Bloomberg reports, U.S. Foreclosure Filings Set Third Record-High in Five Months:

Foreclosure filings in the U.S. climbed to a record for the third time in five months in July as falling home prices and the recession left more homeowners unable to keep up payments or refinance.

A total of 360,149 properties received a default or auction notice or were seized last month, according to data seller RealtyTrac Inc. One in 355 households got a filing, the highest monthly rate in RealtyTrac records dating to January 2005, the Irvine, California-based company said in a statement.

“We’re in a deep hole,” Diane Swonk, chief economist at Chicago-based Mesirow Financial Inc., said in an interview. “There is a whole new wave of foreclosures tied to the cyclical dynamics of the economy.”

What is this ongoing foreclosure activity doing to home prices? It’s not good.

The median price of an existing single-family house dropped 15.6 percent to $174,100 in the second quarter, the most in records dating to 1979, the National Association of Realtors said yesterday. Almost one-quarter of U.S. mortgage holders are underwater, property data firm Zillow.com said Aug. 11.

What about the mortgage modification programs which were designed to stem this tide of foreclosures? In speaking with our friends at 12th Street Capital, who have canvassed a number of the large mortgage servicing operations, we have learned that successful mortgage modifications are typically only occurring with mortgages that are delinquent 30 days or less. After that, homeowners are increasingly inclined to ‘walk away’ from homes which are further underwater (mortgage balance exceeds home value). In fact, Bloomberg highlights:

“It has been more profitable to put a home in foreclosure than restructure the loan,” Swonk said. “The only thing that helps is forgiveness of principal, and there is little willingness to do that.”

The greatest surge in foreclosure activity remains in those states which have already experienced enormous problems. The top 5 being Nevada, California, Arizona, Florida, and Utah. That said, our entire economy is intricately linked and these markets (especially California) cover a large percentage of our population.

What are the implications for this ongoing foreclosure activity?

1. Banks will continue to keep credit standards very tight.

2. The new issue securitization markets for these assets will remain virtually non-existent.

3. State tax revenues will remain under pressure as property taxes received continue to decline. As a result, look for continued cuts in services and likely tax increases.

4. Retail sales will not have a meaningful rebound as the consumer wealth effect tied to home values remains under pressure. This morning Wal-Mart reported flat profit on lower sales. Additionally, overall retail sales were just reported to decline .1 (ex-auto sales, retail sales declined .6) versus a projected gain of .8. This is an UGLY number!! As a result, do not look for a big rebound in inventories which would drive GDP.

5. Unless and until banks fully acknowledge the true value of the assets tied to these home mortgages, the financial system is kidding itself (and doing a very good job of it) to think that our economy will have a true robust recovery.

More on these topics later today. Thoughts, comments always welcome.

LD

Is Barack Obama about to move into the rental market and become the largest single landlord in the process?

Hat tip to AK for pointing out this developing story. Reuters reports, Obama Mulls Rental Option for Some Homeowners:

U.S. government officials are weighing a plan that would let borrowers who have fallen behind on their mortgage payments avoid eviction by renting their homes instead, sources familiar with the administration’s thinking said on Tuesday.

First things first, I fully empathize with all those whom are struggling at this time. However, from the standpoint of economics and capitalism, would this program actually serve as an incentive for some homeowners to stop making their mortgage payments? Would it cause other perverse, unintended consequences as well? Would it redefine the American dream?

Under one idea being discussed, delinquent homeowners would surrender ownership of their homes but would continue to live in the property for several years, the sources told Reuters.

Surrender ownership to whom? The bank holding the mortgage? The mortgage servicer? Uncle Sam? How is a rental payment determined? If based on percentage of income, does this program actually serve as a disincentive for individuals to increase income, if only to lose this benefit?

Officials are also considering whether the government should make mortgage payments on behalf of borrowers who cannot keep up with their home loans, tapping an unused portion of a $50 billion housing aid kitty.

