Sunday, August 24, 2008

The Looming Banking Crisis

Speculators are shorting the two biggest GSE’s in the market place, Fanny Mae and Freddie Mac. Their stock prices could go to hell, but both company’s holdings are pretty sound. More so than the average bank. We are talking several trillion dollars and maybe 100 billion of bad loans. This could work out OK over time. If you’re a stock holder, that ain’t quite the case. The real issue here is the ability of either company to continue writing future loans. The cash isn’t available at these interest rates to keep money on the table for new home loans. This makes the housing mess worse, but really does little to the value of the loans on the books at Fannie and Freddie. The max 80% loan that they could write in California during the boom was $417K (that's for a shack with no indoor plumbing). The financial predicament of Freddie and Fanny might not be quite as bad as everyone thinks.

The real issues of concern should be the HELOC”S (home equity lines of credit), credit card debt and second trust deeds. The Super banks like Bank of America, Citigroup, Wells Fargo, UBS and a plethora of retirement/hedge funds seem to come to my mind for some reason. These financial institutions are holding this garbage. Fannie and Freddie don’t own any.

Some of the big banks in the United States could be on the brink of receivership. Don’t get me wrong, the banking part of each institution is fully FDIC insured but that is only a small part of the bank. These are one stop-shopping-banks, that do anything and everything. For instance, money market accounts aren’t normally under the FDIC umbrella and neither are retirement funds. You’ll see a little blurb at the end of your statement saying the account is SIPC insured. Could that private insurance cover a major catastrophe, like several big mutual funds dropping dead? Probably not. There were laws on the books dating back to the great depression that restricted banks from being a one stop shop. Congress decided to do away with those cumbersome restrictions so our banks could be more "competitive." We know where that went.

Let’s see, we have the Fed loaning funds to Countrywide, Bear Stearns, Indy Mac and others too ill to be mentioned, amounts totaling 80 to 120 billion dollars. You can kiss the loan part good-by, it's gone. Congress sent out 150 billion to Joe tax payer. GM and Ford want a loan guarantee of 25 billion. Was Christmas early this year?

Is the government a little off budget? The 2007 projection was under 2.5 trillion dollars. The government has spent 300 billion extra this year that is not on this pie chart. The only real difference between counterfeiting and inflation is who’s doing the printing.

Even the banks admit to loosing over 400 billion. Our banking system is daisy chained to these ATM home loans. The government and the Fed are throwing money at everything. The really unbelievable thing is that none of these expenditures are even a part of the budget.

When was the last time the government gave you a stimulus check for doing nothing? It kind of like coming home after a hard days work and your wife and son treat you unusually nice. You know they broke something, you're just not sure what!


I'm Not POTUS said...


Did your review include those little tidbits Karl mentioned about the GSE's? Like how all the banks and financials hold GSE stock and debt as part of their equity. On top of which they get a tax break for holding GSE debt. Or how a large chunk of GSE claimed reserves are deferred taxes that require future profits to materialize. Or how GSE are paying out the interest due on non-performing debts so they don't have to mark them. The list of Enronesque tricks goes on and on.

Everyone has hung their hat on the GSE's. It will all be an unholy mess for a good long while.

Your 100% correct that the majority of the 5 trillion in paper is based on solid old loans. When the dust settles it will be fine for them.

But the pigmen will dole those out to themselves, their friends and to the foreign SWF's. We the taxpayers will be left holding the bag of worthless junk.

Anonymous said...

At least FDR expected something in return for the money he handed out during the Great Depression; Hoover Dam, national parks, monuments, etc...

Bush and Congress just gave the money away! Unbelievable.

Jim in San Marcos said...

Hi Potus

I didn't catch Karl's thing on GSE's.

I don't think that the GSE's are the problem. They created a fountain of cash for the banks and now it is gone.

It's the banks that are screwed.

I don't think that we the tax payers are in the bag for the GSE's, but the banks are a different story. I am afraid that they ALL are toast.

I hope I am wrong, thank you for your comments

Jim in San Marcos said...

Hi Anon 7:46

I think it gives you an idea of how serious the problem is--worse than you could ever imagine.

Thank you for your comments

Anonymous said...

The comment by one of your readers about the infrastructure improvments during the depression era programs i.e. WPA, makes a good point. It seems the country would benefit by improving and developiong infrastruture and razing the acres and acres of old shut down factories and blighted areas that have been abandoned. People could obtain work and the long term benefits of such a program would be visible.

See video from you tube and others like it.This one shows what has happened in Detroit and all of the urban decay. Its an eye opener.

Unknown said...

The only real difference between counterfeiting and inflation is who’s doing the printing.

Love that!

Anonymous said...

So if the big bank conglomerates are biting the dust. What is a good bank to switch to?

Talia in TX