Weekend Open Thread (2009-03-27)

Here is your open thread for the weekend beginning Friday March 27th, 2009. You may post random links and off-topic discussions here. Also, if you have an idea or a topic you’d like to see covered in an article, please make it known.

Be sure to also check out the forums, and get your word in the user-driven discussions there!

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About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market. Tim also hosts the weekly improv comedy sci-fi podcast Dispatches from the Multiverse.

63 comments:

  1. 1
    Scotsman says:

    The end of “mark to market” is coming. Now the banks can pump up those balance sheets- the crisis is over! Sure, they’re still the same cr*p loans, but now we can legally pretend everything is OK for another 4 or 5 months.

    The bottom is in. With enough foo-foo spray we can cover up the stench of the turd in the corner.

    http://www.huffingtonpost.com/2009/03/26/new-rule-would-allow-bank_n_179489.html

  2. 2
    Scotsman says:

    What is money? Where does it come from? Why is inflation impossible in our current situation?

    http://video.google.com/videoplay?docid=-9050474362583451279

    Worth the time if you want to expand your understanding.

  3. 3
    Kary L. Krismer says:

    Unofficially we’re now at about the same level of sales for King County houses (SFR) as January and February. That’s still a pathetic number, even if it rises 200 units above, which is easily possible given how many sales close at the end of the month. The number of pendings seems to be increasing steadily too, but the median is still low (but not not declining further as was occurring in the first third of the month).

    As always, information from NWMLS sources, but not guaranteed.

  4. 4
    tomtom says:

    Kary,

    You’re forgetting that all real estate is local. Generalizing about County stats is meaningless. You should know this, you’ve said this to me before.

  5. 5
    Kary L. Krismer says:

    RE: tomtom @ 4 – Well I can check more local areas, and would do so if necessary. But actually, as I have noted, the volume in individual area does tend to be rather volatile, so month to month changes don’t mean too much. I think you’re confusing what I’ve said about price. If you want to see what I said about volume, go to Tim’s recent thread on the decline from peak of the various areas.

  6. 6
    drshort says:

    Since 2000, closings in the month of March have been 50% higher than January and 23% higher than February. Prices also tend to rise in March due to higher quality of houses on the market during that time.

    Year Jan Feb Mar Jan Chg Feb Chg

    2000 3706 4778 5903 59% 24%
    2001 4334 5056 5722 32% 13%
    2002 4293 4735 5569 30% 18%
    2003 4746 5290 6889 45% 30%
    2004 4521 6284 8073 79% 28%
    2005 5426 6833 8801 62% 29%
    2006 5275 6032 8174 55% 36%
    2007 4869 6239 7192 48% 15%
    2008 3291 4167 4520 37% 8%

    Total 40461 49414 60843 50% 23%

  7. 7
    Kary L. Krismer says:

    Because a lot of properties sell at the end of the month, and agents have 3 days to report them, we won’t know the volume change until the first week of April. 25% over February is probably possible, if not likely. I would be shocked though if the price movement wasn’t down significantly.

  8. 8
    One Eyed Man says:

    RE: Scotsman @ 2

    Scotsman, Excellent video on money and the fractional reserve banking system! Thanks! I watched the whole 47 minutes. I had learned much of it before but like most things at my age, I’ve forgotten more than I know. Unfortuantely, I think it over simplifies the current reserve requirement probably because they are beyond the scope of its intent. A better understanding of the reserve requirements would be nice to have when one is discussing issues like how falling CDO values affect capital ratios and the risk of FDIC intervention. The video only talks about the deposit the bank must make with the Federal Reserve Bank and the ratio of deposits to loans. It doesn’t discuss how other assets like CDO’s affect reserve ratios. Obviously the CDO’s are part of bank capital and relevant to the FDIC’s evaluation of the banks financial condition.

    If you run into something that summarizes current reserve requirements and the true make up of the capital tiers, etc, let us know. I would be interested if no one else is. I’ve never spent the time to go to the text books but I’ve never found anything good on line (ie, Wikipedia etc didn’t help). I pulled up the statutes and regs but they are impenatrable and filled with cross references to definitions. And even if you wade through the regs its virtually impossible to tell what they really mean without following some quantitative examples. When I speak of statutes and regs being impenetrable, I know what I’m talking about. I used to draft real estate tax shelter private offerings in the 1980, including the tax opinions.

  9. 9
    One Eyed Man says:

    RE: Kary L. Krismer @ 7

    Kary, How are you keeping track of your intra-month data on pendings? Are you pulling the pendings for the MLS area you want on a certain days and keeping a log of the totals as they change each day or week or other time period? Or just keeping a mental picture of the trend by looking at the numbers periodically? I have no agenda here, I’m just curious.

  10. 10
    Robert says:

    RE: Scotsman @ 2

    Hey Scotsman – a good video but the author was stating the obvious facts like that the commercial banks create money out of thin air which is almost equivalent of printing money. OK. So what? Is that so bad? Ok – so money is debt – so what?

    The author seems to suggest that the best thing to do is to let the govt only print money. Well – I don’t know. The Fed is able to print money anyways – but in a different way than commercial banks for example by changing supply of money. Commercial banks generally work better than the govt. I know it does not seem so like now with all the toxic assets etc. But really – the govt can be even more toxic than those toxic assets. I think a big strength of the US is a lean govt. Otherwise this country would become France and really this is not the way to go.

