Growth of Problem Banks (Unofficial)

With the number of institutions on the unofficial problem bank list now over 800, here is a review of the growth of the unofficial list ...

We started posting the Unofficial Problem Bank list in early August 2009 (credit: surferdude808). The FDIC's official problem bank list is comprised of banks with a CAMELS rating of 4 or 5, and the list is not made public (just the number of banks and assets every quarter). Note: Bank CAMELS ratings are not made public.

CAMELS is the FDIC rating system, and stands for Capital adequacy, Asset quality, Management, Earnings, Liquidity and Sensitivity to market risk. The scale is from 1 to 5, with 1 being the strongest.

As a substitute for the CAMELS ratings, surferdude808 is using publicly announced formal enforcement actions, and also media reports and company announcements that suggest to us an enforcement action is likely, to compile a list of possible problem banks in the public interest. Some of this data is released with a lag, for example the FDIC announced the June enforcement actions yesterday.

Problem Banks Click on graph for larger image in new window.

This graph shows the number of banks on the unofficial list. The number of institutions has more than doubled since early August 2009 - even with all the bank failures (failures are removed from the list). The number of assets is up 50 percent.

On August 7, 2009, we listed 389 institutions with $276 billion in assets, and now the list has 808 institutions and $415 billion in assets.

Note: For Q2 2009, the FDIC listed 416 institutions and $299.8 billion in assets (slightly more than the unofficial list a month later). The FDIC Q2 2010 Quarterly Banking Profile will be released in a few weeks.

The four red dots are the number of banks on the official problem bank list as announced in the FDIC quarterly banking profile for Q2 2009 through Q1 2010. The dots are lagged one month because of the delay in announcing formal actions.

The unofficial count is close, but is slightly lower than the official count - probably mostly due to timing issues.

Based on the current trend, there is still a reasonable chance that the unofficial problem bank list will be over 1,000 banks later this year ...

Discount Window Borrowings Plunge To Just $11 Million, Lowest Since 2007; And Other Observations On The Future Of Fed Liabilities


In all the recent hoopla over Excess Reserves and spurious rumors over whether or not they should generate any form of interest (readers will recall a key catalyst for a surge in the market two weeks ago was the expectedly false rumor that Bernanke would announce the elimination of any IOR (Interest Paid On Reserves) rather than keeping the even current minimal 0.25% rate), everyone seems to have forgotten that old staple: the Discount Window. And probably logically so: while the Excess Reserve issue is one that deals with excess liquidity in the banking system (by definition: otherwise it would be lent out to consumers), Discount Window-related concerns deal with the opposite, or a liquidity deficiency. Logically, the two are mutually exclusive: near record excess reserves held with Federal Reserve Banks simply means that banks are not in any want for money (of any term, but most specifically ultra-short term).Looking at the Fed's H.4.1 statement confirms that for the week ended July 29, the Fed's Primary Credit facility (aka the current version of the Discount Window, together with the Secondary Credit and the Seasonal Credit Facility) usage has plummeted to just $11 million: a negligible number for a "rescue facility" that at the peak of the crisis saw more than $100 billion in overnight borrowings. The finding is not surprising, when considering that the rate on the Primary Credit Facility is 0.75%. As this is higher than the rate on the 2 Year Treasury, there is very little banks can do in reinvesting capital that is more expensive than even long-term funding sources. In other words, with well over a trillion in Excess Reserves, banks are becoming increasingly self-funding, at least in the medium term, and seek to disintermediate themselves from the Fed. In looking at the same problem, but from the perspective of the IOR, the Atlanta Fed concludes: "One broad justification for an IOR policy is precisely that it induces banks to hold quantities of excess reserves that are large enough to mitigate the need for central banks to extend the credit necessary to keep the payments system running efficiently. And, of course, mitigating those needs also means mitigating the attendant risks." An environment in which banks are increasingly leery of relying on the Fed for funding, irrespective of whether IOR at 0.00% or 0.25%, is not one in which consumer should expect to see any incremental lending any time soon.

The chart below shows discount window borrowings since 2007, combing the Primary and Seconady Credit facilities.

