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We have nothing to fear but (the) Fed itself

Wednesday, September 24, 2008, 5:09 PM

Sorry to have been out most of the day - it was a day of non-stop phone calls and meetings. 

At this point, I am about to ready to charge Ben Bernanke under the anti-terrorism law.

How else to explain these comments that came across the newswire today?

12:28 Bernanke: Standard of living, GDP to shrink due to inaction
12:29 Bernanke: Very likely stocks would decline if plan rejected
12:27 Bernanke paints grim picture if Congressional rejects plan 

Translation:  If you don't give my banker friends exactly what they want, I will make sure your people suffer.

Really?  If we don't immediately swallow your plan, our standards of living are going to fall, stocks will take a ride down the log flume, and things will turn grim? Good gracious.  If that message were delivered by Bin Laden, the FBI would be involved.

In his defense, Bernanke did look suitably grim when he delivered these remarks.

Oh, wait.  Wrong picture, I think.

All (semi-)joking aside, the real issue I had with Bernanke's remarks was this:

Quote:
The key to the plan, Bernanke said, was that if Treasury was able to buy the mortgages, it will be able to hold them to maturity. As a result, the fire-sale price could be avoided.

This would remove uncertainty, return liquidity, and credit markets should be able to unfreeze, Bernanke said.

Link

What is this "Held to Maturity" thing of which Bernanke speaks?

Quite simply this: A "held to maturity" methodology for valuing a bond or asset  explicitly assumes that all the embedded cash flows will materialize, and then values that asset on the basis of that cash flow.

Is this realistic?  No.

In the current enviornment, the failed mortgages and other "troubled" assets that the Treasury is proposing to buy have been falling in price almost daily.  This is partly because of the fear that nobody is quite sure what they are worth.  But it is MOSTLY because the default rates on these assets have been extreme and are climbing with each passing period.  

In short, the sooner that Bernanke can "freeze" this process by immediately taking a snapshot of the current value (based on current default rates), the faster he can shovel money back to his banker friends and cut their losses.

The faster he can transfer these losses to the taxpayers, the sooner he can protect the banking industry.

Left completely unasked:  Is an industry so prone to such grand mistakes worthy of our very best efforts at shouldering their losses? 

In an election year, this becomes tricky.  Senators and Congressmen are going to have to face constituents, some of whom may have lost their houses due to completely unforeseen medical emergencies.  How to explain that their random loss is somehow less worthy of attention than a self-inflicted wound, 10,000 times larger, of an over-compensated financial industry?  That, my friends, is a tricky political 'sell.'

In short, the fact that this entire bailout package is being rammed down the throats of Congress in the last few days preceding the last recess of a presidential election year makes me completely suspicious of the timing and the motives of the 'pushers.'

Why is the Fed hard-selling fear and loathing right now?  I can only conclude that they are trying to sell us something they know is not in our best interest(s), or else they are trying to pull a fast one for other reasons. 

I literally don't know which explanation I fear most.

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14 Comments

srbarbour's picture
srbarbour
Status: Silver Member (Offline)
Joined: Aug 23 2008
Posts: 148
Smells like Iraqi WMDs
I agree. This whole thing smells something fierce. The timing is utterly suspicious, and so is the claim of 'emergency!' 'emergency!'. I mean, surely the Fed ought to have known that this was going to happen a couple of months ago? And if not, why haven't we fired them yet?

More importantly, there seems to be a steadfast willingness to ignore the root problem here. This isn't a liquidity problem. It isn't a 'lack of credit availability' problem. It isn't even 'houses aren't selling problem'.

(Funny how all three of those address the rational for: Bailing out Freddie and Fannie, pouring cash into the market, and keeping the rates low.)

The problem is short, sweet and simple. We have a 'credit default problem' -- too many loans defaulting, at too high a rate, on too little collateral. Everything else is just a symptom of the above. How, exactly, is coerced higher taxes, inflation, or whatever going to fix that? It wont. Indeed, knowing the nature of this problem makes it quite obvious that this is a thinly disguised attempt to 'give it to someone else'.

Citizens rule of thumb: 'If it has real merit, then they'll offer clear evidence. If it has no merit, they'll offer fear and speculation.'

I ask, where's the evidence this will change anything? Please? Any at all? Facts? Charts? Didn't think so...

But there does seem to be an awful lot of speculation of what 'would' happen. (And almost no speculation at what the damage of taking this bailout would be).

--

Steve
bearing01's picture
bearing01
Status: Silver Member (Offline)
Joined: Sep 8 2008
Posts: 153
Ben should take a page from Japan's recession

All this bailout & economic interference is going to do is cause the recession (or depression) to hit harder and last longer. The Japan Gov't tried everything to stimulate & bail out its economy in the 90's and nothing worked. All it did was make the recession last 10+ years because in the end everything has to unwine, hit bottom and work itself out. The truth is that we need these mortgage securities to fire-sale and banks to close to reset this economy to a sustainable level. Bailing out these banks and proping up the system will only add air to the leaking bubble.