    You can deduct that the way the system is setup all debt is owed to the bankers that charge interest and so it is them who get rich. I understand. But what is another feasible alternative?

    I think the author has a deep distrust of the current system.

  11. 11
    Robert says:

    BTW – There is another dude that distrusts the current monetary system, the Fed and all the bankers out there: http://www.zeitgeistmovie.com/

    The movie is longer still.

  12. 12
    Robert says:

    There is sthg similar to the video posted at http://www.zeitgeistmovie.com
    The dude over there is also sceptical about the current financial system.

  13. 13
    tiki says:

    Tim, I check in on this site from time to time and I think I’ve come to the conclusion that the site has jumped the shark!

    Let me explain:
    1. When the real estate industry was a chorus of buy now, market will only go up, it was good to have some data that drove a counter (and accurate) view. You did this. kudos.
    2. We are now in mega global economy meltdown. I would imagine your site will probably continue to say things are falling (so don’t buy) and probably go dark when/if things finally go up (who knows when that might happen).

    Here’s why I think this blog has lost it’s value: the only actions coming out of your data are: don’t buy stuff it’s overpriced. Got it, this is what you posted in 2007 (was it 2006?).

    Does this data provide any guidance on how we can profit or benefit from the situation?I haven’t seen anything beyond re-iterating your original hypothesis. This isn’t bad, but it’s kind of like when the paparazzi reporting that Brittany Spears did sometihng bad again, there’s no news in that ‘news’.

    Again it’s not that you are incorrect (you’re really just pulling together public data into charts) I do predict that you will be late to recognize any shifts in the market (in the same way real estate folks didn’t recognize the shift from one paradigm to another)

    Thanks for providing this resource, all the best

  14. 14
    Scotsman says:

    I think most of the video’s value is in the first 20 minutes where he explains that in our current system, debt is the money. The implication then (which isn’t addressed directly) is that there can never be the kinds of inflation people expect given that the government is now “printing.” The debt destruction, and subsequent contraction of the money supply and total economy, will overwhelm any attempts to inflate through government spending or printing.

    The second half, which looks more at alternative currency models, is for another day when folks aren’t consumed by the current crisis. If we do have a total reset, that will be the time to examine alternatives, but no one will be able to successfully push for that level of change now.

    As for reserves and what counts toward them, the rules are in constant flux, always in the bank’s favor, i.e. mark to market, and unlikely to add real stability for some time.

    The big picture is easy to see though- we have a certain level or productive capacity at this time, and more debt than that capacity can service. As interest rates rise that disparity will only hurt us more.

  15. 15
    Scotsman says:

    RE: tiki @ 13

    Tiki- last I knew “jumped the shark” implied that a show or entity had entered the absurd by extending its premise beyond anything that resembled reality. Seattle Bubble is still completely grounded in reality, and is currently maintaining relevance by encouraging potential buyers to wait it out despite the fresh chorus of “buy now, rates are at historical lows and prices have fallen significantly.”

    Folks here called the turn well before it was obvious to the masses, and will probably do a good job of catching the bottom. But life isn’t just about transitions, sometimes its about filling in the spaces between those transitions. That’s where we are now. The straight-of-ways may not be as exciting as the turns, but they’re still an important part of the process, a place where races can be won or lost.

  16. 16
    The Tim says:

    By Scotsman @ 15:

    last I knew “jumped the shark” implied that a show or entity had entered the absurd by extending its premise beyond anything that resembled reality.

    So what you’re saying is that the US economy has jumped the shark?

  17. 17
    Scotsman says:

    RE: The Tim @ 16

    (smacks forehead) See, this is why YOU are the boss. ;-)

  18. 18
    Kary L. Krismer says:

    By One Eyed Man @ 9:

    RE: Kary L. Krismer @ 7

    Kary, How are you keeping track of your intra-month data on pendings? Are you pulling the pendings for the MLS area you want on a certain days and keeping a log of the totals as they change each day or week or other time period? Or just keeping a mental picture of the trend by looking at the numbers periodically? I have no agenda here, I’m just curious.

    Just a mental picture. Total pendings (including STI) were around 1800 near the beginning of the month, and about 2100 now. Excluding STI is also up a similar amount. They aren’t really worth recording intra-month because you don’t know how many will close, they are affected by how many actually close during the month (remember a lot close at the very end) and their unofficial. I don’t record any unofficial numbers.

  19. 19
    DaveyDave says:

    By Scotsman @ 1:

    The end of “mark to market” is coming. Now the banks can pump up those balance sheets- the crisis is over! Sure, they’re still the same cr*p loans, but now we can legally pretend everything is OK for another 4 or 5 months.

    Man, the news/propaganda is coming in so fast now, it’s almost impossible to keep up with. FASB mark-to-market redefinition, Bank seizures, TARP raffle drawings, Treasury auctions, Consumer spending… All of it actually having a potentially large impact on our poor little Seattle’s real estate market. Here’s another article from Bloomberg on the TARP auction plan and the importance of its timing:
    http://www.bloomberg.com/apps/news?pid=20601087&sid=agEBuyNoFyvI&refer=home
    A good quote:

    “The government has said it thinks the assets are worth more than the 30 cents they could get in the market now — that it’s 80 cents or 50 cents on the dollar,” Whalen said. “But that 30 cents is going to look good in three months. Loss rates aren’t going to peak until late this year, when those assets will be going for five cents or 10 cents on the dollar. Absolutely they should move faster.”