A glance at the other side, or the Fed's "excess liquidity" liabilities, reveals that while Excess Reserves have declined by almost $200 billion since their peak of $1.227 trillion on February 24, to the current $1.045 trillion, the balance has been more than made up by the Deposits with FR Banks other than Reserves, which during the same period has more than offset the Excess Reserve decline, climbing from $45 billion to $250 billion. Indeed, as the chart below demonstrates, banks continue basking in the glow of the Fed liquidity excess, whether they collect 0.25% on this capital or not. While the $205 billion increase in the latter category deserves an analysis of its own, we will put that off to a future date.

Combining the two charts yields the following observation: there are three distinct regimes visible: the first one pre Bear Stearns, was one in which the ratio of Primary Credit Borrowings to Excess Reserves was negligible. Then, at the collapse of Bear (blue shaded area), the ratio of Discount Window Borrowing to Excess Reserves surged to over 100%, at its peak hitting 250%: this was Regime 2. However, Regime 2 promptly ended when Lehman also failed, pushing the ratio back to historical levels, as Excess Reserves took off to offset for the massive surge in Fed "assets" as part of QE 1.0. With the most recent reading, the ratio of the two is back to 0.0%.

So what happens next?

If, as Bullard expects, QE 2 is imminent, then the assets imminently purchased by the Fed will result in yet another massive offset of Excess Reserves: in other words, should QE 2.0 prove to be about $2-3 trillion, all of a sudden banks will find themselves depositing instead of $1 trillion in cash with the Fed, anywhere between $3 and $4 trillion. When one considers the FRNs in circulation are less than $1 trillion (as the other main Fed liability), and this relationships starts to get problematic. If the Fed has difficulty explaining why banks are unwilling to lend to consumers when there is over $1 trillion in cash sitting and collecting dust, or 0.25% as it is technically known, the problem gets even thornier when Bernanke (and Jamie Dimon) have to defend 4 times this number. Surely, the US consumer will demand that banks open up the spigot and provide cash to everyone no matter what their creditworthiness, simply as a result of all the excess money floating around. Will lowering the IOR to 0% at that point help? Not at all due to massive problems such a move would create in the shadow banking system. Very much contrary to expectations of lowering the IOR to 0%, Bernanke in fact provided reasons for why such a move would make no sense:

"… Lowering the interest rate it pays on excess reserve—now at 0.25%—could create trouble in money markets, he said.

" 'The rationale for not going all the way to zero has been that we want the short-term money markets, like the federal funds market, to continue to function in a reasonable way,' he said.

" 'Because if rates go to zero, there will be no incentive for buying and selling federal funds—overnight money in the banking system—and if that market shuts down … it'll be more difficult to manage short-term interest rates when the Federal Reserve begins to tighten policy at some point in the future.' "

In other words, all those who say QE2.0 will do nothing to stimulate the economy are correct, as all such a greenlighted action would encourage is the warehousing of yet more cash by banks. And since banks have no incremental incentives to lend it out, it doesn't matter if the Fed's liabilities are $2.5 trillion or $2.5 quadrillion. Instead of stimulating inflation, which is the end goal, all such an action would do is to create further doubts about the stability of the dollar, which in turn, as Ambrose Evans-Pritchard discussed, is a sure way to go to hyperinflation without first passing either Go, or inflation. Hyperinflation: not in the sense of a pull-driven rise in prices from cheap consumer credit, but a complete collapse of faith in the monetary unit of exchange, likely predicated by a rush to physical commodities and a collapse in the paper system supporting the forced shorting of commodities such as gold. And with Treasuries yielding next to zero courtesy of the expectation of the Fed becoming the end buyer for all paper, and stocks surging to infinity, on the assumption that the Fed will not allow the failure of any risk assets, the end result will be the most divergent market in history, in which both inflation and deflation are priced at the very margins with no gray area inbetween (a theme we have been observing increasingly more often on the pages of Zero Hedge). While that may be good in the short-term for long-only holders of any asset classes, in the medium run (not to mention long), it means the end of the financial system, as the Fed will be caught in a Catch 22 whereby it needs to sustain the perception that it will print into infinity to maintain the divergence, or else the convergence will be one of catastrophic proportions. Of course, even the continued decoupling between inflation and deflation will ultimately eat away at the core of the monetary system, resulting in the complete destruction of the dollar. And with both inflation and deflation priced in at the extreme margin, the only sure alternative will be non-paper based forms of exchange. And unless someone can come up with a substitute to the 2,000 year old legacy cash alternative of gold, it is obvious what real asset class will benefit at the end, as society once again reverts from a monetary system to something far simpler, and far less encumbered by the scourge of any society that are Central Banks.

