House of Cards is Falling

The Fed has loaned money where no banker would venture. They have bought the rights to something that has already been paid for once.

Is it 70 billion dollars per week now. It looks like we are the lender of last resort for the whole damn world. Big money is moving out of town and out of country.

Two percent interest and 10 percent inflation. Sounds like the big boys are so paralyzed that they are about to wet their pants. There certainly isn’t a shortage of available cash, if there was, interest rates would have to move up.

Sackerson and I have been trading off on this; Low interest rates vs. High interest rates.

Doesn’t seem like much of a problem with low interest rates. My contention is that no one at the passbook level knows the score. They are all broke and don’t know it--nothing has been marked to market yet. If it had been, it would be pure carnage.

You can argue that everyone is “insured” at the banks. But they are only printing money to replace spent money—that’s called inflation. One money market fund yesterday froze withdrawals because the fund value dropped below the par of one dollar. Is your fund insured by AIG?----- HMMM?????

Nobody is lining up at the banks, everyone is insured. 10-30 percent future inflation and you get 2% interest to boot (what a deal). Gold and silver sure look nice and shiny now. Your money is safe; the government is printing about 70 billion a week now.

The world has lost a lot of money on bad investments. This idea that only the financial institutions lost money not the depositors is ridiculous. Somebody paid hard cash for all of this bad paper that is floating around. The money is gone but the Fed wants to keep our institutions functioning. Institutions don’t lose money only the depositors lose money. There is no math involved in that statement.

What happens next? There are several thousand banks world wide that are in bad shape. It’s very peculiar that there haven’t been any big bank failures in Europe. Maybe they just got bailed out with the AIG loan.

Ask yourself one question. You move 70 billion dollars from nowhere to somewhere to fix a financial problem and no one even had to vote on it? Congress is out of the loop. Hell, the Fed could fix the California budget with just 8 billion. They would be supplying payroll money; not buying what has already been sold and deemed worthless.

Denninger’s post today suggests that maybe the hedge funds are running interference on all of this and making a bundle on the sideline. No argument with it, but it kind of demonstrates that several different players may be doing different things at the same time. Nobody said you couldn't make money on the Feds stupidity.

The idea that things get better from here is a real pipe dream. Look for the government to change the rules on investing. The market is collapsing. There was never any argument over the whole mess being a financial house of cards. The funny thing, is that there still isn't, and that isn't very funny.

Copyright 2008 All rights reserved

Who's Money Was It?

The market got sick today,down 500 points. It's about to get a lot worse.

AIG needs 40 billion dollars for cash flow. Kind of makes you wonder where you would get that amount of money or why you would need that much. That is twice what our three major car companies are worth in stock value.

A tremendous amount of money has vaporized and who has lost it is still a question. I submit that we know who lost it and it wasn't Joe Six Pack (Joe's never saved a dime in his life).

The Fed is going to meet tomorrow to discuss lowering the Fed Funds rate. Could be a real waste of time. Look for world interest rates to jump up to 10 to 15 percent in the very near future.

Previously bought 30 year Treasury Bonds could be discounted drastically to raise cash. Could be a real buying opportunity.

Cash is king. Notice how little of it is around. Those companies that don't have it, are biting the dust. The money that has been lost, has been lost by people with savings. So far, only banks and financial institutions have lost money. Just wait till you get your retirement bank statement at the end of the quarter. You'll notice the money they lost, was your money.




Copyright 2008 All rights reserved

The Mortgage Based Securities Fire Sale

Today's Wall Street Journal (Saturday September 13 page B8 and B9), under legal notices there is a rather large group of Mortgage Pass Through Certificates up for auction. Here's a snapshot of the first 30 of 132 for September 17th auction. Most of it is 30 and 40 year paper written in 2006. Double click for a bigger view.


September 15, 95 issues valued at 286 million

September 16, 53 issues valued at 118 Million

September 17, 132 issues valued at 526 Million

September 18, 21 issues valued at 70 Million

You can Google a CUSIP Number and get more info. Here is a Link that describes how they put these things together. Notice the date on the link is Oct 24, 2006. The package in the link was about 1.5 Billion. So each of the listings above is a portion of an original package. Investors were waiting in line to buy these. This particular package was made up of 1775 loans with 71 percent originating in California. These are probably loans that are about to reset---talk about bad timing.

I don't know how the auction handles bidding. I would guess that there is a minimum bid set for each security. I don't see many bottom feeders wanting to jump into this auction.

