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by Stranded Wind
I called the death of Indymac Bancorp on Monday, July 7th. The Federal Deposit Insurance Corporation seized Indymac on Friday, July 11th.I called the implosion of the two Government Sponsored Entities in the mortgage business, Fannie Mae and Freddie Mac on Wednesday, July 9th. Sunday, July 13th the White House announced a bailout for them.
Want to know what happens next? It’s ape ass ugly and it’s going to happen to you, so don’t say I didn’t warn you.
- Stranded Wind's diary :: ::
First and foremost, let’s discuss my qualifications in this area; I know jack shit. I have, however, been through a couple of publicly held company bankruptcies, I’ve funded a couple of startups and worked for a few others, and I have an operations accounting background acquired in the context of the bankruptcy and dissolution of a firm with over seven hundred retail locations and a couple of thousand franchisees. I can read a P&L, a balance, sheet, and I can detect bullshit in an SEC 10K/10Q filing (How? Damned simple – they’re a pack of lies as a rule, labeled as "forward looking statements").
I was blessed with the good sense to follow Stoneleigh and Ilargi when they stopped doing the finance roundup on The Oil Drum and moved on to their own thing over at The Automatic Earth. Everything I know comes from studying their daily roundup of financial news with associated commentary and I check in occasionally with the Bank Implode-O-Meter and the Hedge Fund Implode-O-Meter to see the scoreboards and flow of troubles. The most complete overall timeline on this mess seems to be over at Credit Writedowns.
Now that we’ve got the bona fides for my amateur status, let’s tackle the topic at hand: The Ginormous Banking Enema of 2008
What is happening?
If you look down from a very high level what you see is this: There is $75 trillion in global real estate, $50 trillion in annual global GDP, and $675 trillion in derivatives - synthetic financial instruments loosely associated with the real world that, when inspected, prove to be worth a small fraction of their face value. Nine years ago Weathervane McCain’s chief economic adviser, Phil Gramm, got the Glass Steagall Act largely repealed. Investment houses engaged in an orgy of what can only be described as private money printing, taking real assets, puffing them up, marking them up, passing them around, and they kept at it until there were five or six dollars of funny money for every real dollar of stuff. Ssshhh, don’t anyone tell the pension funds ...
What is the connection to commercial banks?
We have 8,500 commercial banks in the United States. They take deposits from folks, they make loans, and the bigger ones are publicly held, so their fortunes influence the stock market’s so called "financial sector". It’s in quotes because it was 5% of the economy for a long, long time, then it mysteriously poofed up to 25% ... before beginning a slow motion deflation starting last August. Again, we should keep the pension funds in the dark ...
So these 8,500 commercial banks wrote and sold mortgages and they made commercial real estate loans. Now the housing market is tanking because the asset inflation associated with houses is over because five dollars in funny money isn’t going to get you a nickel of real stuff soon. The commercial real estate market, that being the strip malls and such desired by all those newly minted suburbanites, well ... as Marvin the Martian would say There’s supposed to be a huge ka-b00m! There will be and make no mistake about it ... Ilargi summed it up nicely in the July 19th Debt Rattle.
Ilargi: The rate of failure among the approximately 8500 US banks is about to start accelerating, probably in large and fast steps. The main reason for most of the smaller ones is their positions in commercial real estate and construction, where "The loss rates are just astronomical."
There is just one article supporting this statement, but Ilargi has been dead on with every other prediction and pretty close on the timing of them. I take the failure of Indymac Bancorp to be another event in this chain, with it being the third largest bank failure ever.
How bad is this going to get?
Bear Stearns got bailed out ‘cause they were highly visible (read: failure would have exposed aforementioned funny money to the average Joe), Freddie Mac and Fannie Mae are Government Sponsored Entities who now have their sickly balance sheets backstopped by the U.S. Treasury (read you & me), but all the commercial banks have is the Federal Deposit Insurance Corporation.
Great! All accounts are insured to $100,000! We’re saved!
Way wrong. The FDIC is an insurance operation. They make an educated guess as to how many banks will fail and what the total exposure is, then they collect insurance premiums from them. They’ve got $51 billion ... and Indymac alone sucked up 10% of that. If a big one lets go, like Washington Mutual or Wachovia, then the FDIC will look just like FEMA did facing down hurricane Katrina. Don’t go and look at the scoreboard on the Bank Implode-O-Meter unless you’ve got a very strong stomach. Oh, and do note that a good bit of those write downs are investment banks - the FDIC does not cover their activities.
