I'm quite a bit too young to remember the last time we had major banks failing in this country and I'll admit that it's pretty unsettling. Brad DeLong gives me some confidence that the appropriate people have the tools and judgment necessary to prevent things from getting too bad. But who knows -- I'm kind of an optimist by nature, and optimism hasn't been paying off well lately.
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Bank Failure
12 Jul 2008 01:47 am
Comments (23)
Stop whining.
Unless the mental recession were in lets up soon, I'm going to be bitterly clinging to my gun. And you all better stay out of my Hooverville tent, you damn whiners, you.
the appropriate people have the tools and judgment necessary to prevent things from getting too bad
The important point to make here is that what the appropriate people will do is nationalize and socialize the necessary businesses.
We already basically socialized several major financial institutions, giving them unrestricted access to gov't cash. The plan with Fannie and Freddie is simply to buy them and run them from the government.
This all sort of puts the lie to "we have to cut taxes and regulations because of all the risks taken by rich people and corporations". At bottom, they know they aren't actually at risk, because the government will bail them out.
I don't think the government shouldn't bail them out - ultimately, I'm willng to accept that these institutions are "too big to fail" - but we need to remember this during the good times and the less bad times, that all of these institutions receive massive welfare to protect them.
I work as a Compliance Officer at a much much smaller bank than IndyMac, and my job is to prevent stuff like this from happening (among other things).
Schumer is blaming the OTS, but the kind of stuff that IndyMac did to cause their failure is indicative of two things:
1. Lending standards that were WAY, WAY too lenient.
2. The market in which their bank did business.
Giving NINA (no income or asset verification) loans is going to go (and really already has) the way of the buffalo because of crap like this. Banks are supposed to be the firewall that prevents people from getting loans they cannot afford, within reason. IndyMac had its eyes on profitability and stock growth rather than making the best loans to appropriately qualified borrowers.
I am thankful that the OTS is there to regulate the morons in my industry that get too focused on making profit rather than responsible lending.
And now I'm sure I'll have a customer ask me about our bank's safety. Great.
Word to the wise: If you're not familiar with FDIC insurance and your rights concerning it, familiarize yourself. This isn't the last failure that's going to happen because of the mortgage crisis.
Would the Republican- (including John McCain) and lobby-pushed yet heartily Democratic-approved de-regulation and pro-speculative regulating which destroyed the U.S. Savings & Loan industry count as bank failures recent enough to be remembered?
That's after all what created the OTS in the first place.
Matt, I believe you're actually too young to remember the last time we had a major *recession* in this country. In 2001, weren't you still watching the Saturday morning cartoons?
This all sort of puts the lie to "we have to cut taxes and regulations because of all the risks taken by rich people and corporations". At bottom, they know they aren't actually at risk, because the government will bail them out.
Class Warfare!
We need a bipartisan blue-ribbon panel to propose recommendations.
One thing to take away from the IndyMAC failure is an issue that is very remote to people these days: Never allow your deposits in a single bank/single account to exceed the FDIC insurance limits.
Few alive today have personal memories of ever losing any money to a bank failure or even knowing anyone who has. However, as you can see in the story, many people are going to lose a lot of their money because they had TOO MUCH money in one place.
Always use the 'hand grenade' rule with your cash and spread it out.
Matt you're not that young. The S&L crisis is only 20 years ago. Another 8 years and you would've remembered it.
Washington Mutual is going to fail too. So will a hundred or more smaller local and regional banks. That will wipe out all the FDIC's cash. But don't worry.
FNM and FRE have $4 trillion in assets, declining assets, and guarantees, and have $4 billion in cash. Do the math. They won't fail I suppose as long as they don't actually have to follow the simple rules of accounting. Which they haven't done for years. For over two years neither issued their mandated financial statements. Which means they could not be listed on the NYSE, but were. Which means that no fiduciary could own or buy the stocks with other peoples money, but did.
