Monday, September 22, 2008

Belling's Right, LImbaugh's Wrong (More or Less)

On The Bailout...Belling is right: do the deal and shut up, so long as Congress doesn't screw around with this. Limbaugh's bellowing about "free markets" is seriously erroneous.

Some stuff you need to know before you evaluate The Bailout:

1) 'Impairments' and write-downs on good loans.

Yes, indeed, the credit markets could literally lock up and disappear if something is not done. That means that you might not get PAID, folks, if your employer is dependent on short-term or seasonal credit facilities.

(Work for a building contractor? This means YOU. Work for a company that makes stuff like toys, lawn-mowers, or snowblowers, that is a seasonal good? This means YOU. Work for a school system that gets 2 tax-infusions/year? A municipality that gets only 2 tax-infusion payments/year? How about an automobile manufacturer or dealer? This means YOU.)

Why a "credit lockup'?

Because FDIC and Fed Reserve bank examiners are demanding that Banks write off loans that actually are GOOD loans--but they look 'hinky' to the examiner. This is not widely reported, but trust me, it's happening. Banks don't get a vote; they must comply. This is impairing their capital ratios, meaning that they cannot make OTHER loans--like to your employer (see above.)

'Hinky' doesn't mean that the borrower is not paying; it means that perhaps the collateral doesn't seem to have the value that the Bank says it does. Easy example: if your house is worth $400K but in a FIRE-SALE it's only worth $250K and your mortgage is written for $300K, your collateral is "impaired." You're still making payments! You keep up the house, and pay the insurance and taxes! But the examiner says it's 'hinky' because of "mark-to-market" rules which use FIRE-SALE as a factor.

The same applies to businesses. The machinery which is collateral for the loan is worth $1.5 million, unless it's a FIRE-SALE, in which case it might only be worth $500,000. So it's 'impaired' and the Bank must write down $1 million or so.

Most important, this applies to the "loan lumps" (CDO's) that the Bank purchased from Fannie, Freddie, or Lehman, or Bear. This is large-money stuff, folks. If those CDO's are 'impaired,' that takes out a large amount of lendable capital.

Do that often enough and the Bank cannot make any other loans.

Lockup ensues, and a crash will happen.

2) 'Impairments' and write-downs on bad loans

Yes, there are bad mortgage loans. Let's define that a bit, shall we? For our purposes, "bad" mortgages are those on which no payments have been made for more than 90 days. They're going into foreclosure.

That's only about 5% of the loans out there, which is NOT a lot (although it's higher than the historical average.) They must be written off--but the value of the houses and land is not ZERO; it may be anywhere between 20% - 90% (or more) of the mortgage amount. In other words, it's not a "total loss." In fact, it may even sell for MORE than the mortgage amount, meaning that there's a profit here (sorta--there are expenses, too....)

3) Short-term and Long-term thinking

Short-term, the Banks need relief. They cannot operate with impaired capital, and the value(s) of the "lumps of mortgages" they hold (purchased from Lehmann, or Bear, or Fannie/Freddie) is not determinable. If they get rid of the "lumps," they will have 'fixed' their capital ratios and will be able to lend.

Long-term, the "lumps" of mortgages will pay off, with a few exceptions. 90%++ are being paid now, regularly, no problem. 5%++ are not. The 5%++ problems will be a problem for Gummint (or the taxpayers, if you think that way) and that's the risk.

4) Risks

The biggest risk is NOT the loan packages. It is Congress. This is where all the REAL worries should be concentrated. If the plan is not Simple, Focused, and Transparent, it will be a problem.

All the Treasury should do is pick up the loans, collect what they can in an orderly fashion (that will be most of the loans, no problem) and dispose of the bad stuff in an orderly fashion. NOTHING ELSE SHOULD BE IN THE LEGISLATION. NOTHING. ELSE.


Some people seem to think that "private enterprise" can muscle its way out of this, if only the Gummint would go away and leave them alone. Balderdash. They have no understanding of the banking system. None. Zero. Zip. First off, $700 Bn is a helluvalotta money. You're not getting that from your Mom, or even from Rush Limbaugh--or from Bill Gates, or Warren Buffett. Ain't there. Can't happen.

Secondly, the Banks will ALWAYS be regulated--for better or for worse.

Talk to an honest banker and they will tell you: the Banks got into this because a number of them were (and are) run by greedy little bastards who saw Big Returns (and Big Bonuses) in those CDO's. But that's a minority of bankers, and as usual, the 10% cause 80% of the problems.

Third: Congress and Presidents caused a lot of these problems with stupid laws. What's new? Congress may be better or worse than greedy bastards--which poison do you want? You're going to have one or the other (until the next Revolution, hint, hint...)

Sure, things will go wrong with the Big Bailout. Congress will interfere at some point, sooner or later. But if they keep their mitts off it for three or four years, there's a good chance that it will work out for the best.

Either that, or fuggeddabout that paycheck--right around Christmas.

1 comment:

Headless Blogger said...

The radio mouth is right? Who hijacked this blog?