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#1
25-07-2008, 13:41
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You Know The Banking System Is Unsound When...
Found this one linked on another forum:
You Know The Banking System Is Unsound When... Mike "Mish" Shedlock Jul 24, 2008 1. Paulson appears on Face The Nation and says "Our banking system is a safe and a sound one." If the banking system was safe and sound, everyone would know it (or at least think it). There would be no need to say it. 2. Paulson says the list of troubled banks "is a very manageable situation". The reality is there are 90 banks on the list of problem banks. Indymac was not one of them until a month before it collapsed. How many other banks will magically appear on the list a month before they collapse? 3. In a Northern Rock moment, depositors at Indymac pull out their cash. Police had to be called in to ensure order. 4. Washington Mutual (WM), another troubled bank, refused to honor Indymac cashier's checks. The irony is it makes no sense for customers to pull insured deposits out of Indymac after it went into receivership. The second irony is the last place one would want to put those funds would be Washington Mutual. Eventually Washington Mutual decided it would take those checks but with an 8 week hold. Will Washington Mutual even be around 8 weeks from now? 5. Paulson asked for "Congressional authority to buy unlimited stakes in and lend to Fannie Mae (FNM) and Freddie Mac (FRE)" just days after he said "Financial Institutions Must Be Allowed To Fail". Obviously Paulson is reporting from the 5th dimension. In some alternate universe, his statements just might make sense. 6. Former Fed Governor William Poole says "Fannie Mae, Freddie Losses Makes Them Insolvent". 7. Paulson says Fannie Mae and Freddie Mac are "essential" because they represent the only "functioning" part of the home loan market. The firms own or guarantee about half of the $12 trillion in U.S. mortgages. Is it possible to have a sound banking system when the only "functioning" part of the mortgage market is insolvent? 8. Bernanke testified before Congress on monetary policy but did not comment on either money supply or interest rates. The word "money" did not appear at all in his testimony. The only time "interest rate" appeared in his testimony was in relation to consumer credit card rates. How can you have any reasonable economic policy when the Fed chairman is scared half to death to discuss interest rates and money supply? 9. The SEC issued a protective order to protect those most responsible for naked short selling. As long as the investment banks and brokers were making money engaging in naked shorting of stocks, there was no problem. However, when the bears began using the tactic against the big financials, it became time to selectively enforce the existing regulation. 10. The Fed takes emergency actions twice during options expirations week in regards to the discount window and rate cuts. 11. The SEC takes emergency action during options expirations week regarding short sales. 12. The Fed has implemented an alphabet soup of pawn shop lending facilities whereby the Fed accepts garbage as collateral in exchange for treasuries. Those new Fed lending facilities are called the Term Auction Facility (TAF), the Term Security Lending Facility (TSLF), and the Primary Dealer Credit Facility (PDCF). 13. Citigroup (C), Lehman (LEH), Morgan Stanley(MS), Goldman Sachs (GS) and Merrill Lynch (MER) all have a huge percentage of level 3 assets. Level 3 assets are commonly known as "marked to fantasy" assets. In other words, the value of those assets is significantly if not ridiculously overvalued in comparison to what those assets would fetch on the open market. It is debatable if any of the above firms survive in their present form. Some may not survive in any form. 14. Bernanke openly solicits private equity firms to invest in banks. Is this even close to a remotely normal action for Fed chairman to take? 15. Bear Stearns was taken over by JPMorgan (JPM) days after insuring investors it had plenty of capital. Fears are high that Lehman will suffer the same fate. Worse yet, the Fed had to guarantee the shotgun marriage between Bear Stearns and JP Morgan by providing as much as $30 billion in capital. JPMorgan is responsible for only the first 1/2 billion. Taxpayers are on the hook for all the rest. Was this a legal action for the Fed to take? Does the Fed care? 16. Citigroup needed a cash injection from Abu Dhabi and a second one elsewhere. Then after announcing it would not need more capital is raising still more. The latest news is Citigroup will sell $500 billion in assets. To who? At what price? 17. Merrill Lynch raised $6.6 billion in capital from Kuwait Mizuho, announced it did not need to raise more capital, then raised more capital a few week later. 18. Morgan Stanley sold a 9.9% equity stake to China International Corp. CEO John Mack compensated by not taking his bonus. How generous. Morgan Stanley fell from $72 to $37. Did CEO John Mack deserve a paycheck at all? 19. Bank of America (BAC) agreed to take over Countywide Financial (CFC) and twice announced Countrywide will add profits to B of A. Inquiring minds were asking "How the hell can Countrywide add to Bank of America earnings?" Here's how. Bank of America just announced it will not guarantee $38.1 billion in Countrywide debt. Questions over "Fraudulent Conveyance" are now surfacing. 