That $50 billion housing aid kitty is money still in the TARP. Not that the rule of law means much anymore, but does anyone want to check if we actually need to write new legislation on the disbursement of funds under the TARP for a program such as this? What happens when the $50 billion is exhausted?

As part of this plan, jobless borrowers might receive a housing stipend along with regular unemployment benefits, the sources said.

How much and for how long? Who would oversee the program? Think there is the potential for massive fraud?

A few other questions and comments.

1. The mere fact that this idea is being floated would seem to me to be an admission that the housing market is a long way from bottoming.

2. How would this program impact the principle of property rights? If Uncle Sam is effectively dictating how an owner of a property, be it a bank or otherwise, can utilize that property, does this become precedent for other assets as well?

3. Would Uncle Sam consider establishing incentives for the banks and the homeowners to develop a program such as this through the private market? A tax incentive of some sort for the bank? Do we care to try to embrace free market principles?

4. Do we even try to determine the long term impact of this program on our economy in general and housing in particular?

Little doubt this type of program would be a sharp turn left on our economic landscape.

LD

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

I thank Susan and Andy for tipping me off to remarks made earlier today in which Sheila Bair Says “Too Big to Fail” Strategy for Financial Institutions Must End. The administration and other political pundits are trying to make the case that the Federal Reserve should serve as the systemic risk regulator. In my opinion, Sheila Bair should occupy that role. There is a major political battle developing over this turf. Make no mistake that how this battle plays out will have deep and longstanding implications for our financial system as a whole and for individual consumers.

My vote goes to Ms. Bair and the FDIC, “for doing it correctly” to this point. The U.S. Systemic Risk Watchdog Not Panacea highlights the developing battle between the FDIC and the Fed. Both of these entities have a lot on their plate already, but I believe the FDIC is better positioned to handle this role. Bair and team are laser focused on banking institutions, while the Fed is more broadly focused on the economy, money supply, and the markets.

In recent discussions with a number of colleagues, the topic of the dramatically changing landscape in the world of banking keeps coming up. For many individuals, banks and banking operations can generate a fair amount of anxiety. In the process of praising Ms. Bair, I would like to use that as an opportunity to personalize the world of banking highlighted at the FDIC website.

This site addresses Deposit Insurance, Consumer Protection, Industry Analysis, Asset Sales, Regulations and Examinations, and News and Events. The world of banking does not need to be overwhelming. The opportunities to properly manage your finances, find solid investment opportunities, and navigate the economic landscape are a mere point and click away. Anything you do not understand, bring it right back to Sense on Cents!!

LD

At the core of most, if not all, of our economic problems lies housing. I do not need to replay the tape of low rates, shoddy underwriting, and Wall Street securitizations that all played a dramatic role in creating a bubble the likes of which we have never seen and hopefully never will again. All that said, housing is an enormous market with a wide array of factors impacting it. How does one track it? Are we supposed to rely on our local brokers telling us things feel better? Should we ask contractors if they are bidding on jobs? Dare we rely on our local or national media outlets to provide their expertise and pandering? If we did, housing may have bottomed 14 different times in the last 10 months. In all seriousness, how can we track housing? Welcome to Sense on Cents.

There are two indexes that have developed over the last few years and are enormously respected by market participants. One index, the S&P/Case-Shiller Home Price Indexes, is released on a monthly basis. This index tracks a variety of regions in the country but not every region. Still, all things considered, this index is widely watched as a reliable indicator of health in housing. The index is typically released toward the end of each month. The most recently released report was on February 24th, A Look at Case-Shiller Numbers, by Metro Area. In this report, all indications are that housing has yet to see any support.

Aside from the Case-Shiller Index, there is another index that tracks trends in housing and allows investors to reflect their opinions. This index, the ABX (Asset Backed Index), was created a few years ago by Wall Street to track trends in housing. Clearly given the emphasis on Obama’s housing, plans put forth by Secretary Geithner would have put some optimism in this index, right? Well, we are all aware of the enthusiasm put forth in Obama’s plan to support housing; however, no plan is a panacea and every plan has unintended consequences. Despite the best intentions in Washington, the market sees no bottom in housing.

