Foreclosing on the Home ATM

Homeowners who treated their houses like cash machines, tapping the equity as home values rose, are among the most likely to end in foreclosure, even more than those who bought at housing’s peak, a new study finds.

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Myths of the Great Depression

Jim Puplava of the Financial Sense Newshour had a good interview with Robert Murphy summarizing some of the big picture points described in his book The Politically Incorrect Guide to the Great Depression and the New Deal.

Far from getting us out of the depression, Roosevelt’s “new deal” made things much worse. In fact, his “deal” wasn’t even new. He campaigned against Hoover by calling him “the biggest spendthrift in history” (which, in terms of American political history, was true). Then after he was elected, he proceeded to enact a supercharged version of many of the same, failed Keynesian pump-priming measures that Hoover tried (along with a few new and even worse ideas). Giant deficit spending, public works, wage and price controls, attempts to hold up agricultural prices, and the list goes on and on. The myth that Hoover was anything like a free market sympathizer goes hand in hand with the myth that Roosevelt “got us out of the great depression.” Instead, both Hoover and Roosevelt turned a recession into a great depression with a slew of interventionist policies, many of which were precisely the opposite of what should have been done.

Those sympathetic to Roosevelt sometimes describe his methodology as throwing all kinds of things against the wall to see what sticks. This would be bad enough if it were true as it would show that Roosevelt had no idea what he was doing. But it was actually much worse than this as described in painstaking (and painful to learn) detail by John T. Flynn in 1948 in The Roosevelt Myth.

Anyway, useful interview with Murphy to cover some of the big picture basics.

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How Science Becomes Common Knowledge

From PhD Comics

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You Can't Drink Yourself Sober

"You can't drink yourself sober... You can't leverage your way out of excess leverage and you can't borrow your way out of too much debt."

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Thugonomics

http://zerohedge.blogspot.com/2009/05/foia-disclosure-busts-paulson-geithner.html

Judicial Watch, which lucked out majorly on a FOIA request to the Treasury, has received several hundred pages of stunning revelations, among which are that Hank Paulson essentially used the same tactics that he used on Ken Lewis on a group of nine bankers at the October 13 meeting which apportioned government investments to the various "critical" banking institutions. The major disclosure was captured in a memo called CEO Talking Points, which delineates the continuous use of strongarming tactics by not just Paulson, but by Tim Geithner, and Sheila Bair, who were also present at the meetings. According to one of the Talking Points:

“If a capital infusion is not appealing, you should be aware that your regulator will require it in any circumstance. We don’t believe it is tenable to opt out because doing so would leave you vulnerable and exposed.”

Opting out would also implicate the banks that didn't opt out as being in worse shape thus exposing them to possible runs (either the kind of "silent run" that hit Continental Illinois in 1984 or something more overt). Put all the banks in the same boat and you make it less likely that money will run from the bailout queens to the ones that opted out. Not exactly the kind of openness and disclosure we were promised.

Meanwhile…

http://finance.yahoo.com/tech-ticker/article/248205/%22That%27s-Not-the-American-Way%22-Chrysler%27s-Bailout-and-the-Road-to-Ruin

Chrysler's plan to close about 25% of its dealers is the natural outcome of a series of very unnatural events surrounding its bankruptcy, says Howard Davidowitz, chairman of Davidowitz & Associates.

Specifically, Davidowitz was speaking about how the Chrysler bankruptcy was "hijacked" by the Federal government, which allegedly threaten creditors "if they didn't go along with the fiasco of turning the company over to the unsecured lenders."

Barack Obama's plan is to "sustain the union" in an effort to secure future votes in five key Midwestern states, Davidowitz says, without hesitation. "We the taxpayers are bailing out the union [and] bailing out Chrysler, which is an inefficient company that shouldn't survive and can't survive in the long run, anyway."

[…]

By propping up inefficient companies and keeping zombie banks alive, Davidowitz says "we are exactly on the same path as Japan," which is now two decades into its economic malaise.

But there's one key difference between the U.S. and Japan: While they had about $16 trillion in savings and a 19% savings rate when their bubble burst in 1989, the U.S. savings rate was negative a year ago, a now a relatively meager 4.2%.

