Global Financial Crisis (Was: Subprime Meltdown)

[R.D. Silverman]

Originally Posted by ewmayer

Well, that wasn't long in coming:

IndyMac Seized by U.S. Regulators Amid Cash Crunch

Again, a so-called expert confuses solvency with liquidity. IndyMac made huge bets which went bad

Yep. It's about time that we passed some legislation making the
executives of such companies criminally responsible for their
fraudulent behavior. [And of course they are lining their own pockets
with bonuses even as they loot the company they work for and its
investors].

And the bailout of Fannie Mae and Freddie Mac has just been announced.....

[ewmayer]

Originally Posted by R.D. Silverman

And the bailout of Fannie Mae and Freddie Mac has just been announced.....

Yep: damn Eastern-time-zoners beat me to it:

New York Times: Treasury Acts to Shore Up Fannie Mae and Freddie Mac

WASHINGTON —Alarmed by the sharply eroding confidence in the nation’s two largest mortgage finance companies, the Bush administration on Sunday asked Congress to approve a sweeping rescue package that would give officials the power to inject billions of federal dollars into the beleaguered companies through investments and loans.

In a separate announcement, the Federal Reserve said that it would make one of its short-term lending programs available to the two companies, Fannie Mae and Freddie Mac. The Fed said that it had made its decision “to promote the availability of home mortgage credit during a period of stress in financial markets.”

An official said the Fed’s decision to permit the companies to borrow from its so-called discount window was approved at the request of the Treasury, but that it was temporary and would probably end once Congress approved Treasury’s plan. Some officials briefed on the plan said Congress could be asked to extend the total line of credit to the institutions to $300 billion.

Never believe a government statement to the effect that anything done at taxpayer expense is "only temporary". The opening of the Fed discount window to the investment banks was similarly "only temporary", but just last week Bernanke asked congress to extend its "only temporariness" at least through the end of the year.

In a statement, the chief executive of Freddie Mac, Richard F. Syron, said Monday that the proposal “should go a long way toward reassuring world markets that Freddie Mac and Fannie Mae will continue to support America’s homebuyers and renters.”

..."at taxpayer expense, of course." And, being a long-time renter myself, I am *very* curious to know how the GSEs have been "supporting" me all these years, as I, along my fellow live-within-your-means-heretics, try to save money for a home [all the while being punished for being a saver by the government's decade-long below-market interest rate policy] and wait on the sidelines, hoping the speculative housing bubble blown by said low interest rates [and to no small extent by homebuyer welfare programs in the form of the GSEs] to deflate enough so I can do so without putting myself into hock for the remainder of my earthly days.

Daniel Mudd, the chief executive of Fannie Mae, said in a statement that “Given the market turmoil, having options to access provisional sources of liquidity if needed will help to strengthen overall confidence in the market.”

..."and help us to keep collecting our fat paychecks and bonuses". {Love that the first Google-search result that came up for {"fannie mae" "daniel mudd" salary bonuses} was a Pravda article - given that these GSE insiders apparently get to hide their compensation from the more-obvious prying eyes, it seems these days Pravda is really living up to its name.]

And the NYT`s Paul Krugman`s take on this:

Fannie, Freddie and You

Here’s the background: Fannie Mae — the Federal National Mortgage Association — was created in the 1930s to facilitate homeownership by buying mortgages from banks, freeing up cash that could be used to make new loans. Fannie and Freddie Mac, which does pretty much the same thing, now finance most of the home loans being made in America.

The case against Fannie and Freddie begins with their peculiar status: although they’re private companies with stockholders and profits, they’re “government-sponsored enterprises” established by federal law, which means that they receive special privileges.

The most important of these privileges is implicit: it’s the belief of investors that if Fannie and Freddie are threatened with failure, the federal government will come to their rescue.

This implicit guarantee means that profits are privatized but losses are socialized. If Fannie and Freddie do well, their stockholders reap the benefits, but if things go badly, Washington picks up the tab. Heads they win, tails we lose.

