Elizabeth Warren: We’re Not out of the Woods

This is a few weeks old, but it’s definitely worth watching if you haven’t yet. Elizabeth Warren, chair of the Congressional Oversight Panel (which was created to oversee TARP), has some frank words about the current state of the banks:

Here are a few transcribed excerpts.

Scarborough: “Are we out of the woods when it comes to toxic assets?”
Warren: “No.”
Scarborough: “How bad is it still?”
Warren: “…by and large, the toxic assets that brought us to this point are still on the books of the banks.”

Buchanan: “Are you saying that if they mark to market, and these assets were priced at what they’re really worth now, these banks would still be under water?”
Warren: “…once the folks changed the accounting rules… that means you can carry them on your books at a higher level than the market would treat them. And now the problem is the banks say: ‘In fact, why do I want to sell them? Because if I sell them, I can’t sell them at that value, I’m gonna have to sell them down at the lower market value. That means I have to recognize the loss.’ Recognize enough losses, and some of them are going to be gone.

Buchanan: “If all these banks, or an awful lot of these great big banks are under water if you price their assets what they’re worth, you could have a second big hit here, couldn’t you?”
Warren: “You could have real trouble.”

Warren: “If the idea behind rebuilding the economy is: ‘let’s use a lot of the bad practices we’ve used over the last five years, and see if maybe we get a little bubble going…’ I have to say, much of what is wrong and needs to be fixed is not rocket science.”

The blunt truth is that the policies that have been enacted in response to this financial crisis to date are nothing more than “extend and pretend,” where we hope that the banks can just fake it until the economy somehow magically rebounds.

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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.

67 comments:

  1. 1
    hinten says:

    “The blunt truth is that the policies that have been enacted in response to this financial crisis to date are nothing more than “extend and pretend,” where we hope that the banks can just fake it until the economy somehow magically rebounds.”

    That is not what she is saying or implying at all and has not as far as the three interviews I have seen with her.
    Are you looking for traffic with such trollishious comments?

  2. 2
    The Tim says:

    RE: hinten @ 1 – She said:

    And now the problem is the banks say: ‘In fact, why do I want to sell them? Because if I sell them, I can’t sell them at that value, I’m gonna have to sell them down at the lower market value. That means I have to recognize the loss.’

    How is that not the very definition of “extend and pretend”?

  3. 3
    hinten says:

    That is an accounting trick, a new one albeit, but there have been many like that before (a ccounting of good will, accounting recurring losses as one time events, etc.).

    It is not an attempt of obfuscation by politicians or a symptom of policy as your comment would indicate.

  4. 4
    Jonness says:

    RE: hinten @ 1

    It seems to me, she is saying we just gifted an enormous amount of money (borrowed from China et al) in order to build zombie banks that look good but are insolvent. In order to become healthy, the banks need to eradicate the diseased portions of their books. However, they can’t do this, because killing the cancers would kill the patients. Hello Japan.

  5. 5
    Jonness says:

    By hinten @ 3:

    It is not an attempt of obfuscation by politicians or a symptom of policy as your comment would indicate.

    How is this not a symptom of policy. The policy was to prop up banks that otherwise would have failed. Now they are zombie banks. The policy makers knew up front they could not give the banks enough free money to offset their toxic waste. Thus, we have Japanese zombie banks with extremely high bonus earning managers. As Warren pointed out, we would have been better off allowing Paulson’s friends to fail so that we could restore the power to the American people.

  6. 6
    The Tim says:

    RE: hinten @ 3 – It’s not a symptom of policy? You’re messing with me, right? Did you even watch the video?

    Last September-October, when Secretary Paulson came to us and said: ‘I need 700 billion dollars to clean out this toxic asset problem, get these off the books of the banks, or else the economy will be gone by next week.’ By the time Congress got it passed and he got ready to spend the money he changed his mind and said ‘no, we’re just going to put money directly into the banks.’ Now, some of that money was used to write down some of the toxic assets, but by and large, the toxic assets that brought us to this point are still on the books of the banks.

    and

    Well, the $700 billion, the first $350 billion of it—which is what Secretary Paulson spent—went directly into the banks… this was the ‘don’t ask don’t tell’ money, remember. We didn’t ask how they were going to spend it, and they didn’t tell how they were going to spend it. The second 350 is the part that Secretary Geithner is holding onto, and he’s doing the sort of two dollar bets, all over the table in Vegas.