In any case the stocks are going to zero.
The deficit this calendar year is growing at nearly a $1 trillion dollar rate. The budget is busted. When the bailout of FNM and FRE comes and the Treasury has to sell bonds to pay for it, along with all the other ever increasing sales of bonds notes and bills it's highly likely that the markets are going to say enough is enough. Which means that interest rates are going to rise. They are going to rise probably to heights unimaginable to any but the tin foil hatters.
Both parties are responsible for this mess. In fact the GSE's best friends are Dems like Barney Frank. They spout 'affordable housing' after the median home price rose to 5X median income. Never before in history had home prices risen more than a hair over 3X median income and then for not very long. The housing price crash was inevitable. The rise totally due to an unhinged credit market led by the GSE's.
rapier
WaMu is too big to fail. IndyMAC-sized banks are at just about the limit for size allowed to fail. They'll get special treatment from the OTS and the Fed because of their size. If they fail, then this thing is beyond our government's control. The psychological consequences to the banking industry would be that of the bank runs after the great crash. We really don't need that again.
I would consider the mattress if WaMu fails.
I'm a relic who has vivid recollections of the recession that began in '75. It is s'posed to be the 2d worst (after of course the GreatDepression). The similarities to the present are shocking. The VNam war was financed by deficit spending; LBJ's budget for FY '68 was actually a 'balanced budget' without increased taxes to pay for the war. These federal budgets created an 'inflationary psychology' (ref to frmr Sen Gramm) that was actually a devaluation of the dollar.
In the background were Washington scandals (Watergate was not the only one) that created a climate of distrust in the U.S. Gov't's ability to act wisely & decisively.
There were 'oil shocks'; gas doubled in '73 (from .25 to .50!!) then doubled again in '79. Hoarding resulted in a lack of supply, long gas lines when it was available. Men were getting into fist fights in gas stations.
I could go on and on. We've learned nothing. Very depressing. A VNam vet with new college degree and young family, I ended up living in my mother-in-law's back bedroom pounding the pavement looking for minimum wage work. (Which, btw, included health insurance back then.)
This is going to be very very bad.
"Brad DeLong gives me some confidence that the appropriate people have the tools and judgment necessary to prevent things from getting too bad."
You've just got to be kidding! Obviously Matt doesn't get out enough. For those interested in this topic, 2 excellent sites that will give you the dirty lowdown on the housing bust and fallout.
http://patrick.net/housing/crash.html
http://housingpanic.blogspot.com/
Sometimes I'm optimistic, but lately the signs are adding up to at minimum a very, very difficult economic time ahead. What gets me is that we're starting off in such a hole: huge deficit, low dollar, horrible environmental issues.
No jobs. I know so many kids out of college without jobs. I had trouble getting to sleep last night. I'm worried for my kids--what will things be like in 7 years? Especially if McCain wins and the war in Iraq and Afghanistan boils over to fill Iran in between? No, I'm not optimistic...
You might too young to remember, but a lot of us suffered greatly the last time a Bush was President and we had a little something called the Savings & Loan failures. It was worse then in a lot of places. Bank after bank failed and the FDIC or somebody came in and kept reorganizing failed banks into bigger firms.
Now, it's happening again under George W Bush, just like it did under GHW Bush. Of course, the reason is the same - massive government deregulation of banking leads to quick growth then a sudden explosion due to overspeculation.
The country is filled with fools.
Because they voted in these yahoos the first time, and then they let little Bush do it a second time.
Rich people get rich and bailed out by the gov't, poor people get fucked.
Matt, You'd do a service if you stopped reading Delong. Railing against Norquist, I suppose, diverts him from seeing the forest. DeLong says this is not going to cost the taxpayers!!! Of course, they'll try to hide the cost but believe me, we'll pay. We're already paying as the dollar tanks. Why do you think gold is approaching $1000 /ounce? The US economy is wrecked, the $ will never again be the world's de facto currency. This thing is about in the 2nd inning.