20. Washington Mutual agreed to a death spiral cash infusion of $7 billion accepting an offer at $8.75 when the stock was over $13 at the time. Washington Mutual has since fallen in waterfall fashion from $40 and is now trading near $5.00 after a huge rally. 21. Shares of Ambac (ABK) fell from $90 to $2.50. Shares of MBIA (MBI) fell from $70 to $5. Sadly, the top three rating agencies kept their rating on the pair at AAA nearly all the way down. No one can believe anything the government sponsored rating agencies say. 22. In a panic set of moves, the Fed slashed interest rates from 5.25% to 2%. This was the fastest, steepest drop on record. Ironically, the Fed chairman spoke of inflation concerns the entire drop down. Bernanke clearly cannot tell the truth. He does not have to. Actions speak louder than words. 23. FDIC Chairman Sheila Bair said the FDIC is looking for ways to shore up its depleted deposit fund, including charging higher premiums on riskier brokered deposits. 24. There is roughly $6.84 Trillion in bank deposits. $2.60 Trillion of that is uninsured. There is only $53 billion in FDIC insurance to cover $6.84 Trillion in bank deposits. Indymac will eat up roughly $8 billion of that. 25. Of the $6.84 Trillion in bank deposits, the total cash on hand at banks is a mere $273.7 Billion. Where is the rest of the loot? The answer is in off balance sheet SIVs, imploding commercial real estate deals, Alt-A liar loans, Fannie Mae and Freddie Mac bonds, toggle bonds where debt is amazingly paid back with more debt, and all sorts of other silly (and arguably fraudulent) financial wizardry schemes that have bank and brokerage firms leveraged at 30-1 or more. Those loans cannot be paid back. What cannot be paid back will be defaulted on. If you did not know it before, you do now. The entire US banking system is insolvent. Mike Shedlock / Mish blog: Mish's Global Economic Trend Analysis email: Mish
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#2
25-07-2008, 21:02
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NAB is expecting a A$940 M loss
National Australia Bank (NAB) is estimating that it will lose up to $940 million AUD with investments in US banks, mostly due to sub-prime crisis.
It's a similar story with the other 3 major Australian banks. As per usual the customer is expected to pay for it. I'm certain banks will raise their interest rates even if the Reserve Bank doesn't.
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#3
26-07-2008, 11:25
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I keep hearing the doom and gloom and i dont nessesarly disagree but i have not lived to see a real ressesion and most people my age dont know what one is. When intrest rates are 10-15% then i think there will be some real doom and gloom. Untill then it just seems like endless bumps in the road.
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#4
26-07-2008, 22:49
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No one on the Forum was alive for the Depression - recessions are normal part of business cycle and only last 6 months - 2 years.
Should note that Dow went from 90 (ish) to 380 (ish) from 1925 to 1929 - the crash (the Dow dropped to 40 in 1932 - a 90% plummet in 3 years) and the resultant depression was largely over a year later when the Dow regained 90. It was not however until 1954 that 380 was recovered - 25 years after the peak! At least for now, the finacial powers that be are addressing the problem, albeit with tax payers money, but thats a hell of a lot more preferable than having another depression!! Oh - I would add a couple of charts look earily similar (parabolic) like the Dow did back then - namely oil and gold!! Last edited by 11 : 26-07-2008 at 22:51.
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#5
27-07-2008, 23:17
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QUOTE
Oh - I would add a couple of charts look earily similar (parabolic) like the Dow did back then - namely oil and gold!! UNQUOTE What do you think of Gold NOW? Too late??
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#6
28-07-2008, 06:43
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For me yes - don't think we'll have financial Armagedon and likely to see gold drift back to $850 since it failed to make it back through $1000 - however long term up trend remains intact (provided $830 holds).
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#7
28-07-2008, 07:07
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 My licensed financial adviser has all sorts of degrees plastered on his wall, so I think you can feel rest assured in believing what he says. His official financial advice is: Just put on your happy face and everything will be OK!  It's the "doom and gloomers" like Ron Paul who are causing all the problems, right? 
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LOS is warm, soft, smooth, and brown. 
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#8
28-07-2008, 07:19
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Take Freddie and Fannie out of the picture and the supply/demand curve for the portfolio money gets extremely steep. Loans, which are not easy to get now, would become extremely hard to get, rates would go up, and the lenders would basically just be cherry-picking the borrowers. That is a recipe for total disaster in an already weak market. It would cause property values to dive.
