“Why am I being punished for having bought a house I could afford? I am beginning to think I would have rocks in my head if I keep paying my mortgage.” An excellent question that is being asked by many homeowners that have been responsible and ethical in abiding by the contract that they signed.
Saving all those mortgages might be politically desirable, normative economic thought process; but from a positive economic thought perspective, the majority of the mortgages written after 2005 need to fail because they are not sustainable. In addition, I don’t know why anyone would want to pay $3,000/month on a mortgage that is worth $1,000/month at best. That is the moral hazard.
Read an interest post on this mortgage bailout at "The Big Picture."
Friday, October 31, 2008
Thursday, October 30, 2008
Tuesday, October 28, 2008
Saturday, October 25, 2008
A Billion: The True Story About a Billion Dollars
The next time you hear a politician use the word “billion” in a casual manner, think about whether you want that politician spending YOUR tax money.
A billion is a difficult number to comprehend, but one advertising agency did a good job of putting that figure into some perspective in one of its releases.
A. A billion seconds ago it was 1959.
B. A billion minutes ago Jesus was alive.
C. A billion hours ago our ancestors were living in caves.
D. A billion days ago no one walked on the earth on two feet.
E. A billion dollars ago was only 8 hours and 20 minutes, at the rate our government is spending it.
While this thought is still fresh in your mind, let's take a look at New Orleans. It's amazing what you can learn with some simple division. Louisiana Senator, Mary Landrieu, is presently asking the Congress for $250 BILLION to rebuild New Orleans.
Interesting number. What does it mean?
A. Well, if you are one of 484,674 residents of New Orleans (every man, woman, child), you each get $516,528.
B. Or, if you have one of the 188,251 homes in New Orleans, your home gets $1,329,787 for repairs.
C. Or, if you are a family of four, your family gets $2,066,012.
HELLO!!! Washington, D.C. Are all your calculators broken?? Give me a break. No, give the American taxpayer a break!
A billion is a difficult number to comprehend, but one advertising agency did a good job of putting that figure into some perspective in one of its releases.
A. A billion seconds ago it was 1959.
B. A billion minutes ago Jesus was alive.
C. A billion hours ago our ancestors were living in caves.
D. A billion days ago no one walked on the earth on two feet.
E. A billion dollars ago was only 8 hours and 20 minutes, at the rate our government is spending it.
While this thought is still fresh in your mind, let's take a look at New Orleans. It's amazing what you can learn with some simple division. Louisiana Senator, Mary Landrieu, is presently asking the Congress for $250 BILLION to rebuild New Orleans.
Interesting number. What does it mean?
A. Well, if you are one of 484,674 residents of New Orleans (every man, woman, child), you each get $516,528.
B. Or, if you have one of the 188,251 homes in New Orleans, your home gets $1,329,787 for repairs.
C. Or, if you are a family of four, your family gets $2,066,012.
HELLO!!! Washington, D.C. Are all your calculators broken?? Give me a break. No, give the American taxpayer a break!
Friday, October 24, 2008
When Is Enough, Enough?
The "Wall Street Journal" has just reported that "The U.S. Treasury Department is considering taking equity stakes in insurance companies, a sign of how the government's $700 billion program has become a potential piggybank for a range of troubled industries. The availability of government cash is drawing requests from all corners, with insurance firms, auto makers, state governments and transit agencies lobbying for a piece of Treasury's pie. While Treasury intended for the program to apply broadly, the growing requests could rapidly deplete the $700 billion, an amount that initially stunned many as being quite large."
Recession or Depression?
Bloomberg reports that: “Volvo said it received 115 order bookings for heavy trucks in Europe in the quarter, down from 41,970 trucks a year earlier.” The rest of the article doesn’t even matter.
The only question now remains: recession or depression? The financial erudite still does not fully understand that we are reaping what was sowed by Greenspan during his tenure at the Fed, especially during 2002-03. And what is even more frightening is that his successor, Bernanke, is following the same grievous path.
The only question now remains: recession or depression? The financial erudite still does not fully understand that we are reaping what was sowed by Greenspan during his tenure at the Fed, especially during 2002-03. And what is even more frightening is that his successor, Bernanke, is following the same grievous path.
Monday, October 13, 2008
Don't Panic, Stocks are Safe
A great video by renowned economist, Professor Irving Fisher, talking about stocks from 1929.
