Tag: Banking

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News Updates for Wednesday

We finally figure out the obvious and start buying banks, Gene Simmons buys a record company, and masturbation becomes a healthy ((not to mention natural and zesty)) enterprise in this latest of news roundups for DFE. Lets whip out some stories, shall we?

  • Buying jets with bailout money is for pussies. How about this: take bailout money, then host a conference call filled with influential business leaders and lobbyists to try to break the back of the Employee Free Choice Act. Why not take taxpayer money and then use it to spend on lobbying politicians? And so you can break the bank of the unions that fight for the taxpayers you just bilked?
  • The Obama Administration sees the banking industry sliding farther and farther into trouble and it’s beginning to look more and more obvious that some “nationalization,” or the government buying a controlling interest in distressed banks, may be necessary. As a side note, see Dean Baker for why shareholders of bankrupt banks actually make out quite well in such a scenario. Hint: a few bucks for paper worth nothing is a good thing.
  • Corning expects that of the 3,500 jobs they’re cutting back across the enterprise, 650 of them will be local jobs. Bad news, people. I feel for ya.
  • Peanut butter recalls continue. It was reported last night no less than twelve incidents at the offending company where testing revealed traces of salmonella and they sent the stuff to market anyway.
  • Gene Simmons announced on his website that he’s starting up a new Universal Records company in Canada, eh? Can’t wait to see Gene in full KISS regalia on the Canadian $5!
  • It’s been a long couple months for Toyota. In addition to posting it’s first annual loss in its history, now they need to recall a million vehicles for defective seat belts.
  • Calling all mad hatters! If you thought the salmonella outbreak in peanut butter was fun, get ready for the long-term effects of corn syrup laced with mercury. Yessiree, Bob! Bad news: you may go insane or this may have something to do with the increase in Autism. Good news: you’ll more easily be able to find your way home after you’re diagnosed with mercury poisoning.
  • People are flocking to small business ownership as a way to avoid the layoffs going around right now. Why you would think that selling pizza would be a way to save yourself is beyond me, but interesting, nonetheless.
  • Finally, mixed news for the porn industry: studies show that masturbation among teenagers increases the risk of prostate cancer, yet masturbation among the 50-something set actually decreases it. I guess based on the bell curve, I’m free to whack it whenever I want.
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Panel Says: Rochester’s Stable, so Let’s Change That

Maybe I’m overly alarmist, but it seems to me that this article essentially says that Rochester’s real estate market is quite stable, so it’s a great time to invest heavily in Rochester. That sounds nice, and with the housing bubble collapsing other places, there’s a lot of capital floating around that needs a home. The question is: are we inviting the sort of heedless investment that made other markets so unstable?

I mentioned the capital floating around the market in a previous post last night, so let me expand on that a moment. We don’t think of free capital much right now because of all the bank problems and the credit freeze up. The story in the media has largely been about the lack of credit, which is to say that the story is about a lack of available loans and mortgages, which sounds like a lack of money.

And the banks are definitely hurting financially, so that is partially correct. But many people who were investing in real estate before the problems began did so because they’re wealthy and need places to put money where it will be safe. At a certain level, investing money in real estate, bonds, or whatever is the same as putting it in the bank. Historically, real estate tends to be a safe bet and less prone to wild fluctuations than some other investments.

So now that markets in California and elsewhere have dried up, there’s capital that needs to be invested somewhere. People could put it in bonds, they could put it in gold, but they’ve got to put it somewhere. And with all the banks closing right now, pinning one’s investment capital to property which will always have at least some value probably seems like a smart choice to some. Investing in Upstate New York markets, where we’ve managed to escape the brunt of the Subprime damage and where property values have not significantly changed over the last few years.

Once you get the investors, you get the short-sellers and the hedge funders and it’s all down hill from there. Investment becomes highly speculative and unstable. Once the market has outgrown it’s actual potential – which wouldn’t be long in Rochester – the market dries up and the investors go elsewhere.

I don’t suspect that we’re going to see any wide-spread damage done, necessarily, and there’s not going to be a second housing boom in Rochester. But I do worry that some local towns and villages may find that the investment that’s plentiful today maybe gone tomorrow, with a project half-started. That should probably sound familiar to those of us living in Rochester.

