How Long Can You Tread Water?
By Larry Doyle on March 27, 2009 at 7:45 AM in American Consumers, Bank Nationalization, Banking Institutions, Economy, FDIC, Mortgage Crisis, Real Estate, Sense on Cents (Larry Doyle blog), Tim Geithner, Wall Street
The other day, I provided a cursory overview of the details embedded in the recently proposed Public-Private Investment Partnership, Will Banks Truly Sell these Toxic Assets?
The main point I tried to highlight in that piece was the need for true price discovery for these toxic assets. A loyal reader provided tremendous insight in highlighting that the PPIP needs to assure that sellers are truly at arm’s length from buyers to insure that the price discovery process is real and fair.
There are potential concerns with this price discovery process highlighted in my piece Send in the Clown. Are the bank portfolios, located within the largest banks needing to sell toxic assets, attempting to prop the market higher?
I received some real time market color from KD at 12th Street Capital as to initial responses from customers, both buyers and sellers, who may participate in this PPIP. What have I learned?
If buyers and sellers previously had a wide gap in the perceived value of these toxic securities, then it appears as if that gap may have widened. While cheap government financing and loss mitigation allow buyers to pay higher levels, their bids are only higher by a few points. Meanwhile sellers, instead of working toward a middle ground in the price discovery process, have actually raised their prices.
How might this get rectified? Uncle Sam, in the persons of Tim Geithner and Sheila Bair, will strong arm parties on both sides to engage and transact.
What may expedite this process? Little publicity has been given to the fact that the two largest corporate credit unions in the country, U.S. Central Credit Union and West Corp Credit Union, failed last week. What do these credit unions own in their portfolios? Lots of toxic assets. Who will handle the liquidations? The FDIC.
Buyers know that forced liquidations by failed institutions will establish price levels. If I am a buyer, why should I be in a hurry to purchase assets, knowing that there are plenty of assets for sale.
Why is the administration making the case for new and unprecedented powers at potentially Treasury, Fed, and FDIC to overtake non-financial institutions?
Matthew Richardson and Nouriel Roubini write on the predicament facing certain banks (thank you, Andy):
Finally, we have to anticipate the likelihood that some banks will resist selling their loans and securities. Why? Currently, the government has been giving them the option to keep holding them with the hope that market conditions will improve.
Going forward, the government must insist on the banks’ involvement in the new program. The reason that financial institutions must be pressured is that they are the cause of the financial crisis. They took advantage of loopholes to avoid regulatory requirements, taking a huge bet on securities they were never meant to hold in the first place.
What happens if removing toxic assets from a bank’s balance sheet at near-market prices shows it is effectively insolvent? Then we will have to face the elephant in the room. We may then have to start asking, “Why keep insolvent banks afloat?” And having asked that, we will have to search for ways to manage the ensuing systemic risk.
Either way, once the plan is fully implemented, we will be entering a new phase of the financial crisis.
The powers that be in Washington know that the liquidation process of these toxic assets will inevitably cause the failure of even more entities, both financial and non-financial. To that end, they are making the case now for new powers to step in, take over certain institutions that may pose real systemic risk, and methodically liquidate them. If that is the case, as a potential investor I am behooved to wait and be patient.
Moody’s Cuts Wells, BofA Ratings. What prompted these cuts? Exposure to commercial real estate. Exposure to option-ARM mortgages. Exposure to California and southwestern U.S. market that has extraordinary high levels of delinquencies and defaults.
The waves are high and getting higher. The cross currents are vicious. The undertow is strong.
LD
(Release: November 13)
on sale for only $16.95.
has a spatula.)
8% Off at $11.95, with a rare five-star ranking by 294 customers: 
And check out these: 
("This crazy redhead is on to something. Her pink Rambler story alone is worth the price of the book," writes 
- “Richard Sale’s reportage on Washington, the CIA, the American armed forces, and foreign intrigue has created a perfect background for this account of the steady growth of President Clinton as a master of the game of nations.”--W. Patrick Lang, former head of Middle East Operations, DIA
"Anne C. Heller's stunning biography of Ayn Rand" uses a "plethora of newly unearthed research and fresh insight."
“To that end, they are making the case now for new powers to step in, take over certain institutions that may pose real systemic risk, and methodically liquidate them.”
_____________________
What’s the benefit of having the treasury take over these institutions over having them file for bankruptcy? Does anyone fear the type of precedent and concentration of powers this would establish?
