You Ain’t Seen Nothin’ Yet
Greg Hill left the Happy Fun Comment of the week, and it goes a little like this:
Had an absolutely fascinating dinner conversation with a couple of guys who manage a decently sized portfolio here in the mid-Atlantic region. At its peak it was over $1B in value. It has dropped some, but they managed to get out before the big crash, and have done well compared to others.
Anyway. They were explaining the logic behind TARP, and the reality behind its implementation, and what we should be expecting. They are not happy at all. The simple fact of the matter is that the toxic assets (remember what the “T” in TARP stood for originally?) are still on the books for most banks. And even though the auditors are telling the banks to unload, it’s not happening in any kind of rapid order. There is a whole new round of audits coming due, and mark-to-market is going to create an absolute shit storm all over again.
The simple fact of the matter is that the Fed is buying Treasuries because they’re terrified that the foreign market is about to dry up. We apparently experienced a near miss in September, which scared the living crap out of Bernanke. We tried to sell a batch of Treasuries, and nobody came to buy them. We had to “delay” the sale for “technical reasons”, or something like that.
The next six months are Big Ben’s attempt to shore up the markets so that the wheels keep turning. And the
$600B$800B$1T+ dollars is really an open-ended promise by Ben to keep buying if nobody else does.My guys say pay attention to what happens leading up to the May/June Treasury sales. If the foreign concerns are legit, then Bernanke will get mealy-mouthed about how much more he’s willing to spend.
We’ve got six months, gang. Fall of ’08 may have simply been the shot across the bow.
Discuss.
Unloading toxic assets — I presume a lot of those are residential & commercial real estate. But given the piss poor economy, how can you unload those properties? Do you accept a 10% loss? 50% loss? 75% loss? Who is around to buy these properties?
In many businesses unsold inventory often ends up “written off”. That is just a fancy way of saying it gets broken up into component materials and discarded/recycled/whatever. A lot of the unsold inventory of homes may very well have to be similarly “written off”. We may be looking at the wholesale bulldozing of entire neighborhoods in some locales. And, yes, that will have to go along with huge asset, uh, “adjustments” on the banks holding the bad mortgages and many will go under. It simply has to happen in order for the current storm to blow over.
This is the crux of the problem. These assets are sitting on the books, and need to be unloaded. If we had an orderly process for selling them off, say over the next 2 – 3 years (I’m pulling those numbers out of my hat, to make a point), then the banks could reasonably expect to sell them for 50-75+% of “face” value, if not more. We don’t have that, though. And mark-to-market requires that the assets be valued by the auditors at what the asset is worth if it had to be sold tomorrow. Which has absolutely no relationship to the real value of the assets. The whole point of TARP was to buy those toxic assets so that the Fed could unravel the mess in an orderly manner. But they punted, and just invested in the banks instead. So, yeah, the banks are slowly paying off TARP, so we’re seeing a “profit” on the investment. But the original problem never got resolved.
(Aside: Don’t get me wrong. Mark-to-market serves a purpose. In volatile and flush markets. But applying this to illiquid assets like real estate is nothing short of insane. You simply can’t do that and expect book value to match realistic market value.)
I don’t know what the solution is, but the current one is causing nothing but problems. That doesn’t, by the way, get the banks off the hook as far as the insane lending they were involved in leading up to 2007. Nor does it get the investment houses (I’m looking at you Goldman Sachs) for creating CDOs based on fraudulent ratings of the underlying tranches. Nor does it get the ratings agencies off the hook for not doing their homework and figuring out the slight-of-hand that the investment houses were pulling. Nor does it get the insurance companies, like AIG, off the hook for creating the CDSs that almost broke the back of the system when the CDOs started going belly-up. And finally, it doesn’t get the government off the hook for multiple sins, including pushing the easy money philosophy and giving the banks the green light for such atrocities as Alt-A and Subprime loans.
And the moral hazard embedded in this system is ubiquitous. Nothing’s changed. Because the government stepped in, with TARP, HAMP, etc., we’ve got players who are still neck deep in the corruption. Who’s gone to jail for the fraud? What government agencies are folded up and their managers dealing with Congressional inquiry, fines, and jail time? Why are Moody’s and Standard & Poors STILL IN BUSINESS??????
Is there no one in a position of power, either public or private, who has the moral and ethical backbone to say “ENOUGH!!!”?? It sure as hell doesn’t look like it.
Yeah, I’m in full-rant mode. I don’t know the last time I’ve been so incandescently furious at such a huge group of people.
In the meantime, we have absolute idiots in public life telling us that we need more government, and that our national debt is a minor nuisance, and that capitalism is broken, and the Fed has everything under control. F*cktards. All of them….
I think that everyone with ONE functioning brain cell knows that Obamanomics is going to starve the world. But, we were also raised to keep our mouths shut when we did not have anything nice to say.
Here is the nice thing that I have to say, I honestly believe that Obama will resign by June of next year. Chicagoland politics are about to nab him and he’ll have to go. Rahm is Obama’s last hope.
Thanks for the recognition, Steve. It was really just a passing comment related to the original post you put up last week. There’s a whole lot more that we talked about. Also, they recommended I read “The Big Short”, which I’m just wrapping up now. Boy, am I pissed. I know it’s written at a layman’s level of understanding, but the book still does a good job of exposing the absolutely ridiculous amount of chicanery that went on, in both the public and private sectors.
The big banks f*cked us over, royally. And the government let them get away with it. I can’t even get my head around how deeply and repeatedly we’ve been screwed.
I’m making it my life’s mission to thoroughly understand the bond market. That’s where the real story gets told. I’m clearly only a rookie at this. I need to get a much deeper understanding of it, because that’s where the big money is. That’s where we need to look to see what kind of corrupt dealings are going on. Had there been a greater public understanding of CDOs and CDSs, we may never have gotten to this point. The outcry over the lack of exposure in how the CDOs were built and rated may very well have knifed that baby before it grew too big to manage.
I can’t tell you how mad I am about this right now. Capitalism, the greatest system in the world, where people are challenged to be the best they can be, has been completely corrupted by a bunch of assholes in New York and DC. Crony Capitalism has potentially destroyed or freedoms, our way of life, for decades to come.
May they all rot in hell forever.
Yes, the gov’t (SEC) supported ratings agencies are among the most incompetent of villains. Supported by the Fed, and the Big Banks.
QE 2, and other money printing, will be an attempt to replace Toxic Assets with merely bad, but salable assets.
After over-building on housing, either more housing should be burnt to reduce supply (increase real value), or more money needs to be printed to increase nominal value.
All Big Banks that can’t pay, now, should go bankrupt. The government’s chief job in ‘contract enforcement’ is thru the bankruptcy process when one side fails to live up to its obligations.
Government is plenty strong enough: strong enough to invade other nations, and to occupy them for years, against the will of even our own citizens.
Stronger government won’t help us.
We need smart government: smart enough to nail bin Laden, instead of letting him go free, invading the wrong country, etc.; smart enough to act on military and economic intelligence, instead of ignoring it; smart enough to nail billionaire bankers, instead of nickel & dime deadbeats.