Tuesday, October 07, 2008
Chain of Fools
An excellent article on "Credit Default Swaps -- Insurance on Debt Default" (CDS), which is a must read, by Mark Miller provided the following flow chart on the this enormous mess:
To quote from the article, "To understand the mind-boggling enormity of this mess, it's instructive to picture how we got here. Focusing on subprime mortgages or mortgage-backed securities ignores the dense network of links and connections that form an opaque system of derivatives and debt. Any number of other high-yielding asset classes could have started the crisis, says Paul Mizen, an economics professor and director of the Centre for Finance and Credit Markets at the University of Nottingham School of Economics. It so happened that the subprime market soured first."
In a previous post (September 26, 2008), I mentioned that the Alt. A mortgages, subprime mortgages, and mortgage-backed securities are just the "tip-of-the-iceberg." In that post, I stated that the mortgage market has an approximate value of $7 trillion, but the CDS has an approximate value of $58 trillion. And, therein lies the problem to this financial debacle of major proportion that one only observes once in a generation. Life, as you have known it, has been changed forever.
To quote from the article, "To understand the mind-boggling enormity of this mess, it's instructive to picture how we got here. Focusing on subprime mortgages or mortgage-backed securities ignores the dense network of links and connections that form an opaque system of derivatives and debt. Any number of other high-yielding asset classes could have started the crisis, says Paul Mizen, an economics professor and director of the Centre for Finance and Credit Markets at the University of Nottingham School of Economics. It so happened that the subprime market soured first."
In a previous post (September 26, 2008), I mentioned that the Alt. A mortgages, subprime mortgages, and mortgage-backed securities are just the "tip-of-the-iceberg." In that post, I stated that the mortgage market has an approximate value of $7 trillion, but the CDS has an approximate value of $58 trillion. And, therein lies the problem to this financial debacle of major proportion that one only observes once in a generation. Life, as you have known it, has been changed forever.
Saturday, October 04, 2008
Asset Pricing Solution and Its Impact on Banks' Capital
I am a strong proponent of the market and its mechanism of pricing what something is
worth. But we probably need to think through what a market price is in regard to the
current financial crisis. Not all things can be easily marked to market. This is especially true of the current subprime mortgage backed securities, which are illiquid.
It is one thing to require that you mark your stocks or bonds to market values every day. It is another thing entirely to require all mortgage backed securities, which are extremely complex and require a lot of time and effort to value.
FASB 157 requires that all securities, inclusive of the illiquid mortgage backed securities, need to be priced. One solution would be to have FASB figure out a better way to price illiquid securities, such as mortgage backed securities? Before you respond, read the following item: FASB 157 summary statement at http://www.fasb.org/st/summary/stsum157.shtml.
Of course, we know that the “Genie” is out of the proverbial bottle. I don’t see how FASB can rescind 157, because everyone knows that these assets on the books are toxic. If anything, rescinding FASB 157 would prolong the problem. Valuing these assets at historical cost is not the answer. Since these mortgage back securities (Alt-A and subprime mortgages) are securitized and have been sold as a security, I have a problem in “not” pricing these assets like other securities that trade on security markets at fair value. Financial institutions should simply “bit-the-bullet” and value these assets at fair value and take the responsibility for their errant ways by reducing their capital accounts by the size of the write-downs of these securitized assets. Of course, the $700 billion bailout would allow the Treasury to purchase these toxic assets and replace them with an infusion of capital.
I want you to focus on a possible solution to the mortgage backed security debacle. The problem is a pricing issue with the consequences on a firm’s capital if these assets have to be written down.
We know that a large percentage of Alt. A and subprime mortgages, which have been securitized, are currently on the books of financial institutions at historical cost, probably at par ($1,000 per bond). We, also, know that FASB 157 requires these assets to be marked-to-market. The pricing of these securities is extremely difficult. Are they worth $.20 on the dollar, $.35 on the dollar, or what? No one seems to know what these securities are worth. That is the dilemma for financial institutions. If they write down these securities, say to $.20 on the dollar, they will have to charge $.80 on the dollar against their capital accounts, assuming they booked these assets at par. Some institutions have already done this and for all practically purposes have wiped out their capital. That is why we have had all these acquisitions and mergers in the past few weeks.