DeLong Smackdown Watch: Structural Unemployment Edition

Robert Waldmann is not alarmed:

This is really getting extreme.  All this discussion of the shift of the Beveridge curve is discussion of 1 (one) data point 2010Q2.  Earlier points are above the non-Beveridge line, but, you know it is (and always has been) a curve.  It is also not exactly the cutting edge approach to presenting data on vacancies and unemployment.  That would be the matching function.  Discussions of the vacancy rate and unemployment rate in 2010Q2 do not discuss gross flow -- hiring and job separations.  You and others assume that gross hiring is low for some reason, since, otherwise the unemployment rate would fall.  Some data on hiring and firing might be relevant no ?  It also should be available to the social security administration (I will try to find numbers -- I guess my complaint is about statistical agencies not economists).

A stable matching function implies counterclockwise cycles above the Beveridge curve.  Such cycles are visible in all data sets which include major recessions (I complain about too much attention to one number but also wonder why the graph I always see starts in 2000).  I am absolutely totally not at all convinced yet that there is a hiring anomaly.  I'd like to see a second data point before I read the hundredth post on v and u in 2010Q2.  I think I will have to avoid economics blogs to achieve this goal.

Now on the famous Ben Venue example (I haven't read a hundred posts about the datum 47 qualified applicants yet either but I'm getting there) I think the main point of the complaint was not the only 47 qualified applicants (which might just mean they were offering too low a wage) but the over 3,600 job applications.  Notice there is a news story with 2 numbers (maybe 3 counting the offered wage) and everyone ignores one of them.  My sense is that issue is that there are a huge number of desperate unemployed people who apply for jobs knowing they have only a tiny chance of being hired.  Normally people try to apply only for jobs for which they are qualified, but if there are no such jobs vacant, they have no choice but to bet on long shots.

Now this hord of desperate unemployed people might make it more costly and time consuming to hire and might reduce hiring as a function of vacancies and qualified unemployed people.  If so, the solution is to extend unemployment benefits to prevent people from making trouble by desperately clogging all paths to employment.  However, I'll wait for a second data point before speculating further.

Meh: False Premise or Danger?

The WSJ has this rather interesting story up on The Internet...

The Journal's study shows the extent to which Web users are in effect exchanging personal data for the broad access to information and services that is a defining feature of the Internet.

In an effort to quantify the reach and sophistication of the tracking industry, the Journal examined the 50 most popular websites in the U.S. to measure the quantity and capabilities of the "cookies," "beacons" and other trackers installed on a visitor's computer by each site. Together, the 50 sites account for roughly 40% of U.S. page-views.

Well, yes and no.

Let's quantify a few things and define some terms.

  • A cookie.  A cookie is an alphanumeric code.  It is of no value to anyone except the person who sets it.  That person (the web site) uses it to link you to some action - for example, it can be an authentication token, so when you come back to a site the site "knows you."  It can link a shopping cart (held on that site, say, Amazon.com) to you, so if you close a browser window and come back, it's still there.  But the cookie itself doesn't carry any useful information - rather, it is a bookmark into that useful information.  Note that a cookie, by itself, is not a password.  For example, a cookie on my forum might be "1020939395912391912959".  Can you divulge a password from that, or even a login ID?  Not directly.  If you were to send it (and it was a valid cookie), however, you would discover that it indeed "belongs" to a given user, in that you would be signed in as that person.  Cookies are typically very "sparse-space" objects to prevent "guesses" from being effective - that is, a site might use a 64 or 128-bit wide "space" from which it generates a random number to use as the cookie.  As such the odds of guessing at random one that actually corresponds to something useful is close to zero.

