Free Fall!! Musings ...
The Problem: Lack of Bank Capital
On a balance sheet, assets are on one side and liabilities (plus net worth) on the other. Net worth is also called bank capital. Bank capital is required to be 6% of assets at the least (the requirement came about after the 1980s, the Savings & Loan Crisis and Third World Debt Crisis - one in S&Ls the other in the banking system).
When an asset becomes "non-performing" or delinquent, the asset is removed from the balance sheet and an equal charge is made to bank capital. You see, it is called a "Balance Sheet" because it must balance. Therefore, if a bank eliminates "too many" assets, bank capital will go to zero!!! The bank can not delete the liabilities - those are YOUR DEPOSITS!!!! (YOUR MONEY!!)
Therefore, banks must keep these assets on the books AND value them high enough to keep bank capital positive - OR the bank is bankrupt!
"Marked to Market" - this rule means that assets must periodically be valued AT THE MARKET RATE!!!
This is the "RUB" because when housing prices fell - the value of the mortgages fell!!! Thus the assets were not worth as much as previously stated.
That's the simple part.
In 2004, the top 5 Investment Banks had a meeting with the SEC to "relax" the rule on what qualified as bank capital. Mortgaged Backed Securities were now allowed by the SEC to be used!!! So when these became worth less, so did the most established companies in the world: Bear-Stearns, Morgan Stanley, Merrill-Lynch, Goldman Sachs and Lehman Brothers.
Rescue: When Bear Stearns was merged into J.P. Morgan Chase, then everyone believed the government would "COVER" the companies that were "TOO BIG TOO FAIL."
Then Secretary Paulson made the decision to let Lehman Bros. fail.
That prompted a loss of Faith and Trust. THIS IS THE PARALLEL to the Great Depression!
In the last four weeks since that decision, little seems to have really been done to shore up that faith. Yes, Congress HAS allowed the U.S. Taxpayers to become liable for $700 billion worth of mortgages. However, during that week, more than that was already wiped out in "paper" value!!! (Sorry for my ignorance here but how can you make the banks "mark to market" and then call that "paper" value?!? Seems to me, either it IS real or it IS paper and therefore not yet "real.")
SO WHY THE FREE FALL!!!
No one has restored the bank capital yet. The issue STILL remains and time is NOT on our side. The financial crisis is 14 months old, give or take a month, yet there has been little response to address the housing issues.
YES, REMEMBER HOUSING? That's what started all of this issue. BOOMING housing prices, never say no mortgage companies, only one direction (UP) market beliefs!!!
Housing prices fell, dropping equity in mortgages to low or non-existent levels, making the mortgage paper (ASSETS HELD BY BANKS) not worth the value stated on the mortgage.
FULL CIRCLE - Assets (Balance Sheet) to Assets. So we have come full circle.
Solution: To loan out more money, banks need to have bank capital (i.e. positive net worth).
Problem Two: Recession
The recession began back in Quarter 4 of 2007 ($25.3 billion increase in the 1st quarter or .87% annual growth). Yes, I know that we had a positive 1st quarter BUT LET'S GET REAL - The recession when President Bush came into office began during President Clinton's time - Spring of 2000! We will see what the NBER (National Bureau of Economic Research) says technically but the economy sure did not rebound well. Maybe this is a double dip recession but those are technicalities!!!
Two reasons that Real GDP was positive in the 2nd quarter are the "Stimulus Package" (tax rebate) and the drop in the dollar (the latter seemed to contribute 2.93% to the growth rate through increased U.S. exports and decreased buying of imports). Consumption contributed .87% to growth. We have lost 760,000 jobs during the calendar year AND need 150,000 NEW jobs (on average) per month for new and returning job entrants. THAT MEANS WE ARE DOWN OVER 2 MILLION JOBS! That's a recession.
MORE IMPORTANTLY - does it FEEL like a recession?!? I found everyone saying so during my tours in the U.S.A. this past summer.
Then we look at Consumer Borrowing (one of my last posts) and that's 70% of our economy. When will consumers begin to buy again? When the future looks bright! So you tell me when the future looks bright and that's when we'll be coming out of the recession!!!
Stock Market - the stock market looks at the future. Not what have you done for me in the past, not what have you done for me lately, not what are you doing for me now. WHAT IS THE FUTURE!!! Take a look at the stock market and YOU TELL ME!!
Japan - down almost 10% two days during the week. The Dow Jones 30 Industrials down well over 2,000 points just in October. Yes, October!!