Such one-way bets can encourage the taking of bad risks, because the downside is someone else’s problem. The classic example of how this can happen is the savings-and-loan crisis of the 1980s: S.& L. owners offered high interest rates to attract lots of federally insured deposits, then essentially gambled with the money. When many of their bets went bad, the feds ended up holding the bag. The eventual cleanup cost taxpayers more than $100 billion.

That amount is going to look like relative peanuts compared to [what I predict will be] the eventual tab for the bailout of Fannie and Freddie.

Here`s what absolutely baffles me - if the government wants to encourage homeownership as some kind of unwritten constitutional right, why do it via this circuitous route of creating not one but two for-profit companies and giving them an implicit Federal safety net and other special privileges worth billions of dollars per year? As Krugman notes, that ensures that any profit made by this federally-assisted lending accrues to the companies and their shareholders, who thus make profit not because they devised a cleverer business model than the next guy but simply by government fiat. Since the U.S. Treasury is on the hook [even if "only" implicitly] for any major losses, I say cut out the middleman and create a government-owned mortgage lending company backed by the Treasury. The potential revenues are massive - if it were the *government* holding the $5-trillion-plus mortgage portfolios currently held by Fannie and Freddie and collecting [say] 5-6% interest per annum on it, that represents a revenue stream of close to $300 billion per year - which amounts to approximately 10% of the U.S. Federal Budget. Of course the for-profit entities - including the banks who use Fannie and Freddie as a dumping ground for their "conforming" loans - would scream, and what is worse - might send lobbyists and curtail campaign contributions, so nothing of this sort is going to happen any time soon. We will continue to live with the worst of both worlds for the taxpayer - someone else makes the money in good years, and we assume the risk and pay through the nose in bad years. I sure didn't see anything in the above article detailing the bailout plan saying that the government would actually be getting anything of potential value by way of a quid pro quo.

[Wacky]

Originally Posted by ewmayer

I say cut out the middleman and create a government-owned mortgage lending company backed by the Treasury. The potential revenues are massive - if it were the *government* holding the $5-trillion-plus mortgage portfolios currently held by Fannie and Freddie and collecting [say] 5-6% interest per annum on it, that represents a revenue stream of close to $300 billion per year - which amounts to approximately 10% of the U.S. Federal Budget.

You have grossly oversimplified the situation. The homeowners are currently paying an interest rate somewhere in the range of 5-6%. However, that money had to come from somewhere. Fannie Mae gets that money by creating pools of mortgages and selling that ownership to investors who have no equity interest in Fannie Mae itself. This is no different than the situation where the originating bank used money from CDs, etc. to make the loan originally. And would not be fundamentally different if the US Treasury were to do so. The only difference is that the Treasury MIGHT be able to get a more favorable rate. However, greatly increasing the debt that would be on the Treasury books would also have the effect of increasing the risk and might result in an increased borrowing rate for ALL of the Treasury debt. Such an increase might well overshadow any potential advantage in having the direct government takeover.

Basically, Fannie Mae acts as an insurance company. They withhold a small amount of the interest on the home loans (I think that it is about 40 basis points) to offset both their operating costs and to cover the losses and then pass the remainder to the "real" investors who actually finance the mortgage.

[ewmayer]

Originally Posted by Wacky

You have grossly oversimplified the situation. The homeowners are currently paying an interest rate somewhere in the range of 5-6%. However, that money had to come from somewhere. Fannie Mae gets that money by creating pools of mortgages and selling that ownership to investors who have no equity interest in Fannie Mae itself. This is no different than the situation where the originating bank used money from CDs, etc. to make the loan originally. And would not be fundamentally different if the US Treasury were to do so. The only difference is that the Treasury MIGHT be able to get a more favorable rate. However, greatly increasing the debt that would be on the Treasury books would also have the effect of increasing the risk and might result in an increased borrowing rate for ALL of the Treasury debt. Such an increase might well overshadow any potential advantage in having the direct government takeover.

Perhaps I should have been clearer - you are correct that *suddenly* expanding the U.S. debt balance this way would likely play havoc with e.g. the treasury bond market - my point was more of a "why not do it this way from the get-go", e.g. from the inception of FNM in the great depression. At that point the government was nuking its balance sheet in so many ways that it would have been relatively easy to also add mortgage financing, and that would have at least provided a real expectation of positive returns, assuming one did it responsibly. ["Responsibly" being pretty much codified in the conforming-loan standards, anyway.]