    And Tiki @13, I see your point — to a point. I think most of the posts here though, continue to provide current information to clarify (as much as possible) what’s happening in the RE market. If all of the posts were along the lines of, ‘renters are geniuses and I am sure glad I didn’t buy in 2006’, then I think your point would be spot on. It would all be about the shark jumping then. But I don’t think that’s entirely the case. Seattle Bubble is still highly relevant from what I glean.

  20. 20
    patient says:

    Anyone else that is bothered by the TARP whining from the banks? Let them pay it back so they can continue to pay out bonuses if they feel so confident. What’s the risk in “exposing the weak” from the ones who do not pay it back? Is it such a secret that Citi and BoA are in trouble? If there haven’t been a run yet why should it be when the other pay back their TARP. I don’t get it. And the gov is talking about the need for transparency with one hand but are willing to pay 100s of billions in a futile attempt to cover up who’s in trouble in it with the other. And these guys wants the public to trust them?

  21. 21
    Herman says:

    RE: tiki @ 13 – you should have checked in the week tim devoted to predicting the bottom. Good, rational stuff. There will be a bottom someday and if you’re on this site you’ll see it first.

  22. 22
    DaveyDave says:

    Here’s a fairly gripping NPR story of how The Bank of Clark County was taken over by the FDIC. Kind of chilling…
    http://www.npr.org/templates/story/story.php?storyId=102384657

  23. 23
    Scotsman says:

    RE: DaveyDave @ 22

    “The Bank of Clark County had 100 employees and assets of $446 million — it was a really small bank. But the federal takeover kept 80 FDIC agents, about 50 Bank of Clark County staff, and 100 Umpqua employees, working round the clock for three days.

    Most of the largest banks in trouble right now — Citibank, Bank of America — are about 6,000 times the size of the Bank of Clark County and much, much more complicated.”

    And there in lies the problem. Who takes over BOA, CITI, ETC? The system couldn’t handle a major collapse, which is why the government just props them up, allows changes in mark to market, etc. while they hope things will improve and save them from having to expose their vulnerability.

  24. 24
    David Losh says:

    Here’s the interesting thing that keeps getting glossed over:

    The Financial Accounting Standards Board quietly buckled to banking-industry pressure last week and proposed new accounting practices that would allow banks to value assets at a higher price than they could currently be sold for.

    The government is talking about assets. Less talk about bad loans and more talk about assets. Assets to me are beginning to sound like property already owned by the bank.

    I saw an article about foreclosure in the Business Journal talking about the lack of buyers at the auctions.

    By my recollection about 2004 banks started selling properties for premium prices because the Real Estate market was going up so fast. In 2007 and 2008 people were paying 80% of list price. Today those foreclosed properties are looking like the investors paid top dollar.

    The private sector of investors from what I have seen is very suspicious. Many are tapped out and sitting on properties they will need to keep rented out.

    What I think is that banks are also sitting on tons of properties they are renting out through property management companies.

    If what I think is true then everything is fine. Converting non performing loans into rental income is a shift, but it is income. The problem would be if the banks were forced to sell the assets to accomodate some accounting rule.

  25. 25
    Angie says:

    Since we’re linking to scary stories about money, I hope y’all have taken a look at the Frontline show from this week:

    http://www.getrichslowly.org/blog/2009/03/11/how-marginal-tax-rates-work

    Scotsman likes to make big talk about how Obama’s debt is going to ruin us all, but this does a very fine job of showing how he’s essentially picking up George W. Bush’s tab. When the guys from the Economist and the Wall Street Journal are all joining the pile-on, you know GWB had to have f*cked up BIG TIME.

  26. 26
    DaveyDave says:

    RE: Scotsman @ 23 – You of course are right about the scale difference, Scotsman. If the TARP auction does not have good results — like the banks won’t let these assets go for a price others are willing to pay for them — then we’ll just have to see what happens next. Maybe nothing. The normal process would be for the banks to foreclose and sell. They’d raise additional equity if they needed to. The ‘residuals’ then get processed in a slower, but still effective manner.

    Just for a matter of comparison, here are the percentages of troubled assets according to Bank Tracker:

    Omni National Bank (just seized today): 378%
    Bank of Clark County (seized in January): 235%
    Bank of America: 22%
    Citibank: 26%

    The national 2008 median of troubled assets is 10%. Also, SunTrust bank, which has taken over Omni National’s assets currently has a TA ratio of 31%. Clearly the FDIC thinks 31% is healthy enough at this point, which is a bit disturbing.

    We all know that BoA and Citi’s books are not too transparent and there maybe many more toxics buried. So their TA ratio could very well be understated above. But they’re not in the same league apparently as those banks that have been seized already.

  27. 27
    Kary L. Krismer says:

    By patient @ 20:

    Anyone else that is bothered by the TARP whining from the banks? Let them pay it back so they can continue to pay out bonuses if they feel so confident. What’s the risk in “exposing the weak” from the ones who do not pay it back?

    The problem is that the banks’ best employees do have other options, and if you limit their pay arbitrarily, that they will lose them.

