[Winstonm]

Quote

This looks to me more like Japan 1990.

It is an almost exact replica, including overpriced, overleveraged commercial real estate, undercapitalized banks, and reluctance of banks to assume losses.

[Al_U_Card]

Which means that the Dow will see under 10K again.....right? (Japan's SI having sunk almost 50%)

[mike777]

"....underline "irrational investor euphoria" as to me this is the base cause of excess in asset overvaluation, and not even the brightest among us is exempt from its affect....."



Again you guys want to regulate asset bubbles, assuming they exist, which is a big if. You want to regulate irrational investor euphoria?


Banks and financial institutions are already choking with regulation. They do not understand these vague rules as it is. This is nothing new. They all have legions of lawyers but it is still the blind leading the blind. This is nothing new.

I am not saying have zero regulation but you guys want even more. More regulation to stop, asset bubbles or too much leverage.


Let us go back to square one of the issue. The subprime mess. What is this?

As I understand it, hundreds of billions if not trillions of bucks, euros and other monies were lent to non prime borrowers. Who did the lending? People and instititutions from around the world who are the experts, the superexperts in the business. The very top banks and credit instituitions in the world.

Now hundreds of billions of these loans are being written off as worthless or worth alot less since they will not be repaid.

[hrothgar]

mike777, on Jan 1 2008, 11:56 PM, said:

As I understand it, hundreds of billions if not trillions of bucks, euros and other monies were lent to non prime borrowers. Who did the lending? People and instititutions from around the world who are the experts, the superexperts in the business. The very top banks and credit instituitions in the world.

Now hundreds of billions of these loans are being written off as worthless or worth alot less since they will not be repaid.

From my perspective, there are two distinct issues that need to be considered here:

Issue 1 involves entities that invested in financial instruments whose value ultimately depended on packaged mortgages. Please recall that the upper level tranches of the CDOs were rated very highly by firms like Moody's and the like. Many of these CDOs (undeservedly) had AA or AAA rating. Accordingly, you had a number of fund managers who were supposed to be maintaining fairly conservative investment profiles got severely burned when the market went belly up.

There are a number of pension funds as well as state and local investment funds that have been severely burned by this whole situation. The Florida Local Government Investment Pool is getting a lot of coverage right now. For anyone who isn't aware, the investment pool placed a heavy bet on structured instruments backed by mortgages. The value of these assets collapsed, leading to a run on the investment pool. The pool has now suspended payments and a number of local communities have had a lot of their operating funds frozen. This has been covered in a number of places such as

http://www.cfo.com/a...2724/c_10273009

What makes this really ugly is that there are some communities that contributed funds AFTER the melt down who have also had their assets frozen.

I expect to see similar stories emerging in a number of other states.

Personally I'm not sure how much sympathy I have for groups that hired poor fund managers. (I don't find any of this particularly surprising and folks should have learned something from Orange County) Even so, I wouldn't be surprised to see a bunch of lawsuits in the months ahead

Issue two involves lawsuits over predatory lending. My impression is that there were a number of abusive practices being perpetrated.

[mike777]

".....Issue two involves lawsuits over predatory lending. My impression is that there were a number of abusive practices being perpetrated."


Full disclosure, I and my immediate and extended family basically make our living
because these laws and regulations exist in the first place. When I hear the words, more regulation or better regulation or lawsuits, I think BONUS!


This sounds as if the current laws or regulations that already exist are not being properly followed. Not being followed by inst. that have legions of lawyers/compliance people hired to do nothing but know this stuff and enforce it.

I may have told this story before. I once interviewed to work for the SEC in Calif.
Boss after boss basically told me what they do.
They go around and find (audit) financial companies in noncomplaince. Year after year do they ever find even one company in full complaince? NO! Not even close.

Job security.

[Winstonm]

Quote

Let us go back to square one of the issue. The subprime mess. What is this?

It is an issue of insolvency - an inability to service debt with a corresponding inability to sell the asset at an amount that covers that debt.

But it is not only a subprime mess - it is a debt mess that extends into commercial real estate, credit cards, auto loans, as well as housing.

[Winstonm]

Richard,

Another compelling issue is the problem now facing the bond insurers like MBIA and ACA - there are billions of dollars of municipal bonds insured by these institutions whose own solvency is now being questioned.

ACA has already been downgraded and MBIA is on downgrade watch. As the bonds insured by these companies carry the same rating as the insurer, a downgrade below investment grade will cause a forced sale of these municipal bonds - which have historically been thought only a step below the safety of U.S. treasuries.

There is genuine systemic risk underlying this whole ordeal, and few seem to be aware of its existence.

[mike777]

Winstonm, on Jan 1 2008, 04:52 PM, said:

Quote

Let us go back to square one of the issue. The subprime mess. What is this?

It is an issue of insolvency - an inability to service debt with a corresponding inability to sell the asset at an amount that covers that debt.

But it is not only a subprime mess - it is a debt mess that extends into commercial real estate, credit cards, auto loans, as well as housing.

Lets go back to before square one.


