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HomeBank Stocks Soar!! Bank Bonds Plummet!!
Posted by Larry Doyle on March 23rd, 2009 1:27 PM |
The major market stock averages overall and bank stocks specifically are respondingly positively to the Public-Private Investment Partnership laid out by Secretary Geithner. In the bond market, however, prices for bank debt are responding in a dramatically different fashion.
Why the inconsistency? My sense is that long term shorts in financial stocks are being forced to cover. Investors in the bond market are reacting as if this PPIP will create losses for certain assets as it simultaneously brings liquidity for other assets.
In its totality, the conflicting signals in the stock and bond markets for banks tell me that the jury remains out on the overall effectiveness of this plan for the financial industry specifically and the economy in general. (more…)
Public-Private Partnership? or “Won’t You Be My Neighbor?”
Posted by Larry Doyle on March 23rd, 2009 9:22 AM |
An oversimplified view of the proposed private-public partnership for investors to purchase toxic assets from banks is as follows:
A couple (private investor) looking for a home finds a piece of property (toxic asset) that seems very appealing. A mortgage broker (the government) is indicating that he can preapprove some very attractive financing terms. The mortgage broker also indicates that he can fortuitously provide a large cushion against potential losses on the property. The buyers inquire how that cushion may work. The broker informs them that he has access to funds from all the other homeowners (taxpayers) in town to offer as incentive to sell this property and others like it.
The couple’s interest increases, but they start to wonder what’s the catch as the property has been on the market for a while.
Upon further review, the prospective buyer discovers that the property may have structural issues. In hearing that, they think about scaling back a potential bid on the property. The broker pressures them to the point where the couple starts personally disliking the broker. (more…)
We Need a Bigger Boat
Posted by Larry Doyle on March 23rd, 2009 6:05 AM |
"We need a BIGGER boat!"
The movie Jaws struck fear into the souls of beachgoers in the mid-70s. If our current economy were only a scary movie. A classic scene in Jaws occurred when the salty mariner Quint eyed the shark and informed his sidekicks, “we need a bigger boat.”
In similar fashion, the size of the losses embedded in our banking, insurance, automotive, and states and municipalities will similarly require “a bigger boat!!”
Capital needs in the banking industry are projected from at least $500 billion to $1.5 trillion. Bloomberg reports former Fed chair Greenspan Says Banks Need $750 Billion More Capital. Nouriel Roubini puts the needs at upwards of $1.5 trillion. (more…)
Telling It Like It Is
Posted by Larry Doyle on March 20th, 2009 5:32 PM |
I am neither a Democrat, nor a Republican. Amidst all the pandering and nonsense, I think it is beneficial to get a clear review and hear someone tell it like it is. Rep. Thaddeus McCotter (R-Michigan) does a very good job.
Shame on everyone involved in Washington for a poorly written Stimulus Bill, and an equally poor legislative process.
Gimme Credit
Posted by Larry Doyle on March 20th, 2009 8:56 AM |
In the midst of all the wrangling in Washington, Wall Street, and literally all around the world, the biggest concern for everyday Americans is the accessibility of credit. I am sure everybody reading this post has either had issues gaining credit or knows of people who have had issues gaining credit. The knee jerk reaction for this lack of credit is to lash out at those big, bad banks. Well, those big, bad banks along with their smaller counterparts only provide approximately 50% of the consumer credit in our economy.
Where did the other 50% of credit emanate and where did it go? Welcome to the world of asset-based financing and in turn Asset-Backed Securities. I highlighted back on November 12th that the Wall Street Model is Broken…and Won’t Soon Be Fixed. Well, the breakdown and discontinuation of the ABS market is truly the equivalent of the total collapse of one of your lungs. Try to go about your daily business and all of your activities with access to only half the oxygen supply as normal. Might get a little winded? Might struggle to perform? Might tire rather quickly? Might be less efficient and productive? Well, folks, given the shutdown of the ABS market that is exactly what our economy has been experiencing. (more…)
FDIC . . . For Doing It Correctly
Posted by Larry Doyle on March 19th, 2009 2:41 PM |
Sense on Cents is very judicious in selecting our Economic All-Stars (highlighted in the left sidebar). These individuals continually display a level of professionalism, maturity, consistency, and integrity which are not commonly found in our financial or political spectrum. I deeply appreciate their insights and perspectives and enjoy sharing them with our audience at Sense on Cents and No Quarter USA.