What is your solution? (You may want to address what impact the $700 billion bailout will have on your solution.)
worth. But we probably need to think through what a market price is in regard to the
current financial crisis. Not all things can be easily marked to market. This is especially true of the current subprime mortgage backed securities, which are illiquid.
It is one thing to require that you mark your stocks or bonds to market values every day. It is another thing entirely to require all mortgage backed securities, which are extremely complex and require a lot of time and effort to value.
FASB 157 requires that all securities, inclusive of the illiquid mortgage backed securities, need to be priced. One solution would be to have FASB figure out a better way to price illiquid securities, such as mortgage backed securities? Before you respond, read the following item: FASB 157 summary statement at http://www.fasb.org/st/summary/stsum157.shtml.
Of course, we know that the “Genie” is out of the proverbial bottle. I don’t see how FASB can rescind 157, because everyone knows that these assets on the books are toxic. If anything, rescinding FASB 157 would prolong the problem. Valuing these assets at historical cost is not the answer. Since these mortgage back securities (Alt-A and subprime mortgages) are securitized and have been sold as a security, I have a problem in “not” pricing these assets like other securities that trade on security markets at fair value. Financial institutions should simply “bit-the-bullet” and value these assets at fair value and take the responsibility for their errant ways by reducing their capital accounts by the size of the write-downs of these securitized assets. Of course, the $700 billion bailout would allow the Treasury to purchase these toxic assets and replace them with an infusion of capital.
I want you to focus on a possible solution to the mortgage backed security debacle. The problem is a pricing issue with the consequences on a firm’s capital if these assets have to be written down.
We know that a large percentage of Alt. A and subprime mortgages, which have been securitized, are currently on the books of financial institutions at historical cost, probably at par ($1,000 per bond). We, also, know that FASB 157 requires these assets to be marked-to-market. The pricing of these securities is extremely difficult. Are they worth $.20 on the dollar, $.35 on the dollar, or what? No one seems to know what these securities are worth. That is the dilemma for financial institutions. If they write down these securities, say to $.20 on the dollar, they will have to charge $.80 on the dollar against their capital accounts, assuming they booked these assets at par. Some institutions have already done this and for all practically purposes have wiped out their capital. That is why we have had all these acquisitions and mergers in the past few weeks.
What is your solution? (You may want to address what impact the $700 billion bailout will have on your solution.)
Friday, October 03, 2008
$1.8 Trillion Cost to Taxpayers
Reuters provides an excellent allocation of the bailout cost to taxpayers. Read and weep!
Wells Fargo Buys Wachovia, Not Citigroup
In an interesting turn of events, Wells Fargo, not Citigroup is purchasing Wachovia for $15.4 billion that will require no government assistance, scrapping the federally backed deal with Citigroup for $2.16 billion. This is good news for taxpayers (no government assistance) and Wachovia's investors. Wells Fargo is purchasing all of Wachovia. The Citigroup deal had excluded the asset-management and brokerage operations and put the FDIC on the hook for potential loan losses.
Why is this important? Well, by acquiring Wachovia, Citigroup would have vaulted into the upper echelon of U.S. banks. The addition of Wachovia also would have allowed Citigroup to boast the third-largest network of U.S. bank branches, according to the Wall Street Journal.
Now, this development highlights weak spots at Citigroup and challenges the notion that it had moved solidly from the problem category to the solution camp as the financial crisis unfolds.
Why is this important? Well, by acquiring Wachovia, Citigroup would have vaulted into the upper echelon of U.S. banks. The addition of Wachovia also would have allowed Citigroup to boast the third-largest network of U.S. bank branches, according to the Wall Street Journal.
Now, this development highlights weak spots at Citigroup and challenges the notion that it had moved solidly from the problem category to the solution camp as the financial crisis unfolds.
Thursday, October 02, 2008
Short Sale Ban
On September 19, 2008, the Securities and Exchange Commission (SEC) prohibited short sales in 799 financial securities. As of Monday, September 29, 2008, the list had expanded to 973. With approximately 6,000 equity listings on the U.S. markets, the list covers approximately 15% of all stocks.
The SEC said it would extend the short-sale ban to as long as Oct. 17, 2008, or up to three business days after the passage of the bailout plan. However, it would not make the "short sale ban" permanent.
The SEC said it would extend the short-sale ban to as long as Oct. 17, 2008, or up to three business days after the passage of the bailout plan. However, it would not make the "short sale ban" permanent.
