Mystery Economic Theater 2010

[garo]

cheesehead, please read some of the posts I linked above. I don't think it is possible to have an intelligent discussion without that. I have posted several dozen times on this thread and its predecessor so I'm not going to rehash my positions again. As Ernst said, the severity of the situation in 2008 does not excuse the stupidity of several aspects of the bailout.

BTW, you are the one who jumped into this trying to defend the actions of this and the previous administration wholesale. I will leave you with the SIGTARP report on the Treasury's actions. Neil Barofsky has spent a lot of time on this and is far more informed and competent to comment on the government's actions than you or I will ever be.
http://www.zerohedge.com/article/sig...cruel-cynicism

And please try not to threadspoil with long posts quoting the previous posted wholesale followed by a one sentence reply.

[garo]

One more datapoint:
http://www.ritholtz.com/blog/2010/10...id-aig-losses/

[cheesehead]

Originally Posted by garo

cheesehead, please read some of the posts I linked above.

Since you're a careful reader, you'll have noticed that I keep referring to the situation on September 15 (or sometimes "mid-September"), 2008. The AIG action was decided then. TARP was not.

I have not been referring to TARP (except for one side remark about 96% payback) and I have not defended TARP. Please stop citing TARP criticisms in response to my requests for ideas about the situation on September 15, 2008. Yes, I realize that TARP was a response to the September 15 situation, but it was not the initial emergency action the U.S. government took. (For one thing, TARP had to be passed by Congress. The actions to which I was referring were taken by the executive branch.)

(Two years ago, when TARP was passed, my position was neutral. I did not think I knew enough to be either a supporter or detractor at that time. I objected to what I thought at that time were mischaracterizations of TARP, but only to set the record straight, not defend TARP in general. I have continued to protest mischaracterizations of TARP, but not defend it.)

As Ernst said, the severity of the situation in 2008 does not excuse the stupidity of several aspects of the bailout.

I'm not talking about any aspects other than what happened on the weekend of September 15, 2008 (aside from the 96% remark). Why don't you comment on them instead of all the after-stuff like TARP? (I accept your dispute of the 96% as being properly in response to me, but not all the other TARP stuff.)

BTW, you are the one who jumped into this trying to defend the actions of this and the previous administration wholesale.

Simply not true. Please don't paint me with some broad brush because you're too lazy to distinguish between one thing and another.

I repeat:

My opposition to some single aspect of an opinion posted here does not constitute whole-hearted endorsement of all opposition to the poster's views. Please refrain from treating it as the latter

[garo]

Ok so why don't you tell us what you think was done right on Sep 15 2008 and what was done wrong given the grave situation the US financial system was in at the point.

The big story on Sep 15 was Lehman and not AIG. That happened the same weekend but has since been renegotiated three times. The original terms of the agreement were actually quite okay. It is what has happened since then that is a problem.

BTW, Conrad speaks about TARP and that interview/article was the original subject of discussion so it matters not a whit that you claim that you are not talking about TARP.

PS: I feel that this discussion is going down the (rabbit)-hole again and I'm disinclined to get into another he said she said type thing.

[ewmayer]

Rolling Stonegadfly-reporter-in-chief Matt Taibbi is in Florida, researching a magazine piece on foreclosuregate and the systemic mortgage-issuance, chain-of-title and securitization fraud it is revealing:

Bank of America Admits Many Foreclosure Mistakes

So I'm on my way to Florida, to work on a story about the foreclosure crisis. On my way I wanted to post this bit of news, that Bank Of America has conceded to a significant percentage of errors in its review of pending foreclosures.

This clashes directly with what it said on October 18, when it said that an initial review indicated that "the basis for our foreclosure decisions is accurate." It now says that between 10 to 25 of the first few hundred foreclosures it reviewed were faulty. And that's only what the bank is admitting to.