The ABX is not traded on an exchange and thus easily tracked. Enter my friends at 12th Street Capital who shared with me a few days ago that the “ABX went out at its ALL TIME LOWs yesterday. The real money sellers continue to push it lower in conjunction with the stock market and other credit markets and clearly the street has no interest in supporting the current levels, hence unless you have some real money buyers come into the
market you could expect to see continued softening.”

There you have it. Both indexes that track housing are at all-time lows. Thus, while the stock market had a nice bounce the other day, before we get overly ebullient about the potential for stocks, we want to see if we are seeing any sort of support in these two indexes. For my money, these will be the first two indicators showing a turn in our economy and giving me confidence to invest in stocks.

LD

Oddly enough, the ABX market did not participate in the rally on Tuesday. In 2008 I would have said that the next day rally in ABX would almost be a certainty, however with continued uncertainty regarding government intervention on mortgages and MBS, it seems most longs are carefully picking their spot in the MBS market.

I thoroughly respect Sheila Bair. Our Head of the FDIC has been an honest broker each and every time I have heard her speak. I looked forward to her interview with Paul Gigot of The Wall Street Journal.

Ms. Bair addresses the finer points of the Obama Foreclosure Mitigation Plan which is targeted at helping 9 million homeowners stay in their homes. Specifically she touches on:

1. how this program will not reward bad behavior;
2. how it can be viewed as helping people who have managed their finances appropriately;
3. expectations of redefaults given her experience with the failed institution Indymac.

As I initially mentioned, I believe Sheila Bair is an honest broker in an impossible position. Her seeming lack of enthusiasm does not strike me as not believing in the benefits of this program, but rather a subtle acceptance that this program can only go so far. Additionally, this type of program will have plenty of unintended consequences. Will people who are currently paying their mortgages on schedule start to become delinquent on their mortgages in order to gain the benefits of this program?

I think Ms. Bair will make the best of a bad situation. That said, no program will be totally effective. I am fully supportive of programs that will assist Americans, but don’t be fooled to think that we will get 100% return on all dollars spent.

Let’s go to the video . . .

Let’s review my specific projections from the January 2009 Recap:

For those who track the markets, there is a 75-80% correlation in the annual moves in equity markets with the performance in January. Without parsing words, this performance in January portends a very challenging year for our equity markets. All eyes and ears remain focused on Washington for a comprehensive financial rescue package (Bank Transition, insurance for other assets, aid to stem foreclosures, et al). Trade the range for now with a very wide band. Buy the S&P as it approaches 750 and sell it as it moves above 900. Otherwise….be patient!!

In the bond space, I did believe and continue to believe that despite the Fed and Treasury promoting the concept of quantitative easing (using the Fed’s balance sheet to buy Treasury, agency, and mortgage related assets), these rates will work their way higher simply due to the MASSIVE financing needs of our government and global governments.

The corporate bond space, led by high yield bonds, had very solid returns this month. As we mentioned, we thought these sectors had already priced in the economic turmoil to a much greater extent than the stock markets. High yield bonds were up almost 10% on the month. I would not add to that sector after that performance.

The dollar inched lower versus the Japanese yen. I believe the dollar will continue to weaken versus the yen, as well as the Canadian dollar. The U.S. dollar dramatically outperformed the Euro and the British pound. The economic situation in Europe is just as bad, if not worse, than in U.S. In fact, a number of European countries are being seriosuly challenged to raise funds. Sovereign credit risks (the risk that a government defaults) have risen considerably.

In the world of commodities, gold outperformed due to the global government credit risk, the threat of longer term inflation, and weakness in currencies. Oil remains very volatile but ended the month down 2.5%. Metals remain weak with anemic demand.

Add it all up and what is one to do? In my estimation, an investor is being paid to WAIT before making any major capital commitments. For those who are significantly underweighted stocks, a dollar cost averaging (add a fixed dollar amount on a regular basis versus one lump sum at one point in time) approach is always recommended. I am not going out on a limb to say that we will retest the lows (down another 7-9%) seen on November 20th.