  7. 7
    David Losh says:

    RE: The Tim @ 6

    Wow, you are really off the track here.

    She called these institutions dinasours, which they are. They will fade away.

    She also points out there are millions of American house holds. Business can be as small as a guy with a bubble blog.

    You can build a business with cash. The operative word there is build.

    You can build equity.

    These big banks are also building equity with consumer credit. Home loans are not the only source of revenue. Banks are making money. Our tax dollars are still there.

    Banks will slowly disburse assets and spread the losses. Divisions will be split off.

    Over the course of the next five years we will be saving money in a true savings plan with a return pegged to tangible profits.

  8. 8
    TJ_98370 says:

    .
    “If we don’t have book-keeping we all can believer in……………”
    .
    Mark to fantasy rules!!!!
    .

    I’m depressed. I think I’ll go watch some “Wild Kingdom” videos. Marlin Perkins was a nice man. I like it when he pets the baby animals.
    .

  9. 9
    Scotsman says:

    RE: hinten @ 3

    An accounting trick? It’s fraud, and the consequences fall on the taxpayer.

    Off with their heads!

  10. 10
    Scotsman says:

    RE: David Losh @ 7

    “These big banks are also building equity with consumer credit”

    Put down the pipe, you’re too old for that. They are “building equity” with taxpayer funded transfers from the treasury that they pump into the equity markets, driving them higher when there is no foundational basis to do so, ultimately making the inevitable crash that much worse. You are paying for it, yet continue to believe that Obama and his crew both have your best interests at heart, and know what they’re doing. Wrong on both counts.

  11. 11
    ray pepper says:

    After listening and hearing/seeing her emotion about the impending doom of the Commercial sector I reiterate its all coming back. Not a question of if……………………….just when……………..

    BTW have you seen the deals people are getting who don’t pay their Mtg for 90-120 days with WFC?? Two clients emailed me their’s from Wachovia (Wells Fargo)..They stopped paying and both got the following on their RENTAL PROPERTIES!! :

    Forgive accrued, outstanding, and not capitalized interest through 9/15/2009

    Modify interest rate to 5.393 fixed for 5 years ( both loans were pik-a-pay option arms at 6.56 and 6.52)

    No fees, no appraisal, FREE………….**REMEMBER THESE ARE RENTALS**

    Hmm. this will go over real well when the masses continue to hear about it.

  12. 12
    Scotsman says:

    Don’t worry, we’re in good hands…

    “He is trying to fix the financial markets but does not have an assistant treasury secretary for financial markets. He is spending more money on transportation than anyone since Dwight D. Eisenhower but does not have his own inspector general watching how the dollars are used. He is fighting two wars but does not have an Army secretary.
    He sent Secretary of State Hillary Rodham Clinton to Africa to talk about international development but does not have anyone running the Agency for International Development. He has invited major powers to a summit on nuclear nonproliferation but does not have an assistant secretary of state for nonproliferation. He has vowed to improve government efficiency but does not have the chief performance officer he promised.

    http://www.nytimes.com/2009/08/24/us/politics/24confirm.html?_r=1&partner=rss&emc=rss

  13. 13
    Markor says:

    RE: hinten @ 3

    The policy certainly meets the definition of “extend and pretend”. The existence of other accounting tricks doesn’t change that. The problem will become worse because borrowed money is being wasted on people who don’t deserve it.

  14. 14
    jeff says:

    The banking crisis has only just begun. I’ll be surprised if FDIC remains solvent through the year.

  15. 15
    kompeitou says:

    By jeff @ 14:

    The banking crisis has only just begun. I’ll be surprised if FDIC remains solvent through the year.

    by the end of the year? how about by the end of the week.

    http://www.lewrockwell.com/sardi/sardi116.html

  16. 16
    what goes up must come down says:

    RE: Scotsman @ 12 – NEWS FLASH Your man was guiding the ship (for eight years) when it hit the rocks, no wonder Americans get in these problems they have a SHORT TERM MEMORY.

