Bank of America Privately Asks Gov't For Bailout?
A: This is one f**ked up environment where conspiracy theorists may actually be right! The NY Times had a story yesterday discussing the moral hazard of a gov't bailout. While in past decades wall street banks & brokerages begged governments NOT to interrupt with its progress & innovations, it has come time where now they are asking for just the opposite to get them out of the hole they dug for themselves. Michael 'Mish' Shedlock, of Mish's Global Economic Trend Analysis & Investment Advisor at SitkaPacific Cap Management, offers up some great commentary covering this very interesting read. Which do you believe...Let the tradable markets correct themselves OR aggressive government/fed sponsored bailouts & policy to stop the pain?
According to yesterday's NY Times article, "A 'Moral Hazard' for a Housing Bailout: Sorting The Victims From Those Who Volunteered":
Over the last two decades, few industries have lobbied more ferociously or effectively than banks to get the government out of its business and to obtain freer rein for “financial innovation.”In comes Mish & his very interesting commentary. After reading it, you almost can put together both how bad these problems are and how ridiculous this financial world we live in really is; will we EVER take responsibility for our actions? READ THE WHOLE POST or read some snippets here:
A confidential proposal that Bank of America circulated to members of Congress this month provides a stunning glimpse of how quickly the industry has reversed its laissez-faire disdain for second-guessing by the government - now that it is in trouble.
The proposal warns that up to $739 billion in mortgages are at "moderate to high risk" of defaulting over the next five years and that millions of families could lose their homes.
To prevent that, Bank of America suggested creating a Federal Homeowner Preservation Corporation that would buy up billions of dollars in troubled mortgages at a deep discount, forgive debt above the current market value of the homes and use federal loan guarantees to refinance the borrowers at lower rates.
"We believe that any intervention by the federal government will be acceptable only if it is not perceived as a bailout of the bond market," the financial institution noted.
The government would buy the mortgages at their true current value, perhaps through an auction, at what would probably be a big discount from the original loan amount. The mortgage lenders, or the investors who bought mortgage-backed securities, would be free of the bad loans but would still have to book their losses.
My Comment: This just gets sillier and sillier. If the Government buys them at "True Value" then why don't the banks just hold them at "True Value", or sell them to someone else at "True Value"? Clearly the idea is to dump them on the government at a price far above "True Value".
"Every citizen has a dog in this hunt," said John Taylor, president of the National Community Reinvestment Coalition, a community advocacy group that has developed its own mortgage buyout plan. "The cost of spending our way out of a recession is something that everybody would have to bear for a very long time."
Mr. Taylor estimated the government might end up buying $80 billion to $100 billion in mortgages. But he said the government could recoup its money if it was able to buy the mortgages at a proper discount, repackage them and sell them on the open market.
My Comment: Mr.Taylor is clearly a complete buffoon. How the hell is the government supposed to be able to package this garbage and sell it on the free market if the banks can't?
But identifying innocent victims has already proved complicated. The Bush administration’s Hope Now program offers to freeze interest rates for certain borrowers whose subprime mortgages were about to jump to much higher rates. But the eligibility rules are so narrow that some analysts estimate only 3 percent of subprime borrowers will benefit.
My Comment: Innocent victims are easy to spot. Those who stayed out of the mess but saw property taxes soar to the moon anyway. The second set of innocent victims were those on fixed incomes who got paid a lousy 1% in their money market accounts while the Fed blew the biggest credit bubble the world has ever seen.
The House Financial Services Committee is working on various options, including a government buyout. The Bush administration may be softening its hostility to a rescue as well. Top officials at the Treasury Department are hoping to meet with industry executives next week to discuss options, according to two executives.
"There are a lot of ideas out there," said Scott Stanzel, a spokesman for President Bush, when asked at a White House press briefing on Friday about a possible buyout program. "There are many different ways in which we can address this problem and we continue to look at ways in which we can do that."
My Comment: There are indeed a lot of ideas out there and every one of them but one is a horrid idea. The only good idea is to let this play out naturally over time without the government making matters worse.
UrbanDigs Take: I've said this before months ago! The problems we face today are the result of ultra cheap money + lax lending standards + speculative investing in an illiquid asset using leverage + financial innovation to disperse risk using complex and often mis-understood vehicles + housing deflation. The ultra cheap money and aggressive fiscal stimulus is spurring commodity inflation as housing deflates; an awful combination. The financial innovations were rooted deep and controlled by people with a vested interest in the transaction (make my fee and pass the product down the line approach); it was only a matter of time for the market to seize up. And after years of lax lending standards and very easy money which sparked a 5 year unsustainable boom in an illiquid asset, housing, the very dynamic that powered the boom is now extinct (tightening lending standards, more expensive borrowing costs, illiquid secondary mortgage markets).
What we need is a good old fashioned slowdown to reverse the mistakes made, weed out those that made bad bets, deeply embed the pain of these mistakes in the minds of investors, self-cleansing of the financial markets that allowed this boom to occur, clean off the balance sheets of toxic waste, and prices to revert back to the mean so that we can return on a longer term path of sustainable economic growth with the lessons learned!
Government and fiscal policy needs to be very cautiously applied to these problems so as NOT to disrupt the tradable markets from fixing themselves, and punishing those that made bad bets. If policy and actions are applied too aggressively, a moral hazard will certainly set in, inflation will run rampant, and we will have to deal with potentially worse problems at a later time. What I see now, is the tradable markets working on their own in the following way to correct itself:
a) seizing up of secondary mortgage markets - the very market where banks offload mortgage backed securities is dead. This is causing lending standards to be tightened, available capital to be restricted, lending rates to rise, risk to be re-priced, and losses to be booked on the bad holdings.
b) housing deflation - the turnaround in housing is removing speculative players from the market who helped power the unsustainable boom. In addition, as housing prices fall banks are re-thinking to whom they will lend their capital to and at what rate. In short, the bullshit days of giving anybody a loan because housing goes up are gone!
These two forces are the markets way of correcting themselves. However, it seems government and the fed are doing everything possible to stop these natural forces at work. Yes, I think we need help here, but look at what we got over the past 6 months ---> 225 bps of fed cuts, fed term auction facility injections to provide liquidity to banks and ease LIBOR, gov't sponsored rate freeze plan, gov't sponsored HOPE now plan, $168 billion economic stimulus package, and a bond insurer rescue plan about to be announced! Geez, am I the only one that is seeing all this?
Do you think we need more aggressive measures or to let the markets take it from here for a while?