  • A "beacon" or "silent file".  These are typically zero-size (or nearly-so images.  Their purpose is simply to identify that you visited a given page where they appear, and record that with your IP address.  That recording comes out of the setting site's access logs.

  • Javascript and other similar tools.  This is where the real problem can arise.  A "javascript" file can do almost anything you permit it to.  Likewise, an "applet", "browser helper object" and similar is actual code running on your machine.  The mischief that such a tool can exercise is literally unlimited.

Cookies are not a concern in and of themselves.  They store nothing, and unless you submit some information the only thing a cookie does is track your presence.  That is, it may identify your unique computer to some site, so it knows you were there "X" number of times.  If you want to sign into a site that requires you to provide a password of some sort, you pretty much need to allow cookies to function, because the web's protocol is stateless - that is, once the page you're viewing has downloaded there is no persistent connection between you and the web site.  As such without something like a cookie when you click something it has no way to know that you are who you were, so to speak.

A "beacon" is similarly rather useless, other than to identify that you viewed a specific page.  Again, the utility of such knowledge is questionable, but more importantly if you viewed it, why do you mind that the person who published it knows you viewed it?

The third category, however, is a problem.  And this is where I would draw the line.

Things like Javascript, toolbar extensions and similar items can be tremendously useful.  But they are also potential problems, because you may not know that the information you're providing is being transmitted.

For example, if you order a product it's obvious you did.  The merchant knows, and he has a right to use that fact, absent some agreement otherwise.  But what if you start to type in an order, then abandon it?  Does he have a right to know that?

Well, with some of these tools, he does know that.  More importantly, if he's got a browser helper or other persistent application on your machine, he then potentially can find that you bought a competitor's product - or are looking at one.

That's a potential problem.

More insidious would be outright nasty things, such as a keystroke logger.  While I've yet to see anything like this "in the wild", it is not impossible if you can get someone to load a toolbar or other similar extension.

I find most of this sort of article intentionally alarming, and frankly, misleading.  There's nothing wrong with a publisher knowing you looked at their material, any more than there is with a bookstore keeping records of your purchases if you give them identifying information, and using that to mail you coupons or something similar.  In that regard the online world is exactly like the offline one.

There's a gray area though when you have a site like eBAY that allows dozens of other companies to stick tracking devices (mostly beacons) on their site.  That's a potential problem, because now any firm that buys that space suddenly gets a copy of what you were looking at or doing, and yet you have no relationship with that company.

It would be easy to say "ban that!" but doing so means the advertising model of the web is destroyed.  For example, The Market Ticker runs Google "Adsense" ads on the right sidebar.  Google thus gets information when you view a Ticker, and they in fact can see what the Ticker was about.  I have no control over what they do with this information once they have it.  Note that all they're getting in this case is that you looked, but still.....

The forum, likewise, displays ads on the top bar and, for non-donors, interleaved with messages.  Again, Google can "see" what the link is you're reading.  If you're signed in they can't see beyond the URL (since they aren't signed in) but if you're not on an area that requires authentication they can see the entire contents of the page - just as you do.  Do they look and analyze the content on the page?  I presume so.

Can you separate this out?  Not really, unless you want to make display ads - that is, the payment for eyeballs (not clicks or purchases) unlawful.  In addition disallowing the advertiser to see the content associated with his ad would prohibit the targeting of those ads to the relevant content.  You'll note that if you read an article about Barack Obama on The Ticker, the ads you see have to do with them.  This is only possible because Google can see what you're reading.  Without that, targeting becomes impossible to accomplish.

Where I draw the line and am willing to sound the alarm is when a site tries to load an application, without your explicit permission when the application is loaded or launched, and an explicit description of exactly what it stores, sends and to whom and why.

Indeed, I'd go so far as to call such an act theft, since your computer is your property, and by going to a web page you are not giving permission, implicitly or otherwise, for code to be loaded and executed on your computer.

