“Where’s The Money??….!!”
By Larry Doyle on December 29, 2008 at 6:38 PM in Current Affairs
(bumped up by Susan from Sunday night late)
I hope that all our loyal readers and listeners have been able to enjoy a wee bit of rest and relaxation with friends and family during this holiday stretch. In the midst of connecting with friends, doing a little more reading and research, and watching a few movies, I pondered what may be an appropriate topic for a year end piece.
I thought about providing an outlook for 2009. I considered offering further opinions on Obama’s economic plans. Perhaps a review of the Bush economic program would be well received. Then, yesterday the lead editorial in my local newspaper asked “Where did the bailout money go?” I had my answer. In previous pieces I have touched upon why I thought there was a very good chance why this money would not flow through the system. I hesitate to continue to refer back to my piece published on November 12th (The Wall St. Model is Broken…and Won’t Soon be Fixed).
but for new readers and followers I do firmly believe it is as good as anything I have read or seen in any publication in explaining how we find ourselves in our current position.
Please allow me to digress for a second. I will admit that I am not a movie buff but I do enjoy films that focus on the success of underdogs, have a measure of financial intrigue, or perhaps a combination of the two. Not surprisingly a few of my favorite movies are, “Rocky”, “Jerry MaGuire”, and “The Sting”.
Early on Rocky, in the role of legbreaker, intimidates a longshoreman and in a very threatening fashion demands, “where’s the money.” Rod Tidwell implores Jerry Maguire to “show me the money!”. At the climax of “The Sting”, Doyle Lonnegan totally enraged rushes the window in the racing parlor and demands to know, “where’s my money”. If only our current economy were merely a movie. That said, still so many in our country after disapproving of a $700 billion rescue package want to know “where’s the money?”
In large measure our mainstream media has done an exceedingly poor job as to highlighting the dynamics at work in the banking system. I will utilize a tape from a high profile financial show to reveal how the media is largely pandering to the public on this topic. Prior to doing that, though, let me get very detailed in answering the question as to “where’s the money?”
The business of banks is to lend money and in so doing they provide the liquidity to keep our economy moving. The banks lend money in a number of sectors but they can be summarized as follows: credit cards, residential mortgages, commercial mortgages, corporate loans. In addition to their lending role, most banks maintain a separate investment portfolio to further augment their revenue.
We have maintained that as a result of these investment activities banks retained a wide array of what are now qualified as “toxic mortgage assets”. While globally banks and investment banks have taken $1 trillion in write-downs on these assets, by my estimation and confirmed by independent research and analytics there are likely at least another $750 billion in write-downs yet to take on these assets.
If those write-downs were all we had to worry about we would probably be doing all right. Let’s get more detailed in regard to the consumer and corporate lending and why banks are hoarding cash.
Credit Cards: at end of 2007, banks were experiencing chargeoffs against delinquent cards of app 4.5%. At this point in time chargeoffs are app 7% (a full 50% increase year over year) and projections for 2009 have chargeoffs moving toward 10%.
Commercial Mortgages: this sector has benefitted from a lack of speculative development and as a result has only experienced a default rate of app 1%. However, with expectations of potentially 20% of retailers filing bankruptcy, space in many retail malls will definitely be increasingly vacant. Additionally there will be increased vacancy rates in many office buildings with increased unemployment. There are also app $500 billion if not higher in commercial loans due in the next three years. It is almost certain that there will be an increased number of these loans that will not be refinanced forcing defaults. Overall default rates in this sector could easily triple.
Residential Mortgages: there are 11 months worth of homes currently on the market. There has been a 40% increase in foreclosures year over year, and with an increase in unemployment in 2009 there will be more foreclosures in 2009. More pain.
Corporate Lending: independent research from a variety of firms is indicating that corporate credit defaults will double to app 5% and will triple to app 10% for the most speculative credits.
The ratio of total debt/GDP has increased by app 40% over the last ten years from app 250% to 340%.
How does our banking system respond to a rapidly rising level of defaults and write-downs? They dramatically increase their level of reserves, they increase the cost of credit, and they allocate future credit much more sparingly.