On a balance sheet, assets are on one side and liabilities (plus net worth) on the other. Net worth is also called bank capital. Bank capital is required to be 6% of assets at the least (the requirement came about after the 1980s, the Savings & Loan Crisis and Third World Debt Crisis - one in S&Ls the other in the banking system).
When an asset becomes "non-performing" or delinquent, the asset is removed from the balance sheet and an equal charge is made to bank capital. You see, it is called a "Balance Sheet" because it must balance. Therefore, if a bank eliminates "too many" assets, bank capital will go to zero!!! The bank can not delete the liabilities - those are YOUR DEPOSITS!!!! (YOUR MONEY!!)
Therefore, banks must keep these assets on the books AND value them high enough to keep bank capital positive - OR the bank is bankrupt!
"Marked to Market" - this rule means that assets must periodically be valued AT THE MARKET RATE!!!
This is the "RUB" because when housing prices fell - the value of the mortgages fell!!! Thus the assets were not worth as much as previously stated.
That's the simple part.
In 2004, the top 5 Investment Banks had a meeting with the SEC to "relax" the rule on what qualified as bank capital. Mortgaged Backed Securities were now allowed by the SEC to be used!!! So when these became worth less, so did the most established companies in the world: Bear-Stearns, Morgan Stanley, Merrill-Lynch, Goldman Sachs and Lehman Brothers.
Rescue: When Bear Stearns was merged into J.P. Morgan Chase, then everyone believed the government would "COVER" the companies that were "TOO BIG TOO FAIL."
Then Secretary Paulson made the decision to let Lehman Bros. fail.
That prompted a loss of Faith and Trust. THIS IS THE PARALLEL to the Great Depression!
In the last four weeks since that decision, little seems to have really been done to shore up that faith. Yes, Congress HAS allowed the U.S. Taxpayers to become liable for $700 billion worth of mortgages. However, during that week, more than that was already wiped out in "paper" value!!! (Sorry for my ignorance here but how can you make the banks "mark to market" and then call that "paper" value?!? Seems to me, either it IS real or it IS paper and therefore not yet "real.")
SO WHY THE FREE FALL!!!
No one has restored the bank capital yet. The issue STILL remains and time is NOT on our side. The financial crisis is 14 months old, give or take a month, yet there has been little response to address the housing issues.
YES, REMEMBER HOUSING? That's what started all of this issue. BOOMING housing prices, never say no mortgage companies, only one direction (UP) market beliefs!!!
Housing prices fell, dropping equity in mortgages to low or non-existent levels, making the mortgage paper (ASSETS HELD BY BANKS) not worth the value stated on the mortgage.
FULL CIRCLE - Assets (Balance Sheet) to Assets. So we have come full circle.
Solution: To loan out more money, banks need to have bank capital (i.e. positive net worth).
Problem Two: Recession
The recession began back in Quarter 4 of 2007 ($25.3 billion increase in the 1st quarter or .87% annual growth). Yes, I know that we had a positive 1st quarter BUT LET'S GET REAL - The recession when President Bush came into office began during President Clinton's time - Spring of 2000! We will see what the NBER (National Bureau of Economic Research) says technically but the economy sure did not rebound well. Maybe this is a double dip recession but those are technicalities!!!
Two reasons that Real GDP was positive in the 2nd quarter are the "Stimulus Package" (tax rebate) and the drop in the dollar (the latter seemed to contribute 2.93% to the growth rate through increased U.S. exports and decreased buying of imports). Consumption contributed .87% to growth. We have lost 760,000 jobs during the calendar year AND need 150,000 NEW jobs (on average) per month for new and returning job entrants. THAT MEANS WE ARE DOWN OVER 2 MILLION JOBS! That's a recession.
MORE IMPORTANTLY - does it FEEL like a recession?!? I found everyone saying so during my tours in the U.S.A. this past summer.
Then we look at Consumer Borrowing (one of my last posts) and that's 70% of our economy. When will consumers begin to buy again? When the future looks bright! So you tell me when the future looks bright and that's when we'll be coming out of the recession!!!
Stock Market - the stock market looks at the future. Not what have you done for me in the past, not what have you done for me lately, not what are you doing for me now. WHAT IS THE FUTURE!!! Take a look at the stock market and YOU TELL ME!!
Japan - down almost 10% two days during the week. The Dow Jones 30 Industrials down well over 2,000 points just in October. Yes, October!!
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