altered the market`s perception in such a way that the opinion of right and wrong is skewed (no foundation for good or bad at this point). "Better than expected" has become a means for celebration lately...maybe this "loss of perception" has put the market in a place where rational vs. irrational psychological behavior is no longer discernible. After all, "better than expected" doesn`t always mean long term recovery...especially when the relative comparison is record economic weakness. Do you think the market can come to grips with the fact that the Fed is so deeply intertwined in the credit markets (entire banking system) that investors have no choice but to play along with the Fed`s every aspiration?

Bair Becomes Bane of Too-Big-to-Fail Banks as Enforcer Geithner Must Trust: Sheila Bair, chairman of the Federal Deposit Insurance Corp. and a lifelong Republican, boarded Air Force One for the first time in February. Neither President George H.W. Bush nor his son, President George W. Bush, had invited her on the world’s most famous jet in the five years she worked for them. It was a Democratic president, Barack Obama, who asked her to fly to Washington after the two had unveiled his administration’s foreclosure relief plan in Mesa, Arizona.

"Sheila, come on back here and give me some sugar""Sheila, come on back. I want to talk to you," Obama told Bair, who was seated in the plane’s conference room. He then escorted her into his airborne Oval Office for their first private meeting, where they discussed the government’s role in alleviating the worst financial crisis since the 1930s.

“It was great,” Bair says of her meeting with the president. “He’s got an agenda which we share. Banks are a means to an end. You stabilize the banks to support the economy. But you don’t stabilize the banks for the sake of stabilizing the banks.”

After being left out of big decisions by Bush administration officials, such as the push last year for the $700 billion bank bailout, Bair, 55, has become one of the most powerful policy makers in Washington. Driven by a combination of circumstances and her own candor, Bair has presided over the biggest expansion of the FDIC’s authority since its founding in 1933 to insure bank deposits.

My Comment: (Sorry, couldn`t resist a little sophomoric Friday-follies faux-edit there ... a thousand pardons, "We apologise for the fault in the subtext. Those responsible have been sacked.") ... Ironically, as head of a borderline-insolvent too-big-too-fail institution, Sheila and the Bank Mafiosi may have more in common than she cares to admit. But she does appear to be becoming a useful counterweight to the Geithner-led bail-out-the-banks-at-all-costs-even-if-it-means-gang-rape-of-the-taxpayer crowd:

As Bair builds her power, soaring bank failures are jeopardizing her agency’s deposit insurance fund, which had dwindled to $13 billion in the first quarter, the lowest amount since 1993 following the savings-and-loan crisis. She requested more funding from Congress, which on May 19 more than tripled the FDIC’s borrowing authority from the Treasury Department to $100 billion. Lawmakers also approved a temporary boost of the credit line to $500 billion.

In 2008, Bair says, her struggle with midlevel Treasury Department officials turned tense as they stonewalled her proposal to use federal funding to prevent foreclosures. And she tussled with Timothy Geithner, then the president of the Federal Reserve Bank of New York, over the request last year that the FDIC guarantee all debt issued by lenders -- a move she rejected because it would expose her agency to big losses.

Geithner’s Respect

“I’m from Kansas; I’m not from New York,” Bair says. “I’m a lot of things that are different. So maybe that does give me some more independence of thought and daring to not care who I offend.”

Following Obama’s election in November, Geithner tried to have her ousted for not being a team player, according to people familiar with the matter. Through a spokesman, Geithner declined to say whether he sought to remove Bair from office.

"Man, will someone please get that freaking b*tch out of my hair?""I have great respect for her," Geithner told Bloomberg TV on May 21. “She’s a strong advocate for her agency and a strong advocate for her points of view.”

My Comment: "We apologise again for the fault in the subtext. Those responsible for sacking the people who have just been sacked, have been sacked." Seriously, someone needs to remind Terrible Timmay G that it`s the Federal Depositor Insurance Corporation, not the "Friends of Timmy bad-loan bailout slush fund."