OK, very scared now, so what do I do?
Run, don’t walk, to your bank and get the funds you have clear of this mess before it gets any worse. The safe deposit box ... isn’t. There were rules during the Great Depression such that a treasury agent got to paw through any that were opened before the owner got to touch their stuff; gold, silver, and cash could easily be confiscated in an emergency.
So, what to do? Cash at home in the First Bank of Serta? A fire proof safe? Maybe cashier’s checks in your name and leave the receipts in the safe deposit box, thusly meeting the portability requirement with safety? Nope on that last one, cashier’s checks drawn on a dead bank are dead. Treasury Bills? Wow, look at the Fannie Mae and Freddie Mac bailout ... they’ll not go *poof* instantly, but they’re going down in value bigtime. Swiss bank account? Hey, look at that first salvo in making sure dollars in the U.S. stay in the U.S.
OK, terrified, what do I do?
The GSEs, Freddie Mac and Fannie Mae are indeed "too big to fail" – they’d whack the whole U.S. economy if they went down hard. Ditto for Bear Stearns – had they not moved to conceal the troubles there the failure would have sucked all of the monoline bond insurers under. Monoline bond insurers? If you don’t know I’ve laid enough pain down in this diary – we’ll cover that mess another day. 8,500 commercial banks, putatively protected by the FDIC? Only a few are large enough to receive the "too big to fail" label. The government doesn’t dare touch the FDIC (yet) for fear of clearly communicating they expect the worst. A lot of folks got trimmed in the Indymac crash, with $BIGBUCKS reset to the $100,000 maximum and no recourse. Once this truly gets rolling there will be a reduction in the amounts covered and probably withdrawal limits even with solvent banks.
This can not be stopped. The losses have already occurred. It isn’t an "if", it’s a "when" and I was expecting it around 4/1/2008, but they held it off for another quarter. It looks for all the world like July is the lucky month with the Indymac stuff coming down right next to Fannie and Freddie’s corpses hitting the mighty U.S. Treasury Reanimator. Someone, somewhere is going to pull a joker out of this house of cards – some innocuous bond sale somewhere will fail, a monoline insurer will get pushed over the edge, and then the rout will begin.
The Ginormous Banking Enema has begun with the first little squirt from Indymac Bancorp's failure. It won't end until we're all up to our nostrils in an alphabet soup of make believe financial instruments and newly created federal agencies conceived to clean up the mess.
Some of these entities are indeed "too big to fail" ... but there is no reason we can't impoverish and imprison those that got us here. This isn't about Angelo Mozilo and a couple of unlucky bastards who worked for Bear Stearns - I'm talking a genuine housecleaning - there are thousands of cases where people facilitated fraud and got paid big bucks to do it. They should, every last one of them, be made paupers ... because it's what they've done to us, our children, our grandchildren, and perhaps even further out than that.
(UPDATE:
I've seen a few comments indicating that what I've said here is not happening. If that be the case why did the FDIC seek and receive rule changes allowing retirees to come back to work without impacting their benefits? As I recall a staffer with experience handling the S&L mess from the 1980s is worth $180k/year. Google with a mix of FDIC, hiring, and retiree if you want to confirm for yourself, but these two links seem a good starting point.
http://calculatedrisk.blogspot.com/...
Oh, and Stoneleigh, one of the keepers of The Automatic Earth stopped by to comment this morning, leaving a link to something she wrote a year ago that would be of interest.
The Resurgence of Risk - a Primer on the developing Credit Crunch.
OK, you guys are all talking about this now and as expected there are a spectrum of opinions. Being mindful of this impending change is the first big step in doing what you need to do to protect you and yours. I can offer no more specific advice than that you use what I've written as a measure of the worthiness of any financial advice you might seek; if the source is not aware of this stuff or doesn't think it's important it is time for you to move on to the next option.
Many is a word that only leaves you guessing
Guessing 'bout a thing you really ought to know - Led Zepplin
The FDIC admits to prepping for a hundred, the highest estimate I've seen is 1,500 gone of the 8,500. Size matters; if it's only a hundred but it's the hundred largest, well, that would be grim.
This being said, we're going out to play in the sunshine - have a great Sunday!
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