Econ 2009

[Fusion_power]

Today we saw the 106th bank failure of 2009. The number of ailing banks officially on the FDIC list is about 500. While the number of ailing banks is increasing, actual failures have slowed. The problem is the FDIC's takeover fund. They have spent between 25 and 30 billion dollars so far this year and look to spend 100 billion over the next 4 years. That translates to nearly twice as much money as the FDIC has coming in over those 4 years. How do they propose raising the difference? Well, that is simple, they want the remaining banks to pre-pay their FDIC fees to the tune of about $45 billion. Now what is fair about making a healthy conservative bank pay for the profligate wastrels that made risky loans and ran their banks into the ground? Come to think of it, why on earth are we as taxpayers bailing out the TBTF's that did the same?

Look for more bank failures over the next 2 months. We should end the year with about 150 taken over. This will be the highest failure rate in 20 years.

http://news.yahoo.com/s/ap/20091024/..._bank_failures

DarJones

[ewmayer]

Originally Posted by Fusion_power

Today we saw the 106th bank failure of 2009. The number of ailing banks officially on the FDIC list is about 500. While the number of ailing banks is increasing, actual failures have slowed. The problem is the FDIC's takeover fund.

I am curious as to how large the number failed banks would be if the FDIC weren`t - partly due to its depleted insurance fund, and likely also to marching orders to the effect of "mustn`t spook the markets" - dragging its feet in a major way with respect to shuttering insolvent institutions.

And speaking of insolvent institutions, this time in the rapidly deteriorating commercial-RE space:

Capmark Financial files for bankruptcy: Capmark Financial, one of the country's largest commercial real estate lenders, filed for bankruptcy protection Sunday, reflecting the major problems in the business property sector.

The Real Cost of the Housing Stimulus

Barry Ritholtz posted Friday with links to the alleged large-scale homebuyer-cash-giveaway fraud, to which one of his readers replies as follows:

I love how we con, loot, and pillage the system every chance we get (those who applied for or gave out liar loans, inflated appraisals, scammed the gov’t cashforclunkers or first time buyer rebates, etc.) and then blame the government for our collective bad behavior. Or blame wall street. Or blame the chinese/saudis/russians/koreans/mexicans (here and there). Blame the banks, the blacks, the political hacks, the lobbyists the educators; the collective finger is always pointing at someone else. Face it America, you sucked for the last 8 years. You elected a crap-ass ideological/theological government. You wanted government to “stay out of your business” while the businessmen took advantage of you. You flipped that house! and turned it into an ATM and bought tanker-loads of cheap chinese crap. You didn’t manage your portfolio, you took enormous risks with other people’s money, you invaded 2 countries and didn’t care about the outcome, you wanted to live like millionaires, you over-extended, you lived on credit, so quit your bitching America.

As far as to just how wasteful - even in the idealized hypothetical "absence of fraud" scenario - such government giveaways are, the numbers are rather shocking:

$15,000 Home Buyers Credit Costs $292,000/home: A recent Brookings Institute analysis (found via Barrons) demonstrates persuasively that the $8,000 subsidy actually costs $43,000 per extra house sold; worse yet, the new $15k tax credit will ultimately cost $292,000 per home.

Now comes the latest attempt by politicians to intervene in the housing market: Expanding the about to expire, $8,000, first time home buyers tax credit to a $15,000 credit for everyone. This is counter productive. (Won’t that just make prices more expensive?) The lobbyists want to goose the housing market by any means possible — even if it is an expensive and unhealthy method.

A recent Brookings Institute analysis (found via Barrons) demonstrates persuasively that the $8,000 subsidy actually costs $43,000 per extra house sold; worse yet, the new $15k tax credit will ultimately cost $292,000 per home.

How does that math work? :

“[The] refundable tax credit, which was part of the February stimulus bill, gives $8,000 to first-time homebuyers (but is phased out at higher incomes). It is scheduled to expire on December 1, 2009, although the sponsor of the initial proposal, Senator Johnny Isakson, now wants to extend the credit for another year, and expand it to $15,000. This extension would be a mistake.

Approximately 1.9 million buyers are expected to receive the credit, but more than 85 percent of these would have bought a home without the credit. This suggests a price tax of about $15 billion – which is twice what Congress intended – for approximately 350,000 additional home sales. At $43,000 per new home sale, this is a very expensive subsidy . . .