Also, let's just look at some comparative numbers: During the Bush administration, the U.S. deficit has expanded by roughly $10 Trillion dollars, and *none* of that debt load is of the possible-future-returns variety, as mortgage debt would be - it's pure, unadulterated red ink. Based on your scenario, one would have expected that the U.S. Treasury would be having to pay usurious interest rates to get anyway to buy their paper. Are they? They are not. Not even close.

I'd happily trade half of that sea of pure-red-ink for the $5 Trillion conforming-mortgage portfolios held by Fannie and Freddie, which, even if I end up writing off 20% of [a default rate more typical of subprime and Alt-A, hence more like worst-case for conforming loans], still leaves me with $4 Trillion in interest-*paying* debt and only a $1 Trillion budget hole to fill. I issue the same $5 Trillion in T-bills as before, but earn a net 3-4% on $4 Trillion of it, and pay the current 2-3% on just $1 Trillion.

As it is, by backstopping the GSEs, the U.S. government assumes all the default risk of the above portfolio *anyway*, while getting precisely zilch in the way of returns. How is that in way, shape or form a better alternative?

[ewmayer]

IndyMac customers line up to withdraw money

The FDIC insures bank deposits of up to $100,000 per depositor and up to $250,000 for funds in retirement accounts such as an IRA.

Customers with uninsured deposits could begin making appointments to file a claim with the FDIC on Monday. The agency said it would pay unsecured depositors an advance dividend equal to half of the uninsured amount.

...

Customers will be informed about how their accounts are structured and may be eligible to recoup dollar-for-dollar beyond the $100,000 limit, he said.

If deposits aren't fully insured, customers will receive a receivership certificate and told about the process to possibly recoup more of their money.

Barr said it may take several years before the FDIC completely resolves the collapse and addresses customer claims.

"We have to completely unwind the affairs" of the bank, he said. "We may sell a portion to another bank, sell real estate. There may be lawsuits. There are a lot of different aspects to this."

He said the FDIC will waive any early withdrawal penalties for certificates of deposit, with interest paid up to the withdrawal date.

Gosh, how very generous of them to waive the early withdrawal fees - maybe they`ll even give a free toaster to everyone who had more than the guaranteed-insured amount and ends up losing money. "Lose more than half your uninsured principal and get a free toaster oven!"

Customer James Sherman said he also had more than $100,000 in the bank.

"This is my life savings here. I feel really horrible," he said.

Sherman said he was hoping to get 50 cents on the dollar above the federally insured limit, with the remainder possibly applied to his mortgage with IndyMac.

"What do you resort to now, putting money back in the mattress?" he asked.

You know, that`s no longer sounding like such a crazy idea ... as long as the mattress is in a relatively secure location, and the money is *real* money, not soon-to-be-worth-less-or-perhaps-even-worthless U.S. government Ponzi dollars, you could very well realize a nice rate of return on that. Just make sure to spread the bullion and coins out nice and flat, so the mattress doesn't get all lumpy and hard to sleep on.

Tengeri said he was hopeful about getting the remainder of his life savings from the bank.

"I'm keeping my fingers crossed," he said. "I have full trust in the U.S. government. It may take a little time but I'm not worried."

Right - you have full trust - that`s why you`re keeping your fingers crossed, right? "I have full faith and superstition in the U.S. government." Just keep reminding yourself of the unofficial FDIC pledge: "We guarantee you`ll up to $100,000 back in full ... we just don`t guarantee what you`ll be able to buy with it."


Jim Rogers: GSE bailout an "unmitigated disaster"

Taxpayers will be saddled with debt if Congress approves U.S. Treasury Secretary Henry Paulson`s request for the authority to buy unlimited stakes in and lend to Fannie Mae and Freddie Mac, Rogers said in a Bloomberg Television interview. Rogers is betting that Fannie Mae shares will keep tumbling.

``I don`t know where these guys get the audacity to take our money, taxpayer money, and buy stock in Fannie Mae,`` Rogers, 65, said in an interview from Singapore. ``So we`re going to bail out everybody else in the world. And it ruins the Federal Reserve`s balance sheet and it makes the dollar more vulnerable and it increases inflation.``

The U.S. economy is in a recession, possibly the worst since World War II, Rogers said.