If it were merely these asset classes listed above perhaps our system would be able to recover in a relatively rapid fashion. However, the massive development of the CDS (credit derivatives market) market is the 800 pound gorilla that truly has the banking system and the regulators spooked. The CDS market was developed as a means of insuring credit and thus managing risk. However, the CDS market has grown so far beyond the size of the underlying markets that they were intended to insure that it has gone from managing risk to creating risk. (To further clarify as an example if GE had $1 billion in outstanding debt, it may seem prudent that there only be $ 1 billion in CDS on GE debt. However there are multiples of that as market players have taken to using CDS not only for hedging but for speculating).
The CDS market is app $50 trillion in size and with expected defaults across sectors to move into the 5-10% range there will be an expected transfer of payments between counterparties of $2.5 trillion to $5 trillion. Granted there will be some netting in some of these payments but the real concern is that some entities that will be net payers will not be able to perform thus causing further losses and risks to the overall financial system. This scenario is exactly what is occurring with AIG.
Add the risk of default in payments from CDS on top of the losses expected in the other asset classes and thus, “banks are hoarding cash” and trying to add capital by finding cheap deposits (thus the use of money for bank mergers PNC buying National City, JPM buying Washington Mutual, Wells Fargo buying Wachovia) to protect themselves.
Thus, “where’s the money?” It has already been lent and increasingly won’t be returned. Thus reserves are being built against these current and expected losses. Sorry to be the bearer of bad news but them’s the facts. You will not hear this on your favorite cable shows or or in your local papers.
In fact while Congress and many others in the public eye will scream at the banks, the banking regulators (FDIC and Office of Comptroller of the Currency) are telling the banks to grow their reserves. There have been 25 banks that have closed to date and there are another 200 that are on watch.
If you care to be pandered to please check out the attached video with Mike Barnicle and Jim Cramer from one of the high profile financial channels filling air time but not truly addressing the question of “where’s the money?”
Visit msnbc.com for Breaking News, World News, and News about the Economy
In Joe Friday fashion, if you just want the facts, then check in with LD here at NQ. Please join us tonight to discuss these topics and so much more on LD’s Dollars and Sense at 8pm.
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In the show, you mentioned the seminal moment was 911 and Grenspan reducing the interest rate.
I agree but would add the SEC April 28 2004 agency ruling where they relaxed the Net Capital Rule which allowed the investment backs to leverage above the traditional 10/1. Bear Stearns went 33/1 and went underwater.
Excellent point. Always on the top of your game.
LD, if the “Find that
ManMoney” is being used as reserve funding(?), and that money being “parked”, might it be a prudent choice for the “little guy” be to invested in where the money IS?After losing 45% of the portfolio on the stock side, I am wondering where the Bond Market will take the hit.
Sorry I missed the show,I will listen to the podcast. I was putting the tree away.
Teak…we addressed some outlooks for 2009 on the show. Let me know if you have questions that I can address if they were not addressed on the show.
Hope you find the show informative.
Thanks LD.
wierd… the close made the rest blue.
LD, when you speak of the technicals of a stock is that basically referring to points of resistance?
Just….nope. The technicals measures the degree of buying vs selling.
A resistance point is a price level that a security, say a stock, has a difficult time penetrating over some defined period of time. For example if every ime a stock reaches $80 it sells off then that level becomes a resistance level.
The flip side to resistance is support. If that stock bounces off $40 then that is a support level. Market “technicians” focus primarily on this compoent in making market calls.
Technicals in the housing market are currently very weak as sellers far outnumber buyers. As I indicated in my show we ahve app 11 months worth of houisng supply in the real estate market. Thus the technicals are very weak.
Understood??
How much weight do you assign to the Baltic Dry Index (BDI) when trying to ascertain downturns & upturns in global trade? Are there better indicators? It looks so bad right now I wonder if enough grain is moving to fed people & livestock stricken by drought/flooding etc. Or am I not interpreting it correctly? I know dry bulk carriers move other goods besides grain (coal/iron ore/etc) Was there a lot of hoarding taking place in dry commodities prior to the slowdown? It’s hard for me to believe that everything just sort of ground to a halt within a 50 day time frame, especially on a necessity like grain. If I’m viewing this correctly it scares me because if people aren’t eating there will be a lot of suffering & social unrest.
BINGO.