As for Dodd: I recently watched him chair his committee and was shocked at how clueless he is. flabbergasted! (Warning to Obama.) Same for Barney. ( Sorry to say, because both are fine on other issues.) But people like these (supposedly in charge while all this mortgage/credit scam was going on for anyone to recognize), the Fed, esp Greenspan (whom DeLong idolizes) are responsible for this royal mess. Don't wait for the history books.
At least read Ritholtz. Try to follow where D.Black is pointing.
Granted, it's hard because MSM is clueless as usual. But so are most blogs, in this case!
Re: Which means that interest rates are going to rise. They are going to rise probably to heights unimaginable to any but the tin foil hatters.
Prediction: interest rates will rise no more than 1 percent, maybe not at all. It's election year: the Fed will not be willing to damage the economy with an interest rate hike. The most likely path of remedy will be chronic (but single digit) inflation.
Re: I'm a relic who has vivid recollections of the recession that began in '75. It is s'posed to be the 2d worst (after of course the GreatDepression).
??
I thought that honor belonged to the double-dip recession of 80-82. Unbless you are including everything from '75 on as one recession (which I don't think is justified).
Re: I had trouble getting to sleep last night. I'm worried for my kids--what will things be like in 7 years?
A helluva lot better than they are now, assuming (important proviso) we do not reward the GOP for its mismanagement with another four years in the White House.
Re: The US economy is wrecked, the $ will never again be the world's de facto currency.
Problem is, no other currency can fill that role. China's is pegged to the US. The Euro is less stable than the dollar. The Yen is a flatliner. The only really healthy currency today is the Canadian dollar, but Canada's economy isn't big enough for it to take on the role of reserve currency.
Yeah, I really don't see how this is supposed to work- the government will essentially borrow money, by giving money they don't actually have to save the bank.
Of course, a century ago the railroads played this game all the time- go into receivership, wipe out $50 million in common stock obligations, and then float a big loan based on what remains of the assets. The air went out of that game when the government insured savings and people had someplace safe to put their money.
There's one part of this I've seen before- when carter was President, interest rates went to 17-18%. I might be shocked, but will not be surprised, if the same thing happens to a President Obama.
We should just be glad the Rs aren't giving us democracy they way they give it Iraq. Damn, I gotta go out and give someone a little democracy tonight. This whole situation is making me very tense.
For anybody who is dumb like Matt and thinks things are in hand:
And now, for Fannie and Freddie
http://www.atimes.com/atimes/Global_Economy/JG12Dj04.html
In the US since the middle of last year, various arms of the financial sector have been progressively trimmed, starting with the exotic structured investment vehicles (SIVs) then moving swiftly on to mortgage servicers and providers, and spiralling merrily on to investment banks. Doubts about various commercial banks that take deposits from the public have also surfaced from time to time. All of these entities, though, are mere intermediaries that originate risk and transfer them to other investors, including overseas investors and more importantly, two large US financial firms that absorb the interest and credit risk of millions of American households.
This week, the final chapter in the unravelling of US systemic leverage opened with salvos on two most important government sponsored entities (GSEs) operating in mortgages, namely Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corp. (Freddie Mac). These two financial behemoths have between them about US$5 trillion of mortgage assets, owned or guaranteed, in effect touching some 70% of all mortgages in the United States.Even though these companies are sponsored by the US government, they operate as publicly listed stocks. Looking at their combined stock market valuation of less than $20 billion as of Thursday night (July 10) compared with their $5 trillion in assets shows them already to be in significant economic distress. In contrast, US commercial banks such as Citibank, JP Morgan and Bank of America have stock market capitalization of around 10% of their total assets, even after the massive decline in stock prices this year. Of the $5 trillion, roughly $1.6 trillion sits on the balance sheets of the two GSEs, with the rest "off" balance sheet - and this is precisely where problems began...