  17. 17
    what goes up must come down says:

    Tim so what is the ANSWER to fix things. Everyone can point out problems but what are the solutions, see that is the hard part. Should banks in mass dump these assets?

  18. 18
    David Losh says:

    RE: Scotsman @ 10

    Let’s not start on the equities markets. Let’s stick to cash in cash out.

    All the good citizens continue to dump money, cash, into banks. Even on this blog people talk about having a 20% down payment so the bank will do business with them. Just look at the number of sales this year, or the number of people who refinanced. Ray is talking about some idiot investors who are making deals to give the banks even more money and bragging about it.

    Good citizens love giving banks money. It makes them feel good about who they are. People love to pay bills. It’s a part of the fun. It’s the game.

    The banks invest money in all sorts of thing. They deal in percentage points. They service the debt they create. People are continuing to pay debt. The government is continuing to pay debt.

    People are dumping even more money in the stock market, that’s where the free money is. Now let’s say the stock market takes a plunge down to 6000 or even 7000 at this point. All is well and disaster, for the banks, is averted.

    The bank wins no matter what. They don’t need a slight of hand. They are open and notorious in theft, it’s all legal.

  19. 19
    Indy says:

    “Extend and Pretend” is not exactly apt, but it’s close enough. It’s more like “Extend and Hope”. In an uncertain environment, the best strategy is usually to buy yourself as much time and as much freedom of maneuver to adapt to future changes as you can afford. All we can do today is guess at the total losses that banks will experience. These losses are serious and real and must, eventually, be realized on their balance sheets – but the range of professional estimates of the final bill is huge. So banks can choose to definitely die today, or maybe live tomorrow if things end up better than we expect. What decision would you make?

    That’s the problem with mark-to-market accounting (of which I am generally a proponent) in an indeterminate environment. When the error-bands of valuation are very large and volatile, and the volume of exchange very low, the quality of current transactions in terms of being adequate forecasting indicators of future pricing is also highly suspect.

    It may be that if the situation develops better than most people assume, and that the losses are spread out over five years with future profits helping to ease the blow, that many troubled banks will survive (that otherwise wouldn’t) and the sum of the various programs enacted will be deemed a wise success. If, on the other hand, the losses are severe and occur in a sudden rush and overwhelms a financial institution (AIG anyone?), you haven’t lost much by buying time and forestalling an outright panic.

  20. 20
    Kary L. Krismer says:

    This is all about nothing, IMHO.

    First, standard accounting practices would not adjust the value of assets until disposed of. That said, the idea of adjusting highly negotiable, or marketable assets is generally a good one because it does give you a better idea of how a company is doing at any point in time. This is not such a situation though, because these toxic assets are no longer generally marketable. So in effect, even if you had an exception to normal accounting policies to account for liquid marketable assets, these things would be an exception to the exception.

    Second, a bank holding them might have zero reason to try to sell. By way of analogy, let’s say I had $1,000,000 of auction rate securities that I bought in early 2007. I think that market is still largely frozen, so let’s assume it is. Let’s assume further that the entities that are obligated on my securities are solid entities–viable hospitals and such. Why would I want to sell my securities at a huge discount if I didn’t have to? Especially if perhaps they were paying a relatively high interest rate. These toxic assets might be largely the same for the banks that don’t need to liquidate them, except for the strength of the debtors. But the thing is, if the bank is going to ultimately recover say 70% of face value, why would they need to write them down to 30% if that’s all they could sell them for at the time? Seemingly an allowance for bad debts would be a much better way to go than writing down to market value. And although I’m not familiar with banks’ accounting policies, I believe that is what they have done, at least in some cases.

  21. 21
    melonrightcoast says:

    Wow. It is amazing to read hinton and David Losh’s posts.

    I think you are spot on Tim. My best hopes that what the administration is doing is creating another, smaller bubble, one that they think they can control using all their new tools and tricks (like the Fed purchasing Treasuries, changing the accounting rules, giving away money to buy homes and cars), so that they can slowly deflate this new bubble that they think they control.

