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Think this is going to end well?


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2009 Oct 31, 5:35am   6,741 views  12 comments

by bob2356   ➕follow (1)   💰tip   ignore  

I like the part about the totally bankrupt FDIC being in on it. I am sure that business owners will be much more willing to pay off underwater mortgages than homeowners. Right. Note that this kind of announcement is always made on a Friday too late to be picked up by the media. Perfect timing, more zombies for halloween.

From the Wall Street Journal:

Federal bank regulators issued guidelines allowing banks to keep loans on their books as "performing" even if the value of the underlying properties have fallen below the loan amount.

The volume of troubled commercial real-estate loans is skyrocketing. Regulators said that the rules were designed to encourage banks to restructure problem commercial mortgages with borrowers rather than foreclose on them. But the move has prompted criticism that regulators are simply prolonging the financial crisis by not forcing borrowers and lenders to confront, rather than delay, inevitable problems.

The guidelines, released on Friday by agencies including the Federal Deposit Insurance Corp.,

#housing

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1   tatupu70   2009 Oct 31, 7:21am  

It's a risk, no doubt, but not sure what the alternative is... If you look at the Feds policies as a whole, you can begin to understand what they are trying to do. They are keeping interest rates at a low level which allows banks to make lots of $$. Then also allowing the banks to keep the loans on the books so they can they slowly write them off each quarter with the earnings they are making off the low interest rates. In effect, they are earning their way out of hole.

My guess is that if they made them write them of now, then they wouldn't be solvent. And if we forced all the questionable banks to go insolvent, then it would kill any recovery that we have going...

2   thomas.wong87   2009 Oct 31, 7:56am  

"I like the part about the totally bankrupt FDIC being in on it."

Your deposit and check writing ability is protected by the FDIC to a limit, but do other commercial deposits at same banking institution have the same protection? Will your employer have the protection to write your payroll check or other vendor payments they must make to others? Many employers have a higher banking deposit balance to meet monthly operational costs.

Or the other side, will that payments they received from their customer actually have a viable deposit balance left. Without the cash inflows put higher risk in all businesses, which in turn fund employee spending.

Anyway you look at it.. its nasty stuff. Systemic Risk indeed.

3   Done!   2009 Oct 31, 8:04am  

another financial "Here hold my beer..." moment.

4   elliemae   2009 Oct 31, 9:01am  

"Federal bank regulators issued guidelines allowing banks to keep loans on their books as “performing” even if the value of the underlying properties have fallen below the loan amount."

...so, my dog isn't lazy... she's just performing as usual...

5   bob2356   2009 Oct 31, 10:07am  

tatupu70 says

It’s a risk, no doubt, but not sure what the alternative is… If you look at the Feds policies as a whole, you can begin to understand what they are trying to do. They are keeping interest rates at a low level which allows banks to make lots of $$. Then also allowing the banks to keep the loans on the books so they can they slowly write them off each quarter with the earnings they are making off the low interest rates. In effect, they are earning their way out of hole.
My guess is that if they made them write them of now, then they wouldn’t be solvent. And if we forced all the questionable banks to go insolvent, then it would kill any recovery that we have going…

This plan hasn't worked too well for Japan for the last 13 years. Wasn't the US in the recent past, especially Bernake, scolding the Japanese for not letting zombie banks fail? It's a lot harder when you are in the firing line isn't it Ben. The insolvent banks need to go under and let the banks that were well run take them over. There is no recovery until all the crap is dealt with and out of the system. It would be very painful, but short. Now we are looking at decades of pain. There are over 8000 fdic insured banks. Who knows how many are insolvent without playing accounting games and being propped up by the government. This is a totally useless expenditure of tax money and a complete waste of capital that could be productive. So far in this crisis absolutely no one has been held accountable except the taxpayer. Bondholders have gotten 100 cents on a dollar, shareholders are being propped up with taxpayer funds, executive compensation hasn't missed a beat. This isn't policy, it's national financial suicide.

6   tatupu70   2009 Oct 31, 10:35am  

bob2356 says

It would be very painful, but short.

What makes you think it would be short? It would be VERY painful and long.

While I don't agree with many of the decisions, I think you are overly harsh. I'd say that Lehman was held accountable. And again, I'm not sure the alternative is any better. The banks are still making money.