There has been a tremendous effort in the media to blame this foreclosure crisis on homeowners who over-borrowed and the lawyers who represent them. (A Wall Street Journal article last week blaming a Jacksonville lawyer named James Kowalski for destroying the universe was a new low in crisis reporting and some of the worst journalism I've ever seen). The truth, and I'll get into this in detail when the magazine piece comes out, is that this foreclosure fiasco is a story about wide-scale bureaucratic fraud, with a kind of mortgage counterfeiting and a gangbang mentality with regard to the securitization process has infected the entire system. Since mortgages and mortgage-backed securities are in everything — in your pensions, in insurance portfolios, on the balance sheet of the Fed and its bailout facilities (making all Americans stakeholders in subprime notes) — a wave of phantom and/or mismarked mortgages has the potential to wreck the entire economy, which is why everyone from Ben Bernanke on down is shitting bricks as this story (and disclosures like this BOFA thing) unfolds. This business is, believe me, a LOT worse than even Bank of America is admitting, and it's not confined to just a few reckless banks. Anyway, more to come later.

My Comment: Meanwhile, our Dear Leadership and the Wall Street lapdog media are doing their utmost to try to downplay, mischaracterize (note the almost-universal avoidance even of the word "fraud"; instead we see a litany of politer liar-words like "mistake", "error", "glitch" and "technical issue" in most MSM coverage of the fiasco) and blame-shift onto someone else (typically the underwater borrowers, most of whom deserve to be foreclosed on, but few of whom are likely to have engaged in mass-scale fraud.

This Bloomberg piece is a perfect example of the calling-it-something-much-nicer-than-it-is when it comes to the mortgage fraud issue - I've boldfaced the weasel-words:

Bair Says Regulators Will Uncover More Flaws in Foreclosures

Regulators are likely to discover more problems related to loan servicing by some of the biggest banks as they probe claims that documents were mishandled, Federal Deposit Insurance Corp. Chairman Sheila Bair said.

“We are going to get into more and more problems with the issues that are surfacing now on servicing,” Bair said today at a housing conference in Arlington, Virginia. Resulting litigation could “ultimately be very damaging to our housing markets if it ends up prolonging those foreclosures that are necessary and justified,” she said. Bair didn’t provide details on what other problems she thought might arise.

JPMorgan Chase & Co., Bank of America Corp. and Ally Financial Inc.’s GMAC Mortgage unit are among loan servicers that temporarily halted foreclosures to review paperwork after court documents showed employees may have submitted affidavits without confirming their accuracy.

The FDIC, the Federal Reserve and the Office of the Comptroller of the Currency are conducting joint examinations, with teams inside the firms responsible for handling mortgage payments from homeowners. Results of those exams will determine the federal government’s next steps, Bair said.

“Ultimately this problem will require some type of global solution,” she said. “In developing that solution, I would suggest that all interested parties consider some type of triage on foreclosures” such as safe harbor relief for vacant properties or interest-rate reductions for borrowers.

Bair said she doesn’t think congressional legislation will be needed to address the issue.

My Comment: Right - why bother to try to change the law, when you can simply ignore it?

[Fusion_power]

If you buy property, you have to have some reasonable proof that is can be legally sold. This proof takes various forms depending on state laws. It may be a certificate of title or it may be a historical trace of all previous owners such as an 'abstract'. The underlying concept is that the land must be proven to be viable to be sold.

Mortgages do not have any viability requirements. There are no laws that prohibit selling them nor any proper means of certifying that they can be sold in the first place. This is the "law" that is not currently in existence. It is my opinion that mortgage derivatives should be sold in the market but ONLY if they are verified and certified first. This is not a black and white proposition. For example, is a no-money-down mortgage just as good as a mortgage that had a 25% down payment? Further, before a mortgage derivative could be rated by one of the ratings agencies, I think the rating agency should certify the viability in concrete terms. This has NOT been part of any ratings agency to date.

DarJones

[cheesehead]

Originally Posted by garo

Ok so why don't you tell us what you think was done right on Sep 15 2008 and what was done wrong given the grave situation the US financial system was in at the point.

Just before that weekend, AIG had suffered a sudden downgrading of its securities (due to ratings agencies starting, at last, to take a first step toward recognizing reality). Because it had previously taken advantage of its status as a top-rated firm to refrain from providing full collateral for CDSs, etc. that it had traded with other financial institutions, the downgrading meant that it suddenly had to provide that collateral which it had neglected to provide while top-rated. But AIG didn't have the cash to do so.