    Well, they cannot control everything and this could turn out quite nasty. I’m torn between wanting the new bubble to really pop so that we can get to the bottom more quickly, and wanting their strategy to work so that we don’t have GD2 or The Lost Decade, American version.

    Still deciding….

    On another note, I’m seeing more homes being purchased with Jumbo mortgages. This tells me two things: the credit markets are starting to “work” and that Americans have VERY short term memories.

  22. 22
    deejayoh says:

    By Kary L. Krismer @ 20:

    This is all about nothing, IMHO.

    First, standard accounting practices would not adjust the value of assets until disposed of. That said, the idea of adjusting highly negotiable, or marketable assets is generally a good one because it does give you a better idea of how a company is doing at any point in time. This is not such a situation though, because these toxic assets are no longer generally marketable. So in effect, even if you had an exception to normal accounting policies to account for liquid marketable assets, these things would be an exception to the exception.

    Kary – Please check FAS 115 & 157.

    Standard accounting practices definitely do call for adjusting the value of assets based on fair market value. They even did way back when I took the CPA exam.

    I thought you said you had a degree in accounting?

  23. 23
    Kary L. Krismer says:

    I’m talking about the general rule, and then exceptions to the general rule. The general rule is that you don’t recognize gain or loss until the asset is sold. There are exceptions to that rule, and I’m saying those exceptions make sense in certain situations, but not here. I wasn’t trying to say that there wasn’t any such type of accounting or accounting rule.

    BTW, I’m not sure those rules of accounting, or anything like them, existed back when I got my degree in 1980. I could be wrong, but all I remember is how financial statements could be inaccurate because those types of adjustments were not being made. But perhaps I’m forgetting the exceptions that existed 30 years ago. When the Mastro bankruptcy came up I had to flip through a few bankruptcy statutes and rules, and my thought was it was amazing how much detail I’d forgotten in just 5 years. I used to have a working knowledge of such things, where I’d maybe just have to check the precise wording. No more. But hey, I do still remember most Snohomish, Whatcom and Skagit county zip codes from when I worked at UPS back in the late 70s. The useless stuff sticks!

  24. 24
    Ryan says:

    RE: deejayoh @ 22

    Deejayoh-

    If they have theses securities on their books as held-to-maturity, are they not able to report them at the amortized cost? I thought I read somewhere a long time ago that many banks were moving these securities into this category so that they didn’t have to reflect the artificially depressed market value? Obviously, if they move these assets to the htm category, they are not able to move them back to any other short-term category and sell them without penalty…..

  25. 25
    deejayoh says:

    Definitely arcane stuff. In this case there was a specific rule estabilished that applies to these sort of assets that became “official” in 2006 – but given the speed of these things probably started under discussion 10 years prior. This was set aside in April because it had devastating implications for the banks.

    FAS 157 was specifically suspended by the SEC in April using powers granted under the ERA

    So this is a case where GAAP was overridden by the Government. It fits squarely under the heading of “policy”

  26. 26
    DrShort says:

    By Kary L. Krismer @ 23:

    I’m talking about the general rule, and then exceptions to the general rule. The general rule is that you don’t recognize gain or loss until the asset is sold. There are exceptions to that rule, and I’m saying those exceptions make sense in certain situations, but not here. I wasn’t trying to say that there wasn’t any such type of accounting or accounting rule.

    I thought there was a recent exception for “other than temporary declines” in assets — ie, those should be recognized.

  27. 27
    Ryan says:

    RE: deejayoh @ 25

    Got it, thanks. I agree that it falls under the policy heading but I don’t see this as such a big deal. With a frozen marketplace, obviously the FMV of these assets is going to be much lower than what they are truly worth. Suspending the rules to keep solvency is not an ideal fix but is something I can understand given the implications. Forcing any company to value their assets at close to zero when a market becomes temporarily illiquid would cause them to go bankrupt!

  28. 28
    Joel says:

    By Ryan @ 24:

    …artificially depressed market value…

    By Ryan @ 27:

    …market becomes temporarily illiquid…

    So that’s where all of the Kool-Aid went.

  29. 29
    Scotsman says:

    RE: what goes up must come down @ 16

    Agreed. Now let’s face reality- the new guy is even worse. Like the last guy, he can’t put a sentence together without a TelePrompTer, he just wants to pay off his corrupt cronies, and he’s totally incompetent as a manager. Other than that, all is fine. By the time this is over, Bush will look good.