I CALL IT HIDING NOT HOARDING. LETS’ PRETEND IT DOESN’T EXIST SO THEY CAN GET TOP DOLLAR FROM A PERCEIVED SCARCITY. GROWERS LIKE TO DO THIS TOO. SEND IT TO THE PORTS AND LET IT SIT FOR A FEW YEARS SO THEY CAN GET THEIR PRICE FROM SCARCITY PERCEPTIONS.
Just…
I have indicated that you can expect two things fromme here at NQ.
1. honesty
2. selling nothing
I do not actively track the BDI. I appreciate the color that our esteemed colleague, Rolling_Thunder provides. I find that to be helpful and informative and hopefully you do as well.
I will put the BDI on the list to check. I do know that from a very broad perspective that shipping activity hsa ground to a halt.
Thanks for providing this prompt.
I enjoy your questions.
You mentioned in your “Wall Street model is broken…” (and here) that actual federal commitments are +1 trillion with perhaps another 2.5-5 trillion in CDS’s losses. I’ve heard elsewhere, figures excess of 7 trillion dollars. These are very large numbers. How can our economy absorb such loses? Does it not on the face of it look to be hard times ahead?
It’s more like 9 trillion and going up everyday. It could be over 10T by now.
OOPs
I need to clarify that the 10 trillion is the national debt accumulated in the past several years.
Interested…
I need to be very careful in throwing out these numbers given their magnitude.
let me try to clarify right here.
Globally banks have taken $1 trillion in writedowns (losses) on assets/securities on their books. (CDOS, loans, etc)
There are an estimated additional $750 billion in losses in the banking system.
There are expected $2.5 to $5 trillion in transfer payments on CDS positions. Who knows how much and to what degree these payments will fail to be made.
There have been $8 trillion + worht of capital injections and commitments made to the financial system overall in the form of 1. capital injected into banks in the form of equity 2. capital utilized to backstop the commercial paper market
3. capital injected into AIG 4. capital injected into Freddie Mac and Fannie Mae 5. capital provided to JPM to facilitate the takeover of Bear Stearns
….and more
This $8 trillion is capital already provided and in some cases committed but not yet delivered. Some of this capital is in the form of equity and some in the form of loans. some we may lose, some will be returned, and some may actually generate a positive return although given the current state of the market I am not counting on it.
I hope this clarifies the situation for you. I appreciate your raising it as there is no doubt it can all get very hazy.
By injecting this capital the fed and the treasury are trying to buy “time” to allow revenues to be generated that will in turn be utilized to offset expected losses and writedowns. I hope that makes sense.
Yes, 2009 will be a very challenging year. I hope through this forum that we can provide further insights for people.
ld/
I understand what your saying, the monies are not actually lost yet (or even spent) and investments to prop up institutions may yet see a return or be paid back. Granted, we’ll see, but my counter is that we really don’t know how much exposure players have to assets of dubious value. There seems to be the assumption that if we throw enough money at it, even if we don’t understand the scale of the problem, it will go away eventually.
By the way, your article linked above is a very fine analysis of the evolution of mortgage and CDO markets. I would hope more people would have a chance to read and consider it, whether they argee with all your points or not.
thanks for taking the time to respond,
Interested,
Thanks for your thoughtful response and kind words about the previous piece from November 12th. I am glad that you found it informative.
Look forward to engaging you further as we move into ‘09.
The money went poof. It was never meant to help consumers, but the financial system.
R2D2,
It does seem as if it went poof. Actually by providing this capital the Fed and Treasury were trying to prevent “runs on the bank” that would have likely occurred as some of the larger banks failed. Banks that would have likely failed include, Washington Mutual (taken over by JP Morgan), National City Bank of Cleveland (taken over by Pittsburgh National), and Wachovia (taken over by Wells Fargo).
If those banks went down, there very likely would have been “runs” on many other banks that would have drained liquidity from the banking system and would have caused some degree of panic and significant “psychological” damage.
This does not provide much comfort to somebody looking for a loan but in my opinion this was the scenario that the Fed/Treasury were looking to avoid.
LD, I “get” the resistance idea & have used that in some of my trades but I will have to read up on the “technicals” because NO I don’t get it…in order for someone to “sell” doesn’t someone else have to “buy”? I don’t get how one exists without the other & I don’t think you’re talking about volume. Sorry. Your example of the housing supply, I understand that, however when I try to translate it to stocks things get fuzzy…does it mean the “bid” & the “ask” are too far apart? is it the amount of the difference? Is this like “oversold” is opposite of “overbought”? which may as well be a zen koan in my mind. I will try to read up on it.