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Why a Financial Bubble is Worse Than Usual; Why We Need to Reform Lending

When the Dot Com Bubble was still considered a safe investment, not a bubble, it manifested itself in the production of a few physical things: more computers, more cables, more stores and more employees to handle all those things. When the bubble burst, materials to produce things dried up, investment dried up, companies when under and people lost their jobs. All very painful, but all very common in a well-capitalized and robust economy, especially one on the brink of technological breakthrough.

When this financial bubble started, it began in the housing industry. But the bubble does not concern itself with the building of houses as you might think, though new homes were of course inevitable. Rather this bubble concerned itself with the creation of mortgages, which is literally creating something from nothing. Yes, economists will tell you that there is sound theory behind all of it – and perhaps they’re even right – but at the end of a day, banks borrow from other banks so they can lend you money they don’t have to buy a house you can’t afford.

Then those loans of no-money get rolled into superfunds which pay their investors dividends based on interest earnings on the money lent but never owned. Investors buy shares of superfunds made up of fake money at a profit, thus still more banks are making more money off of fake loans of no-money for people who can’t afford to pay cash for houses.

And what happens when there are not enough good-credit customers to continue creating new fake loans of money you don’t have? Well, you start dipping into the bad-credit customers, of course. And once you’re there, you’ve already forfeited any claim to a moral or ethical business justification for what you’re doing. Now, you’re just slumming.

And we’re all supposed to be pissed at Bernie Madoff? Seriously?

But the elephant in the room that no media outlet wants to touch, no Congressman is going to raise and I doubt very much if even Barack Obama’s going to have the balls to handle – after all, his Veep is in bed with his credit card buddies in Connecticut – is that we need to drastically overhaul any regulations we have on lending and even install some new ones. No, it won’t get us past our current crisis. The damage is done and we need to deal with that separately. But we got here in part because of lending laws that were repealed under the Clinton Administration and they need to be put back in place.

There needs to be penalties for a company who lends to a borrower without full disclosure and without proper documentation – some banks were giving out loans without even bothering to fill out credit checks. Banks aught to be required to provide full details of any mortgage including credit checks and negotiation. There needs to be a minimum and maximum interest rate set by the bank on any loan or mortgage and it needs to be advertised right along with the current deal. Penalties for late payment on loans aught to be loss of credit, not an increase in interest rates on the loan, which benefits the bank and leads to predatory lending. If interest rate penalties are imposed, they aught to be imposed on a temporary basis, not in perpetuity.

We also need to encourage a “Credit Economics” class in high schools across America. We would be less susceptible to the scams and machinations of creditors if more of us knew what we were dealing with.

But will such measures be introduced in the next few years? Perhaps, but probably not until such time as the recession we’re in gets bad enough for people to start demanding answers.

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Santa Claus is Coming to Town!

Never fear, noble bankers!  Just because you’ve fucked up our economy and taken our nation’s money to bail youselves out of the mess you made, that’s no reason not to celebrate this Christmas time with 20 billion dollars of bonuses.  God bless us, every one!!!

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A Number Worth Watching: The TED

Once again with the caveat that I am most certainly not an economist, I will endevour to explain some of what is happening in markets right now in a way I hope makes sense to people.  I do this in part because I’ve been working to try to make things I’m learning over the months more accessible for those trying to figure out what’s going on.  Basically, I’d like to make things easier on people than they’ve been on me.  Also, I attempt this because I’ve overheard friends of mine discussing the Stock Market’s rise and fall as though they were indicators of anything accurate.  It isn’t, but that’s what we’ve largely been expected to believe.

In the particular case of this particular financial crisis, the number to watch is not the NASDAQ or the Dow.  It is the TED.  The who?  The T-bills to Euro-Dollar comparison rate.

In simplest terms, you can think of the TED as a benchmark of the willingness of banks to lend to other banks globally.  It’s based on a comparison between the current rate of interest on a Treasury Bill versus what’s known as the LIBOR, or London Inter-Bank Offered Rate (of interest, in other words).