Citigroup's $1.1 Trillion of Mysterious Assets Shadows Earnings

July 14 (Bloomberg) -- At an investor presentation in May, Citigroup Inc. Chief Executive Officer Vikram Pandit said shrinking the bank's $2.2 trillion balance sheet, the biggest in the U.S., was a cornerstone of his turnaround plan.

Nowhere mentioned in the accompanying 66-page handout were the additional $1.1 trillion of assets that New York-based Citigroup keeps off its books: trusts to sell mortgage-backed securities, financing vehicles to issue short-term debt and collateralized debt obligations, or CDOs, to repackage bonds.

Now, as Citigroup prepares to announce second-quarter results July 18, those off-balance-sheet assets, used by U.S. banks to expand lending without tying up capital, are casting a shadow over earnings. Since last September, at least $100 billion of assets have flooded back onto Citigroup`s balance sheet, accompanied by more than $7 billion of losses.

This is surely somewhat simplistic [and may in fact be optimistic as well], but if one assumes a similar writedown rate of 7% on the bank`s remaining off-balance-sheets assets, we are looking at a potential loss approaching $100 billion here. As the Bloomberg article goes on to detail, the writedowns on much of the remaining off-balance-sheet garbage may be much higher than that, in the range of 30% or more.

Banks are required to disclose their off-balance-sheet assets in annual reports. According to Citigroup`s most recent financial statement, filed in May, the bank`s $1.1 trillion of off-the-books assets as of March 31 included $760 billion of QSPEs and $363 billion of unconsolidated VIEs.

"Full Disclosure"

``Our quarterly financial report provides full disclosure of our off-balance-sheet assets, including our maximum exposure to assets in unconsolidated VIEs,`` Citigroup spokeswoman Shannon Bell said.

Oh sure - "full disclosure" - except in the [admittedly nitpicky technical] sense of "what these will likely prove to be worth when marked to market." Here, I`ll give you clue: "A heck of a lot less than their current fictitious valuation of $1.1 Trillion." And Citi`s peers like JP Morgan and Merrill Lynch are in similar situations. The writedowns are only getting started, it seems.


The Wall Street Examiner`s Russ Winter has a more conspiracy-theoretical take on the woes of the regional banks and why all this shit is hitting the fan "all of a sudden":

From Aaron Krowne’s Bank Implode-Meter comes a comment about IndyMac defaulted homebuilder loans, and the problems and costs associated with half constructed housing projects. []url=http://bankimplode.com/blog/2008/07/11/jp-morgan-to-buy-wachovia-in-bailout-scam/]Aaron also offers some comments on Wachovia[/url] who appears to have brought in a Paulsen [sic] crony from Goldman Sachs. This is probably significant to my general theory that the last six months of the Bush administration will mark one of the greatest periods of systematic looting in American history. Never again will so many assets be handed off to regulators and corrupt apparatcheks for “distribution” to the privileged. This may make the “privatization” of the Soviet Union to Russian oligarchs look like a cake walk. Aaron also mentions that fact that JP Morgan will likely make a move in the Southeast. Wachovia? Maybe, but there are also a slew of smaller regional banks in that region too.

In asking the question of who gets looted and who gets the distressed pickings, I think it is important to consider who is most exposed. The answer is the investment banks who have thin capital bases relative to their fictitious capital holdings and obligations. The biggest plum of all are the assets of GSE’s Fannie Mae and Freddie Mac. Therefore I think we are going to see them dropping one by one like flies. And it really does look like the next crisis is Lehman Brothers. It is not that LEH is terribly more exposed than the others, it’s just that they apparently drew the wrong straw. I will also mention that with enormous amounts of wealth already transferred to oil sheiks and Asians that you can look for them to be the new owners of many marked down American assets. They have the purse, and the only nationality or race that is important is the green. You can count on that as much as you can count on the sun going down at night.