Just…i understand that the technicals can seem a little nebulous. “Overbought” and “oversold” are the terms used to define technicals in a security at the extremes.
There truly aren’t figures or statistics that can be looked up to determine. Often times it is a feel more than anything else based upon volume and speed of a market move ovr a certain time period.
No takers on my Baltic Dry Index question(s)?
My reply got bumped. I’ll try later on.
I can’t repost as I’m getting an error saying that the article has already been posted.
Help Susan!
Great show and it gets better all the time, but just some confusion to clear up. You said commercial is doing ok at the moment. I beg to differ. High net worth, high fico borrowers of commercial loans are being denied because there is no money for them either. Lenders are sitting on their money and will not lend. Failed banks seized by FDIC are bundling the high balance commercial notes and selling them off to one buyer. There are no loans for commercial borrowers unless it’s a standing apartment building in a good area of a metroplois. Owners of property who had loans from failed banks can’t get new loans and end up losing property valued in the millions. Cash is king so lending is not happening now. It’s very painful for developers not to be able to get loans on good projects or to refi their note once it balloons. The best of borrowers and projects get denied. There is so much fear that no lender wants to risk loaning on anything beyond apartment buildings. Strip malls and office buildings are also tier one as are apartment buildings but the economy has affected the ability to get loans for these now too because of the vacancy rate increasing. Almost all tier one are being denied except apartment complexes. And those are down as low as 65% LTV. The ramifications of this may not have shown up yet, but it will be far reaching. This attitude of sitting on the money is creating more problems for the economy. I understand the fear but commercial property is not apt to deflate in value. They are still getting at least 2% increase in value per year.
I do like your focus for the show though. That being a wide view of the economy and how it affects us all.
Rolling….
Great color. I need to be very careful in my delivery.
I was trying to highlight that “to this point” commercial properties have held up very well in terms of defaults only being 1%. I also was trying to highlight that there has not been a lot of “speculative” development of commercial space, especially relative to residential development.
Beyond that, though, I was trying to highlight that this default rate will certainly head higher given the following:
1.retailers declaring bankruptcy thus vacating space in malls..
2. companies vacating space in office buildings with rising unemployment
3. $500 billion+ (I have seen stats ranging as high as $1 trillion) in loans maturing over the next three years. Who knows how much of this paper will be able to be refinanced.
Your color is extremely enlightening and deeply appreciated by me and I am sure by many others.
I also very much appreciate the plug for the show.
Given all of these developments it is not a stretch to see default rates triple if not move higher than that. Against this backdrop it should be no surprize that the real estate crowd has already been to Washington to seek assistance.
Yes I see now LD. I must have missed this point by not reading this carefully.
It has already begun though. 1 trillion in defaults is not far off the mark. Commercial loans are from 1 - 100 million per loan so it easily adds up. It’s just that they can’t get new loans because lenders are ’sitting on their cash’.
This would have been a great case for Hillary as she was big on loosening up funds for direct loans.
Incidently, one of the biggest malls in my western state not affected by the boom to bust, had MANY closed stores this season. It was eerie. After hitting bottom the only way to go is up.
But your show is packed with goodies and bears listening to a second time. You provide a great service in educating the lay person which is very much needed. Most people don’t understand finances and the market in all it’s aspects. So keep up the good work!
Rolling…..My pleasure. Glad that you find the show and my work informative and helpful. I enjoy doing it.
The best form of advertising is always “word of mouth” so hopefully the word will spread!!
Thanks again.
thanks LD for another great article…
Major retailers heading to DC for their own bailout….What’s next Casinos in Vegas?
Economists don’t know much, do they? Even Paul Krugman has lost the thread. Mish Shedlock shows why economists are the last people we should be listening to on the economy:
http://globaleconomicanalysis.blogspot.com/2008/12/krugman-still-wrong-after-all-these.html
Mountainaires…Thanks for sharing.
If Obama had not been so greedy during his campaign, some of the money he AMASSED (yet to be determined where and who it all came from) could have gone to charitable places instead of squaundering it on himself. Perhaps that is where he is getting his money to travel to Hawaii in very grand style, from the “little people’s donations” (no oversight on his campaign donations I hear even though many from non-U.S. sources).
