Thursday, September 18, 2008

Are We There yet?

 Are We There Yet?

 “Fed and Treasury officials have identified the disease. It's called deleveraging, or the unwinding of debt. During the credit boom, financial institutions and American households took on too much debt. Between 2002 and 2006, household borrowing grew at an average annual rate of 11%, far outpacing overall economic growth. Borrowing by financial institutions grew by a 10% annualized rate. Now many of those borrowers can't pay back the loans, a problem that is exacerbated by the collapse in housing prices. They need to reduce their dependence on borrowed money, a painful and drawn-out process that can choke off credit and economic growth.
At least three things need to happen to bring the deleveraging process to an end, and they're hard to do at once. Financial institutions and others need to fess up to their mistakes by selling or writing down the value of distressed assets they bought with borrowed money. They need to pay off debt. Finally, they need to rebuild their capital cushions, which have been eroded by losses on those distressed assets.” Worst Crisis Since '30s, With No End Yet in Sight http://online.wsj.com/article_email 

 The current financial predicament we are experiencing is like taking a lengthy trip with the whole family packed into the good ol’ family ride and the small children keep asking, “are we there yet?” The US economy is on the road to wreck and ruin, and the question is, are we there yet? Not yet. There is still a ways to go before we hit a brick wall or drive off the cliff into the abyss of fiscal disintegration. Recent events like the bailout of AIG, Fannie Mae and Freddie Mac and the fact that long standing investment banks like Lehman Brothers and Merrill Lynch have gone belly up are major indicators things are going to get a lot worse before they get better. Last week we saw Merrill Lynch “rescued” by Bank of America. Merrill Lynch and Lehman Brothers are merely two of the large Wall Street giants that are facing collapse. For the rest, the question is not if, but when? 

 Are we there yet? One reason we are in this situation is because of fraud, plain and simple. The banking and mortgage industries lied to their customers, their shareholders, each other and the public. On a more criminal tip, they rigged the game promoting and selling predatory loans at high rates and they cooked their books Enron style. Once things started to unravel the banksters thinking they could get over, kept their losses off to the side for as long as they could. But now the chickens are coming home to roost. “What this means is that there is a panic run on the banks, by other banks. They don't know who will be next to fail, but they won't take chances. As citizens figure this out, there will be runs on consumer banks as well. Expect the government to declare a moratorium on withdrawals - like $200-$300 per day. The FDIC, which insures bank depositors up to $100,000, is basically out of cash. They normally are funded by premiums charged to healthy banks. They are turning to the Fed/Treasury for additional funding. Expect the FDIC to collapse after the next bank failure or two. In desperation, the FDIC is recalling retired employees to come out of retirement to help with the crisis; there isn't time to train new employees, which can take years to complete. Pension and retirement funds are taking unprecedented losses, far beyond the mere percentage drop in the Dow Jones Industrial Average. Why? Favored investments have been securitized equities and banks. Many of these losses will be unrecoverable.” Let the bank runs begin! By Patrick Wood, Editor September 15, 2008 http://www.augustreview.com/news_commentary/global_banking 

  Not only are Wall Street investment banks facing tougher times every passing day, the commercial banks and the components of the “Shadow Banking system” are also on the verge of collapse. “The latest trouble spot is an area called credit-default swaps, which are private contracts that let firms trade bets on whether a borrower is going to default. When a default occurs, one party pays off the other. The value of the swaps rise and fall as the market reassesses the risk that a company won't be able to honor its obligations. Firms use these instruments both as insurance -- to hedge their exposures to risk -- and to wager on the health of other companies. There are now credit-default swaps on more than $62 trillion in debt, up from about $144 billion a decade ago. One of the big new players in the swaps game was AIG, the world's largest insurer and a major seller of credit-default swaps to financial institutions and companies. When the credit markets were booming, many firms bought these instruments from AIG, believing the insurance giant's strong credit ratings and large balance sheet could provide a shield against bond and loan defaults. AIG believed the risk of default was low on many securities it insured. As of June 30, an AIG unit had written credit-default swaps on more than $446 billion in credit assets, including mortgage securities, corporate loans and complex structured products. Last year, when rising subprime-mortgage delinquencies damaged the value of many securities AIG had insured, the firm was forced to book large write-downs on its derivative positions. That spooked investors, who reacted by dumping its shares, making it harder for AIG to raise the capital it increasingly needed.” Worst Crisis Since '30s, With No End Yet in Sight By JON HILSENRATH, SERENA NG and DAMIAN PALETTA http://online.wsj.com/article_email 

 The whole system is falling apart at the seams and unraveling so fast the corporate mind control apparatus can’t keep up or spin events in a more favorable light. I’m certainly not trying to alarm or frighten you but things are going to get a lot worse in the coming days, weeks and months. This is not a phase, it is the beginning of a long term pattern. Things are getting so bad the FDIC is worried. “As financial institutions continue to fail, the Federal Deposit Insurance Corp. is under pressure to decide how to replenish the fund that insures consumer deposits. The fund is stocked mostly by fees levied on U.S. banks. If the FDIC raises the fees, that would siphon more money from already cash-strapped financial institutions. It could also deplete funds that banks would otherwise use to make loans. But if the FDIC moves too cautiously, the fund could run dry at a crucial time. That could hurt public confidence in the banking system and force the government to use taxpayer dollars to restock the fund. The agency could split the difference by raising premiums faster than most banks would like but slow enough so that the rebuilding of the fund takes years, not months. The fund's $52.8 billion at the end of the first quarter was considered low by historical standards, covering 1.19% of all insured deposits. Two bank failures in the second quarter are estimated to have cost the fund $216 million, and the four bank failures so far in the third quarter could have cost another $9 billion. The failure of IndyMac Bank in July may have wiped out more than 10% of the fund. Such losses could easily push the fund below a 1.15% level, triggering a requirement that the FDIC come up with an action plan within 90 days to bolster the fund.” FDIC Faces Balancing Act in Replenishing Its Coffers - WSJ FDIC Faces Balancing Act in Replenishing Its Coffers - WSJ. As more and more banks fail the FDIC fund will get smaller and smaller. We are averaging one bank failure a week the last month. I predict this will continue as more and more banks are forced to face up to the fact and admit they are insolvent. Even massive infusions of Fed money will not save them. If they can’t find any one to buy their assets they will go under. Soon there may be runs on banks due to panic. As the system unravels before our eyes many will be tempted to ask, “are we there yet?”

 
  -30-

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