As I understand it, my local bank borrows one dollar from me when I put it into my checking account. (liability)
They then loan out ten dollars, yes ten, in long term loans based on my lonely one buck. (assets!)
Yes I am suggesting banks create money/assets.

Now I spend my one dollar in my checking account. In fact I sometimes overdraw my checking account. No problem so far.

Some people do not repay their loans.


You seem to think this whole system somehow may create a mess? I am shocked!

[Winstonm]

Let's go one step futher.

A customer deposits $100 into a bank checking account. The bank then deposits $10 with the Federal Reserve banks - the reserves - and can lend out 10X$90 or $900 dollars.

But instead of simply loaning $900, the bank takes that $900 loan and adds a bunch of other loans, packages them into bundles and sells the entired package of loans to a Wall Street bank for the cost of the loans + a fee. Now the bank has no liabilities against its $90 in assets, and is thus in a position to do the entire process all over again. (Yes, I am saying that securitization has effectively bypassed fractional reserve requirements.)

Meanwhile, the Wall Street bank takes the Residential Mortgage Backed Security it bought from the bank along with others it bought from other banks, takes out the riskiest part, the mezzanine tranches, and bundles all these mezzanine tranches into a whole new security, sliced into tranches based on which tranch gets paid first, and shows Moodys or S&P or Fitch this neat product that they in turn give their blessing to by rating this repackaged crap as AA because of faulty computer models that say that housing collateral value always goes up and never falls.

So now with their new AA rating on this boatload of *****, the Wall Street hucksters sell this Trojan Horse to investment firms all over the world.

Eventually, the crap loans and the golden loans are so comingled that no one has a clue where the good loans or the bad loans are, who holds risk and who doesn't, who can pay back the default insurance bought and who can't, and so everyone simply stops playing the game.

How can this simple concept ever cause a problem?

[mike777]

Winstonm, on Jan 1 2008, 05:36 PM, said:

Let's go one step futher.

A customer deposits $100 into a bank checking account.  The bank then deposits $10 with the Federal Reserve banks - the reserves - and can lend out 10X$90 or $900 dollars. 

But instead of simply loaning $900, the bank takes that $900 loan and adds a bunch of other loans, packages them into bundles and sells the entired package of loans to a Wall Street bank for the cost of the loans + a fee.  Now the bank has no liabilities against its $90 in assets, and is thus in a position to do the entire process all over again. (Yes, I am saying that securitization has effectively bypassed fractional reserve requirements.)

Meanwhile, the Wall Street bank takes the Residential Mortgage Backed Security it bought from the bank along with others it bought from other banks, takes out the riskiest part, the mezzanine tranches, and bundles all these mezzanine tranches into a whole new security, sliced into tranches based on which tranch gets paid first, and shows Moodys or S&P or Fitch this neat product that they in turn give their blessing to by rating this repackaged crap as AA because of faulty computer models that say that housing collateral value always goes up and never falls.

So now with their new AA rating on this boatload of *****, the Wall Street hucksters sell this Trojan Horse to investment firms all over the world.

Eventually, the crap loans and the golden loans are so comingled that no one has a clue where the good loans or the bad loans are, who holds risk and who doesn't, who can pay back the default insurance bought and who can't, and so everyone simply stops playing the game.

How can this simple concept ever cause a problem?

hmm no.


the 100$ is a liability. Customer deposits are liabilities, not assets.
loans are assets, not liabilities...the bank sold assets.

They had a timing mismatch. The borrowed short term...and loaned out long term. Danger Danger.

to help solve the timing problem they sold the long term assets and got cash to pay off their liabilities when you write a check and demand your money back.

If you have no idea if you are buying crap loans(assets) or great loans(assets)..cool........may I sell you more please, sir?

If I know and you do not know, that is what makes markets. If you do not want to know, fair enough. If I lie, throw me in jail for fraud and no one will ever do business with me again..or maybe they will...cool.....

[Winstonm]

Quote

the 100$ is a liability.
loans are assets, not liabilities...the bank sold assets.

Thanks for the clarification, Mike.

But if it sold assets and kept the liability, isn't it still in position to make a new loan to balance the books?

Quote

They had a timing mismatch. The borrowed short term...and loaned out long term. Danger Danger.

Exactly. In fact, this - as I understand it - was Northern Rock's entire business model. Works O.K. as long as the collateral asset value is rising and the short term paper market is liquid - not so well, otherwise.

IMO, the whole fiasco had 3 problems:
1. The Greenspan-led Fed held rates too low for too long, causing an artificial demand based on mortgage rates that outstripped supply and thus caused an overheating of prices.
2. Loan originations were either non-regulated or poorly regulated to allow borderline criminal behavior.
3. The ratings agencies relied on flawed models as guides to rate CDOs and such.

Without these three occurences, the problem could not have grown out of control that I can see.

[mike777]

Winstonm, on Jan 1 2008, 05:49 PM, said:

Quote

the 100$ is a liability.
loans are assets, not liabilities...the bank sold assets.

Thanks for the clarification, Mike.

But if it sold assets and kept the liability, isn't it still in position to make a new loan to balance the books?

hmm the books should always be in balance...hmmm always......that is why they have accountants to balance the books.