I believe the pile on and stealing of American banks will happen at a very rapid pace, maybe even within just a few weeks. It really has to be a done deal by the end of this year. The events that tipped me off were wholesale downgrades of virtually all regional banks by Goldman Sachs, Citicorp and a chorus of lacky lapdogs in June. In addition the old Risklove rabble is running stock prices of banks into the ground with extremely aggressive short selling. For example short positions as % of float on June 15, (probably even higher now) : FHN 25.8%, CNB 36.3%, NCC 20.4%, SNV 19%, RF 12.3%, And now as if problems didn’t exist before, there is suddenly a panic recognition phase about Fannie Mae and Freddie Mac. What a coincidence! And what a coincidence that the overdue closure of IndyMac occurred this week. And next week we get a slew of 2nd quarter bank reports.

I`m not convinced about his regional-bank looting scenario, if for no other reason than that the major players with tentacles infiltrating Washington have much-surer ways of making dough from the demise of the regional banks, which avoids the risk of buying them outright, as some - perhaps a quite significant fraction - are bound to fail. Just look at the wild gyrations of the share price of Freddie Mac last Friday - if you`re Goldman Sachs, you short that sucker all the way down to Friday morning`s panic selloff, then within a few hours - as if by magic - you happen to cover your shorts around the low of $4, happen to suddenly wax optimistic and thus load up shares at that price, then your ex-CEO Hank Paulson happens to come on the tube and spew reassuring words to the effect of "failure cannot be allowed to happen", and the stock price doubles in a matter of hours. Hammerin` Hank goes on to announce a big-time bailout on Sunday, the stock happens to open sharply higher the following morning [see chart below] at which point you unload on the Aunt Millies and Uncle Bucks [a.k.a. the retail investors], who are left holding the bag as the stock quickly happens to resume selling off [and you happen to have reloaded your short positions at the same time you were dumping your shares at $10]. Not a bad way to make a buck, if you have insider access to the tea leaves. Not that I`m saying any such shady dealings actually occurred, mind you - after all, that would be "illegal", and we know Wall Street doesn`t do "illegal" - but a hypothetical "dream insider trader" could easily have realized a profit of 400-500% in a single trading day [from roughly noon Friday to noon today] in such a strictly-hypothetical-because-strictly-illegal-even-if-difficult-to-prove trading scenario. Heck, our hypothetical insider could have even [hypothetically] juiced his [hypothetical] profits by buying, shorting and selling on margin - a risky proposition, to be sure - unless you happen know who`s going to announce what, when, in advance of its actually happening to happen. Call it "fortunate happenstance", but don`t try this yourself at home, kids, because the SEC has issued a stern warning about this kind of thing. Would you like a stern SEC warning with your red herring on toast, kiddies?

And one of Russ` readers describes a much-more-plausible looting scenario [which could of course be combined with the above bear-raid-siren scenario, in a hypothetical twin-killing scenario]: Again note the tangled web of insider connections at work here:

Blackstone Group, the private equity firm, said that it would appoint Lord Nathaniel Charles Jacob Rothschild, a member of the banking dynasty, and Brian Mulroney, the former Canadian Prime Minister, to its board of directors ahead of its flotation.

http://business.timesonline.co.uk/to...cle1892785.ece

And now bank regulators are talking about removing regulatory restrictions on bank holding companies so that private equity firms can buy controlling interests in insolvent banks.

“Private-equity firms are now hatching a plan to provide a backdoor entry for sovereign wealth funds to U.S. retail banks. David Rubenstein, chief of the Carlyle Group, argued in an April speech that troubled U.S. banks are tempting investment targets because “sovereign wealth funds can’t do certain things because of their foreign status . . . private-equity groups can join forces with the funds to facilitate transactions.”

http://online.wsj.com/article/SB1215...ays_us_opinion

You do the math.

[ewmayer]

The Onion | Recession-Plagued Nation Demands New Bubble To Invest In

WASHINGTON—A panel of top business leaders testified before Congress about the worsening recession Monday, demanding the government provide Americans with a new irresponsible and largely illusory economic bubble in which to invest.

"What America needs right now is not more talk and long-term strategy, but a concrete way to create more imaginary wealth in the very immediate future," said Thomas Jenkins, CFO of the Boston-area Jenkins Financial Group, a bubble-based investment firm. "We are in a crisis, and that crisis demands an unviable short-term solution."

