Two new additions to report.
One of my long time favorite blogs is Housing Doom. Tons of great analysis and wonderful color commentary. The posting frequency has gone up as of late, and I always stop by.
The other is Capitalist Preservation. A new site run by a friend to this blog, the material is real time breaking information that comes in handy if you are busy at work and need the important headlines.
Remember, It Will Never End
To try and frame what the theme of the post tonight will try and make clear I want to start off by highlighting two examples of how government bailouts using taxpayer (and way more than that) money, once started, can never, ever stop. The first clear example is the AIG debacle where the insurance firm continues to come back to the well for more money almost monthly. Will it ever end?
The second example comes from the Mortgage Relief Bill proposed by Obama last week that even as it has yet to be instituted, is already being geared up for an expansion of terms. Remember that I wrote here that few people would qualify due to the 105% loan to value restriction? Well, it seems some others have the same qualms about saving taxpayer funds, and thus that tidbit must be changed and pronto!:
Fannie/Freddie Refi's May Extend Beyond 105% LTV
The loan-to-value (LTV) limit on mortgages Fannie Mae and Freddie Mac will be able to refinance as part of Obama’s Homeowner Affordability and Stability Plan may go higher than the original 105 percent, according to National Mortgage News.
The info is based on remarks made by William Longbrake, a former FIDC and WaMu employee, and current member of the board at First Financial Northwest, at the National Association of Mortgage Brokers Legislative and Regulatory Conference in Washington.
He stressed he was speaking for himself and not the White House, but noted it was “entirely possible” the ceiling for GSE refis could rise above 105 percent once procedures were in place to refinance underwater loans.
Last week, FHFA director James B. Lockhart said the line was drawn at 105 percent so the loans could be securitized and also because of capacity issues.
So there you go. We will not reward speculators or gamblers. Oh wait, maybe we will!
Metaphors Have Limits
from the mentioned site Housing Doom came this exchange form Ben Bernanke's testimony today where he uses a stupid metaphor to describe mortgage bailouts:
Bernanke Does Not Get "Love Thy Neighbor"
I was in agreement with Rick Santelli of CNBC when he lamented that those who pay their mortgages are being saddled with subsidizing those that don’t. A lot of people were in agreement with Santelli- so many in fact that it brought a response from Federal Reserve chairman Ben Bernanke: [Thanks L!]
"You could punish him by refusing to send the fire dept and then he would learn his lesson, but unfortunately in the process you’d have the entire neighborhood burning down."
CNBC’s Michelle Caruso-Cabrera quoted a reader who gave the following response:
My neighbor was smoking in bed, his house did burn down, and half of my house was destroyed with it. The Fire Department hit the snooze button on the fire alarm several times, showed up late (house was fully engulfed and ready to collapse) and, had a squirt gun to fight the fire.
Now they are going to waste precious and expensive water (taxpayer money) by pouring it all over the embers.
To this I would add a slightly different view:
A relative has overextended themselves- a lot. They are in debt way over their head. You don’t have the resources to bail them out, and you would not do them any good in the long run if you did. Consequently, you let them take their financial lumps- you just make sure that they have enough to keep the kids fed and off of the streets.
My neighbor’s house is NOT on fire Mr. Bernanke- it’s just overvalued. Consequently, my neighbor has no money to go out and do all the spending that the government so desperately wants him to do. I’ve been renting for the past four years, waiting for house prices to come down so I can buy one without ended up like my neighbor. When his house goes into foreclosure, he moves into housing he can afford, and I can buy the house I’ve been waiting for. It sounds like a good plan to me, and you want to mess it up for both of us.
Sir, your testimony was biblical in it’s tone, with a Judge not, that ye be not judged, theme. (Matt 7:1) However I would prefer you read on a little further to Matt 19:19, Thou shalt love thy neighbor as thyself. That means ALL of your neighbors, and ALL of us need affordable housing- even if it hits the balance sheet of the banks.
Bernanke can’t prop this bubble up, and isn’t helping any of us by trying. Here’s hoping he figures that out before bankrupting all of us.
Metaphors have limits, and Bernanke's was a weak one to use. At least he is consistent with using imagery of fear and pain. It is not quite "tanks in the street" but it is your entire neighborhood burning down. Not sure where Big Ben lives, but there is no way any of my neighbors homes burning could touch mine unless they had a meth lab inside when it went up!