  30. 30
    Ryan says:

    RE: Joel @ 28

    Joel, can you please clarify for me:

    1. Whether or not you think the current market value for these securities is accurate and true to their “real” value?
    2. If you believe that the market for these securities will ever return?

    I don’t think I am drinking anything when I say that the answer to #1 is no and the answer to #2 is yes. In fact, just today on Komotv’s website, they are already discussing an AP story about the market for CDOs returning.

  31. 31
    deejayoh says:

    By Ryan @ 27:

    RE: deejayoh @ 25

    Got it, thanks. I agree that it falls under the policy heading but I don’t see this as such a big deal. With a frozen marketplace, obviously the FMV of these assets is going to be much lower than what they are truly worth. Suspending the rules to keep solvency is not an ideal fix but is something I can understand given the implications. Forcing any company to value their assets at close to zero when a market becomes temporarily illiquid would cause them to go bankrupt!

    I thought it was kind of a big deal because the FASB is a relatively independent body and the SEC has historically delegated oversight of private accounting practices to them. So having congress give the SEC the authority to override them seems like a pretty unprecedented shift in authority

    from the FASB site:

    Since 1973, the Financial Accounting Standards Board (FASB) has been the designated organization in the private sector for establishing standards of financial accounting. Those standards govern the preparation of financial statements. They are officially recognized as authoritative by the Securities and Exchange Commission (SEC) (Financial Reporting Release No. 1, Section 101, and reaffirmed in its April 2003 Policy Statement) and the American Institute of Certified Public Accountants (Rule 203, Rules of Professional Conduct, as amended May 1973 and May 1979). Such standards are important to the efficient functioning of the economy because investors, creditors, auditors, and others rely on credible, transparent, and comparable financial information.

    The SEC has statutory authority to establish financial accounting and reporting standards for publicly held companies under the Securities Exchange Act of 1934. Throughout its history, however, the Commission’s policy has been to rely on the private sector for this function to the extent that the private sector demonstrates ability to fulfill the responsibility in the public interest.

  32. 32
    Ryan says:

    RE: deejayoh @ 31

    Yes, I stand corrected, it is a very big deal. Thanks for clarifying.

  33. 33
    David Losh says:

    This thread comes down to a couple of guys kicking a can back and forth. It’s no big deal if in fact big banks are dead. I think they are.

    Inside the bank are departments that can take over the losses, market them down, or eliminate them. We are talking about housing units. Aside from interest income we can also look at rental income.

    Value can be pegged to the economic viability which are real dollars. That’s what makes secured assets more desirable.

    You are correct that the stock price will plummet, but that’s something Warren Buffet is propping up.

  34. 34
    Andre says:

    By Kary L. Krismer @ 20:

    This is all about nothing, IMHO.

    … except for the strength of the debtors. …

    It seems you haven’t understood why the financial crisis happened. All the reason we are in this mess is in your exception.

  35. 35
    Kary L. Krismer says:

    Unprecedented doesn’t mean unnecessary. The freezing of the auction rate securities market was a first time event too, I believe, and I think by definition that would mean those assets had a market value of zero at that time. But I don’t think that means there were worthless.

    However, that doesn’t mean that even couldn’t totally disrupt a company–look at LandAmerica’s 1031 company.

  36. 36
    Kary L. Krismer says:

    RE: Andre @ 34 – The exceptions I’m talking about are two accounting practices.

    As to my comparison to housing loan assets, that’s just a matter of degree. If the assets have a “market value” of close to zero, but “only” 30% of the loans default, and those recover 60% of the amount owing, then the “market value” greatly overstates the problem.

  37. 37
    SeattleMoose says:

    The first $350B (the don’t ask don’t tell stash) of TARP resulted in:

    1) Record AIG bonuses (big public flap, they were gonna give the money back, etc…..then….quietly…the story died out and….the bonuses quietly stay in place)
    2) Record Goldman Sachs bonuses (all of a sudden paid their “loaned” money back and then 20,000 employees got what worked out to be $600K PER PERSON)

    Hank Paulson, I salute you. The ex-CEO of Goldman Sachs raids the US Treaurey while posing as Treasurey Secretary, leaves office, and then his old company pays out bonuses a half year later…..in a recession?

