Who Knew?

who knew??

Big Ben and Hammerin’ Hank that’s who.

Today’s drop amount = $12.5 billion

Brought to you by the Fed and the Treasurey…

excess tax receipts are getting out of hand…..may be we should start paying down that debt, that we are currently over……

But that matters not as the DOW just went green…

Gotta love it

Ciao
MS

I agree with KP’s assessment of greed leading the decisions. I’ll also add that they knew all along. It was financial musical chairs and none of the participants felt they would lose…

Wall Street knew, but they didn’t care. The genius of the scheme is that they engineered it so they took all the reward and passed on all the risk.

Sarcasm? What’s that?

That’s really funny.

I think there are many talking heads on CNBC that didn’t know. Actually, many of them still don’t seem to know.

If by ‘poor people,’ they mean persons who didn’t get 15-25% YOY raises commensurate with rising house costs, then yes.

MM,
dilligently saved for that 20% down, and risks losing it to (further) inflation

While the focus has been on subprime borrowers, it is important to remember that there are other groups that are also screwed.

1: Home ATM zealots: As Barry has discussed before, with a negative savings rate, Americans cashed out equity to maintain spending over the years. Now with flatlining and/or falling home prices, cash-out refis are closed. Consumer spending has to take a hit.

2: Speculators with multiple homes: many, many folks have bought 2nd, 3rd, Nth homes as leverage and loose lending standards formed a virtuous circle. These people used their pristine Prime credit ratings to borrow far more than their incomes could support — using cash-out refis to pay interest on earlier loans. Sort of a single-man Ponzi scheme. These people are genuinely screwed.

In summary, I think two things are coming next:

1. Consumer spending slowdown. Look for lower retail sales, rising credit card delinquicies, and a slow Christmas.

2. The subprime problem morphing into a prime problem. Look for rising Prime defaults.

Mr. Beach-

Since you brought up the topic of the Home ATM, I think it’s worth mentioning a few reasons why borrowing against equity is not as irresponsible as is frequently depicted here:

First, the tax laws have prevented deducting most consumer interest for about 20 years, so unless you are paying cash for vehicles and have no other debt, it is rather foolish not to use equity to pay off those obligations. The interest rate is lower and you get a tax break for a few years.

Second, from Day One many people plan to pay for their kids’ college education by dipping into equity. The other alternative for most is to borrow against their 401k, but that loses the tax break.

In both cases, hitting equity is entirely reasonable assuming that you have built up a real stake over the years and don’t go crazy about it. In my own case, I bought my house in 1985 and paid off an absurdly high mortgage in 2001. Around 2003, I observed that I had $50k in auto loans, some creeping credit card debt, kids starting college, and no tax break, so I borrowed half of the value back out on a 10 year note. The car and credit card balances went away, the financial part of college was mostly resolved (don’t ask about the other aspects), and I am still writing off some pretty good interest.

I realize that you qualified your comments about Home ATM with “zealots” and assume that you probably agree with most of what I have suggested, so I am not picking on you. I just saw an opportunity to bring another aspect of the issue up that many people here seem to overlook for whatever reason.

==whipsaw==

I’m not sure about the sarcarsm – sometimes it seems these guys are so insulated from reality that if their computer models failed it really would be a shock – I mean, how many “poor people with bad credit” do you think they have ever met in their lives?

Barry, I thought this was an interesting montage of the current credit crisis and solvency issues , and the author also shows the parallels between today and the panic of 1907:

1. In one way, I’m sympathetic to the institutional reluctance to face the music. I’d give a lot to mark my weight to ‘model’ rather than to ‘market.’ – Warren Buffett, Fortune, 8/16/07 (On the financial institution practice of valuing subprime assets on the basis of a computer model rather than the free market price.)

2. The Federal Reserve was not founded to bail out Bear Stearns or a few hedge funds. It was founded to keep a stable currency and maintain its value. – Jim Rogers, Rogers Commodity Fund

3. For the second time in seven years, the bursting of a major-asset bubble has inflicted great damage on world financial markets. In both cases–the equity bubble in 2000 and the credit bubble in 2007–central banks were asleep at the switch. The lack of monetary discipline has become a hallmark of unfettered globalization. Central banks have failed to provide a stable underpinning to world financial markets and to an increasingly asset-dependent global economy. – Stephen Roach, Morgan Stanley

4. There is a lot of pain still to be had in the equity markets, particularly aimed at the risky end of the spectrum. We think the fair value on the market is about a third lower in the U.S. . . – Jeremy Grantham, Grantham, Mayo and Van Otterloo

5. Suddenly, the world is realizing that gold is still a safe haven asset. We’ve seen pretty substantial losses in equity markets. I think this is genuine safe-haven buying. – James Moore, theBullionDesk

6. I think Greenspan would have cut rates already. So I do think things are beginning to look different at the Fed. – Paul Kasriel, Northern Trust

7. At this juncture, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained. – Fed chairman, Ben Bernanke, Congressional testimony, March, 2007

8. “If prices go down, we will have problems — problems in the sense of spillover to other areas,” Greenspan said. While he hasn’t seen such spreading yet, “I expect to.” – Former Fed chairman, Alan Greenspan, speech, March, 2007 as reported by Bloomberg.com