An extension and expansion of the tax credit will cost far more than the $15 billion of the current credit, likely in excess of an additional $30 billion. And the cost per new house sale will likely be much higher going forward, as a greater proportion of the sales will be for those who would have bought anyway, without the credit. (emphasis added)

My Comment: And it gets even "better", because the pulled-forward demand from such subsidies have the effect of artificially raising (or propping up) home prices, meaning that instead of 85 homes selling for (say) $200K each, you get 100 homes selling for $220K each, i.e. the artificial boost in prices resulting from the subsidy may more than negate the subsidy itself for the recipients! This a great cash cow for the realtors, but once the giveaway ends, home prices will continue their ongoing reversion toward long-term means (that is, sustainable long-term price levels based on actual incomes), and thus instead of the non-subsidy 85 people being perhaps slightly underwater on their mortgages (but not in dire straits because they didn't expect to catch the exact bottom, and were able to afford the home without a subsidy), you have 100 who are $20K each deeper underwater. Oh yeah, that`s a great economic stimulator, there.

[__HRB__]

Originally Posted by ewmayer

I am curious as to how large the number failed banks would be if the FDIC weren`t - partly due to its depleted insurance fund, and likely also to marching orders to the effect of "mustn`t spook the markets" - dragging its feet in a major way with respect to shuttering insolvent institutions.

The surprising thing is that even the more intelligent people believe that building the economic equivalent of a perpetuum mobile is merely an engineering problem.

In the absence of a deposit insurance the number of failed banks would be lower, because banks would be forced to develop reliable signals that deposits are safe with them - otherwise no one would deposit anything and financial intermediation as a business couldn't exist.

Banking sector regulations effectively reduce the competition by raising market entry barriers and instituting price-controls. As long as people refuse to understand that, e.g. the FDIC does not present a net benefit for the consumer, but rather an indirect transfer of wealth from the consumer (taxpayer) to the banking sector, any banking regulation is a guaranteed recipe for the destruction of the opportunity to create wealth.

P.S. "Nagging Nabobs" was coined by Safire, not Buchanan.

[wblipp]

Originally Posted by __HRB__

P.S. "Nagging Nabobs" was coined by Safire, not Buchanan.

IIRC, it's Nattering Nabobs of Negativity.

[__HRB__]

Originally Posted by wblipp

IIRC, it's Nattering Nabobs of Negativity.

IYRC? Man - you old!

Of course it must be nattering, as nagging would imply that the opposition could find a fault which it could nag about.

Thanks for being a nagging nabob of non-negativity .

[ewmayer]

Mish Shedlock shares your take on the moral hazard represented by FDIC insurance, HRB. I believe some kind of broad protection for depositors is needed, but banks should not be rewarded for taking the kinds of excessive risks that current FDIC insurance encourages.

Originally Posted by __HRB__

P.S. "Nagging Nabobs" was coined by Safire, not Buchanan.

It would appear you are correct, my "Agitator for Accurate Attribution" friend ... according the ever-reliable Ask.com:

"Although this phrase is often credited to Agnew himself, it was actually written by William Safire, the legendary columnist for The New York Times, who was a speechwriter for Richard Nixon and Spiro Agnew. Some of Agnew's other pearls were actually written by Patrick Buchanan, another White House speechwriter at the time."

Right ballpark, wrong infielder. Safir (and Buchanan) apparently had an exquisite knack for the kinds of mocking alliterative turns of phrase so beloved by VP Agnew - according to Wikipedia (emphasis mine):

Soon after joining the [New York] Times [in 1973], Safire learned that he had been the target of "national security" wiretaps authorized by Nixon, and, after noting that he had worked only on domestic matters, wrote with what he characterized as "restrained fury" that he had not worked for Nixon through a difficult decade "to have him—or some lizard-lidded paranoid acting without his approval—eavesdropping on my conversations."

I also didn`t know that Safire was a graduate of the famous Bronx High School of Science, but it appears that school is similalrly strong in the humanities as in the sciences: 7 Nobel prizes and 6 Pulitzers, a fine balance.

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

Clock ticking on debt ceiling: This week Uncle Sam plans to sell $123 billion worth of Treasurys. That will bring the country's debt level very close to the $12.1 trillion debt ceiling

NEW YORK (CNNMoney.com) -- Roughly $211 billion separates what the country owes and its self-imposed credit limit.

And by Friday, after another week of massive debt sales by the Treasury Department, that gap will likely have narrowed considerably.

It is now expected that the $12.104 trillion debt ceiling could be breached by the end of November.

It is also expected that lawmakers will raise the ceiling, as they have done more than 90 times since 1940 -- eight of them since 2002.

If they don't, the government could be forced to shut down. But that's not the worst that could happen. In fact, the government did shut down for a spell in 1995 and life went on. The reason lawmakers will eventually approve an increase is because without one ultimately the value of U.S. bonds would sink, jeopardizing the portfolios of countries and investors around the world who invest in U.S. debt.