[ewmayer]

A bit of Friday humor courtesy of our friends at The Onion:

Nation Ready To Be Lied To About Economy Again | The Onion - America's Finest News Source

WASHINGTON—After nearly four months of frank, honest, and open dialogue about the failing economy, a weary U.S. populace announced this week that it is once again ready to be lied to about the current state of the financial system.

Tired of hearing the grim truth about their economic future, Americans demanded that the bald-faced lies resume immediately, particularly whenever politicians feel the need to divulge another terrifying problem with Wall Street, the housing market, or any one of a hundred other ticking time bombs everyone was better off not knowing about.

In addition, citizens are requesting that the phrase, "It will only get worse before it gets better," be permanently replaced with, "Things are going great. Enjoy yourselves."

"I thought I wanted a new era of transparency and accountability, but honestly, I just can't handle it," Ohio resident Nathan Pletcher said. "All I ever hear about now is how my retirement has been pushed back 15 years and how I won't be able to afford my daughter's tuition when she grows up."

"From now on, just tell me the bullshit I want to hear," Pletcher added. "Tell me my savings are okay, everybody has a job, and we're No. 1 again. Please, just lie to my face."
...
According to a CBS News/New York Times poll, 98 percent of Americans no longer appreciate President Barack Obama's attempts to break down the economic crisis into simple terms they can understand. Instead, many say the president should have the decency to insult their intelligence by using complex jargon to confuse and deceive them, perhaps even implying that the subprime mortgage fallout was just a big misunderstanding that resulted from a clerical error. [Full Article]

My Comment: LOL, it would be merely hilarious if it weren`t so close to the mark.

[Fusion_power]

The GM shoe dropped today, the final song was sung, the curtain closed.

Whats that you say? They are going to come back?

Well, technically you are correct, but they will never be the same. One thing you CAN look forward to is some really cheap prices for new cars.


So what is the next major crisis we will face?

Arguably it will be large scale bankruptcies of small businesses and the ongoing banking morass. Two factors will drive this. The first is the continuing malaise in the real estate market, and the second is the no confidence vote many banks have acquired. The loss of small businesses will be triggered by larger events such as the closing of many GM locations and similar knock on effects.

The banking industry has a rather nasty outlook because of FDIC funding. Cut all the mouth exercise to reality and it is evident that the reserve is not large enough. Present estimates put it at about $13 billion. This will be absorbed within the next 2 months and then they will have to borrow to close down a bank.

DarJones

[ewmayer]

Originally Posted by Fusion_power

The GM shoe dropped today, the final song was sung, the curtain closed.

After opening lower than last Friday's close, GM common stock actually *rose* today, despite the fact that it is sure to be worth nil in very short order. We live in Bizarro world ...

Now some of that might simply be short covering, but if I were short GM I'd simply wait for the price to get closer to zero before the next options expiry date - I have a feeling that there are in fact a whole of day-trading fools who believe that "the new GM" will actually have something to do with the stock of the "old GM", and are about to learn a painful lesson in "bankruptcy 101".

------------------

I`ve been saying for a while now that the current financial/real-estate/debt crisis is in many ways the ultimate failure of Reaganomics, in the sense that deregulation of financial markets (and the accompanying anything-goes attitude on Wall Street, as epitomized by the "greed is good" ethos immortalized in the Reagan-era Oliver Stone film Wall Street), an explosion of government spending, and the appointment of Alan Greenspan to head the Federal Reserve are all Reagan legacies, and were continued and extended by all 3 of the ensuing presidents - Bush Sr, Clinton and Bush Jr. In an op-ed in today`s NY Times, Paul Krugman adds another toxic Reagan legacy to the mix: The elimination of the Depression-era minimum-down-payment requirements for mortgage loans:

Paul Krugman | Reagan Did It: The change in America’s financial rules was Ronald Reagan’s biggest legacy and the gift that keeps on taking.

“This bill is the most important legislation for financial institutions in the last 50 years. It provides a long-term solution for troubled thrift institutions. ... All in all, I think we hit the jackpot.” So declared Ronald Reagan in 1982, as he signed the Garn-St. Germain Depository Institutions Act.