Because the CDSs were part of a vast web of highly-leveraged but unregulated "securities" that banks had traded with each other around the world, and because AIG was one of the largest traders of those "securities", an AIG collapse would have immediately brought about the collapse of numerous other financial institutions around the world. Their collapse would have spread to many others and shut down the world financial system.

Avoiding that worldwide collapse required that AIG somehow immediately get its hands on several dozen billion dollars. The only entity capable of supplying that was the government. (I think there may have been an appeal to private entities about supplying this, but they were unable to do so.) So, it was necessary for the Fed to set up an $85 billion credit line for AIG to prevent the collapse.

That Fed action was a thing "done right".

However, you wrote that it was "very irresponsible of Conrad to say that it was either TARP and the AIG bailout or another Great Depression." That is what I disagreed with, because without the AIG bailout, its collapse probably would have caused something similar in scope to the Great Depression.

As for whether TARP was a correct action to take as a necessary followup to the Sept. 15 AIG bailout, that is a separate matter. I explained my views on TARP earlier. I could post additional conclusions I make now, but not until we clear up this misunderstanding as to what I disagreed with and what I didn't.

The big story on Sep 15 was Lehman and not AIG.

Half-right.

First, Lehman's share price collapsed in early September. Then, as investors learned of the nature of the rot in Lehman's assets, they quickly looked at other companies holding similar assets. AIG was the biggest of those. As said earlier, ratings agencies began to recognize reality and downgraded AIG from its top-ranked status. That brought about the sudden Sept. 15 need for collateral etc. as mentioned above.

Yes, Lehman also declared bankruptcy then, and that was a big story, but we know now that it was the AIG predicament that was so much more serious that it required extraordinary action. (I think a Lehman-alone collapse could have been handled through normal bankruptcy procedures.) Had the latter part been immediately known to, and appreciated by, the public, that would have been the headline item just after that weekend.

[* edit - Time magazine's view: http://www.time.com/time/business/ar...841699,00.html ]

That happened the same weekend but has since been renegotiated three times.

What's happened since that weekend can be debated, but that's not what my "I disagree" applied to.

BTW, Conrad speaks about TARP and that interview/article was the original subject of discussion so it matters not a whit that you claim that you are not talking about TARP.

Cute.

You don't want to admit that you misinterpreted what I wrote, and then painted me with a broad-brush exaggeration of what my actual position was, so you just declare that what I claim doesn't matter.

No need to apologize; just stop doing it.

[cheesehead]

Originally Posted by Fusion_power

Mortgages do not have any viability requirements. There are no laws that prohibit selling them nor any proper means of certifying that they can be sold in the first place.

Might not that differ state-to-state?

[Fusion_power]

Might not that differ state-to-state?

It does not differ enough to matter. The big banks found numerous innovative ways to circumvent state laws. Otherwise, we would not have the current mortgage mess. The underlying fault - still unaddressed - is that crappy mortgages were written, securitized, and sold as investment grade securities. Until that legal hole is plugged we will not have a safe mortgage market.

DarJones

[ewmayer]

Chris Whalen of Institutional Risk Analytics has a must-read piece ... I was going to mention Ford Motor Company`s fine earnings report separately, but because Whalen also discusses it in his full article, I`ve added a link to the Ford news (the article also talks about VW) in the first quoted line:

Triple Down: Fannie, Freddie, and the Triumph of the Corporate State: "John Bull can stand many things but he cannot stand two per cent." That aphorism, quoted by Walter Bagehot, a 19th-century editor of The Economist, expressed savers` traditional distaste for very low interest rates. For the first three centuries of the Bank of England`s existence, 2% was indeed as low as the central bank was willing to let interest rates fall. Not even the Depression, nor the long Victorian period of stable prices, induced the bank to go any further. Some minimum return on capital was deemed to be required. -- Buttonwood, The Economist, September 16, 2010

Despite examples of the success of restructuring with [Ford] and even General Motors, the invidious cowards who inhabit Washington are unwilling to restructure the largest banks and GSEs. The reluctance comes partly from what truths restructuring will reveal. As a result, these same large zombie banks and the U.S. economy will continue to shrink under the weight of bad debt, public and private. Remember that the Dodd-Frank legislation was not so much about financial reform as protecting the housing GSEs.