As I have pointed out before, people that need to raise cash, sell the good stuff first hoping the bad stuff improves with age. You get stuck in the end. This is stuff begging to be buried in kitty litter. You'd think that someone would mention which investment firm is in a desperate selling mood. Maybe we ought to ask Senator Schumer.

Copyright 2008 All rights reserved

Where is the Garbage?

Most of Fannie’s and Freddie’s loans were of the 80/20% variety or 80% with PMI. The biggest loan that they could have written in California would have been 417K. The 20% down or second would have been 104K. Out here the last 2 years, 521K wouldn’t even get you a house with indoor plumbing. Most of the stuff in this area was going for 600K to 1.2 million at the peak. So there are a lot of interest only loans that Fannie and Freddie couldn’t touch that were sold to "someone."

Add all of the real non GSE loans together and try to give it a name, it won’t be Freddie or Fannie. There is a lot of stuff floating in this swamp; HELOC’s, second trust deeds, interest only loans and other stuff with a bad fish smell. Billions of dollars worth of real estate in foreclosure are managed by local banks for owners unknown, that can’t even follow through on a short sale.

For a joke, assume 9 out of 10 banks in California are insolvent (Ben might snarf his coffee on that one). The FDIC is in no position to fiddle with foreclosures. The Feds look at the banks balance sheet and if it doesn’t pass, they’re toast, the bank will close.


Until the other day, the Fed had no structure in place to process foreclosed real estate loans. What's stopping them from transferring bad home loans at a failed bank to Freddie and Fannie? This is pure conjecture on my part. The Fed could use the GSE’s infrastructure to unwind the bad real estate loans held by failed banks. Guarantee the junk, throw it out and if it comes back, nothing lost, the Fed was already stuck holding the bag. This could add liquidity to the market, oh goodie!

One thing is very apparent. A tremendous number of loans have been written that have nothing to do with Freddie and Fannie. This doesn't even include outright fraud which could double the size of this mess. But yet only 11 banks have failed? Common sense suggests that this is absurd. Two of the biggest real estate conduits have been taken over??? And the banks had no part in it? Then there was Bear Sterns and Countrywide; they are long gone and forgotton. All of these institutions were upright solid pillars of the community one day and bankrupt the next. Do you get the idea that we are being supplied with "very selective" information?

The government guarantee has taken the risk out of mortgage securities. Fannie and Freddie are going to be force fed new loans to “stimulate” the housing market. That’s probably why they were taken over in the first place; they stopped buying the real crap (if the GSE’s don’t buy it, the Fed gets to eat it when they close the banks).

The Fed confiscated Freddie and Fannie and everyone that had a short position got paid 6 dollars a share. Of course if you owned the stock, it was your 6 dollars that got kissed good-bye. After an event like that, why own any bank stock? The rest of the world probably feels the same way towards U S real estate paper. This is their second chance to get out. It didn’t take a hurricane to create this mess, but just look at the damage.

The smell of garbage is real. August 8th I blogged about how Freddie and Fannie faced bankruptcy in the distant future. Now Bloomberg runs an article saying how obvious it was. I contend it wasn't a damn bit obvious until last Friday, plus the article has very little real anchorage in fact. The GSE's have a problem that is in the future. The Banks have a garbage problem that encompasses 70 to 90 percent of the banking complex TODAY. This crap is on their books and it isn't going away. Fannie and Freddie are country bumpkins compared to this crowd named "Slick" and "Double Dip." The banking system is on the verge of imminent collapse.

Of course there is no reason to start a panic; it would just make things worse sooner. The real problem is, foreigners are liberating their capital back to the motherland. (How can that be?)

Here's hoping that your medical plan allows for "Mind expanding drugs." You'll need something to cheer you up as things get worse.

Copyright 2008 All rights reserved

The Gilding of Freddie and Fannie

The Federal Reserve is going to save Freddie and Fannie? It’s a little like taking your wife in for a brain transplant. She'll argue that it's not really that necessary. Do you get the idea that Bernanke is up to something?

It seems quite suspicious that Fannie and Freddie are really that bad off. They might hold some bad paper, but they probably don’t hold a large amount of crap (second trust deed and interest only loans). This seems more like a ploy to prime the pump for financing housing loans. A government guarantee of Freddie and Fannie gives their paper, grade A investment quality. It's called gilding the lily. Two years from now, this could be reflected upon as an incredibly stupid idea (if the housing market loses another 20 percent of value, the taxpayer could be caught holding the bag, not Freddie and Fannie).