Unfortunately, the Journal article aggregates together "zero files" (which simply note you accessed a given page) and javascript and similar "user intercept" tools, which can intercept what you type, mouse-over and similar, AND TRANSMIT IT WITHOUT YOUR KNOWLEDGE OR CONSENT.  This is a dramatic disservice, because while one part of what they call "beacons" are of no harm at all, the other is potentially quite dangerous and, in my opinion, should be legally barred.

I have no problem with Javascript that is used to expand or reduce a menu, or otherwise direct your flow around a site.  That's fine.  But the other extreme - using a "Bug" to transmit the text you are typing into an email box on eBAY, for example (which you presume is going only to the recipient!) to an advertising agency?  THAT is dramatically over the line.

If I caught an advertising agency (e.g. Google) doing that on my sites, they'd be toast.  Instantly.  What I don't know, because The Journal doesn't tell us, is whether they actually detected this sort of thing - and if so, on which sites they did.

Signing into a web site inherently requires the use of cookies or their moral equivalents.  That is thus implicitly part of the web, and I find no problem with it.  Likewise, "beacons" are no more than a simpler way for a site to parse the log of your access, which all sites generate as an inherent part of their operation (although some intentionally throw the data away.) 

If we need regulation it's on the third category of web activity - that should be absolutely unlawful without the explicit consent of the consumer, who first is apprised of exactly what is being monitored, transmitted and stored, along with what is being transmitted and how it will be used and exactly who is going to get the data, with explicit and strict penalties for either non-disclosure or lying.

In short, the "study" the Journal did is that it doesn't distinguish between content on the host's machine (that is, what you view, which can be gleaned from ordinary web analytics off the log files of the web server) and actual loaded code that is literally spying on you.

Specifically, it is the unauthorized transmission of information - that is, transmission of your data not as a result of clicking something, not as a result of submitting text in a box or form, but rather automatically just because you mouse over or key something - without submitting it - that is problematic.

I'd like to see a follow-up to this, and have so noted to the article's authors....

High-Frequency Programmers Unhappy Making 6-Figures; Investors Punish Corporate Expansion Plans; Chinese Bank Turmoil; India Develops $35 laptop

Here is some weekend potpourri to ponder, covering a wide variety of global economic topics.

India's $35 Laptops

India develops world's cheapest "laptop" at $35
India has come up with the world's cheapest "laptop," a touch-screen computing device that costs $35. India's Human Resource Development Minister Kapil Sibal this week unveiled the low-cost computing device that is designed for students, saying his department had started talks with global manufacturers to start mass production.

"We have reached a (developmental) stage that today, the motherboard, its chip, the processing, connectivity, all of them cumulatively cost around $35, including memory, display, everything," he told a news conference.

He said the touchscreen gadget was packed with Internet browsers, PDF reader and video conferencing facilities but its hardware was created with sufficient flexibility to incorporate new components according to user requirement.
70% of Companies "Beat The Street" - Here's How

It’s easy to beat low expectations
Quel, as they say, surprise! Aluminum Co. of America kicked off the second-quarter earnings season after the markets closed Monday by beating analysts’ consensus earnings expectations. Alcoa, which is traditionally the first Dow stock to report, had a profit of 13¢ a share versus forecasts of 11¢.

Then, on Tuesday, Intel Corp., the leading maker of computer chips, also beat expectations, with profit coming in at 51¢ a share versus analysts’ forecasts of 43¢. Quel surprise!

Yes, it’s the summer earnings derby, whereby the markets pretend to be surprised by companies beating the consensus forecasts, which, by tacit agreement, have been lowballed. The companies give guidance that is conservative. The analysts willingly concur, rolling over and playing dumb.

In the parlance of the Street, it’s “grooming.” Companies find no advantage in putting themselves out to guide rigorously and precisely; analysts find no advantage in bucking that guidance. It’s a convenient dance, a little two-step that works.

Just as companies pretend to offer guidance with a straight face and analysts concur with a nod and a wink, we in the cheap seats must watch the performance in the knowledge it’s merely an act. The so-called “whisper” estimates — what the Street really expects — becomes a loud prompting from stage left, theatre of the absurd.

The first-quarter earnings “beat” rate for S&P 500 index was 73%, one of the top “surprise” levels in the past 10 years. But recent beat-analyst-expectations rates have all been near the 70% mark.