"You know what we need to fix it: pain! We need 12-13% unemployment… Then in two years you can start to recover. We're never going to recover because the debt doesn't go away."

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Hussman on the Relaxing Stress Test

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Last week, financial stocks enjoyed a powerful advance and short squeeze on the announcement of the results of the “stress test” of major banks. It is important to begin by noting that this was not a regulatory procedure with teeth. It was initially a response to Congressional demands to introduce greater objectivity into the use of public capital for these bailouts, and gradually morphed into nothing more than a “confidence building” exercise. And keeping with the emphasis on keeping the numbers happy, as opposed to providing full and fair disclosure, the Wall Street Journal reported on Saturday, “The Federal Reserve significantly scaled back the size of the capital hole facing some of the nation's biggest banks shortly before concluding its stress tests, following two weeks of intense bargaining. In addition, according to bank and government officials, the Fed used a different measurement of bank-capital levels than analysts and investors had been expecting, resulting in much smaller capital deficits.”

To some extent, it is not possible to get full and fair disclosure using the method that regulators used in the first place, since it relied on banks' self-estimates of their potential losses in a further economic downturn. These of course being the same banks that made the bad loans, and have already proved themselves vastly incapable of loss estimation and risk management. Moreover, the Fed only asked for loss estimates for 2009 and 2010, not beyond – “Each participating firm was instructed to project potential losses on its loan, investment, and trading securities portfolios, including off-balance sheet commitments and contingent liabilities and exposures over the two-year horizon beginning with year-end 2008 financial statement data.” This period specifically excludes the window where we can expect the majority of “second wave” mortgage losses to be taken, as it does not capture any losses that will emerge as a result of mortgage resets from mid-2010, through 2011, and into 2012.

The “stress test” procedure also conveniently excludes any potential mark-to-market losses during 2009 and 2010, as banks “were instructed to estimate forward-looking, undiscounted credit losses, that is, losses due to failure to pay obligations (‘cash flow losses') rather than discounts related to mark-to-market values.”
Now, just think of this for a minute. Even if you assume that the “risk-weighted assets” of the banks are about two-thirds of their total assets (as the stress-test does), we're still looking at $7.8 trillion in total assets at risk in these banks, and despite being on the edge of insolvency only weeks ago, we are asked to believe that they will need less than 1% of this amount – $74.6 billion – of additional capital even in a worst case scenario. How do the stress tests arrive at this conclusion? 1) They underestimate potential losses by minimizing the horizon over which the losses would have to occur, excluding potential mark-to-market losses and restricting the loan losses to “cash flow” losses only; 2) They define capital well beyond tangible sources, to include about double what is available as Tier-1 common; 3) They include $362.9 billion in “resources other than capital” – essentially pre-provision net revenue expected to be earned by the banks over the coming two years to absorb potential losses; 4) They report the capital buffer that would be required after massive dilution in the common stock of these banks has already occurred.

As an example, Citigroup comes in with $119 billion in capital ($22 billion as Tier-1 common). Total assets are over $2.1 trillion, but the stress test assumes “risk weighted” assets of less than half that. Citi projects losses in 2009 and 2010 of $104.7 billion in a scenario where the unemployment rate reaches 10.3%. Citi assumes that it will earn $49 billion during that period which would partially absorb those losses, and that it will obtain $87 billion in Tier-1 from other capital sources, presumably including $33 billion of preferred that it would be willing to convert to common. Of course, Citi's entire market cap is only $22 billion, so the “$5.5 billion” that Citi is reported to need under the stress test is what it would require after a 5-to-1 dilution in its common stock (87+22/22). Essentially, we've got a company with a common equity buffer of just over 1% of total assets, that just 8 weeks ago was on the verge of receivership, and investors are urged to believe that there are enough voodoo dolls in the vault to make the company solvent even in a further weakened economy.

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Taxpayers Getting Hosed Yet Again

Fannie and Freddie will be money sink holes in 2010.

The Office of Management and Budget released a report yesterday on the budgets and proposed overhauls of Fannie Mae and Freddie Mac that included the possibility of liquidating their assets. But don't get your hopes up.