The LIBOR is the rate at which banks typically lend to one another.  The TED is the difference between that rate and the T-Bills interest rate, which is considered to be a relatively stable benchmark.  As the TED goes up, things get bad.  Typically, the number hovers around 30 (or a 0.3% difference between the two).  Currently, it’s at around 465.  That basically means no bank is willing to lend to any other bank.  Until that number drops, our financial woes continue unabated, irrespective of the Dow’s current position.

So, that’s the bottom line of the TED and why we need to keep an eye on it.  As a basic explanation for why the rate is so high, think in terms of your own bank loans, like a mortgage.  I guess we’ll pretend the whole Subprime irresponsible lending thing never happened when we discuss this. . .

If you apply for a mortgage through FHA, you will be required to provide proof of employment because the bank would obviously like some proof that you will have the capital to pay back the mortgage.  If the amount of the mortgage relative to your income is fairly high or if you’re employment history is short, then there is a good chance you may now or in the near future have a problem repaying the loan.  If they give you a mortgage at all, the bank will probably enforce a higher interest rate on you.

The LIBOR works in roughly – very roughly – the same way.  It is the amount of interest imposed on a loan between banks.  In our current situation, there is a very good chance that some of the banks who have invested in risky enterprises may collapse.  And that’s a lot of banks, worldwide.  Moreover, those same banks are holding onto assets that might have otherwise been used like cash (like easily-tradeable capital) that are now worthless.  So, these banks have very little capital on hand to repay loans and are at risk of going belly-up before they’re done paying.

The relative risk of lending to these institutions has gone up dramatically.  At the same time, banks who might do the lending don’t necessarily want to be left with IOU’s instead of cash while they themselves are in danger of collapsing.  That’s still more incentive to raise rates.  Unfortunately, it now appears that rates have been raised to the point where no one can get a loan from anyone else.  Since lending between banks is the kernel from which most world economies draw capital, that means a frozen credit market equals a frozen economy.

So, there you go.  If you’d like to read more about the TED, you can check out this Wiki and this blog post, which I found to be quite instructive.

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FDIC Now Insuring Loans?

RochesterHompage.net has the video of George Bush’s address to the nation in the Rose Garden, updating us on the status of the recovery effort.  He announced what amounts to a three-point plan – if by plan, you mean flavour of the moment thinking – for unfreezing the credit crisis.  Among those plans and most striking to me is the plan to have the FDIC insure “most new debt” by insured banks.

He says that all his plans include “protections for the taxpayer,” but how is that possible when he’s also putting us on the hook for every failed loan?  Keep in mind Felix Salmon’s take on the current state of the capital investment plan, which is where the banks will doubtless be getting the money for the loans in the first place.

We’re living in scary times, my friends.

Late Update: Via TPM, here is a Post article that is of considerable granular detail about the bailout.  Looks like there’s actually a stipulation in the loan agreements that prevents banks from renegotiating golden parachutes, but leaves the golden parachutes that are already there alone.  Dandy.

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Brad DeLong on the McCain Bailout Plan

McCain seems to be batting a 1000 on this financial crisis.  In the town hall “debate” of last night, he proposed buying up failed mortgages and “renegotiating” with the borrower on the value of the home as it is now.  Brad Delong gives us a rundown on why that’s such a bad idea.  In short, what McCain proposes to do is buy the bad debts from the banks that created them at face value, then become the banker to every bad debt borrower out there.

Apart from handing over billions of dollars to the irresponsible lenders, the problem with this that DeLong does not mention is that home prices are still falling.  So, the person who seems fine at the moment may be in trouble in a matter of months.  Meanwhile, it is the failing value of the homes that was the trigger for this whole mess in the first place.  The McCain plan does nothing to solve this problem and so seems to be treating the foot of a man with a broken leg.

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Local Media Oblivious to Credit Reality

Like most blogs, this blog often takes up space discussing the media, but I don’t like to think of this site as a media watchdog, particularly.  If the media is discussed, it’s often because in order to discuss the story adequately, the media’s role in it is necessary background.  I criticize local media even less because, frankly, I don’t pay attention to much of it.  Often on issues of national import, where a great opportunity lies to make those issues local, the opportunity is missed by a media culture that chooses to view Rochester as exceptional.