If economics is the dismal science, what ironic description does fundamental analysis deserve? Of course, securities analysts can hide in the consensus pack. And, of course, an analyst does himself and his firm no real favour by going out on a limb and going against the crowd. You can be wrong with the rest and not be punished. You cannot be wrong against the rest.
Chinese Banks Face Huge Default Risk

Chinese banks face state loans turmoil
China’s banks are facing serious default risks on more than one-fifth of the Rmb7,700bn ($1,135bn) they have lent to local governments across the country, according to senior Chinese officials.

In a preliminary self-assessment carried out at the request of the country’s regulator, China’s commercial banks have identified about Rmb1,550bn in questionable loans to local government financing vehicles – which are mostly used to fund regional infrastructure projects.

Local governments had, until recently, been on a construction spree on orders from Beijing to prop up the economy in the face of the financial crisis. However, since the start of this year, top Chinese bankers and regulators have been warning that many of the loans used to fund infrastructure spending and a property boom could go bad.

Chinese banks lent a record Rmb9,600bn last year – more than double the new loans issued in 2008. But stern warnings by regulators for the banks to slow down lending appear to be having an effect on the economy. The regulator ordered a stop to this type of lending at the start of the month.
Investors Punish Corporate Expansion Plans

Investors Say No to 'Let's Expand' Companies
Among the lessons from earnings season so far: Now is not the time for optimistic CEOs to tell skittish investors an expansion push is right around the corner.

In a sign that the shell shock from the financial crisis, recession and European sovereign-debt mess hasn't worn off, investors last week punished the stocks of companies that are talking openly about plans to expand.

Delta Air Lines executives spent much of an earnings conference call Monday parrying with analysts over the airline's plans to increase capacity by 1% to 3% in 2011, on top of this year's growth of 1% to 1.5%. Delta Chief Executive Richard Anderson said Delta is committed to "capacity restraint," but the stock fell 2.9% that day. The shares lost 2.3% for the week, compared with a 5.4% gain by the NYSE Arca Airline index.

In contrast, the kinder, gentler approach to production capacity went over much better. Harley-Davidson shares jumped more than 13% on Tuesday after the motorcycle maker announced rosy quarterly results and noted its plans to cut shipments by 5% to 10% in 2010.

On Monday, Texas Instruments CEO Rich Templeton pointed to the chip maker's "steady investments in production capacity," saying they were allowing the company "to meet higher demand levels from customers."

The comments and mildly disappointing quarterly revenue pushed the stock down more than 3% Tuesday, though the shares finished the week up 2.5%. Some analysts worried that the expansion could come back to haunt Texas Instruments if the economy softens. The company stressed that prices it has been paying for additional capacity have been good deals, reducing any potential downside risk.

United Airlines parent UAL Corp. got a pat on the back from analysts for its plans to keep capacity additions relatively muted. Its shares jumped 4.8% on Tuesday after UAL released earnings.
Companies for the most part do not want to expand and are instead hoarding cash while outsourcing everything they can to Asia. Pray tell, where is job growth going to come from?

Programmers Want Bigger Slice of the Pie

High-Frequency Programmers Revolt Over Pay
Pity the programmers toiling away at Wall Street's secretive high-frequency trading shops--places like Goldman Sachs ( GS - news - people ), Citadel and Getco. They wrote algorithms that take advantage of fleeting trading opportunities and bring in up to $100,000 a day. In return, they received a fraction of the pay doled out to their bosses.

Now some programmers feel used and are instigating a revolt. They are doing so by striking out on their own or forming profit-sharing arrangements. Jeffrey Gomberg, 32, worked for a trading firm that paid him a low-six-figure income after four years on the job. His trader colleagues, by contrast, made millions manipulating the algorithms he'd written.

Last year Gomberg and a fellow programmer quit their jobs and cut a deal with HTG Capital Partners of Chicago, whose programmers typically trade on regulated futures exchanges. HTG supplies office space, technology and access to exchanges. Gomberg keeps 40% to 80% of net profits, with the percentage rising as his profits do. More importantly, says Gomberg, the programmers retain ownership of the code they write.