It would be merely hilarious satire if there weren’t so much truth in it. Alan “Mr. Bubble” Greenspan is probably taking the Onion’s clarion call for a new ginormous speculative investment bubble quite seriously – after all, nobody knows bubbles better than Mr. Bubble blows bubbles.

By the way, the "Little pieces of paper" bubble already happened, and amazingly, lasted nearly 200 years before beginning to deflate in the 1960s - they're called "dollars", and their value is rapidly shrinking as the pool of greater fools [a.k.a. Everlasting Buckstoppers] dries up.


NYTimes| The Prescient Are Few

HOW many mutual fund managers can consistently pick stocks that outperform the broad stock market averages — as opposed to just being lucky now and then?
Skip to next paragraph

Countless studies have addressed this question, and have concluded that very few managers have the ability to beat the market over the long term. Nevertheless, researchers have been unable to agree on how small that minority really is, and on whether it makes sense for investors to try to beat the market by buying shares of actively managed mutual funds.

A new study builds on this research by applying a sensitive statistical test borrowed from outside the investment world. It comes to a rather sad conclusion: There was once a small number of fund managers with genuine market-beating abilities, as judged by having past performance so good that their records could not be attributed to luck alone. But virtually none remain today. Index funds are the only rational alternative for almost all mutual fund investors, according to the study’s findings.

...

The statistical test featured in the study is known as the “False Discovery Rate,” and is used in fields as diverse as computational biology and astronomy. In effect, the method is designed to simultaneously avoid false positives and false negatives — in other words, conclusions that something is statistically significant when it is entirely random, and the reverse.

The more-common phrase for the False Discovery Rate is the "Bill Miller Coefficient".

[Uncwilly]

Originally Posted by ewmayer

IndyMac customers line up to withdraw money

Gosh, how very generous of them to waive the early withdrawal fees - maybe they`ll even give a free toaster to everyone who had more than the guaranteed-insured amount and ends up losing money. "Lose more than half your uninsured principal and get a free toaster oven!"

I fail to see the logic of rushing the bank, once the feds take it over. One will get the same amount of money today, tomorrow, or next week. I would wait and see the rate that the feds would pay. Other than that, go on-line and transfer it to ING or someplace else.

The $100,000 limit is not what it used to be, but in the area that IndyMac serves there are ~10 other significant chains that would boost FDIC coverage to $1,000,000. Plus there are a couple of dozen smaller banks, a dozen credit unions that most could get into, plus untold numbers of on-line banks. Add a spouse and use retirement fund options, and many people could, with accounts at multiple banks, get over $3,000,000 of FDIC coverage. If one keeps that much in cash and cash only, they are stupid.

Yahoo reports at least 9 other banks within 500m of IndyMac's headquaters, so even a lazy person could hit multiples. (one is a countrywide, even)

[ewmayer]

Originally Posted by Uncwilly

IThe $100,000 limit is not what it used to be, but in the area that IndyMac serves there are ~10 other significant chains that would boost FDIC coverage to $1,000,000.

That assumes that in the event of a bank failure, the insurer is in a position to cover the defaults. One of the things the credit/banking crisis has shown us is just how thinly many of these insurers are capitalized - apparently there is little in the way of effective minimum-capital regulation in this area. The soon-to-be-defunct monoline bond insures like Ambac and MBIA were both leveraged over 100-to-1, which allowed them to make fat profits when times were good and the default risk was [seen to be] vanishingly small. Those folks can't even survive a credit-rating-downgrade, much less a default by one of their major clients.

[ewmayer]

We have decided to bestow the coveted Moron of the Week award quite early this week, to previous multiple winner Ben Bernanke: As of yesterday Treasury Secretary Hank Paulson was still very much in the running due to his blatant lies about the GSEs Fannie Mae and Freddie Mac, but Ben simply hit one out of the metaphorical Moron park with his testimony to the Senate Banking Committee this morning.

Bernanke gloomy on housing, economy: Fed chairman says housing finance crisis and energy costs will hurt growth. Shares of troubled mortgage finance giants open sharply lower.