    Also, not all the banks absolutely needed the funds, but took them in order to make money by lending more money. Then the government (particularly the House) comes in after the fact and starts putting additional conditions on. That makes it such that companies will only be willing to take the money when it’s later than optimal, making their failure more likely.

  28. 28
  29. 29
    b says:

    RE: Kary L. Krismer @ 27

    Kary, the companies failed. If the best employees don’t want to stay, who cares? We only need average employees to wind these companies down, we should not be pumping in money trying to make them better than their competitors. They should be broken up and sold in parts, too big to fail means they are too big.

  30. 30
    Kary L. Krismer says:

    RE: b @ 29 – I agree the companies were allowed to get too big, but I don’t think you want “average” employees winding things down, especially to the extent there is trading activity going on. I’ve always felt that one of the unexpressed problems with the California energy crisis was that the government had average traders and management while the other side (Enron, etc.) had superior traders.

    Stated differently, you want to maximize the recovery (limit the losses), and that takes good people.

    BTW, if AIG had gone into bankruptcy, the attorney fees associated with the case would have probably dwarfed the 200M in bonuses very quickly.

  31. 31
    b says:

    Kary –

    I am curious, where are these best going to flee to? Worst case scenario, they all flee to new companies or small untouched funds, thus strengthening the part of the market that did NOT sink everything into this mess. That sounds pretty good to me. The government is not going to be making any money on this deal in the first place and having the best and brightest out there trading against each other to buy the good parts of these companies is a very desirable outcome. What exactly would the best do in these sinking ships? Who are their counterparties that you want them to trade better than? We are giving them taxpayer money so that they can leverage trades against our 401k’s and IRAs? Its a zero sum game.

  32. 32
    DaveyDave says:

    As you know, there have been many pieces about the banks recently where the story seems to get lost in the headlines. The slant towards rebounding markets is getting common. Here’s a Reuters article that is pretty even handed:
    http://www.reuters.com/article/ousiv/idUSTRE52Q72I20090327
    Here’s a quote about why the recent banking sector rebound may be premature:

    Some analysts still believe the banking sector is undercapitalized. Investment bank Westwood Capital estimates lenders will lose $300 billion to $500 billion from commercial real estate loans and investments.

    Credit cards could result in another $200 billion of losses and corporate debt defaults could result in a few hundred billion more, Westwood estimates.

    Add to that the remaining losses from areas including residential mortgages and the U.S. banking system could face more than $1 trillion of writedowns and losses. By some estimates, that amount is roughly equal to the capital in the system.

    I wonder how many employees the FDIC has…

  33. 33
    jon says:

    RE: b @ 31 – Or they can do like Soros did and heavily promote a naive and easily manipulated neophyte into an important government post and then invest heavily in a bear positions, picking up some sweet billions.

  34. 34
    Kary L. Krismer says:

    RE: b @ 31 – To some extent it might be a zero sum game, and to some extent it might help entities that we don’t really want to help. Yes ultimately the productive members of the firm will be better off elsewhere, but again using AIG as an example, 186B is quite a huge stake for the government. We need to make sure that we do everything we can to get that money back. I’d think whatever efficiencies might be gained if these people moved would be insignificant to 186B.

  35. 35
    Kary L. Krismer says:

    RE: DaveyDave @ 32 – I read that article earlier this morning, and was rather disappointed. Even though I agree with some of the points, I thought it was a lot of generalities and very little substance.

  36. 36
    DaveyDave says:

    RE: Kary L. Krismer @ 35 – Yeah, like almost all articles nowadays, all the services borrow from each other and string together carefully released publicity from organizations like NAR, the FED, etc. Every so often, there’s a fact or ‘expert quote’ that isn’t in any of the other articles. Sound familiar? A bit discouraging when trying to determine what’s happening and form an opinion about what’s going to happen. But the one nugget that was in this Reuters’ piece was the estimation about the magnitude of all toxic debt in relation to existing bank capital. It brought the situation into a little clearer focus for me.

  37. 37
    S-Crow says:

    In the trenches escrow report: not a huge revelation to be sure, but some of the losses these lenders are taking are just mind blowing. Some of the more recent developments where people were buying new construction with 100% financing are just taking a beating. Jillayne Schlicke and I have discussed the problems with these loans for quite some time.

    I’m starting to believe the suggestions we read about where people will just walk when many of the comps in their neighborhood are short sales at 30-40% less of what was paid just 16-24 mos ago.

    Had a long talk with a Depression baby yesterday who happened to be Grandma S-Crow (mom) We discussed the walkaway conundrum. She informed me that people of her generation paid their debts till they were dead or out of money. Moral of the story: today’s generation doesn’t give a hoot about contracts, debt obligations, and a handshake or your word. If you fell out of favor because you didn’t live up to your word or obligations your name was as good a dirt. That scared “the hell out of most people,” to be “cross about it, ” she said. When times were tough, she’d “type for people, sell “Yule” logs during X-mas season, sew for people, buy liver & cow tongue instead of good meat, and if we couldn’t afford heating oil, we’d just bundle up to stay warm.” And, “all this fuss about mortgages. The banks always held them. We dressed up to go to the bank you know. I never heard of them handing them (loans) off to anyone else.” Sounds like one way to keep stability: portfolio loans again.

    She grew up in Oklahoma. Her father became a sought after Agricultural & soils scientist/consultant working all over the world from the Middle East to South America, including building water aqueducts for irrigation in Afghanistan.