The two government run mortgage finance companies have been scandalously costly for tax-payers, costing Americans far more in bailout money than they ever saved in cheaper mortgages. The OMB says that the two companies will need at least $92.2 billion more in fiscal 2010. This is on top of the $78.2 billion in aid they've received since they were taken over by the government in September.

Meanwhile, the auto bailout is $83 billion and counting.

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You are a Landfill

This financial crisis is easy to understand. The irresponsible financial institutions dump their garbage on the Fed, and the Fed in turn dumps it on you.

Bear Stearns, AIG Dumped $74 Billion in Subprime, CDOs on Fed

April 24 (Bloomberg) -- The Federal Reserve took on more than $74 billion in subprime mortgages, depreciating commercial leases and other assets after Bear Stearns Cos. and American International Group Inc. collapsed.

In its biggest disclosure of the securities accepted to stabilize capital markets, the Fed said yesterday it had unrealized losses of $9.6 billion on the assets as of Dec. 31. The bonds, swaps and notes were taken in from Bear Stearns, once the fifth-biggest Wall Street firm by capitalization, and AIG, which had been the world’s largest insurer.

The losses on securities backed by assets such as home loans in Florida and California signal that U.S. taxpayers may be forced to reimburse the central bank through the Troubled Asset Relief Program, according to Christopher Whalen, managing director of Torrance, California-based Institutional Risk Analytics.

“The numbers basically confirm that Treasury is going to have to take some TARP money and reimburse the Fed,” said Whalen, whose financial-services research company analyzes banks for investors. “It is essentially up to the Treasury to get the Fed out of this.”

The central bank lent $2 trillion to financial institutions and has not disclosed information about most of the collateral backing those loans.

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The Treasury Bubble

Bloomberg reports that a soaring U.S. budget deficit will mean billions in bond sales.

With spending on unemployment insurance and other safety- net programs rising, the deficit is already at a record $956.8 billion six months into the fiscal year. To help close that gap, the Treasury Department has more than quadrupled borrowing, pushing the government deeper into debt.

“Tax receipts are just collapsing,” said Chris Ahrens, head of interest-rate strategy at UBS Securities LLC in Stamford, Connecticut, one of 16 primary dealers required to bid at Treasury auctions. The need to sell more debt “is a big issue in the Treasury market and it is ongoing. The surging budget deficit is the primary cause.”

The government will have to sell $2.4 trillion in new bills, notes and bonds in fiscal 2009, according to UBS. From October through December, the Treasury sold a record $569 billion, up from $82 billion in the same period a year earlier, and auctioned another $493 billion in the last quarter, up from $156 billion. That helps to make up for the drop in tax receipts, pay for the rise in spending and refinance maturing debt. Along with the principal, the sales add additional interest costs to the deficit for years to come.

At some point, the Treasury will find it more and more difficult to find enough buyers for all of its debt. This comes at a time when primary treasury dealers are already holding a record amount of treasuries.

The amount of Treasuries held by primary dealers has reached a record as the Federal Reserve buys U.S. debt to combat the recession and bring down consumer borrowing costs.

The bet on higher prices means that if prices fall, the move to bigger yields will be “violent,” according to UBS Securities LLC. UBS is one of the 16 primary dealers that trade directly with the Fed.

[…]

“If this alteration in dealer positions represents a secular change in balance-sheet risk management” it will be another case of unintended consequences, UBS strategists led by William O’Donnell wrote in a note to clients yesterday. “In striving to drive market rates lower, the Fed may have created the conditions for a more violent rise in yields.”

It won't happen any time soon but eventually the economy will start to turn around. Perhaps before then, the existing supply of treasuries will be massive and growing while T-bond holders are running for the exits. How much will the Fed be willing to buy when it sees interest rates cranking up?

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The Great Inflation Debate

Here is a good offering in defense of the "nasty inflation will come" position. The big counter argument presented by the "deflationists" hasn't changed. They argue that inflation fears are unfounded because we've already had our inflation. We created nasty asset bubbles and now the air is rushing out in all directions. So no matter how much money the Fed creates, it simply can't create nearly enough to fill the monetary black hole that's opening up as the entire economy delevers from absurd heights. And so the debate rages on.

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