"The economy continues to face numerous difficulties, including ongoing strains in financial markets, declining house prices, a softening labor market, and rising prices of oil, food, and some other commodities," Bernanke told the Senate Banking Committee early Tuesday.

"...Many of these problems are a direct result of my misguided, idiotic, knee-jerk Fed interventions...so sorry, allow me to fall on my sword..."

Bernanke said the financial sector's problems are not the only problems facing the economy. "The financial headwinds on spending and economic activity have been compounded by rapid increases in the prices of energy and other commodities," he warned.

Here we go with the crank meteorology again. The spike in inflation is of course directly related to Bennie`s insane spate of rate-slashing in an effort to bail out the Wall Street big-money players, which further weakened an already-anemic dollar.

Bernanke added that spending has held up better than expected, helped by the Treasury's economic stimulus program, which has so far pumped $92 billion into the economy. At the same time, he warned that spending by consumers "seems likely to be restrained over coming quarters" and that businesses also are likely to be cautious with spending plans.

This is the credit bubble writ large - straight from the Greenspan playbook, another alleged finance genius confuses "debt expansion" with "economic growth". Hello? That`s precisely what got us into this mega-mess to begin with.

Despite Bernanke's gloomy outlook - his most pessimistic since he took office in 2006 - he said the Fed had raised its forecast for overall economic growth. It is now looking for 1% to 1.6% growth in 2008, up from its April forecast of 0.3% to 1.2% growth.

And now you're just pulling completely-invented Pollyanna numbers out of your ass, Ben. You have absolutely no reason to believe there will be any economic "growth" above any of your previous forecasts, and you know it. I`m glad at least one lawmaker [Sen. Jim Bunning] saw through the smoke and mirrors and basically ripped Bernanke a new one. [Fellow legislator and erstwhile independent presidential candidate Ron Paul is the only other one who seems to really get just how bad things are].

Bernanke, in response to a question from Sen. Richard Shelby, R-Ala., said he felt that IndyMac "was particularly weighed down with low-quality mortgages. In that respect its failure, barring acquisition by another firm that didn't occur, was inevitable."

"Particularly weighed down..." you mean it`s an isolated case, like this dirty dozen list of fellow "isolated cases"?

But he added that the banking system is well capitalized. "My concerns have turned less on the solvency of the institutions and more on their ability to provide credit necessary to keep the economy growing."

Oh god, not the tired "[insert bullshit positive-sounding modifier here] capitalized" lie - so if a bank is insolvent and hemorrhaging money from its rotten loan portfolio, it can still be "well capitalized"? How does that work, precisely? You mean, if the Fed gives it the lifeline of a place of the "temporary" emergency discount borrowing window? The one that has already eaten up over the half of the Fed's $800 Billion reserve capital? Oh yeah, that`s a great business model there.


GM Suspends Dividend, Will Cut Jobs to Raise $15 Billion Through Next Year:General Motors Corp., buffeted by a U.S. sales collapse and three years of losses, suspended its stock dividend, cut salaried worker costs by 20 percent and proposed selling assets to raise at least $15 billion in the next 18 months.

First time GM has cut the divvy since 1922 ... quite possibly looking at the final throes beginning here. Quite simply, GM will not survive in any form resembling its current one as an independent automaker.


Biggest oil price drop in 17 years: Crude falls $6.45 a barrel - 2nd largest price drop in dollar terms - as Fed chief indicates inflation and high fuel prices will cut into U.S. demand for oil.

As the article notes, in terms of *percentage*, the price drop was little more than a blip in historic terms. However, assuming Bush and Israel somehow manage to not start a war with Iran [at best a 50/50 proposition, IMO] and oil does continue to drop back toward [say] $100 in the coming months, this is a great example of a "be careful what you wish for" scenario. "You want lower oil prices ... well here ya go, you got lower oil prices ... of course they're lower as a result of YOUR FABULOUS BONUS PRIZE, behind door #2 ... an incredibly deep GLOBAL RECESSION!"