  38. 38
    b says:

    Kary –

    What I am saying is that better for the government to ‘cut its losses’ and will make the market more healthy and robust in the end. It has no business pseudo-controlling companies for private profit. When you are winding down an operation you do not go searching and paying for the absolute best people unless you are trying to loot the company.

  39. 39
    DrShort says:

    By S-Crow @ 37:

    Moral of the story: today’s generation doesn’t give a hoot about contracts, debt obligations, and a handshake or your word. If you fell out of favor because you didn’t live up to your word or obligations your name was as good a dirt.

    This is probably a result of banks transforming from local to national/international. It’s a lot easier to walk away from some faceless corporation than the banker who lives down the street from you that you will run into at the store and church.

  40. 40
    zipzippygc says:

    My home buying has hit a snag — Redfin seems to no longer show historical prices as the seller plays the game of constantly putting the home on and off the market. The prices used to be shown, but now are represented by an asterik.

    Any comments? This seems to put the buyer back to the stone age, because the velocity of price drops is now hidden.

  41. 41
    johnnybigspenda says:

    I read this the other day: “Fundamentally, business for home builders and their supporting industries has to improve. Our population grows by about 3.5mm people annually. This represents a need for about 900,000 living units. Currently, we are building less than half that amount.”

    What are people’s thoughts on this? Any truth?

  42. 42

    zipzippygc,
    I think Redfin is doing that so they don’t violate NWMLS policy, but the county records will have past sales, or find a NWMLS subscriber ( like your friendly neighborhood real estate agent) to send you that information.

  43. 43
    Kary L. Krismer says:

    RE: b @ 38 – I would generally agree, but that was probably a better argument before 186B was invested.

  44. 44
    Kary L. Krismer says:

    RE: DrShort @ 39 – And also a result of more favorable bankruptcy laws and deeds of trust. I’m not sure they had deeds of trust back in the 1930s.

  45. 45
    Kary L. Krismer says:

    By zipzippygc @ 40:

    My home buying has hit a snag — Redfin seems to no longer show historical prices as the seller plays the game of constantly putting the home on and off the market. The prices used to be shown, but now are represented by an asterik.

    Any comments? This seems to put the buyer back to the stone age, because the velocity of price drops is now hidden.

    Between prior price drops and having a clue what is owed against the property, the latter is much more important. I think that’s very difficult for a non-agent to do in King County, but not Pierce or Snohomish. It would though, be nice to know both.

  46. 46
    deejayoh says:

    RE: johnnybigspenda @ 41

    I think the current estimate is that there are 18 million vacant housing units in the US. So by those numbers, if we need 900k units per year, we are good for 20 years of no building.

    Of course, there are always some vacant units, but as recently as 2005 there were only ~15mm units. We easily have 3-4 years of oversupply vs. population growth – if one assume steady household formation rates and sizes. I think in economic downturns immigration slows and household sizes generally increase.

  47. 47
    deejayoh says:

    RE: zipzippygc @ 40 – Adding on to Ira’s response re: NWMLS policy – I think price changes are only hidden for inactive listings. So unless the agent relists with a new MLS # (which I think NWMLS has made more difficult) the prices changes will show up again when the house goes back to active status.

  48. 48
    Scotsman says:

    Here’s a great video on how the Geithner Plan II could allow the banks to game the system, dumping their loses on the Fed and Treasury. Lots of talk on various forums on how this is probably the intent. We are dupes.

    Stick with the video- 12 minutes, simple graphics, but it does all come together in the end.

    http://www.youtube.com/watch?v=n-arbfLTCtI&feature=channel_page

  49. 49
    tomtom says:

    By deejayoh @ 47:

    So unless the agent relists with a new MLS # (which I think NWMLS has made more difficult) the prices changes will show up again when the house goes back to active status.

    The NWMLS isn’t making it *too* difficult for serial relisting. Here’s a house with seven listing in eight months:

    http://www.redfin.com/WA/Seattle/6509-37th-Ave-NE-98115/home/16883420

    Of course, Agent is owner.

  50. 50
    bob says:

    RE: Scotsman @ 48 – nice video. short and to the point. After watching all the videos recommended on this thread Scotsman, can you recommend one more – where to keep my fence sitting, bubble wary, too scared to pee, hard earned cash?

  51. 51
    One Eyed Man says:

    RE: Scotsman @ 48

    I don’t think the Treasury intends to allow related party transactions. At least not so clearly visible as having a financial institution use a related party as the purchaser. The tax code and all well drafted business agreements have provisions that prevent most if not all self serving manipulation through the use of related parties. Treasury will also have to prohibit the seller from providing non-recourse financing for the buyer, especially if they allow the seller to set a minimum price at the auctions. If a seller can provide the buyer with non-recourse financing at the auction and set a minimum bid, they can get rid of their toxic assets and realize only the loss built into the minimum bid plus the buyers required cash that they will finance on a non-recourse basis.

    Most everyone I know of has assumed that the main reason the TARP didn’t buy toxic assets with the first TARP disbursement was because they didn’t want the governent and the seller to be setting the price. If you allow related party transactions, you’re basically allowing the seller to set the price without any arms length negotiation. As the video shows, related party transactions will result in selling to the government for 100% on the dollar less the buyer’s required cash percentage set by the plan.