Stress Tests Revealed as Blank Checks
You know I got snookered. I actually believed that the so called "stress tests" were going to identify those banks too impaired to keep playing and that there would be at least a couple of sacrificial lambs put out of their misery. Well, as the band The Who likes to sing "We won't get fooled again!"
It turns out the "stress tests" are nothing more than figuring out how large a check will have to be written out to prop up the largest banks. That's it. That's all. Calculated Risk has a TON of charts showing the parameters of the so called tests (basically optimistic and slightly pessimistic scenarios) and if the details interest you, I direct you there. There are many details that are galling, like the price point in time reference for converting preferred shares to common set at the average of the 19 trading days prior to February 9th. I am serious, they actually came up with that!
What I would highlight is that even the reports on the tests admit they are not actually tests in the pass/fail sense, but estimates of how much cash the banks will get:
Big banks face 'stress tests' from regulators
WASHINGTON (AP) -- The Obama administration hopes to restore confidence in the nation's ailing financial sector by subjecting 19 of the largest banks to "stress tests" that will gauge whether each institution has adequate capital to survive a severe downturn.
Banks that need new funds will be given six months to obtain it from the private sector or, failing that, from the federal government's $700 billion bank rescue program, the Treasury Department said Wednesday.
I love that "private funds" line. Like that Saudi Prince, who bought all those Citi shares only to get massacred, will pony up another fortune to go bye bye. As if. More article:
Government officials haven't specifically said which banks will be subject to the tests, but under the government's criteria they would include large nationwide banks such as Citigroup Inc., Bank of America Corp., JPMorgan Chase & Co. and Wells Fargo & Co. The 19 largest banks hold two-thirds of the banking industry's assets.
Government officials hope the tests will boost market confidence in the banks by making it clear the institutions either have the necessary capital to weather a major downturn, or will obtain it from private investors or the government.
Bank regulators said they wouldn't release the tests' results, but the banks will likely make some disclosure of the outcome, particularly if it shows they don't need more capital. Banks that seek private capital likely will indicate how much they need and the government will announce any new investments.
Daniel Alpert, managing director of Westwood Capital LLC, an investment bank, said the stress tests will "force reality to the surface" by demonstrating that many large banks face increasing losses on commercial real estate and other assets. Westwood holds a small stake in Citigroup.
Administration officials did not say whether they expect to request more taxpayer money to fund the next round of investments in banks, beyond general statements that they would provide the capital that banks need.
How are they going to force reality to the surface without releasing the information?
Take home point: I was fooled. This is no test, just a rough estimate of a huge bailout that is structured as to not result in nationalization per say, nut really it is in practice. Also, the banks can keep on coming back for more as long as they need. Makes me think of the film "The Neverending Story".
Ben Bernanke Breaks the "Fourth Wall"
"Breaking the fourth wall" refers to a situation in which a character reveals his or her awareness of the audience.
During Ben Bernanke's testimony today he made the serious mistake of getting personal and acknowledging criticism pointed at the FED. Historically FED heads are aloof, detached, speak in clever riddles, and accept no blame. Ben must really be under pressure to have made this quip today:
Bernanke tells Congress Fed knows what it is doing
WASHINGTON (MarketWatch) - Federal Reserve Board Chairman Ben Bernanke tried to assure Congress and investors that federal regulators are not grasping at straws in the response to the financial crisis.
"We're not making it up," Bernanke told the House Financial Services panel.
"We're working along a program that has been applied in various contexts," he said. "We're not completely in the dark."
The sense that Washington was reacting to events rather than shaping them has grown since former Treasury Secretary Henry Paulson switched the focus on the first $350 billion in bailout funds he received from Congress last fall.
Bernanke said that the government was prepared to inject capital to fix holes in the banks caused to the sudden sharp drop in their assets. But the size of the holes remains an open question.
Oh man. When you know what you are doing and it is yielding results there is no need to tell everyone that you know what you are doing. I found Bernanke's quote today very revealing.
I understand that the powers that be are under enormous strain. I applaud that they are working extremely hard and probably long hours to get things done. My main gripe is that they would better serve the US by stopping these silly stress tests and never ending bailouts and just force all the junk out in the open. Let the bodies hit the floor and what remains will begin anew. Just as it has always done.
Tonight we saw that the bailouts for the banks are now effectively open ended commitments. A while back I asked what would be too much money to throw into insolvent banks, 1 trillion, 5 trillion?, 10 trillion? Today we got an answer. The answer is clearly "We will let you know, we know what we are doing." Well, thanks gentlemen, now I feel much better.
Have a good night.