We need the economy to decline considering it is a non-producing credit/consumer driven economy built on a false premise. If the world looses faith in our ability to borrow from them (forever) and buy/import their goods (forever) in order to pay back our debts then our dollar is toast. This is an inevitable fate that will either happen very soon or later in the near future.

The Gov't is trying to come up with new ways to lend more money to people to stimulate spending in an already over-leveraged credit-maxed society (and government). It's like a drug dealer trying to push more drugs on someone who is on the brink of over-dose... It's time we come down, crash and sober up.

Ray Hewitt's picture
Ray Hewitt
Status: Gold Member (Offline)
Joined: Apr 5 2008
Posts: 458
extortion
Karl Denninger noticed from one comment that the bailout package was prepared months ago. They waited till the last minute when emotions were high to push through this bill. I think Washington has gotten to the point where they don't care what the public thinks. They're going to ram it through and the markets are going to explode. Bush becomes a lame duck president on November 6. He might even throw Iran in with the mix. Who says Bush doesn't have an exit plan?
Xflies's picture
Xflies
Status: Silver Member (Offline)
Joined: Aug 19 2008
Posts: 157
It's the change in momentum of foreclosures that is key
While I agree completely with your point of foreclosures still rising, I think it is the change in the rate of foreclosures that is key. A change in momentum precedes the change in direction and the last month's report showed a slowing of the increase in foreclosures. The high fliers and speculators were the first to go under in massive numbers but now we're at the level where foreclosures are more sensitive to changes in the employment rate and overall economic health. Even if you think you're underwater on your home, you're not going to file for bankruptcy, ruin your credit history, not have a place to live or rent because you went through a bankruptcy and have no credit... all just to screw the bank out of $50k from an average $250,000 mortgage. I sense so much doom and gloom here and while people claim to be optimists at heart, you sure don't see it here. Personally, I hope this buys enough time for the average young couple who is still renting, to venture out and buy a home at firesale prices... it's a great devaluation hedge too :) Remember... it's the change in momentum to watch for.
bearing01's picture
bearing01
Status: Silver Member (Offline)
Joined: Sep 8 2008
Posts: 153
I believe the rate of

I believe the rate of foreclosures will rocket again. Last month there was a dramatic fall in the number of Notice of Default (NOD) and Notice of Trustee Sale (NTS) in the state of CA due to the new law, SB 1137, requiring more time before the bank can turn a NTS into a REO.

http://mrmortgage.ml-implode.com/2008/09/19/ca-foreclosure-notices-fall-...

plus

http://mrmortgage.ml-implode.com/2008/09/22/august-ca-home-sales-foreclo...

Also note that defaulting on your mortgage is not like defaulting on a credit card. You barely get a slap on the wrist and in 2-years you can qualify for a mortgage again. It's not claiming bankrupcy. You just stop paying your mortgage and 6 months later the bank contacts you to notify you that they are issuing a NOD. This is because the banks have so many houses in foreclosure that there's too many to handle at once. Then perhaps 9 months later some banks will actually trade you cash for keys (yes they give you money to get out of your house). So, you live 9 months rent free and are then paid to leave. You don't even have to pay tax on the debt that is forgiven by the bank. Got to love that bail out package that Bush provided last winter!

Considering most people bought with interest only mortgages and no down payment, then cashed out the gained equity to buy their Mercedes, this is a very common activity in California. The only thing keeping you in that underwater house is your pride.

http://activerain.com/blogsview/314787/George-Bush-and-Short

http://www.whitehouse.gov/news/releases/2007/12/20071220-3.html

http://www.homesalessandiego.com/blog/bush-signs-mortgage-debt-forgivene...