    I don’t think the toxic asset auctions are going to result in a lot of sales, but I do think that they will result in some sales at a price above the distressed asset prices currently available for toxic assets. If you think the current market price isn’t a discounted distressed asset price, or that the plan won’t allow banks to set a minimum price then there might not be any sales, except perhaps a few for liquidity purposes.

    In my opinion, the government has no intention of wiping out the common shareholders of the remaining large financial institutions at least in the near term. As Scotsman stated above, there aren’t any big financial institutions left to buy the assets of another large fiancial institution. FDIC insured is one thing. FDIC owned and operated is another. Not only would an FDIC take over of one of the big institutions at this time potentially wipe out the FDIC’s insurance pool, it might cause the cascading collapse of the remaining large banks in a manner commonly referred to as systemic risk

    Ben and Timmy G (and probably congress) will do everything in their power to avoid the geo-political stigma of a full collapse. To be known as the guys who let the financial system of the last major bastion of free market capitalism be nationalized isn’t something they want next to their names in the history books. In my opinion, they’ll do everything they have to do including providing capital by additional purchases of non-voting preferred while preserving the facade of private ownership in the common shareholders. And if need be, they’ll print money and buy treasuries until the Peso looks like a Krugerrand when compared to the dollar. They’ll make it work if it takes every last penny the american taxpayers have.

    If I understook your prior comments, Scotsman, I think you might be concerned that the Fed and Treasury don’t have enough weapons to turn the tide of decrease in the money supply and deflation caused by deleveraging. I disagree with that view for several reasons. First, according to CPI stats, CPI increased by an average of about 2.5% per year from 1934 to 1937. While there was significant deflation from 1929 to 1933 (about 25% total decrease in CPI) it ended within about a year or two after Roosevelt took office. Second a large portion of the deleveraging is related to lending outside the fractional reserve banking system, like the mortgaged backed securities market and investment banks. Additional lending will be needed inside the fractional reserve banking system to replace the decreases in lending in the securities markets.

    From my observation, the overall game plan to save the financial institutions is a 3 part strategy. First, keep the yield curve steep so the banks have substantial net income before losses on toxic assets and real estate loans. As you will recall most or all of the large finacial institutions said that first quarter earnings were good.

    Second buy time by using the programs currently in place and perhaps some new ones. These plans are like methodone for a drug addict. They keep the banks alive and give the system time to heal by earning operating income. They are designed to keep the financial system alive for 3 or 4 years while the banks earn enough profits to cover the losses and or raise additional private capital. The plans currently in place do several things to buy time. They general provide liquidity, slow if not stop the fall of real estate prices, and keeping bank capital above minimum requirements.

    And third; wait 3 to 4 years while adjusting the programs as necessary to keep the losses from over taking quarterly bank earnings. Will that be enough time? Certain analysts think it will be for Wells Fargo. I haven’t looked at the forecasts on any other financial institution. Wells has a current loss reserve of 24 Billion and is expected to incur another 100 Billion of losses. They are currently earning about 8 Billion a quarter before the losses. If the plan can keep their earnings from operations up, keep their additional losses at about 100 Billion and spread this out over about 3 years, they should make it.

  52. 52
    Mikal says:

    RE: One Eyed Man @ 51 – Finally another good post in a desert of nothingness.

  53. 53
    Scotsman says:

    RE: One Eyed Man @ 51

    You are a babe in the woods, about to be eaten by the bears.

    First, if you don’t see how the banks and federal regulators are working together on this, for example the mark to market changes, slackened reserve requirements, etc. then there is no hope. The government is breaking every rule it ever made in order to put off having to take over the larger banks because they know they don’t have the manpower or ready resources to do the job effectively. Allowing the banks to take advantage of TARP2 in the manner described in the video is actually brilliant and most certainly intentional. It is the only choice that allows the appearance of a market based mechanism to work. It puts the losses on the Fed which can inflate its balance sheet via treasury with little initial impact. Eventually though, we get to pay for them. As to your assertion that some regulator will prevent this from happening, I’m speechless. First, as I’ve said, they’re in on the game. We all now know congress doesn’t even read legislation before passing it, so they’re worthless, and treasury still doesn’t have more than 2/3 of its top positions filled, including all of the regulatory posts. How convenient. Cuomo was on a mission there for a while, but seems to have been mysteriously quieted lately.

    As to some of your other points: this will all be over well before 3-4 years are up, so that time frame is invalid. First quarter bank earnings will disappoint despite leaked rumors a month back. Despite the Fed’s attempts to flatten the yield curve it’s doing it’s best to invert. Despite billions of manipulative purchases it has almost immediately returned to prior yields. As a result, bank earning continue to rely on fee income that has risen with the refinance surge, but won’t last.

    Most importantly, everybody in the know realizes that bank financial statements are crap and currently do nothing but obfuscate the truth. Remember, none of the tier3 off balance sheet derivatives, etc. have even been included in the current loss estimates. There are a lot of smart people out there with institutional knowledge that would be buying bank stocks and/or assets and driving up prices if they really thought there was any kind of opportunity there. The fact that bank stocks are still way, way down from previous prices tells it all. Don’t let your hopes and optimism keep you from seeing the facts.

    Get out of debt. Maximize liquidity. Keep cash at home, in t-bills, and in multiple FDIC insured accounts at smaller regional banks.