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LOS is warm, soft, smooth, and brown.
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#9
28-07-2008, 07:41
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As much as I detest the actions of the Fed, which clearly intends to monetize all the default problems away, I think one must consider the fact that nearly 99% of all the prime loans out there were made to people who are making their payments on time, and will continue to do so to the best of their abilities. Even with the sub-prime and alt-A loans, what is the default percentage? Most of those loans are still getting paid back.
The problems lie with the fact that when the debt was securitized, sub-prime paper was mixed in with prime paper, and Alt-A loans, which are not really prime paper were considered as such. Then the mix of high-risk paper and low-risk paper was bundled together, given an A rating and sold off. This was outright fraud on the part of the investment bankers that did it. It was outright negligence or worse, on the part of the supervisory agencies and rating agencies whose job it is to check this stuff out. That "worthless" paper that the Fed is taking as collateral is only worthless in terms of its' value on the open market because it is, basically, extremely difficult, maybe impossible, to tell how much of the mix is low-grade and how much is high grade, predict the future default rates, and determine what the real yield will be. Therefore, no one wants to touch it, and you would have to almost give it away to move it the open market. If the paper were liquidated on an open market, many banks would be insolvent as a result and would fail, their shareholders, and depositors would get burned, and a very few rich people, who were willing to buy a product of unknown quality, would literally reap immense, gigantic profits, because most of the loans would get paid off to them. So, it is not as if all those trillions of dollars of debt will never be paid. Some of it won't be, but most of it will. How many people do you know who make their payments every month, and are likely to continue to do so, and how many people do you know who are walking away from their home and letting the bank take it over? In the big picture, not that many. Therefore, although, in principle, I detest the actions of the Fed, in practice, for them to do otherwise, would cause a collapse of the banking system. Do we really want to go back to hiding our money under the mattress, and burying gold and silver coins in your back yard? By keeping the real estate market, which is dependent on the banking system, alive, new buyers come in, who are subjected to old-fashioned standards of loan underwriting, which really makes their loan paper valuable, and gradually, over some period of time, the old loose-money bad paper gets paid off/wrote off, and the financial system returns to a firm footing. In the meantime, inflation is the tax we all are charged for the fraud/negligence/mistakes of the recent past. But I am not against sending to jail some of those resposible for this mess. It think it ought to be done, to send a message about consequences for acts of negligence and fraud. Maybe they should start with an investigation into the people at the Fed, who neglected to exercise the supervisory powers entrusted to them.
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LOS is warm, soft, smooth, and brown.
Last edited by JayBee : 28-07-2008 at 07:53.
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#10
28-07-2008, 07:51
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... 2.3% ... up from 0.9% prior to sub-prime blow up (2006). (Bloomberg) Having a little reflection and (looking back at the 1980's commodity bubble/inflationary period) one thing stands out - interest rates! Real US (and all other G7) long end (bond) interest rates are now in real (inflation adjusted) terms NEGATIVE - is the bond market the next thing to collapse? Last edited by 11 : 28-07-2008 at 07:57.
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#11
28-07-2008, 08:56
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Thats one of the many problems.. Other ones include the fact that when an debt is packaged and sold from an origional lender, to 3rd parties, the origional lender has no interest in knowing if the debt can be paid. What kind of loan is it when there incentive is to give the loan and not to care about getting paid back. Hence NINJA loans, liar loans, etc. Then theres the problem that rating agencies have had thier fees paid by the originators of the loan, so its in the rating agencies interest to overstate the credit rating of these bonds. Again a horror story. Then theres the monolines who processed fees to insure all this mess.. Low low fees in a rising market but no one seems to have considered the possible failure of these credit bonds. And lastly you then have the incestuous relationship between wall street and government. You have the 'to big to fail' (which I dont agree with), you have 'implicit' government guarantee, you have tax payer bailouts so the entire population has to take a small loss to save a small population taking a huge loss. I see big government as wasteful and see no reason why they should be able to run these things more efficiently than the markets. Markets are a function of risk assessment, when theres bailouts theres no punishment for risk, by doing these things you eat into the very pillars of the system. Sadly sometimes things have to go bang and take out investors, sure its sad to hear that granny Jones lost her life savings in some blow up or failed bank, but perhaps granny Jones shouldnt be speculation in markets she doesnt understand, perhaps a bit of prudence about where people hold thier assets and the credit worthyness of the banking system is exactly what people need right now. Perhaps it is that very fear that the system needs to get back on track and the longer we postpone it, like a deflating Japan, the longer this pain is going to be with us. Perhaps a nation of ill informed amateur speculators gambling with their pensions is exactly part of the problem. Quote:
Bu you make it sound so Dickensian.. Would it really be so awful ?? Does it have to be so basic ?? Dont forget, without the inflation monster ravaging peoples savings, those that were buried under the back yard, and nestled in the floorboard under the mattress wouldnt be getting smaller every day, if price stability was around like it was pre FED (a dollar being worth 1 dollar in purchasing power for a few 100 years !!) Perhaps people like granny Jones wouldnt need to be dabbling in toxic financial alphabet soup that she doesnt understand, just to make her savings not evaporate before she wants to spend them. Basically the FM and FM, the credit bubble, these are huge issues that could well have the kind of knock on effects that change the very nature of the financial system. Thats the fear I was hollering about 2 - 3 years ago while the boom was in its later stages. Now the big questions that we have to ponder are.. Will we have deflation or inflation ?? (or some new horror in deflation of asset values, combined with inflation of consumables, that one is the worst of all worlds and I can see that dark cloud out there), do we think the government can regulate this problem away or will their actions exacerbate it over the longer term for milder pain now ?? and lastly how best to protect assets and triumph in these possible markets, which risk to hedge and which risk to leverage !!