Interesting Factoid of the Day:

"IndyMac [Financial] was started in 1985 by Angelo Mozillo [sic] and David Loeb, founders of Countrywide, as Countrywide Mortgage Investment and then spun off in 1997 as an independent bank making mostly Alt-A mortgages too big to be sold to Fannie Mae or Freddie Mac. Its loans were somewhere between prime and subprime in quality. Teaser interest rates to less-than-prime credits, many without verification of income, and variable rate loans were not uncommon. The bank insisted it was not making subprime loans."

The rotten apple doesn't fall far from the tainted-money tree, it seems.

[Uncwilly]

Originally Posted by ewmayer

"IndyMac [Financial] was started in 1985 by Angelo Mozillo [sic] and David Loeb, founders of Countrywide, as Countrywide Mortgage Investment and then spun off in 1997 as an independent bank making mostly Alt-A mortgages too big to be sold to Fannie Mae or Freddie Mac. Its loans were somewhere between prime and subprime in quality. Teaser interest rates to less-than-prime credits, many without verification of income, and variable rate loans were not uncommon. The bank insisted it was not making subprime loans."

The rotten apple doesn't fall far from the tainted-money tree, it seems.

The attached street view from google, the building on the left is Countrywide, the one on the right is IndyMac's HQ.

[ewmayer]

Originally Posted by Uncwilly

The attached street view from google, the building on the left is Countrywide, the one on the right is IndyMac's HQ.

Nice ... That darker-toned low building in the middle must be Mozilo's personal tanning salon. That explains the bottled-water truck ... those 8-hour-long orange-glo(TM) tanning-bed sessions can make the tannee powerful' thirsty.

Oh, I found a link to Senator Jim Bunning's no-nonsense comments expressing his extreme skepticism about the Bernanke-led Fed's interventions to date and their request for even greater powers - methinks he must be a regular reader of Mish Shedlock's blog:

Bunning Statement To The Senate Banking Committee On The Federal Reserve Monetary Policy Report

Senate Banking Committee
Tuesday, July 15, 2008

By: Senator Jim Bunning

As Prepared For Delivery:

Thank you, Mr. Chairman. I know we have a lot of ground to cover today, but I want to say a few things on the topic of this hearing and of the next.

First, on monetary policy, I am deeply concerned about what the Fed has done in the last year and in the last decade. Chairman Greenspan’s easy money the late nineties and then following the tech bust inflated the housing bubble and created the mess we are in today. Chairman Bernanke’s easy money in the last year has undermined the dollar and sent oil to new record highs every few days, and almost doubling since the rate cuts started. Inflation is here and it is hurting average Americans.

Second, the Fed is asking for more power. But the Fed has proven they can not be trusted with the power they have. They get it wrong, do not use it, or stretch it further than it was ever supposed to go. As I said a moment ago, their monetary policy is a leading cause of the mess we are in. As regulators, it took them until yesterday to use power we gave them in 1994 to regulate all mortgage lenders. And they stretched their authority to buy 29 billion dollars of Bear Stearns assets so J.P. Morgan could buy Bear at a steep discount.

Now the Fed wants to be the systemic risk regulator. But the Fed is the systemic risk. Giving the Fed more power is like giving the neighborhood kid who broke your window playing baseball in the street a bigger bat and thinking that will fix the problem. I am not going to go along with that and will use all my powers as a Senator to stop any new powers going to the Fed. Instead, we should give them less to do so they can do it right, either by taking away their monetary policy responsibility or by requiring them to focus only on inflation.

Third and finally, since I expect we will try to get right to questions in the next hearing, let me say a few words about the G.S.E. bailout plan. When I picked up my newspaper yesterday, I thought I woke up in France. But no, it turns out socialism is alive and well in America. The Treasury Secretary is asking for a blank check to buy as much Fannie and Freddie debt or equity as he wants. The Fed’s purchase of Bear Stearns’ assets was amateur socialism compared to this.

And for this unprecedented intervention in the markets what assurances do we get that it will not happen again? None. We are in the process of passing a stronger regulator for the G.S.E.s, and that is important, but it allows them to continue in the current form. If they really do fail, should we let them go back to what they were doing before?

I will close with this question Mr. Chairman. Given what the Fed and Treasury did with Bear Stearns, and given what we are talking about here today, I have to wonder what the next government intervention in private enterprise will be. More importantly, where does it stop?