TARP is a loan--if you can keep the banks solvent, then they can pay you back. If you let them fail, then the taxpayer money truly is down the drain...

7   bob2356   2009 Nov 1, 9:27pm  

You are treating BANKS as a monolithic entity. First off Lehman, like Goldman Sachs, Bear Sterns, etc. was an investment bank. These banks have nothing at all to do with commercial banking. Why any of the investment banks got bailout money, other than being friends of Paulson, is a mystery. Last I checked something like 85% of Goldman's revenue was from trading stocks. They have no relevance whatsoever to the commercial banking system. If Goldman disappeared the only noticeable result would be a reduction in the volume on the various stock exchanges. The worst part is that most of the taxpayer money sunk into AIG went directly to the investment banks at full face value allowing massive bonuses to the bankers involved. The greatest game of three card monte ever played.

Within the commercial banking sector how many banks are really healthy is also a mystery. Since there has been a steady stream of failures of banks the government has declared well capitalized we probably won't know any time soon. But there are many banks large and small that really are in good shape. It makes no sense of any kind to prop up the zombie banks. Their assets of value can go to healthy banks and the investors NOT THE TAXPAYERS should take the losses on the bad assets. The investors reaped the rewards of the gravy years without offering to share with the taxpayers, why do they expect the taxpayers to share in the losses.

Short is a relative term. It will be much shorter than setting ourselves up for a lost decade (or two) like the Japanese have done. With the massive public debt and the much more massive unfunded future liabilities a lost decade would be a catastrophic financial disaster for the USA. The heart of capitalism is having poorly run businesses fail and be eaten up by newer, hungrier, more efficient competitors. Propping up failed businesses with taxpayer money has been tried many times throughout history. It has never worked, anywhere, anytime.

History doesn't repeat but it does rhyme-Mark Twain.

8   tatupu70   2009 Nov 1, 10:34pm  

bob2356 says

Their assets of value can go to healthy banks and the investors NOT THE TAXPAYERS should take the losses on the bad assets.

But with FDIC, it will be the taxpayers that take the losss. That is guaranteed--no pun intended.

bob2356 says

First off Lehman, like Goldman Sachs, Bear Sterns, etc. was an investment bank. These banks have nothing at all to do with commercial banking.

If only that were the case. With all the deregulation, it's all interconnected anymore. The investment banks were the ones buying up all the bundles of loans that created this mess. And if Goldman disappeared, it would be noticed...

In the abstract, I think you are right. But in the current situation, I don't. With the mess we're in, if you forced all the suspect banks to immediately fail, it would be catastrophic to the FDIC and would push us back into recession or depression. But if you keep interest rates low (which they would be anyway because we're in a recession), allow banks to generate good earnings through their normal operations, then a good deal of the questionable banks will be able to earn their way out of this bad patch and be saved. And keep the prospect of recovery going.

9   bob2356   2009 Nov 2, 8:06am  

"But with FDIC, it will be the taxpayers that take the losss. That is guaranteed–no pun intended. "

The FDIC only insures deposits. The stock and bondholders get nothing from the FDIC. At least the taxpayers won't shoulder the entire burden as we are doing now. No one would force any bank to fail. Like the savings and loan debacle the failures would be over a period of years as the weakest banks would fail first. Propping up the banks with taxpayer money will insure the failures happen over a much longer period of time (decades) causing the economy to limp along for many many years to come.

Most banks aren't lending so the interest rate is meaningless. All that is happening is the bailout money (from the taxpayer) and almost no interest loans (ditto) is being socked away to cover future losses. Losses that are being hidden any way possible so they can be trickled out a little at a time. Note that this will look banks look much better on paper than they really are which will result in many more rounds of obscene bonuses paid to bank executives courtesy of the taxpayer.

The one thing many banks (both commercial and investment) are doing is taking the very low interest rate money, which is being printed as fast as it can be, and buying treasuries in huge quantities. This is a scam on two levels. It means the government is financing the debt by printing money while making it look like there is artificial demand for treasuries. This keeps the interest rate on treasuries low with phony demand. It also means the taxpayer is giving the banks the difference between the loan rate and the rate of tbills. For absolutely nothing. The money is going around in circles with banks taking a cut every pass. There will be a day of reckoning for this when the foreign investors have had enough of this game and step out. It won't be pretty.