If your books are not in balance all the time that is hmm accounting fraud?

[jtfanclub]

Al_U_Card, on Jan 1 2008, 03:42 PM, said:

Which means that the Dow will see under 10K again.....right? (Japan's SI having sunk almost 50%)

The "Dow" is an average of industrials, I don't expect it to drop quite that far. Close.

http://finance.yahoo.com/q/bc?t=5y&s=%5EDJ...5EIXIC&c=%5EDJI

Both the Down Jones Transportation and the NASDAQ more than doubled since 2003. Wouldn't surprise me a bid for them both to drop down to half their summer values.

S&P 500 and Dow Jones Industrials...maybe 70% of their current values.

[Winstonm]

mike777, on Jan 1 2008, 05:52 PM, said:

Winstonm, on Jan 1 2008, 05:49 PM, said:

Quote

the 100$ is a liability.
loans are assets, not liabilities...the bank sold assets.

Thanks for the clarification, Mike.

But if it sold assets and kept the liability, isn't it still in position to make a new loan to balance the books?

hmm the books should always be in balance...hmmm always......that is why they have accountants to balance the books.

If your books are not in balance all the time that is hmm accounting fraud?

Isn't this balancing of the books the very reason for the intrabank lending?
And if fellow banks are not willing to take your RMBS as collateral for an overnight loan.....?

[mike777]

1) If people will not loan me or my company money, ya I am in big trouble. In fact I am out of business until someone does. Here are the keys to the front door of the company. Good luck.
2) The broad USA stock market going down 50% sounds pretty bad to me.
3) Maybe I should buy bonds(mortgages) or real estate (houses)? Broad based commodities anyone? Of course demand(prices) may drop for some of these things also.

[hrothgar]

mike777, on Jan 2 2008, 02:10 AM, said:

3) Maybe I should buy bonds(mortgages) or real estate (houses)? Broad based commodities anyone? Of course demand(prices) may drop for some of these things also.

I think that industrial commodities are going to go up, up, up...

Mining and petroleum companies if you're boring, metal futures if you're aggressive

Copper has really spiked over the past few years, however, I think that there is still upside.

[mike777]

Yes, the argument against commodities is that a worldwide..ok read china, industry recession occurs and demand tanks. Of course recessions do come and they do go...so

Billions still like to eat or keep warm or keep cool even in recessions. Babies are made...babies grow up....the world hopefully grows and does not, does not end in that big bang thingy.

[Al_U_Card]

And when the crux of the issue becomes indebted servitude? We owe our souls (and bodies and futures) to the company store (corporations/banks).

The largest growth industry in the US lately? Prisons and prison service providers. And they haven't started to throw debtors in.....yet.

[Al_U_Card]

jtfanclub, on Jan 1 2008, 05:55 PM, said:

Al_U_Card, on Jan 1 2008, 03:42 PM, said:

Which means that the Dow will see under 10K again.....right?  (Japan's SI having sunk almost 50%)

The "Dow" is an average of industrials, I don't expect it to drop quite that far. Close.

http://finance.yahoo.com/q/bc?t=5y&s=%5EDJ...5EIXIC&c=%5EDJI

Both the Down Jones Transportation and the NASDAQ more than doubled since 2003. Wouldn't surprise me a bid for them both to drop down to half their summer values.

S&P 500 and Dow Jones Industrials...maybe 70% of their current values.

Here in Canada we have the TSX which is more broad based. There is also a large component in raw materials and resources.

Unfortunately, the banking/financial sector is also very large.

10,000 sounds about right to me.

[pdmunro]

Quotes re subprime crisis:

"These sorts of things are what's known to the academics as "endogenous to the system"--that is to say, they're normal. They happen usually every three to five years. So we had a freezing up of the market for corporate credit in the summer of '02. We had an equity bubble just before that. In '98 we had Long-Term Capital. In '94 we had a mortgage collapse like we're having right now. In 1990 we had an S&L collapse. In '87 we had a stock market collapse. These things flow through the system, and they're part of the system."

Bill Miller, Chairman and chief investment officer, Legg Mason Capital Management
http://money.cnn.com/galleries/2007/fortun....fortune/5.html


"Gary Shilling’s 12 Investment Themes:

1. The housing bubble has burst.
2. The Fed will ease; meanwhile, the yield curve will remain flat inverted
3. U.S. stock prices will fall, perhaps below the 2002 lows, in the midst of a major recession
4. China will suffer a hard landing due to domestic cooling measures and U.S. recession
5. Weakness in the U.S. and China will spread globally, dragging down economies and stocks worldwide
6. Treasury bonds will rally
7. The dollar will rally, but not before the recession is global
8. Commodity prices will nosedive
9. Maybe global and chronic deflation will commence
10. Maybe U.S. consumers will start a long-run saving spree, replacing their 25-year borrowing and spending binge
11. Maybe deflationary expectations will become widespread and robust
12. Speculative areas beyond housing may suffer in 2008. "

Gary Shilling, Forbes magazine columnist
http://store.digitalriver.com/store/es_764...illing_FDC_Edit