Well, we have retested those November 20th lows and on the last two days of the month took them out by 2-3%. We are now down anywhere from 12-19% across the board for most stock indices on a year to date basis.

In a normal market environment, if stocks gave ground by 2-4%, one would expect government bonds to rally in a “flight to quality” move. The fact that equities are down 11% for the month and government rates have moved HIGHER is a clear indication that the overwhelming supply of government bonds to finance our deficit will continue to be a major issue going forward. The market absorbed well more than $150 billion in government supply (bills to 30 year bonds) this month. In the face of that, it is no surprise that rates moved higher. The question for investors is where does one go.

The enormous government supply along with the weakness in stocks did put a dent in the credit sensitive sectors of the bond market this month. The “crowding out” effect (government financing needs crowd out the availability of capital to flow to private enterprise) will continue to be a major problem.

In very volatile trading, the U.S. dollar did improve primarily versus the Japanese yen while only marginally versus the Euro (although it is significantly stronger vs the Euro on a year to date basis). As I mentioned to a reader, the yen seems to have weakned as many hedge funds have finished unwinding trades in which they had borrowed the yen. I missed this call and thus I was clearly wrong that the dollar would still weaken vs the yen.

Gold is up solidly on the year but actually had gotten higher than $1,000/oz during the month. I do not invest in gold simply due to a highly speculative contingent that plays in this commodity. I think many funds and managers have purchased this commodity as a safe haven move but are willing to sell those positions out for short term profits.

The BIG question is where do we go from here. Should I buy stocks here? Should I sell? Should I hold? Obviously, those are questions that can only be answered based on one’s personal situation. All I can offer is my assessment of the markets, the economy, Washington, Wall Street and hope it helps you navigate your own financial and economic landscape.

While the markets have retraced back to those November 20th lows and even moved lower by 2-3%, I still can not make a case for buying the market. Why? Very simply because overall market valuations do NOT clearly and distinctly display themselves as cheap. You may ask how is it that markets that are now down 50+% are not cheap. Remember that stock prices are a measure of forward earnings and the multiple paid for those earnings. A fair multiple is typically between 12-18% but in bear markets that multiple can get decidedly cheaper than 12. Let’s take a multiple of 15 times. At yesterday’s close of 735, that equates to an earnings projection on the S&P 500 of $49/share. That is overly optimistic and hopeful and thus the risk remains too high relative to the reward.

I always traded and invested based on the premise that “hope is a lousy hedge” meaning that one needs to fully review the risks prior to investing and not “close your eyes, buy in because it is down a lot, and HOPE it works.” I do think we are approaching a stage where the market may still move lower but then start more of a sideways price action. Why? Very simply because the volumes are declining on a lot of exchanges which indicate the selling pressure is abating. That said, I think investors are in NO rush to buy.

I actually have somewhat greater concerns about bonds than stocks. Why? I think a lot of investors have rushed into the bond market, that supply of bonds will increase not only in the government space but also the municipal space as towns, cities and states deal with their budgetary problems. Corporate bonds were very cheap relative to stocks coming into the year but have dramatically outperformed in the first two months. Given that a lot of investors in the corporate bond space are newer investors (looking for a place to park money), I think bonds across all sectors may start to weaken from here.

The U.S. dollar is benefitting from a flight to quality move given the major political and social issues elsewhere in the world. Additionally, as the U.S. government has shown it will not allow major banks to fail (although the banks’ shareholders can and will be diluted), a lot of money has flowed into the dollar. I think the Canadian dollar and Australian currency are fundamentally stronger than the U.S. dollar at this point.

In regard to Washington and its impact on the economy and markets, it strikes me that the Obama administration is hellbent on implementing as much of its social program and liberal agenda as quickly as possible. The markets are sending a very clear signal that his agenda is not pro-growth, investor friendly, or fiscally sound. He’s the President and the electorate sent the Republicans home, so we need to let our democratic process work. That said, the markets do not and will not stand idly by “HOPING” things work out.