We are only out of recession (technically at best) because of huge amounts of money being borrowed/printed and spent by the federal government. It has to end at some point. There is no free lunch. Any money borrowed by the government is not available to capitalize business activity. Business activity is what generates the tax revenue to pay back the debts incurred by government. Worse is the fact that this money will have to be paid back out of future GDP numbers at some point. The economy will take the hit somewhere along the line unless the US defaults on tbills.

10   tatupu70   2009 Nov 2, 8:42am  

bob2356 says

We are only out of recession (technically at best) because of huge amounts of money being borrowed/printed and spent by the federal government

Yes--that is the point. That is by design. Government increases spending during times of recession to make up lost demand. That's not the problem. The problem is that during times of growth, the government can't control their spending (Clinton years excepted) to pay down the deficit.

bob2356 says

The FDIC only insures deposits. The stock and bondholders get nothing from the FDIC. At least the taxpayers won’t shoulder the entire burden as we are doing now

I'm not sure what you mean here. None of the TARP money goes to stockholders--stock price is determined by supply and demand. It might have gone up because the chances of bankruptcy decreased with a TARP loan, but none of the money went to stockholders. In any event, the cost to taxpayers would be much greater if you forced banks to fail rather than letting them earn their way back to acceptable reserves.

No doubt we have to make some tough decisions in the future. Ending two wars and taking a hard look at military spending would be a good start. It can be done though. It wasn't that long ago that we had a balanced budget--we can do it again

11   bob2356   2009 Nov 3, 3:03am  

Your comment was fdic would bail out the banks. fdic only bails out the depositors money in the banks not the bank itself. The fdic has nothing to do with tarp at all. You do realize that in theory the fdic is an insurance company (FEDERAL DEPOSIT INSURANCE COMPANY) with banks paying premiums. In theory NO taxpayer money is supposed to be involved at all. When the spam hits the fan this theory will fall apart rapidly. Anyway in theory bank failures cost the taxpayer nothing.

Of course the tarp money went to the stockholders. If a bank fails the stock would be worth zero. Tarp at least is supposed to be paid back (fat chance). There are billions of taxpayers dollars being thrown at the banks in many other forms that simply gifts.

Again no one is forcing anything. Allowing is the proper word. Many of these bailed out banks, again I am talking about the walking dead which do not represent the balance of the banks in the system, have no chance in hell of earning their way back to any approximation of solvency in our lifetimes. The bailouts to these institutions represents a gift from the taxpayers to the overpaid bank executives, stockholders , and bondholders as a payback for years of lobbying money given to the whores, oops politicians, in our political system.

12   tatupu70   2009 Nov 3, 3:54am  

bob2356 says

Your comment was fdic would bail out the banks. fdic only bails out the depositors money in the banks not the bank itself. The fdic has nothing to do with tarp at all. You do realize that in theory the fdic is an insurance company (FEDERAL DEPOSIT INSURANCE COMPANY) with banks paying premiums. In theory NO taxpayer money is supposed to be involved at all. When the spam hits the fan this theory will fall apart rapidly. Anyway in theory bank failures cost the taxpayer nothing

I didn't say that FDIC would bail out the banks. I said that if we allow many banks to fail, then the taxpayer will take the hit. The FDIC is severely underfunded right now, and if there is a wave of failures then it will take taxpayer funds to pay the depositors. See 1980's S&L crisis.

bob2356 says

Again no one is forcing anything. Allowing is the proper word. Many of these bailed out banks, again I am talking about the walking dead which do not represent the balance of the banks in the system, have no chance in hell of earning their way back to any approximation of solvency in our lifetimes. The bailouts to these institutions represents a gift from the taxpayers to the overpaid bank executives, stockholders , and bondholders as a payback for years of lobbying money given to the whores, oops politicians, in our political system.

But banks are being "allowed" to fail, as you put it. 9 more just a day or two ago. I agree that banks that have no chance to earn their way back to health should fail. And I think that is happening.

And I also agree that banks and Wall St. have way too much influence in Washington. As do pharmaceutical companies, the NRA, ABA, etc. I'd love to kick special interests out on their ass. But I don't see a conspiracy around every corner... And, in this case, I think the policy decisions are being made with the best interests of the country in mind.

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