  54. 54
  55. 55
    Scotsman says:

    From Barrons- how the government lies.

    Fair warning.

    “We had feared that with the change in administrations, we’d have to revise our long-standing mistrust of government statistics…

    …misleading figures cut across a wide swath of the economy, encompassing housing, manufacturing, employment — you name it. The leading agent of deception, unintentional or otherwise, has been that old sly villain, seasonal adjustment…

    As Merrill Lynch’s David Rosenberg (who, incidentally, is planning to do a bit of adjusting himself and moving back to his native Canada; our loss, Canada’s gain) points out in a recent commentary, the official keepers of the books have been unusually aggressive in constructing seasonal adjustments for February’s economic data.

    To illustrate, the seasonal adjustment for new-home sales was the strongest since 1982; for durable-goods orders, the strongest since they were first released in 1992; the retail-sales figures for February were flat (or, as David says, flattering) after such adjustment, but unadjusted fell 3%, the biggest drop on record. He also notes dryly that the 40,000 raw non-seasonally adjusted housing-start total for February “all of a sudden becomes a headline-adjusted annual rate figure of 583,000.”

    Which makes David think that come the inevitably sharp downward revisions of such distorted data, first-quarter real GDP is likely to suffer a 7.2% drop. Which, together with the 6.3% skid in the fourth quarter of 2008, would be the worst back-to-back contraction in the economy in 50 years.”

    WHAT?! 40,000 IS NOT EQUAL TO 583,000?! Give me a break. People have no idea what is really going on.

  56. 56
    One Eyed Man says:

    RE: Scotsman @ 53

    Scotsman, I agree with most of what you are saying. I haven’t bought any real estate since 2003 and our assets are currently one-third in cash. Sure I wish I had gone to all cash, but I didn’t cause I believe in diversification. I’m saying that the government will rig the game to keep the financial sector alive. But I don’t think they are trying to flatten the yield curve. As I said above, I think they are trying to keep the curve as steep as possible while keeping long term rates low. Saving the financial sector requires keeping the short end to as near zero as possible and keeping the long end cheap enough to keep real estate prices from deteriorating much more. They want to rig the game so that the banks have enough operating income to pay the losses over time and spread the losses out over several years to gain that time. And they will change the rules as much as they need to in order to accomplish that.

    As to the rumors about bank operating income, if I recall correctly, I think that some of those statements were very specific and came directly from CEO’s or other corporate officers who would probably incur the rath of the SEC and investors’ lawyers bringing lawsuits if their statements were fraudulent. In the age of the pitch fork, I don’t think they would take that risk.

    Once it looks like several large financial institutions like maybe Goldman and JP Morgan Chase have the ability to absorb another large bank, the puppet masters might pull the life support plug on Citi (or maybe B or A) and sacrafice them to appease those who believe free markets mean loosers must die. But they won’t do it until the system looks strong enough to avoid public panic and systemic collapse.

    As to being a babe in the woods, I’d love to be young again. If I had a 20+ year time horizon for my investments, in the very near future I’d be betting on inflation, not deflation. I’d lock in low long term rates as soon as I thought the real estate market was close to a bottom. Sure it’s stupid to buy early, and I probably wouldn’t buy if the property didn’t come at least close to positive cash flow. But if you miss the cheapest rates in half a century you’ve also missed a huge opportunity. Capitalism means taking risks and usually with other peoples money to the extent that they will loan it to you at a rate below what you can earn on it. My recollection is that 30 yr owner occupied rates have averaged over 8% since Freddie Mac started providing statistics in 1972. In a cyclical market place, I generally believe in reversion to the mean. Isn’t that part of what calling the last 4 years of the real estate market a bubble is based on? 6% non-owner occupied 30 year money might be a once in a life time opportunity. If you believe that the banking system and our economy is based on at least moderate inflation, the risk reward ratio on locking in cheap long term money is huge.

    Capitalists need a functioning financial system. Deflation destroys the capital of the financial system by destroying the value of long term assets that are used as collateral. With the exception of the 1930’s, we’ve never had a long period of deflation, and Ben will print money and devalue the dollar if necessary so that it doesn’t happen for an extended period. Inflation, on the other hand, can wipe out debt faster than you can pay it off. The concern over whether the Chinesse will continue to buy our debt isn’t because they fear deflation, It’s because they fear we’ll destroy their investment by destroying the value of the dollar to save our financial system.

    If you think that our economy will inevitably fail because we no longer produce enough real goods to service our current debts, I’d be investing in an AK with a couple thousand rounds of ammo rather than T-bills. My 300 win Remmington 700 has the accuracy and stopping power, but not the volume of fire power to protect my 3 yr food supply. OK, I’m kidding, but as I said above, I like diversification.

    In closing Scotsman, I value you’re opinions and acknowledge that I learn from the stuff you and others put on this site. If I didn’t, I wouldn’t keep reading it. I also value disagreement with my analysis and occassional correction of factual errors (which I hopefully don’t make often). Thanks for making me look around so I don’t trip quite so ofter over what I didn’t see.