“We designed this deal so we wouldn't lose intellectual property,” he says. “If it doesn't work out, we can go somewhere else and take all the software [that we developed]. That's really the key.”

Another high-frequency programmer, who spoke on condition that his name not be used, quit two firms that he believed were underpaying him. He says one group was generating $100,000 a day from his high-frequency trading software and paying him $150,000 a year. “I'm on my way to making a ton,” he says.
Given that HFT programs put out offers that are not legitimate (thus constituting fraud), I fail to see why HFT should not be banned. Thus not only is HFT not needed, neither are the HFT programmers.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List


Housing: An Exercise In Truth-Finding

Now comes Hankey Pankey Paulson trying to cover up his own legacy, with the following piece of bilge:

A significant root cause of the crisis was the combined weight of government policies promoting homeownership; these are apparent in the housing GSEs, the Federal Housing Administration (FHA), the Federal Home Loan Banks, the federal tax deduction for mortgage interest and various state programs. Homeownership was overstimulated to the point that it was unsustainable and dangerous to the broader economy.

Uh huh.  Remember this, it's all the Democrats fault.

It's not the fault of those who put together "faux capitalism" - that is, the principle that when one wins one keeps the money.  When one loses - and especially when one blows an intentional bubble and then has it collapse around them, they lose everything they allegedly "made" plus perhaps more.

Let's also not forget that Hankey Pankey was a tremendous personal beneficiary of these very same policies.  After all, it was he who went to the SEC and got the leverage limits removed from his own company - Goldman Sachs - that then allowed them to "gear up" into that very same housing market with dodgy securities such as the Abacus CDOs.

The best way to address the systemic risk posed by Fannie and Freddie is to shrink them by eliminating their investment portfolios -- and their huge debt loads that put the financial sector at risk and necessitated a costly public rescue.

Really?  Why didn't you do that in 2007 or 2008 Hank?  Those portfolios never held a government guarantee, and you know it.  In fact, it's right on the face of every prospectus!

Right there in black and white Hank.

Now I know you'll say that had you not supported Fannie and Freddie "the financial system would have immediately collapsed."

Ok, let's say I agree with this.  I don't, but that's neither here nor there, because in point of fact you came to Treasury before the crisis began, and had you believed this at the time you could have issued a strong statement that Fannie and Freddie paper is not guaranteed and won't be, and further, you could have direct OTS and OCC to exclude their preferred stock (among other things) from bank capital. 

You did none of the above.

The GSEs are providing an enormous stimulus to the economy. Placing Fannie and Freddie in conservatorship was, in my view, the most effective of the stimulus efforts undertaken in the past two years. This stimulus was aimed squarely at the driver of our financial and economic crisis: the decline of home prices. Without public support, ensuring that mortgage financing was available during the worst moments of the financial crisis and the ensuing 22 months, the housing market would have ground to a halt, home prices would have spiraled downward, foreclosures would have skyrocketed, and financial institution balance sheets would have suffered greater losses, leading to a prolonged downturn and the loss of millions of additional jobs.

Again: The housing bubble and the faux "stimulus" that rising prices produced WAS FALSE.  It in no way reflected reality and you cannot make it reflect reality now, years later. 

PRICES MUST CONTRACT TO AFFORDABLE NORMS to restore balance, and we are nowhere near that point.

Home sales are still suffering despite record-low mortgage rates, and the availability of low-cost mortgage credit is vital to avoid a further housing decline that tips the economy back toward stagnation.

Home sales cannot recover until the price of a house reasonably reflects utility value - not financial speculation.  This correction has not run anywhere near it's full course.  Every action taken thus far has been an attempt to avoid this reality.

I was sent an Excel spreadsheet by Congressman Grayson's office last evening which, according to his office, can be redistributed.  It makes clear EXACTLY how bad this bubble really is, and why even today this is not over.

A full 30% of homes with mortgages today are in negative equity on their first mortgage - that is, excluding any seconds, HELOCs and similar.  The highest underwater statistics are found in Nevada where an astounding 78% of homes are underwater, Arizona, Florida and Michigan with nearly 50%.  No state has fewer than 10% of their first mortgage loans underwater.