Because President Barack Obama and the leaders of both political parties are unwilling to address the housing crisis and the wasting effects on the largest banks, there will be no growth and no net job creation in the U.S. for the next several years. And because the Obama White House is content to ignore the crisis facing millions of American homeowners, who are deep underwater and will eventually default on their loans, the efforts by the Fed to reflate the U.S. economy and particularly consumer spending will be futile. As Alan Meltzer noted to Tom Keene on Bloomberg Radio earlier this year: "This is not a monetary problem."

Indeed, the public embrace by the Federal Open Market Committee of further quantitative easing or "QE", instead of calling for the immediate restructuring of the largest zombie banks, actually threatens to push the U.S. into a deeper and far more dangerous economic path.

... Resolution and liquidation is how a free market economy regenerates. The trouble is, the approach taken with the large banks and the GSEs is precisely the opposite of that applied to smaller lenders. The policy of the Fed and Treasury with respect to the large banks is state socialism writ large, without even the pretense of a greater public good.

Forget Treasury Secretary Tim Geithner lying about the relatively small losses at American International Group (AIG), the fraud and obfuscation now underway in Washington to protect the TBTF banks and GSEs totals into the trillions of dollars and rises to the level of treason. And the sad part is that all of the temporizing and excuses by the Fed and the White House will be for naught. The zombie banks and GSEs alike will muddle along until the operational cost of servicing bad loans engulfs them. Then they will be bailed out -- again -- or restructured.

...Over the past several years, the large zombie banks actually looked better on our [Banking Stress Index] survey than the average, this due to overt subsidies, QE and low interest rates. But now the larger lenders are sinking under the weight of rising servicing costs, falling asset returns and other problems linked to mortgage securitizations. So while the Fed continues to try to revive the largest banks via massive monetary ease, the FOMC is at the same time preparing to do further damage to solvent lenders, insurers and other investors via QE2.

The IRA has spoken to a number of executives in banks and life insurance companies about the impact of QE and Fed zero interest rate policy on their income statements and balance sheets. The universal message: If rates do not return to "normal" levels by year-end, the pain in terms of reduced earnings on assets and the resultant negative cash flow will start to become so apparent that the financial markets will actually notice. In particular, we have been told that by year end several of the largest publicly traded banks and life insurers could show significant declines in net interest earnings due to QE -- declines driven by falling net interest income that may provoke ratings downgrades. And when this next systemic crisis comes -- whether in December or later in 2011 --- the full blame will belong to the members of the Bernanke Fed and the Obama Administration.

Being Technically Solvent

Back in July of 2008, John Hussman of the Hussman Funds wrote a great essay, "Bagehot`s Rule and the Cost of Being 'Technically Insolvent'" in which he reminded us all that while the British economist Walter Bagehot believed that central banks should lend aggressively in times of financial insolvency, the rate of the loans should be very high -- not zero as is the current FOMC policy. Hussman wrote:

"Bagehot`s name has surfaced in a few editorials in recent weeks, but they have invariably focused on the "lend freely" portion of his advice, while overlooking Bagehot`s admonition to impose costs, capital requirements, and other safeguards where public funds are concerned. In short, liquidity should be available to Fannie Mae and Freddie Mac, but the interest rates charged should be very high."

Of course the problem of adopting Bagehot`s rule regarding high real credit costs is that you immediately expose all of the insolvent financial institutions -- including the US Treasury. This the Obama Administration, Treasury Secretary Geithner and the functionaries on the FOMC will not do. But the examples of Ford, GM and the smaller banks in the U.S., most of which have restructured without bankruptcy, suggest that the path to economic renewal requires reorganization and losses to creditors.

In the case of the large banks and GSEs, this means a great deal of pain for investors and taxpayers alike when, no, if, these institutions are finally restructured. But that is the good news and thereby lies the path to national recovery. What we need from the Fed is some leadership on the issue of making the White House take responsibility for restructuring the economy. Barack Obama has got to stop blaming George Bush for a problem that was decades in the making and which now belongs to him alone. Get over it, Mr. President, and get to work.

[garo]

an AIG collapse would have immediately brought about the collapse of numerous other financial institutions around the world. Their collapse would have spread to many others and shut down the world financial system.

Prove it! I have read this line many times but have never seen any supporting evidence.