I do firmly believe we will work our way through these economic challenges, but it will be a longer and harder road than most market analysts and political pundits would promote. Maintaining hope is a critically important part of our country and our moral fiber. I am ALWAYS hopeful, but I am not blindly hopeful. That would be called willful neglect.

Check out the piece, Buy and Hope Investing, written by John Mauldin, one of our Economic All-Stars (see left sidebar at Sense on Cents).

One thing I truly hope is that you find Sense on Cents helps you to navigate the economic landscape and that you will share the site with your friends.

LD

***UPDATE: I was not aware at the time of my writing but it is reported that the Obama administration is projecting the economy will grow at a 3.2% GDP in 2010. That assumption is wildly optimistic. No respected economist would project that figure. Consensus has it in the 1.5-2% range. What does this mean? Well, lower growth means lower revenues, means higher deficits, means greater funding needs, means more borrowing, means higher government interest rates, means more “crowding out”, means slower growth for the economy going forward!!

There was little doubt about President Obama’s social agenda and economic platform during his campaign. While markets will somewhat discount campaign rhetoric, they do not discount economic reality. The markets are sending a strong signal that Obama’s economic proposals and proposed budget are anything but pro-growth. Obama Delivers $3.6 Trillion Budget Blueprint runs the risk of raising taxes at a time of economic distress. Raising taxes was a prime factor that increased the economic malaise in the 1930s. Obama is willing to take that risk as he sticks to his campaign plan and is pressured by the liberal wing of the Democratic Party.

We know that housing lies at the core of our economic crisis. Decreasing a mortgage interest deduction as proposed to fund his health care proposal will only serve to put further pressure on a large part of our nation’s housing market. I thought we were trying to stabilize housing.

Proposing a decrease in the deduction for charitable giving by the top 2% is not going to help increase — let alone hold — the level of giving when it is most badly needed. (Joe Biden needn’t worry about this given he has averaged $350 per year in charitable giving over the last ten years!! That’s right. Those stats are in his publicly filed tax returns). I thought we were trying to promote charitable giving.

Given that many small businesses file under the individual tax system as limited liability companies or Subchapter S corporations, Obama’s proposed tax increases will not serve to help employment. I thought we were trying to promote job growth.

Well, I can’t say that I’m surprised by Obama aggressively putting forth his agenda, but this is the redistribution of wealth that was hotly debated during the campaign.

I strongly believe the government should not focus on tax rates but rather tax revenues. What rates generate the most revenues and then spend it accordingly.

Additionally, if one thinks his tax increases are stopping at the top 2% or only those at 250k and above, let me share with you that these changes will effect those with taxable earnings of 208k. Well, 208k vs 250k. I mean it’s close. If you think he is stopping at that, guess again. The 2% Illusion is not reality!!

Obama is President so he writes the budget, but for every action there is a reaction and the markets are not reacting well.

Ceteris are NEVER paribus!

LD

I know of no team that has ever established a winning discipline by “throwing Hail Mary’s.” The same can be said of investing. In the midst of these challenging markets, do not lose sight of your long range goals and the disciplines necessary to achieve them. Leave the “Hail Mary’s” for the gridiron entertainment.

The Wall Street Journal provides us with an excellent piece on this topic:

Desperate investors do desperate things.

A few months ago, most people were too terrified to do much more than wring their hands while sitting on them. But now, as the stock market takes another bullet every day and the yields on cash dwindle away, some investors seem to be flinging caution to the winds.

You can read the rest of the article at your leisure. Enjoy your weekend. – LD -

As Stock Losses Loom, Don’t Throw a ‘Hail Mary’
by Jason Zweig
illustration by Heath Hinegardner
The Wall Street Journal; February 20, 2009

The tracks remain steeply sloped with many curves along the way. With all eyes and ears and hearts focused on the wide range of developments in the economy, the markets, and the world of global finance we have added a few extra cars for the ride. Come early to make sure you get a good seat.