Wednesday, October 01, 2008
FDIC: Increasing the Deposit-Insurance Levels
Our lawmakers want to increase the FDIC deposit-insurance levels from $100,000 to $250,000. The rational is that the level has not been increased in over twenty years and will restore confidence in the banking system by comforting depositors who might otherwise take their money out.
On the surface this increase in deposit-insurance levels seems innocuous enough. However, when one looks at the balance sheet, it may not be so innocuous. The FDIC's deposit-insurance fund is already at a historically low level, with roughly $1 backing every $100 of insured deposits. The FDIC insured roughly $4.5 trillion in deposits as of the second quarter, and had $45 billion in the actual fund. Given the current capital ratio of 1%, or a financial leverage factor of 100:1, our lawmakers want to increase the size from $4.5 trillion to $11.25 trillion. Wow! Therefore, its capital ratio becomes .4%, or a financial leverage factor of 250:1.
Of course, the FDIC could levy higher fees to fund the increase levels, which would keep the capital ratio what it is currently. However, given the financial plight of the current banking industry, that might be hard for banks to do. I guess an alternative would be to temporarily waive the premiums that banks pay to the FDIC and have the Treasury be liable for covering losses. Why not? What is a trillion or two to the Treasury, it's only tax payers money. And, of course, the FDIC is backed by the "full faith and credit" of the U.S. Government. Need I say more? Only to ask the question, what will happen to the value of the dollar and our global economic leadership position if we continue to bail out entities and entities through monetizing our currency?
On the surface this increase in deposit-insurance levels seems innocuous enough. However, when one looks at the balance sheet, it may not be so innocuous. The FDIC's deposit-insurance fund is already at a historically low level, with roughly $1 backing every $100 of insured deposits. The FDIC insured roughly $4.5 trillion in deposits as of the second quarter, and had $45 billion in the actual fund. Given the current capital ratio of 1%, or a financial leverage factor of 100:1, our lawmakers want to increase the size from $4.5 trillion to $11.25 trillion. Wow! Therefore, its capital ratio becomes .4%, or a financial leverage factor of 250:1.
Of course, the FDIC could levy higher fees to fund the increase levels, which would keep the capital ratio what it is currently. However, given the financial plight of the current banking industry, that might be hard for banks to do. I guess an alternative would be to temporarily waive the premiums that banks pay to the FDIC and have the Treasury be liable for covering losses. Why not? What is a trillion or two to the Treasury, it's only tax payers money. And, of course, the FDIC is backed by the "full faith and credit" of the U.S. Government. Need I say more? Only to ask the question, what will happen to the value of the dollar and our global economic leadership position if we continue to bail out entities and entities through monetizing our currency?
Stock Market Circuit-Breaker Levels for Halting Trading
NYSE Circuit Breakers:
In response to the market breaks in October 1987 and October 1989, the New York Stock Exchange instituted circuit breakers to reduce volatility and promote investor confidence. By implementing a pause in trading, investors are given time to assimilate incoming information and the ability to make informed choices during periods of high market volatility.
Rule 80B:
Effective April 15, 1998, the SEC approved amendments to Rule 80B (Trading Halts Due to Extraordinary Market Volatility) which revised the halt provisions and the circuit-breaker levels. The trigger levels for a market-wide trading halt were set at 10%, 20% and 30% of the DJIA, calculated at the beginning of each calendar quarter, using the average closing value of the DJIA for the prior month, thereby establishing specific point values for the quarter. Each trigger value is rounded to the nearest 50 points.
The halt for a 10% decline would be one hour if it occurred before 2 p.m., and for 30 minutes if it occurred between 2 and 2:30, but would not halt trading at all after 2:30. The halt for a 20% decline would be two hours if it occurred before 1 p.m., and between 1 p.m. and 2 p.m. for one hour, and close the market for the rest of the day after 2 p.m. If the market declined by 30%, at any time, trading would be halted for the remainder of the day.
Under the previous Rule 80B trigger points (in effect since October 19, 1988) for a market-wide trading halt, a decline of 350 points in the DJIA would halt trading for 30 minutes and a drop of 550 points one hour. These trigger points were hit only once on October 27, 1997, when the DJIA was down 350 at 2:35 p.m. and 550 at 3:30, shutting the market for the remainder of the day.
Source: NYSE
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