And if there’s one issue in particular where the local media adds no value – and in some cases, seems to have actively engaged in doing the Rochester public a disservice – it is the subprime lending crisis, which has now bloomed into the global credit crunch. This story has been out there for a year and a half, but you’d never know it by the local media coverage.

When the shit really started hitting the fan and the story became impossible not to cover about eight months or so ago, the story locally became about those people in California and elsewhere.  The D&C, in particular, ran stories claiming that because we don’t have the swings in real estate values other places had, we’d be just fine.  Rochester, we were told, was exceptional in that way.  We’re just a sleepy little town that the “Big Issues” don’t affect.  We’re not like California, heavens no!

When reports came out on how Rochester and Monroe County were being affected, the local media promptly reported that the report came out. . . .  no analysis, no deeper coverage, no exploration of the places affected by the Subprime foreclosure rate, just a report that the report happened.  No one noticed, for example, that foreclosure rates bloomed not only in the inner city (as is in keeping with the obliquely racist and classist narrative on the national level), but in the outlying suburbs as well, particularly on the east side.  It might have been illuminating to Rochestarians to know that it wasn’t just a poor people problem, it wasn’t just a brown people problem.  It might have prepared them for what’s come next if they’d known how big a problem this really was and is.

And now that the credit crisis has moved into a new and more malignant phase, freezing global credit markets and causing Wall Street to tumble, the story has moved to the Business section, where it can be once again ignored.  The direct line that could be traced from Medon, through JP Morgan Chase, through Avenida D, through – yes – California, and through Washington was never traced.  Best of all, this morning, the creme de la creme of benighted journalism steped in with the following doozie:

Markets oblivious to rate cut | democratandchronicle.com | Democrat and Chronicle

For the second consecutive day, the Federal Reserve took action in hopes of staving off a global financial collapse. And again U.S. financial markets failed to calm, extending losses for a sixth straight day while shrugging off a Fed-led, globally coordinated half-point cut in interest rates.

. . .

“The fundamental problem here is around expectations and around psychology,” said economist Kent Gardner, chief executive of the Center for Governmental Research in Rochester. “The interest rate cut will stimulate demand to some degree. They’re trying to calm the waters.”

Wow.  It’s the Markets that are oblivious, are they?

Imagine this: you go to Gentile’s Farm Market in Penfield and discover that they’ve sold out of corn.  They announce to you that, in order to sell more corn, they’ve reduced the price by half a percentage point.  You leave and wait till there’s more corn to buy.  And the next day, the D&C puts out an article proclaiming “Local Corn Consumers Oblivious to Corn Price Reduction.”

If there’s nothing to buy, the price doesn’t matter.  There’s a credit freeze sweeping the planet – banks are afraid to lend even to other banks, hence there is now or soon will be no credit for the rest of us.  It’s as simple as that.  Meanwhile, the rate cut is there to protect the *financial* markets, not Wall Street.  Normal lending and borrowing are not conducted on the Stock Market: stocks are sold on the Stock Market.  ((Sheesh, I would have thought that fucking-a obvious.))  Further, if companies are maintaining profits by holding investments – and many do – then those holdings may be now worthless and the stocks must necessarily fall in value.

But the local media has gone to such lengths to bury their collective heads – and our own – in the sand on this issue, it’s not difficult to imagine that they’re bound to be uninformed.  Local media continues to be noticeably absent on the issue, preferring instead to rebroadcast wire stories without the slightest context.  The crisis continues to be treated like just another Business Section non-issue that people don’t care about.

The D&C for it’s part has been studiously unwitted in its modicum of reporting and now, after years of supporting Republican candidates and swallowing Republican talking points, they remain true to type and adopt the same faux-Populist outrage as their Conservative political counterparts.  They now write headlines which seem to tremble with rage over the “oblivious” Wall Street.

There are no mysteries in the current crisis and no surprises.  All of this has been written on the wall for a long time, now, for those of us who cared to look.  What’s more, it’s been written on this blog, as I’ve done my best to try to report the goings on as they’ve happened.  I’m one guy with a day job and no real resources to speak of and as far as I can tell, I’m doing a vastly better job of reporting the issue than the entirety of Rochester media.  Prove me wrong, Ed.  I’m not saying I’m doing a great job – I’m not – I’m saying my half-assed job is embarrassing local media.