For newer riders, this is a Q/A forum/discussion on all financial issues. As we move along, we welcome any and all questions, comments, observations, and critiques of any and all economic issues from both a macro and micro level. We especially would welcome perspectives from overseas “travelers” as we are truly all in this ride together.

Don’t be bashful, grab a coffee, settle down, you’re amongst friends here. So much to talk about!! Stimulus bill, “bad bank”, interest rates, mortgage markets, municipal finance, employment report, global trade…….!!!!

For our newer riders, your conductor is not a professional financial planner but merely a Wall St. veteran who welcomes the opportunity to share his views and instincts on the economy, the markets, and world of global finance. All you will get are honest opinions and thoughtful advice.

While people are boarding, your conductor wants to take this opportunity to highlight our guest for tomorrow evening’s special guest on LD’s Dollars and Sense radio show on No Quarter radio.

*** LD’s Dollars and Sense is pleased to have Steve Rehm join us this Sunday eveningat 8 p.m. ET for an inside view of the world of banking, regulators, and Wall Street from a “bank doctor” without peer in global finance today!!

Steve is not only a dear friend but simply the best in his field of expertise. Steve has “operated” in this realm for over the last thirty years.

-4 years at Freddie Mac working on the growth of the secondary mortgage market…

-22 years at Citi/Salomon Brothers, the preeminent mortgage shop on Wall Street. Worked with some of the legends of “the game” and across a wide range of client initiatives including asset-liability management, debt structurings, M&A transactions, and equity issuance. Heavily involved with assessing and interacting on a number of legislative, regulatory, and accounting issues.

-6 years between JP Morgan Chase, Royal Bank of Scotland, and Barclays growing and developing the initiatives at these firms and teaching them the intricacies and nuances of financial “surgery” within and throughout a community challenged by a variety of illneses and plagues!!

Steve Rehm has more personal relationships and overall experience in these “operating rooms” than anybody in global finance today. DON”T MISS the chance to get the review of “the internals” from “the doctor”, Steve Rehm!! We are thrilled to have him join us at LD’s Dollars and Sense on No Quarter Radio!!

Aaaaaaaaaaaaaall Aboard!!!

ALSO: Republicans are arguing the the economic crisis began with housing, so the effort to overcome the crisis should start in the same place — housing.

Join us in 10 minutes for LD’s weekly radio show tonight at 8:00 p.m. ET to 9:00 p.m. ET. We’ll discuss a wide array of financial and economic issues from Wall Street and around the world.

You are welcome to call in with questions and comments any time during the show. Dial in to (347) 677-0792 and turn down your computer volume since you can listen to the show for the brief time you’re on hold.

You can also log in to BlogTalkRadio.com, and join the live chat room during the show. (The chat room usually gets going about five minutes before the show.)

Our “very special guest” for our “LD’s Dollars and Sense” is an individual who, in my estimation, has more professional Wall Street relationships than any other individual. Allow me to share the background of the legend that is … Michael Maloney.

Michael started working on Wall Street in the mid-1960s at the tender age of 16 for a specialist firm on the floor of the NYSE. In 1970, Mr. Maloney was an equity block trader for the venerable Stone and Webster. In the late ’70s, Michael moved into the world of financial recruitment and career consulting. He is known as “the man to see” for those looking to move onto or within the world of Wall Street. He has longstanding relationships that would fill the Manhattan directory and has lived to tell about them. From placing chief investment officers to back office assistants, from working with the major investment houses to startups, Michael truly epitomizes the phrase, “it’s not merely what you know but who you know.”

Please join us for a fascinating look back and, simultaneously, a piercing view forward with “the man to see,” Michael Maloney!!

Larry Doyle has continued to track his original investigative report on the nomination of prospective SEC chairwoman Mary Schapiro, “Let’s Really Question Ms. Schapiro.” Larry scoured news and investment sites for any background information on Ms. Schapiro, and also read the 68-page 2008 annual report of FINRA, the Financial Industry Regulatory Authority, which raised a large number of questions about Ms. Schapiro’s abilities as a “watchdog,” as a “cop on the beat.”