  57. 57
    One Eyed Man says:

    RE: Scotsman @ 53

    Scotsman, I agree with most of what you are saying. I haven’t bought any real estate since 2003 and our assets are currently one-third in cash. Sure I wish I had gone to all cash, but I didn’t cause I believe in diversification. I’m saying that the government will rig the game to keep the financial sector alive. But I don’t think they are trying to flatten the yield curve. As I said above, I think they are trying to keep the curve as steep as possible while keeping long term rates low. Saving the financial sector requires keeping the short end to as near zero as possible and keeping the long end cheap enough to keep real estate prices from deteriorating much more. They want to rig the game so that the banks have enough operating income to pay the losses over time and spread the losses out over several years to gain that time. And they will change the rules as much as they need to in order to accomplish that.

    As to the rumors about bank operating income, if I recall correctly, I think that some of those statements were very specific and came directly from CEO’s or other corporate officers who would probably incur the rath of the SEC and investors’ lawyers bringing lawsuits if their statements were fraudulent. In the age of the pitch fork, I don’t think they would take that risk.

    Once it looks like several large financial institutions like maybe Goldman and JP Morgan Chase have the ability to absorb another large bank, the puppet masters might pull the life support plug on Citi (or maybe B or A) and sacrafice them to appease those who believe free markets mean loosers must die. But they won’t do it until the system looks strong enough to avoid public panic and systemic collapse.

    As to being a babe in the woods, I’d love to be young again. If I had a 20+ year time horizon for my investments, in the very near future I’d be betting on inflation, not deflation. I’d lock in low long term rates as soon as I thought the real estate market was close to a bottom. Sure it’s stupid to buy early, and I probably wouldn’t buy if the property didn’t come at least close to positive cash flow. But if you miss the cheapest rates in half a century you’ve also missed a huge opportunity. Capitalism means taking risks and usually with other peoples money to the extent that they will loan it to you at a rate below what you can earn on it. My recollection is that 30 yr owner occupied rates have averaged over 8% since Freddie Mac started providing statistics in 1972. In a cyclical market place, I generally believe in reversion to the mean. Isn’t that part of what calling the last 4 years of the real estate market a bubble is based on? 6% non-owner occupied 30 year money might be a once in a life time opportunity. If you believe that the banking system and our economy is based on at least moderate inflation, the risk reward ratio on locking in cheap long term money is huge.

    Capitalists need a functioning financial system. Deflation destroys the capital of the financial system by destroying the value of long term assets that are used as collateral. With the exception of the 1930’s, we’ve never had a long period of deflation, and Ben will print money and devalue the dollar if necessary so that it doesn’t happen for an extended period. Inflation, on the other hand, can wipe out debt faster than you can pay it off. The concern over whether the Chinesse will continue to buy our debt isn’t because they fear deflation, It’s because they fear we’ll destroy their investment by destroying the value of the dollar to save our financial system.

    If you think that our economy will inevitably fail because we no longer produce enough real goods to service our current debts, I’d be investing in an AK with a couple thousand rounds of ammo rather than T-bills. My 300 win Remmington 700 has the accuracy and stopping power, but not the volume of fire power to protect my 3 yr food supply. OK, I’m kidding, but as I said above, I like diversification.

    In closing Scotsman, I value you’re opinions and acknowledge that I learn from the stuff you and others put on this site. If I didn’t, I wouldn’t keep reading it. I also value disagreement with my analysis and occassional correction of factual errors (which I hopefully don’t make often). Thanks for making me look around so I don’t trip quite so often over what I didn’t see.

  58. 58
    One Eyed Man says:

    Sorry for the double post above. My only excuse is that I’m a very high functioning incompetent. With that said, ponder this: If the banks will be able to use related party transactions to sell their toxic assets under TARP as the video posted by Scotsman @ 48 suggests, shouldn’t bank stocks take an even bigger jump than they did last week? In any event, I wouldn’t put too much faith in what the big, in the know, investors do. They get it wrong sometimes too. That Texas investor group put 7 Billion into WAMU last spring and lost it all.

    It will be interesting to see what happens as to related party transactions when to Treasury’s full plan comes out and we should probably know in several weeks. Of course that’s assuming Treasury doesn’t stall because they can’t put togather a plan that helps the banks without being a sham as to how the price is set. Scotsman, if I’m wrong I promise I’ll change my name from One Eyed Man to Blind Man. If you’re wrong will you change your’s from Scotsman to British Lackey? Just a joke, no offense intended. I like to think I’m funny but my spouse thinks I’m just offensive.

  59. 59
    Scotsman says:

    RE: One Eyed Man @ 58

    We’ll see with the bank stocks- it’s too early to tell. All we really have so far is “feelers” and trial balloons from treasury. Nothing ever seems to be set in stone with these guys. But I get the sense that the quality of the underlying assets are pretty well known by those who have been dealing with them for the past couple of years.

    I still don’t believe that group put billions into WAMU. That has to be a record of some sort for speed and size of a total loss. Do you think the same group is looking at GM and thinking “hmmmm…?”

    British Lackey? Well, that’s better than an Irish —. Why not. I’m really only interested in pursuing facts and ideas that work in the real world, and happily yield to those who can teach.

  60. 60
    Scotsman says:

    Fun little video about our progress. (don’t know if this wil work or not…help!)

  61. 61
    The Tim says:

    RE: Scotsman @ 60 – If you are trying to embed a video in the comment directly—sorry, it won’t work. The way WordPress is configured, it only allows the blog owner to directly post images and videos into comments.

  62. 62
  63. 63
    Herman says:

    Overlay that debt graph with the DJIA?

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