I believe Obama did not get his money from Grass Roots donations, yes, some of them, but a large bulk is from George Soros type people who know how to scam the system and were/are the backbone of Obama’s campaign.
Obama could not have spent all the money he got this past year, even with all the buying of super-delegates and stealing of caucuses and the election. Super-delegates can be bought cheap. So where is the fortune he got? The DNC says it is broke. If Obama was as “charitable” as he pretends to be, he should have told his Obots to give the money to help others and possibly help the economy, not feed the ego of their Fuhrer like they have done. He is again traveling to Hawaii and no one can ask questions or bother him at all. Sounds like Bush III, but Bush II only had to go to Crawford TX to dodge the bullets, Obama has to go a little farther to get away from it all.
…correct me if I’m wrong, but Obama can’t seem to find a way to help his own blood brother out. Maybe he doesn’t trust the guy (sic).
Please provide detailed information that proves your accusations. If you have none, then stop spreading lies. Just because you don’t like Obama, doesn’t mean you have to lie about him.
I guess that this does deal with money but not in the context of how we are discussing.
I would guess that an open thread or another post is probably a better forum.
….but thanks for sharing…
yes
All I know is there has been alot of dishonesty and greed going on for quite some time and paybacks are a BITCH. Many people have been living beyond their means for quite some time and maybe this is what is needed for people to stop it.
However, high net worth, high liquidity people Not living beyond their means are going under too. The lack of credit is creating systemic failure for everyone. Remember Michael Jackson and Ed McMahons failure was due to an inability to get funds to refi their high balanced loans because lenders are not loaning. In this market who would loan?
LD, re your response to r2d2: I don’t think the deal between Wachovia & Wells Fargo is complete…lots of buzz Wells may back out. Gee Wizz I hope Wachovia doesn’t go under…I have heard (but have not confirmed) that “in a pinch” FDIC only insures deposits within maximums & NOT necessarily accumulated interest. If Wachovia crashes what would happen to its brokerage accounts? Go bye bye? Check out SPIC “Why we are NOT the FDIC” SPIC apparently only has a billion+ in reserve. I try to understand this because someone I care about (who is the biggest “buy & hold” type) has a lot in a “quantitative brokerage account” there that they cannot afford to lose. The people (not just at Wachovia) (ticker symbol WB) make their $$$$$$$ based on the amount of investments they manage NOT on the success of those investments.
Just….
Very interesting comment about Wells-Wachovia. I have not heard any of that and given how hard Wells fought to get Wachovia away from Citi, I would be stunned if that were the case. The FDIC was heavily involved in that process.
In regard to the brokerage accounts, I would strongly encourage your friend to check because brokerage accounts should be separately help at the bank. He is not a creditor of Wachovia. Call the branch manager. I am not sure how a “quantitative brokerage account” differs from a regular brokerage account. Can you share any color on that?
mountainaires, thanks for the Fred Thompson tape, any challenge to Paul Krugman’s analysis is fine with me. You may want to send the link to the Thompson clip to Larry Kudlow at CNBC, it’s probably too long for primetime but Kudlow might put it on his blog. Ole Larry is fed up with all these bail outs. Thanks rolling-thunder, LD & all. Very interesting thread
LD, thanks so much. I’m really glad you’re contributing here at No Quarter. This entire economic meltdown IS–to steal a phrase–a “defining moment,” and I’m completely focused on it, and learning so much. I was never really interested in economics [my beloved spouse is a finance guy, who had Greenspan pegged all along]. I started reading economic bloggers in 2004–people like Roubini– and, because of that, we protected ourselves well for what is happening now. Unfortunately, I’ve watched friends and family who were complacent suffer the fallout. And, watching the Cramer and Barnicle tape makes my head explode, too. It’s so outrageous…
Mountainaires….You are correct. This era is truly a defining moment for our country. How we come through it will be very telling.
I am glad that you enjoy my work. I enjoy the forum and the ability to share my opinions. I don’t have all the answers by any means but I am glad to develop the dialogue. Hopefully our following will grow.
You indicate that your spouse is involved in finance. I would be interested in what he thinks of my work as well.
Thanks again for your support!!