We are living through a truly historic and challenging economic period. We want to help you make sense of it all.

Two weeks ago, for example, we were joined by insurance expert Sean D’Arcy of Northwestern Mutual (this show is a must for everyone who has an insurance policy and, since we all do, make sure you catch this important program). LD also wrote up the discussion in this story, “Got Insurance? 529 Plans? Financial Aid?…Read On….”

The week before, Kevin Doyle, founder of 12th Street Capital and former senior executive at Countrywide, joined us from 8:15-8:45pm. We discussed the dynamics and development of the sub-prime mortgage business, the outlook for regulations and the rating agencies, and much more. Fascinating discussion. For those who care the shows are archived.

Larry Johnson’s business partner, John Moynihan, joined us on December 21st. John is an expert in forensic accounting and money laundering. We discussed the Bernie Madoff situation and fraudulent activities in general. Also fascinating.

Get the real “behind the scenes” look from financial experts only here at “No Quarter’s Dollars and Sense with LD.”

:::::::::::::::::::::::
Afterwards, the archived show will be up at BlogTalkRadio or via iTunes/iPod (see our instructions in the right column under No Quarter Radio).)

AND: Check out Larry’s series of “Central Station” posts in which he takes questions from you, and answers them. The latest “Central Station” was yesterday morning, January 24th, from 9 a.m. to noon.

It was only a matter of time before the losses embedded in our banking system caught up and surpassed the capital injected. As such, our politicians and bankers are now forced to be somewhat honest with the public at large.

At long last the “news” is out: there’s another expected $1 trillion in embedded losses in our banking system. I have tried to judiciously, but clearly, highlight that very fact here at NQ over the last three months. In today’s WSJ:

Goldman Sachs economists estimate that financial institutions and investors world-wide will ultimately realize $2 trillion in losses on U.S. loans, but have recognized only half those losses so far. That scares investors who might otherwise give banks needed capital, and makes banks reluctant to make new loans. Regulators say they worry that the only remaining source of capital for banks is the government.

While I know a few readers here at NQ, blogs are generally anonymous communities. Given the nature of my writings, a month or so ago I realized it would be more effective and compelling if I opened myself to public criticism if warranted. For that reason, I went from identifying myself as LD to Larry Doyle. For those who know me, I think they would say that I am a very competitive, honest, and humble individual. I’d like to think that I am. That said, I have plenty of shortcomings. As we look to grow our audience and community, I beg your indulgence as I retrace the posts since I started writing in mid-October in which we wrote about these massive unrealized but embedded losses. We’re all about sharing here, so please pass this along to your friends. We’ll try to stay ahead of the curve for you. ~LD

Without further adieu . . .

The Economy – What Lies Ahead (October 14, 2008)

This injection of capital will not necessarily fully flow through to the economy. The banking system here in the U.S. likely has $1 trillion in embedded losses. This plan is trying to buy time for the system to recognize those losses. The recognition of those losses will curtail future growth for the banking system and the economy as a whole.

Economic/Market Highlights 10/16 (October 16, 2008)

Remember the overall banking system has upwards of $1 trillion in losses that need to be recognized. Both Citi and Merrill know this and have pre-announced that they do not expect to show a profitable quarter in the near future.

McCain/Palin’s Economic Stimulus Plan (October 23, 2008)

. . . what these steps have done is buy time so that the banking system can generate revenues over the next few years to both write down and realize losses that are currently on their books, but which if were currently acknowledged would have rendered certain banks as already bankrupt.

Markets Selloff 10% Overnight (October 24, 2008)

In the midst of all this though, please remember that as I have tried to highlight, that there are likely $1 trillion in embedded losses in the banking system. That bill must be paid.

The Wall St. Model is Broken … and Won’t Soon be Fixed!! (November 12, 2008)

The losses in the banking system alone are upwards of $1 trillion. From there let’s move into insurance companies, hedge funds et al. Paulson, Sheila Baer, Bernanke and others know that any money that goes into the system is purely going to help the banks recapitalize themselves in the face of these losses.