He was, as it happened, wrong about solving the problems of the thrifts. On the contrary, the bill turned the modest-sized troubles of savings-and-loan institutions into an utter catastrophe. But he was right about the legislation’s significance. And as for that jackpot — well, it finally came more than 25 years later, in the form of the worst economic crisis since the Great Depression.

For the more one looks into the origins of the current disaster, the clearer it becomes that the key wrong turn — the turn that made crisis inevitable — took place in the early 1980s, during the Reagan years.

Attacks on Reaganomics usually focus on rising inequality and fiscal irresponsibility. Indeed, Reagan ushered in an era in which a small minority grew vastly rich, while working families saw only meager gains. He also broke with longstanding rules of fiscal prudence.

On the latter point: traditionally, the U.S. government ran significant budget deficits only in times of war or economic emergency. Federal debt as a percentage of G.D.P. fell steadily from the end of World War II until 1980. But indebtedness began rising under Reagan; it fell again in the Clinton years, but resumed its rise under the Bush administration, leaving us ill prepared for the emergency now upon us.

The increase in public debt was, however, dwarfed by the rise in private debt, made possible by financial deregulation. The change in America’s financial rules was Reagan’s biggest legacy. And it’s the gift that keeps on taking.

The immediate effect of Garn-St. Germain, as I said, was to turn the thrifts from a problem into a catastrophe. The S.& L. crisis has been written out of the Reagan hagiography, but the fact is that deregulation in effect gave the industry — whose deposits were federally insured — a license to gamble with taxpayers’ money, at best, or simply to loot it, at worst. By the time the government closed the books on the affair, taxpayers had lost $130 billion, back when that was a lot of money.

But there was also a longer-term effect. Reagan-era legislative changes essentially ended New Deal restrictions on mortgage lending — restrictions that, in particular, limited the ability of families to buy homes without putting a significant amount of money down.

These restrictions were put in place in the 1930s by political leaders who had just experienced a terrible financial crisis, and were trying to prevent another. But by 1980 the memory of the Depression had faded. Government, declared Reagan, is the problem, not the solution; the magic of the marketplace must be set free. And so the precautionary rules were scrapped.

Together with looser lending standards for other kinds of consumer credit, this led to a radical change in American behavior...

[fivemack]

The FDIC is clearly going to run out of money by the end of the year; on the other hand, by this point that's basically an accounting issue, I suspect they will get grants rather than loans from the central government in order to keep working, since losing the ability to bail out broken banks is something of an election-loser.

I don't know if the insurance payments from banks to FDIC have gone up; insuring banks is a quintessentially bursty business, where you get lots of income in many years (and banks infuriated at having to pay some fraction of 1% of their deposits annually in insurance when no bank has failed for a decade) and huge outgoings in some years, it might well actually be better to remove the hypothecation, have a tax on deposits held by banks and write cheques from central government to bail out banks when they fail.

[__HRB__]

Originally Posted by fivemack

I don't know if the insurance payments from banks to FDIC have gone up; insuring banks is a quintessentially bursty business, where you get lots of income in many years (and banks infuriated at having to pay some fraction of 1% of their deposits annually in insurance when no bank has failed for a decade) and huge outgoings in some years, it might well actually be better to remove the hypothecation, have a tax on deposits held by banks and write cheques from central government to bail out banks when they fail.

Or one could simply let the depositors lose their deposits. Or let the depositors insure themselves.

This would ensure that banks have an incentive to develop techniques to prove that deposits are safe, and depositors have the incentive to check whether a bank is safe.

Logic tells us that systematic risk cannot be diversified (insurance against the apocalypse is impossible), and there is not only moral hazard on the banking side, but also on the side of the FDIC, since there is an incentive to hold no reserves (i.e. underestimate risk) and treat the contributions as disposable income.

Your homework is to list the reasons why markets haven't evolved any business-to-business or business-to-consumer banking insurance.