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Central Banks Coordinate Rate Cut

There is no precedent for such a thing as this in our history.  The Federal Reserve, the Central European Bank and the central banks of Britain, China, Canada and Switzerland have all coordinated a collective rate drop of about a half percent on their prime rates.  This means that interest rates on loans from these central banks are lower by a half a percent, and since most business begins with banks borrowing from central banks, this means rate cuts across the board for most things which are not fixed-rate loans.

What effect will this have on markets?  Well, short term, it’s meant diddly shit.  The markets in Asia and the US plateaued breifly and continued their steep decline for a fifth day straight.  MSN Market Dispatches is reporting that the Dow has lost 1400 points in that time.  Yikes.

Long term, I don’t really see where this helps, either.  Sadly, this move has to be seen at least in part as a desperation move, not a decisive move in the right direction.  That’s because the problem with the credit market is not now nor has it ever been a question of interest rates.  It’s a question of liquid assets which no longer exist.  Lowering interest rates does nothing to stop that problem.  Until there is adequate liquidity in the markets, I’m afraid the problem will persist.

The Federal Reserve’s move to begin issuing commercial paper seems, to me, a far more sound decision.  That’s because commercial paper is what gets most businesses by their day-to-day operations, like paying employees.  The down side here is that they’ve requested 99 billion dollars to do this with, but that market is about 1.7 trillion dollars worth of trade.  That means someone’s going to lose out.

Still, if the Fed can maintain the workaday operations of our nation’s job engines, then what we’re seeing is really a massive investment opportunity in the making: after all, if the stock market continues to plumet, stocks bought cheaply in the next few days will be worth a barrel of monkeys come the upswing.  Let the stock markets dive.  We need to worry about monetary policy and banking liquidity at this point.

Update: Paul Krugman chimes in with far more salient points than I: basically, the rate for CP (commercial paper) is not tied to the Fed rate anyway, so it’s not going to do much good.  Why, then does he favour the move?  Lots of comments there asking the same question.

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The Fed Buys Up Short Term Debt? What it Means, Maybe.

The Federal Reserve Bank has announced that it will be funding short term debt for businesses – commonly referred to as “commercial paper” – in order to free up capital.  What does this all mean?  Another sop for the rich?

Well, yes.  But they’re all sops to the rich, so get used to seeing that.  But the point in this case is that businesses often use short two- or three-day loans to pay their employees while they await the week’s returns on sales or whatever.  This market, like all lending markets, has begun to get a bit frozen over, and that means the potential of companies not being able to pay their employees and inevitably having to let some go.

The Fed is stepping in and – with a loan from the Treasury of some estimated 99 billion dollars – providing that short term lending vehicle to keep capital flowing to the people who are going to ultimately be the saviours of this crisis: American workers and consumers.

So, I grant that I don’t know all that much about economics.  But it seems like this is the sort of thing we want the government doing, at least temporarily.  I find it odd that companies need to use two-day loans to pay their bills, but I’m sure it’s all very technical.  And this doesn’t seem like the type of lending that’s going to lead to the government losing it’s shirt, since we’re talking about two-day loans of relatively small amounts.

But we’ll keep an eye on it.

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Well, That Ain’t Good. . .

Interesting news from Europe today.  It seems that most European nations do not quite have the robust deposit insurance that the United States government provides its citizens.  In fact, some only insure deposits up to a measly twenty thousand euros.

That was then, this is now.  Germany has announced it will be insuring all deposits of any amount.  That of course has people worried that the Germans – as the financial and banking powerhouse of the European Union – might know something the rest of us don’t.  Based on my reading of the article, it seems that the ripples of something really huge are beginning to show themselves in all quarters of the European Union.  France, Germany, Italy, the UK and Spain all seem to be bracing for a big fall.

See?  We do still have influence over world affairs.  sheesh.

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Financial Stocks Soar!

Great news for all you rich people!  On the announcement of the bail out, the S&P Financials market soared 19%.  Just though you aught to know.