    Mission accomplished!!!!

    No graft, greed, or corruption here folks…..move along.

  38. 38
    Markor says:

    RE: what goes up must come down @ 16

    NEWS FLASH Your man was guiding the ship (for eight years) when it hit the rocks, no wonder Americans get in these problems they have a SHORT TERM MEMORY.

    Hear, hear! However I would change to “when it was intentionally rammed into the rocks” and “SELECTIVE MEMORY”.

    Obama may make things worse, but we were screwed as of 2007.

  39. 39
    Markor says:

    RE: Ryan @ 27

    Forcing any company to value their assets at close to zero when a market becomes temporarily illiquid would cause them to go bankrupt!

    But the market is not illiquid. There are enough buyers to quickly buy every house the banks own, at some price point. I would buy several bank-owned houses in the Seattle area sight unseen and immediately with cash, at some price point. Likewise a stock is not illiquid just because the buyers will pay only $5 instead of the $100 it was last year.

  40. 40
    Markor says:

    RE: Indy @ 19

    It may be that if the situation develops better than most people assume, and that the losses are spread out over five years with future profits helping to ease the blow, that many troubled banks will survive (that otherwise wouldn’t) and the sum of the various programs enacted will be deemed a wise success.

    That’s possible, however it’s likely that any “success” will ignore the increase in the national debt.

    If, on the other hand, the losses are severe and occur in a sudden rush and overwhelms a financial institution (AIG anyone?), you haven’t lost much by buying time and forestalling an outright panic.

    There’s a third solution, which is that the losses are severe (the actual losses) but are managed so they do not cause an outright panic. Like the way the gov’t managed Wamu’s takeover by JPMorganChase. Little cost to the taxpayer, and the losers get to be the losers they are instead of converted to winners at taxpayer expense.

    I don’t see as much success in a troubled bank surviving as I do in a nontroubled bank buying the troubled bank for peanuts.

  41. 41
    Scotsman says:

    RE: Markor @ 39

    Indeed, inconvenient though it may be, there is always a market and a price that clears that market. What people forget is that as the economy continues to worsen, the value of the assets continues to fall. It’s said that most banks are carrying this stuff at an average of 94% of original value when the market value is closer to 60-70%. The sad part is, if they were to write them down to only 85% of original value, the banks would die. So the whole discussion about mark to market is irrelevant- it would take the banks a decade or more to earn back the loses from these assets, and even that would be like trying to catch a falling knife. I don’t see any way out except continued bailouts, and those days are over.

  42. 42
    Markor says:

    RE: Scotsman @ 41

    If the days of bailouts are over, what are you predicting? Should I be withdrawing my money from the bank and buying real assets before it’s too late? The ultimate baillout would be of the FDIC in a panic. We know that bailout is all but impossible.

    When I first came to Seattle Bubble that was my thinking. Cash is trash because it’ll vanish when the panic hits. So why not buy a house? I’ll lose, but not as much. Eventually I decided to wait but I remain anxious. I don’t trust gold, since I can’t use it myself and that could be a bubble too.

    I’m already thinking of withdrawing my 401k money; I’ll probably do that before the end of the year. I’ve read of frozen accounts. Currently that’s happening only to so-called stable-value funds. The fund managers disallow withdrawals because that will–wait for it–destabilize value. Apparently this is allowed by law or in the fine print somewhere. What’s to stop this from happening to all 401k’s as baby boomers seek to retire?

  43. 43
    deejayoh says:

    By Markor @ 39:

    RE: Ryan @ 27

    Forcing any company to value their assets at close to zero when a market becomes temporarily illiquid would cause them to go bankrupt!

    But the market is not illiquid. There are enough buyers to quickly buy every house the banks own, at some price point. I would buy several bank-owned houses in the Seattle area sight unseen and immediately with cash, at some price point. Likewise a stock is not illiquid just because the buyers will pay only $5 instead of the $100 it was last year.