9. This is not a rescue. – Goldman Sachs Chief Financial Officer David Viniar after Goldman poured $3 billion into one of its hedge funds

10. This is a sort of preemptive rescue. – Eric Kuby, chief investment officer for the Goldman fund mentioned

11. When you’re in a pit, the first thing to do is to stop digging. – James Ellman, Seacliffe Capital

12. The US financial system is teetering. Its USDollar currency is losing global support, with some outright revolts in crucial territories. The chief private sector export from the US financial sector has been fraud-ridden asset-backed bonds and their toxic credit derivatives. What should anyone expect? For years an institutional dishonesty within all things financial in the United States has been engrained, spreading, and become integrated with high levels of the USGovt. The Wall Street hucksters exported fraud. The backlash might be more severe than the soft soap gurus anticipate. Look for an international boycott. The shock waves in the US financial markets are preliminary symptoms of bigger events soon to come. Stability identified is nothing but quiet between tremors. – Jim Willie, Hat Trick Letter

13. The German banks’ situation is not uncritical. – Alexander Stuhlmann, Germany’s Landesbank

14. After all, in a credit crunch, cash is deemed to be king. In which case, gold owned outright has just been crowned emperor. – Adrian Ash, BullionVault

15. [C]apitalism without financial failure is not capitalism at all, but a kind of socialism for the rich. – James Grant, Grant’s Interest Rate Observer

16. US sub-prime is just the leading edge of a financial hurricane. – Bernard Connolly, AIG

17. When the music stops in terms of liquidity, things will get complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing. – Chuck Prince, Citigroup

18. Why is it possible to rescue S&L buccaneers in the early ’90s and provide guidance to levered Wall Street investment bankers during the 1998 long-term capital management crisis, yet throw 2 million homeowners to the wolves in 2007? – Bill Gross, Pimco

19. So perhaps the most worrying single remark made by a responsible banking official during the current crisis came from Jochen Sanio, the head of Germany’s banking regulator BaFin. He warned on Aug. 1 that his country could be facing the worst banking crisis since 1931 — a reference to the collapse of Austria’s Kredit Anstalt, which provoked a wave of bank failures across Europe. – Martin Walker, United Press International

20. Angelo Mozilo, chief executive of Countrywide Financial Corp, which is one of the chief victims of the sub-prime home loan debacle, said the housing crisis was the result of “one of the greatest panics I have ever seen”. When asked if housing would lead the US into a recession, he said: “I can’t believe … that this doesn’t have a material effect … on the psyches of the American people and eventually on their wallet.” – Phillip Inman, The Guardian

21. As calamitous as the sub-prime blowup seems, it is only the beginning. The credit bubble spawned abuses throughout the system. Sub-prime lending just happened to be the most egregious of the lot, and thus the first to have the cockroaches scurrying out in plain view. The housing market will collapse. New-home construction will collapse. Consumer pocketbooks will be pinched. The consumer spending binge will be over. The U.S. economy will enter a recession.” – Eric Sprott, Sprott Asset Management

22. The U.S. economy, once the envy of the world, is now viewed across the globe with suspicion. America has become shackled by an immovable mountain of debt that endangers its prosperity and threatens to bring the rest of the world economy crashing down with it. The ongoing sub-prime mortgage crisis, a result of irresponsible lending policies designed to generate commissions for unscrupulous brokers, presages far deeper problems in a U.S. economy that is beginning to resemble a giant smoke-and-mirrors Ponzi scheme. And this has not been lost on the rest of the world. – Hamid Varzi, International Tribune

23. It’s a crisis if everybody calls it a crisis. – Morgan Downey, Lasalle Global

24. It’s inappropriate [for money market funds to invest in credit derivatives]. It doesn’t have a place in money market funds. When I created the first money market fund, I said you have to have immediate liquidity, safety and a reasonable rate of return. You also have to have a situation where you’re not giving people headline risk. – David Evans

25. The crisis in the US sub-prime mortgage market could bolster the gold price not only because gold provides a safe investment haven. The crisis is expected to slow GDP growth, spurring lower real interest rates and a weaker US dollar that will boost gold investment demand. Gold’s traditional role as a safe haven asset in times of financial turbulence and instability is enforced in the current market as the metal recouped the majority of losses which occurred in a flight to cash in the beginning of August. Supporting this view is the fact that gold recovered despite a rise in the US dollar caused by a European Central bank intervention that boosted liquidity in Europe. – Dr. Peter Richardson, Craton Capital

Final Word

While compiling the quotes for this article, I could not help but note an irony: The most severe test of the Federal Reserve in the modern era dates almost 100 years to the day from the Panic of 1907 – the credit crisis that instigated the Fed’s founding. The Panic of 1907 was characterized by bank runs and a stock market crash as investors fled the financial system. The current crisis, though it has produced similar results, is a much more complex and wilder breed of cat. Market commentator Henry K. Liu, offers a keen insight: “With the daily volume of transactions in the hundreds of trillions of dollars in notional value of over-the-counter derivatives, the Fed would have to inject funds at a much more massive scale to affect the market. Such massive injection would mean immediate and sharp inflation. Worse yet, it would cause a collapse of the dollar.” Unpredictable circumstances such as these speak compellingly for gold ownership which, by the way, proved to be just as effective a safe haven in the Panic of 1907 as it is likely to be now.