When Barney Frank, Nancy Pelosi, and Barack Obama complain that they need to make sure that credit lines open and remain open, they are not addressing the fact that the banks have an overwhelming amount of non-performing assets already and that those assets are likely going to grow in the face of an unemployment rate headed up by 2% to 4%!!

Economic/Market Highlights 11/12 (November 13, 2008)

Transparency
I had an exchange with a reader as to why the government is not revealing which banks have been participating in certain specific programs launched over the last few months. I made the case that the government is trying to protect the participating banks and in turn the taxpayers by not revealing the names.

The reader responded as to why and how could he ever invest in a bank. That is a very good point, investing in banks now is a much higher risk proposition because one does not know just how deep losses are in individual banks. Who does know?? Hank Paulson knows and he does not want to reveal those figures because they would further spook the markets.

“The Greatest Generation”…… (November 14, 2008)

The TARP bailout/rescue plan proposed to date has not inspired confidence nor generated any real impact for three reasons:

1. the banks have such sizable embedded losses that the funds already injected are being and will be used to recapitalize the balance sheets …

Economic/Market Highlights 11/17 (November 17, 2008)

Markets read this as a further indication that losses are so deeply embedded in the system that only time and “private money” can truly bring needed change. But how does “private money” receive incentive to enter the market?

Economic/Market Highlights 11/19…The Pain Increases!! (November 20, 2008)

Neither Paulson nor Congress nor anybody in Washington or Wall St. will tell you that the system has trillions in embedded losses but they do and our markets know it and are showing it by their prices.

“IT’S EASY TO FIND FAULT…especially if you’re clueless!! (December 11, 2008)

It keeps getting back, though, to the fact that the current situation as well as our future situation under any reasonable economic scenarios highlight the fact that the Wall St. banks are sitting on enormous embedded losses and expected future losses (continued increasing defaults on residential mortgages, credit cards, commercial loans, corporate loans). The money is not flowing through because:
banks need to replenish capital against these losses.

“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?”

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”. Globally, while banks and investment banks have taken $1 trillion in write-downs on these assets, by my estimation, confirmed by independent research and analytics, there are likely at least another $750 billion in write-downs yet to take on these assets.

Larry Doyle’s (LD’s) Dollars and Sense “Central Station” (January 10, 2009)

Comment by LD | 2009-01-10 10:45:43

Citi will inevitably sell other units at discounted prices.

In summary, it is not outside the realm of possibilities that this institution ends up being nationalized much like has occurred with some banks in the UK.

Against this backdrop, do not expect access to credit to improve anytime soon.

“Market Musings on a Monday . . . “ (January 12, 2009)

We have highlighted extensively why the embedded losses in the banking system would inhibit credit from flowing.

“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?

“When Big Ben Speaks . . .” (January 14, 2009)

What does this mean? The banks need more money along with government guarantees against further losses from their deteriorating portfolios. To wit, Citigroup is selling divisions to raise capital. How will those government guarantees be structured? Potentially the nationalization of a banking institution, like Citi, or the splitting of Citi and perhaps other banks into “good banks” and “bad banks”. The “good banks” will house the day to day operations, while the “bad banks” will house the toxic and deteriorating assets and will be capitalized by, you guessed it, “Uncle Sam!”

The markets and economy remain turbulent. Economies overseas are also in the midst of stormy weather.

Banks are flooded with bad loans. The auto industry is praying for an Obama lifeline!

Residential housing and commercial real estate continue to take on water.

Where can you go to get away and make some “sense” of this madness? Central Station has a train departing at 9am that will take your questions and comments on the markets, economy, and world of finance at large.

Your conductor, LD, is not a professional financial planner but is a Wall Street veteran.

Bring your coffee, invite a friend, settle down as you’re amongst friends here. Selling nothing other than honest opinions and advice. We’ll be departing momentarily…….so….

Aaaaaaaaaal Aboard!!