    What % of the foreclosed homes go back to the bank at auction? I thought it was pretty high. Maybe that is outdated info. If so, that’s not exactly an arms-length transaction

  44. 44
    Markor says:

    RE: SeattleMoose @ 37

    Good points. Yeah the AIG bonus thing was so predictable. You could practically hear the lawyers advising “don’t worry, a plane will crash somewhere next week and the public will lose interest”.

  45. 45
    deejayoh says:

    Good read on Mish’ blog today about the ancillary impact of the crisis on smaller banks that were holding these securities as collateral:

    http://globaleconomicanalysis.blogspot.com/2009/08/critically-under-capitalized-banks.html

    It is fairly clear from reading this article that the impact on the value of these securities was not temporary nor has their value recovered with what litte liquidity has been added to overall credit markets. Given delinquency rates the value of the securities is unlikely to rise – no matter how much liquidity there is in the market.

    Whereas with FAS157 all these banks would have gone under – now it is just a waiting game. But in the end it seems the results will probably be the same

  46. 46
    Kary L. Krismer says:

    RE: Markor @ 39 – We’re talking the debt instruments, not the underlying properties. The banks don’t own the underlying properties (or at least not that many of them).

  47. 47
    Markor says:

    RE: Kary L. Krismer @ 46

    Then they can sell the debt instruments for peanuts. I’m sure there’s a market for them at some price. Wamu quickly sold all its debt instruments.

  48. 48
    Kary L. Krismer says:

    By Markor @ 47:

    RE: Kary L. Krismer @ 46

    Then they can sell the debt instruments for peanuts. I’m sure there’s a market for them at some price. Wamu quickly sold all its debt instruments.

    And if they did, the gain or loss would be shown at that time. But the scenario was they didn’t need to or want to sell.

  49. 49
    Markor says:

    RE: Kary L. Krismer @ 48

    My points are 1) their market is not illiquid after all, and 2) letting banks fail in an orderly fashion (i.e. each one sold, with losses to shareholders not taxpayers) is what gov’t should be doing. Many banks don’t need to sell only because the taxpayer is paying dearly to prop them up. They’d need to sell at a deep discount if their losses weren’t being socialized.

  50. 50
    Scotsman says:

    RE: Kary L. Krismer @ 46

    Ultimately, the collateral is the fall-back position. The CDO (collateralized debt obligation) should never be worth much less (processing costs) that the collateral. In the interim, the quality of the cash flow (payment stream) rules the day. Since the properties are often legally remote from the sliced and diced obligation, sorting it all out may prove impossible. But a major sales point was that they were ultimately collateralized by the underlying real estate, not just the borrower. Add in all the derivatives, re-collateralizations, etc. and only God knows who owns what. Anyone who touched these will be dead before the legal settlement is wrapped up, another contributor to their falling values.

  51. 51
    Kary L. Krismer says:

    RE: Markor @ 49 – I think you may be underestimating the cost to taxpayers of bank failures. It is a system funded by banks, but at some point it has the government’s guarantee behind it, so massive bank failures would be rather expensive, I would assume.

  52. 52
    Markor says:

    RE: Kary L. Krismer @ 51

    That’s why it’s best for the bank to be sold to the highest bidder. If no bidders then I’m okay with the gov’t forcing banks to buy other banks, even at a loss. Then the gov’t can raise the FDIC premiums or whatever and eventually make the buyer bank whole. Banks get plenty of sweet love from the gov’t, so it’s fair that sometimes they should be forced to repay in kind.

  53. 53
    Jonness says:

    By Markor @ 13:

    The problem will become worse because borrowed money is being wasted on people who don’t deserve it.

    IMO, that’s the quote of the day :)

  54. 54
    Jonness says:

    By what goes up must come down @ 17:

    Tim so what is the ANSWER to fix things. Everyone can point out problems but what are the solutions, see that is the hard part. Should banks in mass dump these assets?

    Actually, the solution is extremely simple. Hang all responsible parties with piano wire. Then hold an election for all the vacant positions with the promise of another round of hanging for those that don’t act in the best interest of the nation. Eventually, you’ll either fill the positions with good people, or have a lot of fun eating popcorn and watching the hangings on CNN.