Absolutely correct, Sammie. Bankruptcy is the answer, but since these are banks, we need to step in to protect the depositors. No need to “price protect” buyers of these toxic assets and give even more money away.
The people being protected by the bailout are the counterparties to all the derivatives…sovereign wealth funds, hedge funds and foreign banks. They should all burn in hell.
Ironically my husband and I drove through California and noted all the new subdivisions, many were at a standstill (credit frozen??).
We are now driving through the Southwest — and again we see massive numbers of new subdivisions all fairly recent. How many of these are now ghost towns or nearly so as foreclosures hit the home owners??
The other question — where is the water coming from to fuel these subdivisions in the deserts of California and the Southwest??
I’ve seen no follow-up about where the former home owners go after foreclosure and eviction. Could be to the RV parks — where trailers and RVs are crammed in, inches from each other. Some of the RVs belong to snow birds — but many look as if they have been in place longer.
And then we were in a boom town — OIL!! Hobbs N.M. — the major industry is oil. Lots of new wells being drilled. So some areas of the country are able to get credit — so many small and medium oil service industries with huge inventories of NEW trucks and equipment and NEW buildings. I’m betting that all of these were bought with credit.
Dateline NBC had a great show last Sunday describing in lay terms how we got into the current economic crisis, featuring Professor Warren from Harvard. She was fabulous. They are airing part 2 tonight and part 3 on Sunday.
http://www.law.harvard.edu/news/2009/03/24_warren.html
L.D. please explain what’s going to happen if the mark-to-market accounting rule is changed as is being considered. Are we all saved if smoke and mirrors are legitimized?
Ellen,
There are some legitimate instances in which mark to market should be relaxed. In my opinion, though, those instances are few and far between.
In its totality, I do believe that a relaxation of the mark to market is an attempt to buy time and forestall losses. That is a version of the smoke and mirrors.
Are we saved? No, we’re tricked, if we allow ourselves to be.
I’m not entirely clear on what is meant here by “non-financial institutions”. I get the impression that we might actually mean non-depository financial institutions. If that’s what is meant, a case can be made that maybe the government should have that expanded power.
The government would certainly be in a better position to deal with a situation like AIG if they had it. The situation might not have come up in the first place, because CEOs would be aware of the personal consequences of irresponsible business practices. Pull one like they’ve done at AIG, and you wouldn’t be in a position to work angles to your continuing advantage at the taxpayers’ expense; you’d be standing outside on the sidewalk, and wondering about the extent that you might be implicated in something that went well beyond a pattern of bad business decisions.
Why don’t you bankers and so called financiers admit that you are just a bunch of crooks with your Ponzi schemes and evil derivatives. Wake up America, the bankers are bleeding you dry with their multi-trillion dollar bailouts, ie theft. Don’t trust anyone in the financial, mortgage, insurance, and stock industry. They are robber barons and would like to control and tax all of America forever. Watch them go after Social Security and Medicare. Like a Pit Bull on a bloody bone, if these financial “wizards” smell money, they will attack and attempt to control it. Here it comes, world currency and carbon taxes. Beware IMF World Bank monetization.
you bankers? every single one? don’t trust anyone?
when did we meet?
I presume you all have Snidely Whiplash moustaches… *S*
LD, after reading your posts and listening to your radio programs it is obvious you intend to inform, and it is obvious that this is one enormously complicated mess we are in, as you have attempted to expose in the course of your service to those of us following. Larry Johnson mentioned in a post not too long ago that his buddies believe that the market would improve (and it has) but then it would fall rather substantially. So far, from following your works, I don’t see how we will see any improvement in a long period of time. I don’t have debt, I live modestly, I own a home, I am years off from official retirement and have a ML portfolio. Should I get out of the market, I’m pretty sure i know what my financial adviser at ML would say, so I am just curious what you think about the outlook. Oh, and I can’t afford to lose much more in the market if I hope to have a future. I know you probably don’t want to touch this, but I would appreciate a bone at this point and would never bite your hand.
CG…..given that you have asked in that frame of reference, my personal feeling is that the market will trade in a range for the next few months but ultimately I do think the path of least resistance is to lower prices.
Please read my most recent post at my site Sense on Cents which I just posted addressing earnings. It is not a time sensitive piece and I will cross post it here.