The Bernanke-Paulson Car-Wash-Fund-Raiser for Freddie and Fannie is a last ditch effort at getting funding back into the housing market to keep prices from further deteriorating. So far the antics of this dynamic duo seems to have had little effect. Their dropping of the Fed Funds rate did little to keep the mortgage rates down. Home loans are at about 7% and creeping up. There are no home buyers.

The banks right now, are still Bernanke’s real problem along with other financial institutions like the hedge funds. Most FDIC insured banks that need cash, raise interest rates. The depositor gets a better deal than T-bills (ING bank is now offering 4% interest). If the bank goes belly up, the Fed gets to pick up the tab. It’s a win, win for the bank. With all of the junk written out here in Kalifornia, you would think that most of the banks in this state, would be on the Feds watch list. This money wasn't pulled out of thin air.

The next two weeks could prove very interesting. Interest rates should continue their trek upward. The Asian stock markets appear to be collapsing and it could spread to our markets. What seems to be very apparent, is a continuing contraction of the money supply. Throw in one or two hurricanes and a bank closure or two, that should keep the election off of page one.

Copyright 2008 All rights reserved

Credit Cards, the Big Black Hole (Reprinted)

This is a reprint from April 7, 2007 and still very much a subject of concern.

It was “Fog a mirror,” to qualify for a home loan. Now it’s “Have an address,” to get a credit card (the number of cards you want to apply for is optional). The housing market ran amok so why can’t the credit card market? The credit card fiasco will come to an end, just like real estate.

From our previous model suggesting the collapse of Loan Companies, we figured that they would be working for nothing the minute defaults hit 8%. It only took 6% to take them out. Let’s project that model out for a credit card collapse. Interest charged 20% less interest paid to cash suppliers 7% equals’ 13% interest on the float for the credit card companies. So in theory, 13% of their credit card loans defaulting puts them in a zero earnings scenario. From there it’s a reverse burn.

There is the question on the $9,200 credit card debt owed “per household.” Is that per “card” or per “client?” Does Visa tell Master Card? From a computer point of view; J. Doe, John Doe, and John D. Doe are three different people. How many of these households have the same address?

My dad before he died at the age of 81 (in 2001) had 10 cards and owed over $45,000 which they (you know who) had to write off. How can the banks issue cards to people that old? In 1987 he lost everything in the stock market crash and walked away bankrupt. So he had to wait 10 years to get these cards. These had to of been issued when he was 77 years old. To top it off he was using the cards to buy Florida real estate (he wasn’t doing that bad with it either).

What if the major credit card companies sorted their cards issued by address. I wonder how many cards would pop up with the same address? My Dad’s address would have been good for 20 (his girlfriend also had 10). An acquaintance of mine who is a building contractor would be good for 30.

We are not even discussing fraud. Times were good to us and the party was great. The credit card companies are functional units right now holding 2 trillion of unsecured debt. Once the credit card investor (whoever it is) realizes that he can’t just pick up his toys and walk away, it’s over. The money’s been spent. It’s gone. Whose money was it? That’s a question without an answer for the present.

This is going to be a fun year--- Charge it!! Getting 20 gallons of gasoline is painless with plastic. And if you are over 80, use or abuse the hell out of the card. It gives new meaning to the phrase "You can't take it with you," especially to the bank that issued your card.

The Real Estate Conduit is Broken

Forget about the Government Sponsored Entity's (GSE'S) going bankrupt. That isn’t the problem. Fannie and Freddie were buying loans from banks, packaging them and selling them to investors. The banks then re-loaned those same funds out to another home buyer. This provided the markets with lots of liquidity.

What has happened now? There are no investment buyers for these loan packages. The market has dried up. The Government can’t force Freddie and Fannie to buy loans and try to sell these financial packages, their investor base is gone. There are no buyers at these interest rates.

Freddie or Fannie might unload some inventory to raise cash to cover bad loans in their inventory, but not purchase new loans even if it was top shelf stuff. The net effect is that market liquidity for home loans is gone. The middleman (the GSA) can’t move the merchandise. Freddie and Fannie are no longer a conduit for housing finance.

Now, the banks are limited in the amount of new loans that they can write (Freddie and Fannie are not buying their paper). So what do we have? Thousands of houses for sale with no financing available. What do the Banks have? A very big bag of HELOC’s and second trust deed loans and credit card debt. The HELOC’s and second trust deeds are toast and to make things worse the banks have a bad cash flow problem.

At this point, we have the banks trying to raise capital to cover their bad loans. There is no sense in issuing any new loans until the market settles. Where does the homeowner stand? They can’t sell a house without some bank financing the buyer.