This isn't an accident, it's an intentional act.  These over-valuations - that is, the unsecured lending outstanding - accounts for nearly two and a half trillion dollars.

That's "money" that was siphoned off intentionally by the banksters to their personal profit, and your detriment.  It is money that was effectively stolen from you, the American People - you were goaded into taking on more and more liability without any actual change in the true economic value of the asset you pledged.  The housing industry, which skims 6% or more off every transaction, made hundreds of billions additionally - all siphoned off of you.

The correction of this imbalance cannot be avoided.  Negative equity cannot be "waved away" and returning to bubble valuations in an attempt to make it so is not possible - the leverage that allowed it before was fraudulent.

The "Home buyer tax credit" was an intentional act of fraud perpetrated by government in an attempt to avoid acceptance of the truth - and to protect those financial institutions and individuals that profited from screwing you, the American people, over the last decade.  All it did was create even more bagholders - it solved nothing because it can't.

We must accept reality in this country.  We must clear this market and allow prices to return to their natural, economic values, even when those values are far below today's prices.  We must hold those who were responsible for making the fraudulent employment of leverage in this fashion to account, and we must prevent it from happening again.

But we cannot avoid the economic pain that this adjustment will cause.  I'm well-aware that nobody wants it, and nobody wants to admit to their culpability, but none of what someone wants changes the mathematical facts.

Our economy cannot recover in truth until these adjustments - and acceptance of reality - occurs.

14.7 Million (19%) Of US Mortgages Have $770 Billion In Underwater Equity, $2.4 Trillion In Total Debt Impaired


An excel spreadsheet released from a recent briefing by Mark Zandi and Robert Shiller is making the rounds within the blogosphere. It provides a useful compilation of the underwater equity statistics in the country. In a nutshell here are the observations:

  • 19%, or 14.748 million of the 77.570 million US households, are in negative equity
  • 30.6% of the 48.243 million of homeowners with first mortgages are in negative equity
  • 21.8% of the 67.578 million in owner-occupied single family homes are  in negative equity
  • 4.133 million of the 14.748 million of underwater homeowners are underwater by 50%+, meaning the owe more than 50% more than their homes are worth
    • Of the 50%+ underwater category, the worst states are California (672K), Florida (423K), and Texas (344K)
  • Total Negative Equity in the US is currently estimated at $771.1 billion
    • California mortgages have $234 billion in negative equity, Florida mortgages have $79 billion in negative equity, Texas mortgages have $48 billion in negative equity
  • $2.4 trillion in total mortgage debt is impaired due to negative equity

How Mark Zandi, who prepared this spreadsheet according to the meta data, could look at this data and come up with his recent paper in collaboration with Blinder, claiming that the recession is over, is simply beyond rationalization.

Some of the key data in chart format:

Total and relative mortgages in negative equity:

Underwater mortgages as a % of all owner occupied households:

Total negative equity by state:

Underwater homeowners as a % of owner occupied households: 50%+ and Total

Those who wish to obtain the source Mark Zandi excel should write to the usual place.

 

Deflation Upon Us

I enjoyed my "Spotlight Session" with Tom Sosnoff yesterday afternoon. Tom spoke a lot about his fondness for bond futures these days, and I'd never really look at these charts. I was intrigued by his favorite (finally! a market exists with a clear trend!)

0731-tz

The biggest question before us, I believe, is whether inflation or deflation is going to be the course of the next few years. A lot of folks - precious metals fans in particularly, obviously - have signed up on the inflation side of the ledger.

To my way of thinking, so many indexes out there are screaming "deflation" that it's difficult to ignore. The above chart, at the very least, suggests inflation is nowhere on the horizon. Have you seen interest rates? I never thought I'd touch my 4.875% mortgage, since it was so good, but I'm going through all the paperwork right now to refinance at 3.75% - amazing! This is not an inflationary environment.

I would also note that the gold bugs index is hinting at some action very similar to what we saw in that glorious summer of 2008. Take note of the tinted areas and their relationship to each other.

0731-hui

I'm going to check out the new comments section now and see if anyone is having trouble. Have a good weekend!  

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