This last point, going to the very credit quality of the US government itself, is significant. On the back of the Japanese financial crisis in the 1990s, the government there absorbed the financial risk of its banking system over and over again, eventually losing its own prime credit ratings - a stunning rebuke for the world's largest creditor nation of that time.
Unlike Japan of that time, the US is running a massive fiscal deficit that threatens to get worse with the recession even as Republicans demand more tax cuts and other measures designed to make the problem worse. With bank after bank in trouble, and an almost endless moral hazard net being thrown by a feckless government, it appears likely that the much-vaunted triple A credit rating of the US government could come under a cloud sooner rather than later. This will be a fitting end to the decades of excess in that country. The time to pay the piper has arrived, with a bang.
And this:
How to stop the Great Crash of '08
http://www.atimes.com/atimes/Global_Economy/JG01Dj07.html
The oil price has doubled in the past year because the US Federal Reserve panicked over risks to the over-leveraged financial system and flooded markets with excess liquidity. The world is willing to pay arbitrarily high prices to hedge against inflation, but the cost of inflation hedges drags down the world economy. Last week's spike in commodity prices and swoon in global stock markets points the way to a deep and prolonged fall in economic activity.
Breaking out of the death spiral still is possible. With mixed emotions, I propose a simple solution. In fact, a crash would not be an altogether bad thing for the United States. At least it would exorcise the something-for-nothing culture of the past two decades.The baby boomers would not be able to retire, to be sure, but in America retirement means watching an additional 40 hours of television per week. For all I care they can keep working. For the world's poorest, though, the consequences would be deadly (see Rice, death, and the dollar, Asia Times Online, April 22, 2008). My proposal draws on the experience of 1979-1984 under similar circumstances, although the parallel is far from complete.
By catastrophic breakdown, I mean a well-defined chain reaction:
# Markets expect economic growth to decline as oil prices rise.
# American financial institutions, whose market capitalization has fallen by almost half in the past year, sustain higher default rates from households and firms, leading to some failures.
# Credit availability shrinks as banks come under pressure, raising the default rate.
# The price of household assets (real estate and stocks) continues to decline, destroying their creditworthiness.
# Markets expect the Fed to continue to ease monetary policy and offer unlimited liquidity to all comers, as it did with the mid-March bailout of Bear, Stearns.
# Investors turn away from falling equity markets and buy inflation hedges, pushing oil and commodity prices up further.Monetary ease is a medicine whose side-effects have become worse than the disease. Blaming "speculators" for rising oil prices is cheap demagoguery. Pension funds have invested hundreds of billions of dollars in commodity index funds during the past two years to hedge against inflation. The more the Fed debases the dollar, the more money shifts away from the stock market into inflation hedges. The data leave no doubt of this.
There is a visible long-term relationship between oil and the dollar. The dollar collapse and oil price spike of today mimics the dollar's fall and the oil price surge at the end of the feckless administration of Jimmy Carter, and stopped when the Fed tightened monetary policy between 1979 and 1982. Therein lies a lesson.
Recently, though, the correlation of daily returns to oil and the trade-weighted dollar index has reached a new low, that is the oil price is more likely than ever to rise on days that the dollar index falls.
The position of American households is so fragile that major institutions might fail. Washington Mutual, America's largest thrift institution, is now trading at a tenth of its 2007 stock price. It is not clear whether any other institution is willing, or indeed able, to take it over.
Federal Reserve chairman Ben Bernanke knows that something has gone dreadfully wrong. He spent the month of June threatening to do something about the sagging dollar and soaring commodity prices, until the market concluded last week that he was bluffing. Bernanke simply doesn't have the nerve to raise interest rates into a weakening economy.