The point not really fully realized, is that it was the high velocity of money traveling through the real estate market kept the game going at a super fast pace. The present inability of Freddie and Fanny to act as a conduit, has ended the housing boom. You can argue that Freddie and Fannie are a bail out problem, but they aren't going to drop dead in 6 months; our banks on the other hand are in melt down mode. The real estate market is going to go from bad to worse. The economy's problem is a lack of liquidity (money with velocity).

What does all of this mean? Interest rates have to rise to entice investors back into the GSE paper market. But as interest rates rise, the average home buyer can afford less house. For Freddie and Fanny, business is going to get even slower. Their losses could increase. Anything they took on an 80/20 basis has to fall to 80% and they still break even. Most financial organizations figure a worse case scenario of a 20% loss so Fannie and Freddie could still survive quite a while.

This meltdown has little to do with Fannie and Freddie. Our financial institutions that hold MBS's, CDS's, CDO's, second trust deeds, HELOCS and credit card debt are the ones in trouble. That stuff is pure crap. Who owns it? We know the GSE's DON'T own it. It has got to be the banks and mutual funds. Don't be surprised if we have 10 bank closings this Friday--Big 3 day bank holiday.

Plus Warren Buffet is buying more Wells Fargo or American Express (he didn't say which). It makes you wonder if the Sage of Omaha got a little Kansas "Weed" mixed into his Nebraska sage. I wouldn't hesitate to short either one, go figure.

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!

Where Did American Business Go?

Once you realize that business does not pay taxes, you begin to see how Congressional thinking can be flawed, the cost is added to the price of the item. The employer doesn’t pay one dime into Social Security or health care, the worker does. The employee's wage is just a number that the employer adds to his cost of doing business. The entrepreneur in this country is motivated by profit.

Employee productivity can increase profits. But notice if government wants a bigger share (taxes), there is an easier way to increase profits. Move off shore. Right now wages in China are from 25¢ to 60¢ per hour. A manufacturer making a product for sale in the United States can avoid a lot of tax by not producing it stateside. Ever wonder what sort of employee retirement plan China has to offer?

The American consumer loves the cheap prices. The question comes up, “Do we really make anything in this country?” Notice that outsourcing gets rid of the high labor costs. Plus you are no longer a manufacturer; you are an importer/wholesaler. Life has suddenly become simpler; you can fire the book keepers.

Think it out. Manufacturers set up shop in a foreign country. They pay less in taxes. Cutting American labor means their Social Security contributions are less. Of course, if you are unemployed because of this, you don’t pay any taxes either. That in turn entitles you to unemployment insurance for 36 weeks and food stamps (the ski slopes in Colorado will be packed this winter). Do you get the feeling that this mess is building up momentum while traveling down hill???

All Congress did was raise corporate taxes, raise the minimum wage, and raise employer social security contribution amounts. By God, Congress is going to look out for Joe Six Pack. I know they meant well. Let’s face it; the only topic Congress can handle at an expert level has more to do with reproduction than anything dealing with basic economics.

What is the net result of Congress’s actions? We don’t produce much of anything anymore. The industry we have left either sells hamburgers or Starbuck coffee. The tax base instead of increasing has gone down. So what will Congress do for an encore? I would hope nothing, but by god they’re hell bent to fix this up. It’s a little like sharpening the blade on your lawn mower while its running. You can trim your nails at the same time.

All is Well??--Right!

Our markets have been pretty dull for the last two weeks except for oil and the precious metal's markets. There isn’t too much to write about without repeating myself but this web site Heritage.org has a good view of the present economy. There are about 20 visuals that are well worth a look.

I particularly liked the one below that displays the amount of taxes paid by 10% of the population. Double click for a larger view.

The scary part, is the fact that the government is very dependent on that “rich” group of people to fund the current budget. They could disappear in a financial implosion.

The thing that has me in awe right now, is the amount of the projected financial losses by various institutions. Money is being lost, trillions of dollars. And still not one investor has lost a dime.

Greed created this whole mess. People “invested” in a house to make money. The Realtors here in San Diego were probably trolling the border for new home buyers (they might have missed a few). Now I know why the phone systems around here say “press 1 for English and 2 for Spanish.” Then there were the finance companies that made 10K to 40K per loan. It was very obvious to bloggers back in 2006 that this real estate speculation lacked common sense. Right now, in our area in San Marcos, there are 6 houses in foreclosure and 5 in preforeclosure on Camino Del Sol (it’s probably a mile in length). We are talking 600K houses.

It seems like in California we are adding 1,000 houses to the foreclosure roles daily and no one is really concerned.

Do you get the feeling that everyone is holding their breath??? Nah, it's just my imagination running amok again.