It makes life a whole lot easier for folks at Treasury if lawmakers take that vote before the ceiling is breached -- and they usually do. But there have been times when Congress voted to raise the limit after it was pierced, according to a recent Standard & Poor's report.

If they don't do so before the breach, "the U.S. Treasury must engage in some legerdemain to create additional headroom," wrote Standard & Poor's managing director John Chambers.

My Comment: "And we at Standard & Poor's are experts at accounting legerdemain...." So it looks like we`re headed for a another oh-so-predictable session of debt-ceiling-related Kabuki theater on capitol hill, with enough pompous posturing, phony declarations of deficit-hawkishness and partisan sniping to keep C-SPAN busy for weeks. But the outcome is foreordained, so our dear legislators should just STFU, and scrap the phony "debt ceiling" bullshit - it`s only a ceiling if you actually treat it as one. The fact is, this debt-fueled house of cards not only has no real ceiling, it had its roof blown off decades ago.


Karl Denninger had a post last week about Citigroup sending a mass-circulation letter to many of its credit-card customers announcing a huge rate-jacking (in some cases tripling the rate from 10% to 29.9%), which apparently included many individual and small-business customers with top-notch credit scores. After going through the various possible reasons for such an action, he concluded that Citi is possibly in serious trouble again ... or better, still - since the main issue of their nearly $1-trillion off-balance-sheet toxic debt exposure has at best been slightly offset but has not been solved by the multitude of government backstops, bailouts and money-transfers from taxpayers to the banksters, it was more a matter of when, not if, their bad balance sheet crows would begin to come home to roost:

Citigroup's "Hail Mary Pass": How To Know Citigroup Is In Serious Trouble

To recap what this says:

* Standard "purchase" interest rate is going to 29.99%.

* The "default rate" is also now 29.99%.

* The cash advance fee rate is now 5% (most were 2% previously, but I do not have the previous value for this account or for Citibank in general.)

Citibank's average yield year-to-date (consumer and plastic) was about 12%. But they're suffering 10% defaults, making their true margin about 2%. That's still a positive number.... if it's accurate. [EWM: See the letter from the credit-default specialist in Mish`s post below for more on this ... in fact things may be quite a bit worse, due to fractional-reserve-lending leverage]

Huge numbers of small business owners - especially sole proprietors - use these cards as a means of financing operations. They relied on that 10 or 12% interest rate, and most of them have huge balances outstanding.

I have since confirmed that this letter is not just going to people who have had credit "challenges". Indeed, this appears to be a blanket change on the part of Citibank. I now have multiple copies from people who assert that they have 750+ FICOs and have never missed a payment on this or any other obligation - the "paragon" of so-called "responsible" credit use. All of the letters are identical.

The problem should be obvious - for someone with one of the 12.99% cards that is now 30%, this is a radical change that more than doubles monthly interest expense. Of those who have sent me copies of this letter and disclosed their previous rate, none were over 20%, meaning that these changes represent 50% or greater interest rate increases. If you're anywhere near the edge of being unable to pay, this will shove you off the bridge and into the deep, shark-infested water of bankruptcy.

But more important, I believe, is what this says about what's really going on in these banks. Many simply put this out there as a "response" to the pending credit-card legislation, and note with irony that the bank that is most-owned by taxpayers (Citibank) is the one doing the worst screwing of the consumer.

But is it that simple? After all, given the extraordinary support that the taxpayer has put into Citibank (they would be literally out of business several times over but for our support) would not Treasury stomp on this sort of abuse? Remember, Barack Obama is supposedly "for the people" and "change in Washington and on Wall Street", right?

Perhaps there something more dangerous - and hidden thus far - going on here? Perhaps what we're really seeing is a business reacting to hidden deterioration of asset bases that are not known by investors and the public due to the legitimation of bogus accounting that happened this last March, but which is known by company executives!

My Comment: The latter possibility is serious enough that I decided to track the story for a little while to see if it had "legs" ... in the meantime several other top bloggers, including Mish, picked up on the story, and thanks to the ensuing flood of letters-from-readers-and-industry-insiders a clearer picture is emerging - it now appears that Citi sent out on the order of 2 million such letters, a staggering number. Given that this action is sure to drive away legions of quality customers (i.e. those who have options and are not consigned to debt slavery as a result of being unable to obtain better terms elsewhere), the "Citi is just doing this as a way of greedily front-running the coming credit-card regulation-tightening legislation" seems an unlikely explanation. Here is Mish`s latest (includes links to the entire blogosphere "thread"), I quote from the reader who ferreted out the number of letters sent:

How the Citi-Grinch Stole Christmas (And Why It's a Good Thing)

Hi Mish,

I got a Citibank letter last week raising my interest rate to 29.99% from 7.99%. I have a 780 credit score and pay my account off every month. My limit was $18,200. I never made a late payment to Citibank (or anyone else).