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Men have only 2 emotional states, hungry and horny.. So ladies, if you see me without an erection, make me a sandwich.
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#12
28-07-2008, 09:06
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Most answers, like Kevs, look at recent performance, shorter term trendlines and charts, all of which are very valid.. But just consider for a second gold as the anti paper.. Consider the risks in the paper system and then wonder what a true 'flight to quality' might mean. From one of my funny papers the other morning Quote:
I think things move in waves.. Back and forth like tides.. And despite every bail out, despite the taxpayer being forced to buy bad debt they dont want (no one wants !!!) the tides will still move in and out. Trying to stop them is like King Canute shouting at the sea.
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Men have only 2 emotional states, hungry and horny.. So ladies, if you see me without an erection, make me a sandwich.
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#13
29-07-2008, 10:43
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Quote:
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__________________
LOS is warm, soft, smooth, and brown.
Last edited by JayBee : 29-07-2008 at 10:45.
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#14
29-07-2008, 11:07
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Everybody talks about GOLD. But in fact what you are buying in most cases is a piece of paper claiming to represent x amount of Gold.
Except if you are an Asian, hanging the golden chain around your neck, i.e. taking physical delivery. What percentage of the volume is actually done in physical gold? Were can I find trust worthy info about how the gold trade is actually done, who makes sure that physical Gold in the securitized quantities is actually there?? Why is a scenario vaguely similar to the subprime crisis inconceivable?
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#15
29-07-2008, 11:18
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You can buy at one of many places that hold physical gold on your behalf.. BullionVault.com is a well respected on.. Perth certs can be allocated or unallocated and are backed up by the faith of the western Oz government.. By the time Australia defaults then you need ammunition not gold.
I fail to see how you can link 'subprime' which was an obvious credit explosion based on cheap fiat money and a physical asset.
__________________
Men have only 2 emotional states, hungry and horny.. So ladies, if you see me without an erection, make me a sandwich.
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#16
29-07-2008, 11:26
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Ohh I 100% agree.. But it is fair to say that the ballooning derivates and other markets that simply didnt exist back then need to be counted in there somewhere.. They may even help the gold market in any mania stage by flooding hot money into it (probably near a peak).. But if you consider with the DOW alone that the gold DOW ratio for the 80's averaged about 5:1 then even on that metric alone discounting every other new market since then that still prices gold in the >2000 range. And thats for the entire 80s average not the spike peak.. Gold peaked back then at around 850 while the DOW was what 1000 ?? So the gold price was 85% of the DOW back then.. Or a bit over 9000 per ounce in todays DOW terms to compare the spike peak in that ratio.. I say thats still room to the upside.
__________________
Men have only 2 emotional states, hungry and horny.. So ladies, if you see me without an erection, make me a sandwich.
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#17
29-07-2008, 11:59
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Sure, I CAN buy physical Gold but my question was related to the vast majority of gold trades which are done on paper. If I buy x gold through my bank I get a confirmation which doesnt look different from a stock market transaction, right. That why I said, vaguely, vaguely is so inconceivable that trust in gold may be defrauded on a large scale too? Who makes sure that all the paper gold does not exceed the physical inventory? The same audit companies that assured us of AAA rating of mortgage backed securities, right ?? Nothing is inconceivable , is it?
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