Under parallel circumstances, then Fed chairman Paul Volcker did precisely that in 1979, bringing the central bank's lending rate up to 20% over two years of tightening. Inflation under the Carter regime had run out of control, the dollar collapsed, and the price of oil rose to a then menacing $40 per barrel. After Volcker tightened monetary policy the dollar's trade-weighted exchange rate doubled and the price of oil fell sharply.
At the same time, the Ronald Reagan administration cut marginal tax rates sharply, and the American economy began a quarter-century growth cycle. Lax monetary policy had produced stagflation instead of growth, but tax cuts succeeded. The costs, to be sure, were painful - 1,600 American banks and a similar number of savings and loans failed between 1980 and 1994, at a cost of $160 billion to taxpayers. America sustained its worst economic downturn since the Great Depression, with an unemployment rate of 11% in 1980.
The present crisis, sadly, is far less tractable. Top marginal income tax rates of 70% in 1981 were the equivalent of banging your head against the wall. It felt good when you stopped. With the top federal rate at roughly half the 1981 level, it is hard to argue that lower tax rates will buoy economic activity. Home ownership, moreover, offered a hedge against inflation, and rising home prices sustained household net worth.
Today's crisis, by contrast, threatens the solvency of households. After a quarter-century of taking on debt, home prices are collapsing. Americans, moreover, have saved nothing during the past decade, borrowing an annual sum from foreigners that amounted to $1 trillion in 2007. The crisis of household solvency became a banking crisis through the collapse of the market for lower-quality (subprime) mortgages, and threatens to metastasize into something much broader. That is the message the markets delivered during June.
There is no way to avoid some economic pain. America is in a recession and will stay in a recession for a while. The only question is whether it will come out of the recession in one piece....
[He then lists his recommendations. Read the piece.]
This brief list does not cover such weighty matters as energy policy, bank regulatory policy, and so forth, but it indicates the sort of turnabout that America requires. Americans have to change their lives. There are two ways to do this. The federal government can provide incentives to do so, or the market can compel a change in behavior using the instruments of torture at its disposal.
With the above presentation I have discharged my civic duty. The likelihood that the present administration and Congress will do anything remotely like this, of course, is vanishingly small. My advice to individual investors? Invest in some popcorn, because the next six months will be something to watch.
Mr JonF. I am indeed smooging the economic downturns that began in the late 70's and ended in about '83 into one event. I know that there were upturns and downturns during that period, but to me it was all one long hard time. Not being an economist--I won't argue the distinctions.
Ms Beth. I too worry about my kids. A memory: with 5yrs of university and a dual major in liberal arts, I was working in a gas station. "Check the oil, ma'am?" A cabby made frequent trips in and out. I noticed he had an interesting book in the seat beside him and struck up a conversation. Turns out he had a MA in Anthropoloy. Between us we had 12 yrs of higher education. That's what the near future looks like to me.
Just because a bank loans out $100.00 does not mean they have $100.00 in the safe or in liquid assets. Its more like $10.00 on the banks books in some form for every $100.00 loaned out.
So for all your money they are paying you 1, 2, maybe 3% interest on, they are turning around and charging 5 to 20% interest ten times over. Pretty slick deal for the banks, until the market turns against them and suddenly "poof" everybody's money disappears.
For a very good explanation of how our banking system works check out www.scamorbam/bankingscams.html
Just because a bank loans out $100.00 does not mean they have $100.00 in the safe or in liquid assets. Its more like $10.00 on the banks books in some form for every $100.00 loaned out.
So for all your money they are paying you 1, 2, maybe 3% interest on, they are turning around and charging 5 to 20% interest ten times over. Pretty slick deal for the banks, until the market turns against them and suddenly "poof" everybody's money disappears.
For a very good explanation of how our banking system works check out www.scamorbam/bankingscams.html
Comments closed July 26, 2008.
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Heads in the Sand
"the appropriate people have the tools and judgment necessary to prevent things from getting too bad"
There can be nothing more scary than hearing that.
Posted by saifedean | July 12, 2008 2:19 AM