I thank Susan and Andy for tipping me off to remarks made earlier today in which Sheila Bair Says “Too Big to Fail” Strategy for Financial Institutions Must End. The administration and other political pundits are trying to make the case that the Federal Reserve should serve as the systemic risk regulator. In my opinion, Sheila Bair should occupy that role. There is a major political battle developing over this turf. Make no mistake that how this battle plays out will have deep and longstanding implications for our financial system as a whole and for individual consumers. (more…)
Let’s Revisit Europe: The Weakest Link
Posted by Larry Doyle on March 17th, 2009 5:15 AM |
I thank our loyal reader in Michigan, Mr. Fiscal Liberal, for sharing with us a piece written by Simon Johnson, the former chief economist of the International Monetary Fund, a professor at the MIT Sloan School of Management, and a senior fellow at the Peterson Institute for International Economics.
Mr. Johnson writes about the growing problems in Europe. I am hard pressed to see how the European situation, both in the East and West, can not end badly. There are too many economies that are effectively insolvent or on the brink of insolvency. I believe this is the region of the world which will experience increased economic strife leading to social unrest and political change. Can the problems in Europe be contained given the massively interconnected world of global finance?
Thank you again FL for sharing this very enlightening piece from Simon Johnson!!
G-20s Real Agenda Should be Saving Europe from Itself
By Simon Johnson
Last Updated: 10:28AM GMT 16 Mar 2009The media coverage of the G20 finance ministers meeting this weekend was dominated by the apparent battle between those who support more fiscal stimulus and those who want to impose more regulations on the financial system.
This, we are led to believe, is the big debate facing the full G20 heads of government summit early next month: the US is pushing for a bigger global fiscal stimulus (2pc extra government spending from everyone, to be monitored by the IMF), while the continental Europeans are holding out for greater regulation. Gordon Brown is trying hard to cast himself as the broker for any apparent deal. (more…)
Mortgage Modification Guidance
Posted by Larry Doyle on March 14th, 2009 12:00 PM |
There is little doubt that there was massive fraud perpetrated by unsavory and unethical mortgage brokers during the housing boom. I do not mean to paint all mortgage brokers with the same brush. As with any industry, there are a tremendous number of highly ethical people working hard to make an honest living. Regrettably, not everybody falls into that camp.
Our economy would be well served if both local and federal authorities worked harder to expose the criminals in the system, indict them, prosecute them aggressively, and make them pay a very stiff price for their actions.
Not too surprisingly, some of the same ilk that wrote fraudulent mortgages are now populating the mortgage modification industry. People need to be exceedingly careful in engaging those who seem to want to help them modify their mortgage. (more…)
A Question of Honor
Posted by Larry Doyle on March 13th, 2009 1:00 PM |
On January 31st, I wrote a lighthearted piece, Know Your Customer, about my personal experience with an Asian counterparty. The lesson I learned from that experience back in the late 1980’s was that business dealings in Asia are ultimately “a question of honor.” Are you honorable in your manner? Are you honorable in your engagement? Are you honorable on a going forward basis? Are you honorable in both word and deed? Obviously in a meaningful relationship, this code of honor must run both ways.
Our relationship with the People’s Republic of China hinges on American consumers’ purchase of Chinese exports and ongoing Chinese purchase of U.S. government debt. As I just highlighted in my most recent piece, Chinese exports fell 26% in February 2009. Numbers like that will make any government uneasy. During challenging economic periods, the tenuous nature of any economic relationship is captured in understanding the nuances of the Prisoner’s Dilemma. (more…)