When I called them to either maintain my current terms or opt-out, the rep told me she had been getting nothing but complaint calls all day. She said Citibank had sent out 2 million such letters. I was given one choice: accept the new terms or have my account canceled upon its expiration of 12/31/09. I told them to cancel the account.

The “hail Mary” you describe is even larger than you imagined.

MJ

My Comment: Mish follows with an example showing the dire need for anti-usury regulation in the CC arena: A South Dakota bank targeting the "are you suffering from derogatory credit?" crowd with a card carrying an eye-popping 79.9% interest rate. I would characterize any such usurious-lending-to-the-desperate as "derogatory credit".

[__HRB__]

Originally Posted by ewmayer

I believe some kind of broad protection for depositors is needed, but banks should not be rewarded for taking the kinds of excessive risks that current FDIC insurance encourages.

Those are conflicting goals, and you are essentially advocating to decrease diversifiable risk and increase systematic risk.

I don't understand why you think that making it easier for everybody to put more of their eggs in one big basket is to their benefit. Agitator for Accurate Attribution, my foot, I'm An Attacker of Accumulated Arealisms, but my friends call me De Debunker of Distributed Delusions.

You're the perfect example of an otherwise reasonable person who believes that there are free lunches if only we could solve the engineering problem.

I think you would stop believing such nonsense, if it weren't for the Public Posse of Primitive Primates around you. While human evolution has favored the individual who manages to sufficiently agree with the other monkeys, I would like to remind you that evolution also favors individuals who manage to stay away from groups that are sufficiently wrong and all get wiped out in one go.

[ewmayer]

Originally Posted by __HRB__

Those are conflicting goals, and you are essentially advocating to decrease diversifiable risk and increase systematic risk.

You're the perfect example of an otherwise reasonable person who believes that there are free lunches if only we could solve the engineering problem.

"Free lunch" implies that everyone is insured and no one has to pay the premiums - clearly that is not the case here. Rather it is an issue of perverse incentives - all banks pay into the FDIC insurance fund at rates only very loosely correlated with any measure of riskiness, and since no one has gone to jail in an least 20 years for driving a bank into insolvency via reckless risk-taking, all the incentives are skewed toward chasing (and offering) maximal returns, under the guise of risk-freeness.

How about something along the following lines? Replace the insurance of the "100% of your money back" variety with something along the lines of "100% up to [some modest sum, say 20% of an average person`s annual income], plus whatever percentage is recoverable in an insolvency process." In other words, instead of having the government subsidize all the risk, put the depositors ahead of the bondholders in the asset-recovery pecking order, but still with no blanket 100%-of-your-money-back guarantee. That way both the depositors (especially the large ones) and the investors in the bank have an incentive to make sure the bank engages in sound business practices, but small depositors (who are more likely to fall into the just-trying-to-make-ends-meet camp) can deposit without fear. That also aligns the risk/reward for depositors better, since the big money tends to earn higher interest. For its part the FDIC would have less incentive to drag its feet with respect to taking over insolvent banks, because there is a clear correlation with such delays and lower recovery rates.

Any depositor who is not fully covered but wanted to be would be free to buy extra insurance, either by paying the FDIC the premium, or perhaps by way of private insurance. If they don`t like the terms they can invest their money in the rigged casino stock market, but now knowing full well that that carries risks of loss of principal.

In that sense, deposit insurance would not be all that different from a public water supply - a modest fee gets everyone a basic minimum of service, but if you want to use a million gallons a day, you've got to pay in some proportion to your usage.


Madoff Associate Jeffry Picower Found Dead in Pool

Madoff associate Jeffry Picower dies at 67

PALM BEACH, Fla. – Jeffry Picower, a serial financial con artist philanthropist accused of profiting more than $7 billion from the investment schemes of his longtime friend Bernard Madoff, was found at the bottom of the pool at his oceanside mansion and died Sunday, police said. He was 67.

Picower's wife, Barbara, discovered his body and pulled him from the water with help from a housekeeper, authorities said. He was pronounced dead at Good Samaritan Medical Center at about 1:30 p.m.

Palm Beach police are investigating the death as a case of "he got off way too easy" drowning, but have not ruled out anything on the cause of death.

Picower suffered from fraud-committing sociopathy Parkinson`s disease and had a complete and utter lack of conscience, morals or ethics "heart-related issues," said family attorney William D. Zabel. He described Picower's morals health as "poor."

