Wednesday, May 7, 2008

Must Read Mr. Practical Article

After a couple of very nice days, it is going to rain for 2 days straight. I hope this Spring and summer is not a parallel of all the snow from last winter. One can hope.

Fannie Mae Pulls Things From their Fanny
Imagine you are truly "too big to fail". Imagine you have your hand in a business so deeply, anything and everything will be done to bail you out. If you had that kind of safety net, you may behave and communicate in ways that no other entity could ever do. That is the only way a company can have around 45 Billion in hard capital backing, get this 2.27 Trillion in mortgage obligations. That is too funny. In the face of this, regulators have approved FNM to hold even LESS, yes less, cash in reserve for losses right at a time when FNM is being asked to buy up the latest crap mortgages out there. I am really sure this is all going to end well, really.

Along this line of thought, Minyan Kevin Depew's "5 Things You Need to Know" was dedicated to FNM yesterday, and it was a must read:
In the article Kevin used FNM's own charts to show how without a clue the management is. What I loike the best is that even after so called "historical models" have been shown to not work at all when lending standards do not conform to historical stringency, FNM is still using viciously flawed models to estimate losses. In their chart for home price growth (or contraction) in the US chart, their is a ton of fine print at the bottom which harbors a real whopper; Fannie Mae deems sales of foreclosures as non important to their price assumptions! Seriously, enlarge the graph and read the fine print! FNM even states that foreclosure sales cause prices to drop even more than they estimate, but exclude them anyway! I give up. You could not make up a better story. Why this graph and FNM metric is not a huge story amazes me.

So FNM has 45 Billion backing 2.27 Trillion, they are using estimates that are obviously screwed, and they are backed by the US taxpayer. WONDERFUL. I agree the worst is behind us, it is behind us getting ready to slam us from behind and not in a fun way!

Must Read Mr. Practical Article
Sorry to rip things off again! I read a piece form the Minyanville writer Mr. Practical today that captures everything that I think and feel about the current fiasco PERFECTLY. Link is here:

I am not sure what the rules are for these kinds of things, but I want to make sure this gets seen as much as possible, so here it is:

Fed Chooses Wall Street Over Main Street
"It took from 1914 until November 2007 for the Federal Reserve to accumulate $800 billion worth of Treasury debt. It has taken from December 17 to the end of April for the Fed to divest itself of $260 billion of this portfolio, a decrease of one-third. In its place, it has placed AAA-rated mortgages. At the current swap rate, the Federal Reserve System will be out of Treasury debt in December of 2008. But by adding car loans to the list of eligible paper, the Fed will most likely greatly accelerate this.” - Economist Gary North

To the average person this is gibberish. Perhaps this is why the Fed is able to do what it's doing: slowly nationalize the banking system. The stabilization that everyone is giddy about has its cost. The private market, with the encouragement of the Federal Reserve, has manufactured vast debt that cannot be repaid. Banks used up their capital long ago, so the Fed has to take those bad loans away from them and give them capital back.

Stabilization is not a working banking system. When you hear all the CEOs of Wall-Street say the crisis is nearing an end, it has no implication for a working banking system that will create more credit.

The Fed adds a new twist everyday. Now it's going to pay interest on reserves banks must keep at the Fed. This will allow the Fed to expand its balance sheet even more and buy even more bad loans from banks. Again, this isn't a positive: It illustrates just how bad things are.
By the way, it's the U.S. taxpayer that will be picking up a good portion of this interest they will now pay to banks.

Chairman Ben Bernanke has been given high marks for saving the system. But just what are we saving? The average person does not understand that what they are really saving is the bankers and Wall Street at the expense of the middle-class standard of living. A devalued dollar of 50% hurts the middle class much more than a 50% decline in the stock market. Why not let a failed system fail, thus re-distributing savings and income back to the middle class? Of course, everyone will suffer but in the long run that will happen anyway and saving the system will disproportionally hurt the middle class more.

The system is broken. Every action by the Fed says so. Those that anticipate a shallow recession still do not understand this. The credit crunch has barely begun affecting the real economy. We're in the very early stages of this process and the government wants to boil the proverbial toad (the middle class) as slowly as possible.
Risk is very high.

Nuff said! Perfect encapsulation of where we are.

California City Fails to get Bailout
Vallejo California has announced that the city council has voted to pursue filing for bankruptcy protection due to insolvency. Citing enormous pay for police and fire fighters, as well as escalating pension obligations the city will run out of cash by the end of June.

I think this is a pretty big deal. Huge even. What does this mean for the muni bond markets? Probably not good things. What does this mean for similar California, Florida, Arizona, and Las Vegas cities faced with the same kind of issues? Probably not encouraging things.

Almost right on cue when Hanky Paulson said the worst of the credit crunch was over, this big city default news was out. Funny if it was not so sad. This story bears serious following.

Have a good night.

1 comment:

Anonymous said...

Spent most of the afternoon out at the farm getting ready to plant next week so I didn't have much time to follow the markets today and frankly I'm to danged tired to care. Don't know how long before the light bulb comes on for some of these folks but eventually they'll get it.