$150 Billion dollars to AIG…and…this will definitely make your head explode:
http://www.ritholtz.com/blog/2008/12/aig-free-money/
Wow!!! I will share with you that back in the early 80s when i was a lowly grunt I worked very closely with Tom Savage at First Boston. He worked on deal structures. I had never seen this quote.
Thanks for sharing.
LD-
(Posted this yesterday in the Central Station thread from last week but I think that train has more or less gone, so I thought I’d bring it in here)
This thought occurred to me since you always encourage people to learn, learn, learn, and particularly in your responses to justsomeone’s inquiries above (in the Central station open thread; similarly your discussions with Mountainaires in this thread). I’d like to know some of your favorite or recommended literature for acquiring knowledge about finance, investments, economics, etc, either online or in print. I’ve spent an absurd amount of time reading places like wsj.com and money.cnn.com, as well as investment and personal finance books. I guess I’m interested in hearing what a seasoned professional such as yourself might recommend since the books I’ve covered so far have gotten to the point of too simple and boring, and I’d like to get some more depth and detail without having to delve into my dry, bland college econ textbooks.
Thanks always for these informative postings and discussions. Keep it up.
MPC,
Thanks for “switching cars”. I need to do a better job at “checking” for new riders as we make our way along.
Great question!!
Obviously there is an entire industry that has developed in this space and one could occupy the entire day and week reading and reviewing. I am a big believer in balance so I encourage a healthy dose of time learning about finance, the economy, and markets but within the context of a balanced life. I need to remind myself of this lesson as well. We want balance and diversity in our overall portfolio!!
Back to your question. Developing a feel for this space is similar to learning a foreign language. One needs to learn the vocabulary, the figures of speech, an accent, and then perhaps axioms.
For me, I spend the bulk of my time with the WSJ (as well as wsj.com). I find this to be by far and away the best periodical and website in addressing business topics. Additionally I review bloomberg.com. They are quite good as well and ahve very comprehensive reviews of different sectors of the market. Weekend reading and review also includes Barrons.
I like these outlets the best because I find them timely and forward looking.
The basic business magazines seem to be more looking in the rear view mirror.
Two periodicals that I respect but have not spent much time reading are the Financial Times (a daily more focused globally) and The Economist.
Whatever you don’t understand or want clarified, bring it here to NQ and I will do my best to explain.
MPC,
I just realized that you may have been interested in knowing what books I have read that have influenced me as well.
I will try to categorize the books as follows:
Pleasure
Reminiscences of a Stock Operator by Edwin Lefevre
Liar’s Poker by Michael Lewis
Bombardiers by Po Bronson
Technical
Inside the Yield Book by Sidney Homer and Martin Liebowitz
Little Book of Common Sense Investing by John Bogle (John was one of the founding fathers of the mutual fund industry)
The Little Red Book of Selling by Jeff Gitomer
Warrem Buffet Speaks by Janet Lowe
Inspirational
They Call Me Coach by John Wooden (words to live by!!)
Quiet Strength by Tony Dungy
Common Sense
What They Don’t Teach You at Harvard Business School by Mark McCormack
The Millionaire Mind by Thomas Stanley PH.D
Who Moved My Cheese by Spencer Johnson M.D.
I think what you may see as a theme throughout these books is a focus on the big picture.
Enjoy!!
Thanks, LD. I’ll definitely explore as many of these as I can and see what I find.
MPC,
One other book that is very strong is “The Complete Bond Book” by Darst.
Good luck….keep learning!!
[...] “Where’s The Money?” on December 29th specifically addressed the extent of losses and expected chargeoffs in our banking system. Why do the mainstream media and politicians continue to pander to the public on this topic? [...]
[...] shutdown of the these markets for securitized products were the major topics of our pieces “Where’s The Money” (on December 29th) and “The Wall Street Model is Broken…and Won’t Soon Be [...]
[...] Where’s the Money?? . . . !! (December 29, 2008) [...]
[...] “Where’s The Money??….!!” (December 29, 2008) In large measure, our mainstream media has done an exceedingly poor job as to highlighting the dynamics at work in the banking system. I will utilize a tape from a high profile financial show to reveal how the media is largely pandering to the public on this topic. Prior to doing that, though, let me get very detailed in answering the question as to “where’s the money?” [...]