My Comment: Found dead in his own swimming pool...apparently having read The Great Gatsby for inspiration. Picower was the biggest beneficiary of the Madoff Ponzi scheme, even more so than Madoff himself. I wonder if the MIT Institute named in honor of his Ponzi-funded largesse will be undergoing a name-o-plasty soon. If Madoff-case trustee Irving Picard decides to go after some of the charities and other "good causes" which benefitted from these kinds of ill-gotten gains, that`s gonna get really interesting.

[__HRB__]

Originally Posted by ewmayer

"Free lunch" implies that everyone is insured and no one has to pay the premiums - clearly that is not the case here. Rather it is an issue of perverse incentives - all banks pay into the FDIC insurance fund at rates only very loosely correlated with any measure of riskiness, and since no one has gone to jail in an least 20 years for driving a bank into insolvency via reckless risk-taking, all the incentives are skewed toward chasing (and offering) maximal returns, under the guise of risk-freeness.

The FDIC cannot base rates on riskiness, because of the inherent information asymmetry - a bank always knows more about the riskiness of its assets than the regulator. Furthermore, assessing risk is a hard problem in itself, and the banks that are in business are better at assessing risk than the ones that went bankrupt in the past. There is no such darwinistic mechanism that will evolve a FDIC with improved properties, which results in the FDIC possessing the most deficient risk assessment of all parties.

If it were possible to generate profits by running a non-fraudulent deposit insurance, don't you think that during the past 2000+ years of financial intermediation some clever greedy bastard would have come up with a way to do it?

A non-subsidized FDIC is an illusion.

Originally Posted by ewmayer

How about something along the following lines? Replace the insurance of the "100% of your money back" variety with something along the lines of "100% up to [some modest sum, say 20% of an average person`s annual income], plus whatever percentage is recoverable in an insolvency process."

Don't forget that you also need to create some Gestapo to stop people from opening accounts at several different banks, otherwise this is a subsidy for bad banks: if, in absence of regulation you would have almost all of your cash in an account at a 99% safe bank, then a rational individual would only keep 20% of his cash at the good bank and distribute the other 80% among the 50% safe banks.

I'm sure that isn't the way you intended the regulation to work, but it's in the nature of excludable goods that regulating them will always work contrary to any good intentions of the designer.

Originally Posted by ewmayer

In other words, instead of having the government subsidize all the risk, put the depositors ahead of the bondholders in the asset-recovery pecking order, but still with no blanket 100%-of-your-money-back guarantee.

Insurance companies have evolved the following principle: the higher the deductible, the lower the premium. How many businesses do you know that operate on a qualitative analysis? Not many people go 'aha!', when the $500/hour consultant tells them that revenue>cost is a business model.

Originally Posted by ewmayer

Any depositor who is not fully covered but wanted to be would be free to buy extra insurance, either by paying the FDIC the premium, or perhaps by way of private insurance. If they don`t like the terms they can invest their money in the rigged casino stock market, but now knowing full well that that carries risks of loss of principal.

1. If private insurance does work, why am I forced to subsidize the FDIC?
2. If private insurance doesn't work, why am I forced to subsidize the FDIC?

Originally Posted by ewmayer

That way both the depositors (especially the large ones) and the investors in the bank have an incentive to make sure the bank engages in sound business practices, but small depositors (who are more likely to fall into the just-trying-to-make-ends-meet camp) can deposit without fear.

The just-trying-to-make-ends-meet camp doesn't deposit anything - they might have some money in the drawer with their underwear, but otherwise they live from paycheck to paycheck.

The more depositors fear about the safety of their money, the better the bank has to communicate that it is safe. Putting the occasional bank out of business with a bank-run is the consumer reminding the management of other banks:


"Do your job properly, or we'll make sure that you won't have one."

.

[garo]

There was no FDIC in the 1930s. What happened then? Were customers more careful than now? Did banks take less risk than now?

[Fusion_power]

There was no FDIC in the 1930s. What happened then? Were customers more careful than now? Did banks take less risk than now?

The answer is no.... and yes... In the last 10 years, banks have taken on much higher levels of risk than they carried back in the 1930's. But then, interest rate paid on deposits in recent times was generally higher and interest collected on loans was also higher. The problem comes in with the risk vs reward cycle. The more risk the bank takes, the more monetary reward they can earn. Now lets reduce that risk by declaring them 'too big to fail' and see what happens. If you want to see the risk in action, just take a look at the levels of leverage used by banks. Don't confuse this with the investment brokerage type pseudo banks that run leverage of 30 or 40 to 1.

Darjones