  55. 55
    The Tim says:

    By what goes up must come down @ 17:

    Tim so what is the ANSWER to fix things.

    In short: stop the looting, and start prosecuting.

  56. 56
    Jonness says:

    By Scotsman @ 29:

    Agreed. Now let’s face reality- the new guy is even worse. .

    It appears neither religion is working out so well for you guys. I mean, I’m way good with your economics, but why would a fiscal conservative like you embrace such a fiscally irresponsible party. Please don’t tell me it’s because you like the brand recognition?

  57. 57
    Scotsman says:

    RE: Jonness @ 56

    Heh. I’m not embracing any of them, haven’t been happy with more than a handful of politicians for a couple of decades now. But it’s not really their fault- it’s ours, if anyones, and more a function of the way incentives are structured for those we elect.

    The good news? I sense change in the air…

  58. 58
    Jonness says:

    By Scotsman @ 57:

    RE: Jonness @ 56

    Heh. I’m not embracing any of them, haven’t been happy with more than a handful of politicians for a couple of decades now.

    OK.. I guess I misunderstood. I thought you were admitting to having voted for Bush–twice.

  59. 59
    what goes up must come down says:

    RE: Jonness @ 58 – Joneness don’t you know no one voted for Bush especially the second time :-)

  60. 60
    what goes up must come down says:

    RE: The Tim @ 55 – Still don’t understand how that will fix things, it would definitely feel good but how does it actually change what is happening? I mean shouldn’t you either be stating that the banks should write down the assets now, many should close their doors, etc….. or another sequence of actions to address the actual problem of over valued assets.

    I mean if you own a stock and it takes a huge dip do you sell or do you hold with the idea it will come back since you may have originally bought it because it seemed like a good investment of course then one would ask why did it dip in the first place. What is your proposed course of action to deal with the assets?

  61. 61
    Ross says:

    RE: Scotsman @ 41 – Inflation & time heals troubled assets.

  62. 62
    Kary L. Krismer says:

    By Jonness @ 58:

    By Scotsman @ 57:

    RE: Jonness @ 56

    Heh. I’m not embracing any of them, haven’t been happy with more than a handful of politicians for a couple of decades now.

    OK.. I guess I misunderstood. I thought you were admitting to having voted for Bush–twice.

    You could easily vote for someone and not be for them. The lesser of two evils. And with Kerry and Gore, that would be very likely. I never viewed any of the three (Bush, Gore, Kerry) as being particularly good choices. FWIW, I also didn’t view McCain or Obama to be particularly good choices. So I perhaps typically think in the lesser of two evils mode when it comes to elections.

  63. 63
    CCG says:

    RE: what goes up must come down @ 16

    They’re all bulls@#$ers. I wrote to Obama (and every other Congressperson) telling him not to vote for the bailout – just like 99.99% of the other people who wrote in. Some good that did. Democracy in this country now consists of a choice between a @#$ sandwich with pickles or without. I voted for Ron Paul, but I used to be a Democrat, so I guess I can feel smug for the next 4/8 years while the Republicans gnash their teeth and the country continues down the greased socialist chute to hell (as opposed to the last 8 years, where the Democrats gnashed their teeth and the country continued down the greased socialist chute to hell).

  64. 64
    Scotsman says:

    RE: Kary L. Krismer @ 62

    OMG- I agree with Kary. The room is spinning, I feel faint…. ;-)

  65. 65
    Kary L. Krismer says:

    RE: Scotsman @ 64 – Hey, I just agreed with you, either in the C-S thread or the daily thread. The world must be coming to an end! Run! Hide!

  66. 66
    Fazu says:

    By Scotsman @ 29:

    RE: what goes up must come down @ 16

    Agreed. Now let’s face reality- the new guy is even worse. Like the last guy, he can’t put a sentence together without a TelePrompTer, he just wants to pay off his corrupt cronies, and he’s totally incompetent as a manager. Other than that, all is fine. By the time this is over, Bush will look good.

    I love it! Scotsman, you’re always a good read. I totally agree.

  67. 67
    what goes up must come down says:

    If Bush ends up looking good than you better have a bunch of canned food and bullets, because it is going to be one long night.

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