Abelian's picture
Abelian
Status: Member (Offline)
Joined: Sep 15 2008
Posts: 2
700 Billion
Hi Chris, Was the number 700 billion picked out of thin air? If you take a closed banking system,with reserve ratios of 1:10, the banks as a whole can theoretically lend 700 billion x 90 = 63 Trillion dollars with this infusion of cash ( government debt). Even if 200 billion is wasted, thats 45 trillion of debt creation. Where is this 45-63 Trillion dollars worth of lending going to go? Assuming the banks are made whole. Who are they going to lend money to, at what interest rate, and with what collateral. I see the top 1% getting the debt, which won't necessarily be paid off, just sold to the government again until the system collapses.
miranda's picture
miranda
Status: Bronze Member (Offline)
Joined: Apr 29 2008
Posts: 28
From
From http://www.washingtonpost.com/wp-dyn/content/blog/2008/09/24/BL2008092401517_5.html?hpid=opinionsbox1&sid=ST2008092401730&s_pos= White House spokesman Tony Fratto made (a) curious statements. Fratto...denied that the plan "was conceived of or put together hastily. There was an enormous amount of analysis and debate and discussion before we came forward with this program. I think we have anticipated a lot of the questions that members of Congress would naturally have about taking this step, but we have had -- some of the policy staff have had months to think about what a program like this would be like and how it would work. Others have had at least weeks to think about it. Members of Congress have had days to think about it." So the administration saw this coming months ago -- but neither did anything nor told anyone? AFP reports: "In a subsequent email exchange, Fratto declined to say when the administration first began internal discussions on the mammoth plan, but told AFP: 'It shouldn't come as a surprise that we think about contingencies.'"
Reuben Bailey's picture
Reuben Bailey
Status: Silver Member (Offline)
Joined: Mar 17 2008
Posts: 138
Add Bush?
Should we add Mr. Bush and Mr. Paulson to that indictment? Or would Mr. Bush get off by saying that he was just echoing the other two?
miranda's picture
miranda
Status: Bronze Member (Offline)
Joined: Apr 29 2008
Posts: 28
If you don't give my banker friends exactly what they want...
remember Gov. Spitzer? Back in February he wrote an op-ed * http://www.washingtonpost.com/wp-dyn/content/article/2008/02/13/AR2008021302783.html * Predatory Lenders' Partner in Crime * How the Bush Administration Stopped the States From Stepping In to Help Consumers * By Eliot Spitzer Thursday, February 14, 2008; A25 * Several years ago, state attorneys general and others involved in consumer protection began to notice a marked increase in a range of predatory lending practices by mortgage lenders. * Even though predatory lending was becoming a national problem, the Bush administration looked the other way and did nothing to protect American homeowners. In fact, the government chose instead to align itself with the banks that were victimizing consumers. * In 2003, during the height of the predatory lending crisis, the OCC invoked a clause from the 1863 National Bank Act to issue formal opinions preempting all state predatory lending laws, thereby rendering them inoperative. The OCC also promulgated new rules that prevented states from enforcing any of their own consumer protection laws against national banks. The federal government's actions were so egregious and so unprecedented that all 50 state attorneys general, and all 50 state banking superintendents, actively fought the new rules. * But the unanimous opposition of the 50 states did not deter, or even slow, the Bush administration in its goal of protecting the banks. In fact, when my office opened an investigation of possible discrimination in mortgage lending by a number of banks, the OCC filed a federal lawsuit to stop the investigation.
srbarbour's picture
srbarbour
Status: Silver Member (Offline)
Joined: Aug 23 2008
Posts: 148
Treason?
So we have a government agency that pretty much admits, based on its own arguments, that it essentially allowed the situation to erode to until it reached the brink before informing the people who absolutely needed to know about the situation.

...

I don't know about you. But I'm pretty sure that if a soldier admitted to his general that he knew that an 'enemy surprise ambush' was coming for hours, but didn't bother to inform that General until one minute before -- nor prepare the other soldiers for the fight -- but instead actively encouraged everyone to think everything is all right, relax their patrols, and prepare for the next days parade... Maybe a court martial would be in order? Perhaps followed by a conviction of treason and the death penalty?

We can dither on how severe this is, but I believe this goes far beyond simple dereliction of duty (e.g. the SEC) for which the public servants should be fired, and probably stripped of all merits (public pension, etc...). Instead this smacks of an outright subversion of the public trust. If this is true, these fellows should be thrown in jail. Yesterday.

--

Steve
joe2baba's picture
joe2baba
Status: Martenson Brigade Member (Offline)
Joined: Jun 17 2008
Posts: 807
bush
he gets off on executive privilege rueben but it comes down to this. in the movie eddie and the cruisers the character sal says to wordman "you know guys like us... they discover oil under our garden .....all we get is dead tomatoes"
blackrott's picture
blackrott
Status: Member (Offline)
Joined: Aug 2 2008
Posts: 20
Chase them out of office
In Peru when they elect someone and they don't do what they say they are going to do. The people throw them out of office. The people chase them out of the country. I'm tired of being so tolerant. Does any one think there are any smoke and mirrors with this 700 billion unlimited fund? is it possible while this chaos is going on that congress is passing something else behind scenes? Everything seems too blatant, too shock and awe.
SteveS's picture
SteveS
Status: Gold Member (Offline)
Joined: Sep 6 2008
Posts: 358
Scary section 8 clause
The whole bailout thing is a mess, but this is the part that really caught me: Section 8: "Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency." What???!!!
waterdog's picture
waterdog
Status: Member (Offline)
Joined: Sep 12 2008
Posts: 7
If you don't give my banker friends exactly what they want...
What a coincidence! In February Spitzer criticizes Bush administration's aggressive support of bogus loans, and in March his prostitution scandal breaks thanks to federal wiretaps. My how efficient our government can be when properly motivated.

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