News What is wrong with the US economy? Part 2

[russ_watters]

I'm not disputing that the United States does a bunch of borrowing and is accumulating debt. But the fact of a trade deficit, even a sustained one, is not sufficient to conclude that debt is accumulating. There are any number of ways to fund a trade deficit without borrowing money.

I'd like to clarify/emphasize this. It seems like there is a widely held belief that the "trade deficit" works the same way as the "federal budget deficit". They are not the same. One is the yearly increase in the accumulation of federeal government debt and the other is the yearly difference between imports and exports - with no accumulation of a "trade debt".

Further, it isn't even useful to speculate about how much of the trade deficit is financed by debt - the number cannot be converted by any method to give a debt number. Most certainly there is some fraction of our total imports financed by adding debt. And there is also some fraction of our total exports financed by giving credit. I suppose you could subtract the credit from the debt and find out if our foreign trade improves or hurts our debt situation overall, but I don't know that those numbers are even commonly tracked - and they have nothing to do with the "trade deficit".

 

[gravenewworld]

I'd like to clarify/emphasize this. It seems like there is a widely held belief that the "trade deficit" works the same way as the "federal budget deficit". They are not the same. One is the yearly increase in the accumulation of federeal government debt and the other is the yearly difference between imports and exports - with no accumulation of a "trade debt".

Further, it isn't even useful to speculate about how much of the trade deficit is financed by debt - the number cannot be converted by any method to give a debt number. Most certainly there is some fraction of our total imports financed by adding debt. And there is also some fraction of our total exports financed by giving credit. I suppose you could subtract the credit from the debt and find out if our foreign trade improves or hurts our debt situation overall, but I don't know that those numbers are even commonly tracked - and they have nothing to do with the "trade deficit".

Many economists believe that the federal deficit directly affects our trade deficit. This is known as the twin deficit theory.
If politicians really cared about stimulating our economy they wouldn't be arguing for more tax cuts, but they would instead be advocating for larger increases in government spending. Government spending is an endogenous component of total GDP while taxes work through exogenous methods which means tax cuts will have a weaker overall affect

 

[turbo]

The AIG bailout is proof that the neo-cons don't believe that the free market can work. AIG should have spun off the profitable insurance business so that their shareholders would still have some equity after the derivative-heavy investment segment failed. The Fed has ensured that the necessary failure/correction/healing will not happen or will happen only very slowly, and that is short-sighted, IMO. If they wanted to help our economy and improve our faith in it, they should have taken steps to back-stop the FDIC so that ordinary people don't lose their savings when large commercial banks start failing.

 

[Astronuc]

Share of Constellation Energy Group (CEG) fell 38% to $29.55 as it disclosed ties to Lehman Brothers, but closed at 35.76 yesterday. I expect they'll rebound today or if not, later this week. Constellation was built up around the old Baltimore Gas and Electric.

The company said its liquidity remains sound despite the bankruptcy of the Wall Street firm. Constellation said in a filing with regulators that Lehman Brothers' total commitment within existing credit facilities stood at $150 million. Constellation said it holds excess liquidity of approximately $2 billion, excluding the existing Lehman commitment.

 

[Astronuc]

Stock futures slip after U.S. government's AIG move

S&P 500 futures fell 6.6 points to 1,209.70 and Nasdaq 100 futures dropped 7.75 points to 1,725.25. Dow industrial futures lost 25 points.

"Due to this week's failures in the financial sector, banks, insurance firms, the fund industry, and non-regulated financial institutions will have to absorb further losses," said Tim Brunne, a strategist at UniCredit. "There is systemic pain in the financial world."

"The futures are down on disappointment the job couldn't get done privately, but this should end up being a positive," said Marc Pado, a strategist at Cantor Fitzgerald.

U.S. stocks climbed on Tuesday on speculation of an AIG rescue, which took away from an initial negative reaction to the Fed's move to keep interest rates at 2%. The Dow industrials rose 141 points, the Nasdaq Composite added 27 points and the S&P 500 rose 20 points.

AIG fell nearly 27% in pre-market trade.

As of this post, over 4 million shares of AIG have been traded in pre-market (NYSE that is).

 

[Astronuc]

The NY Times has decent overview of the AIG rescue.
http://www.nytimes.com/2008/09/17/business/17insure.html

This graphic explains the situation - http://graphics8.nytimes.com/images/2008/09/17/business/17aig.span.jpg

But government officials reluctantly backed away from their tough-minded approach after a failed attempt to line up private financing with help from JPMorgan Chase and Goldman Sachs, which told federal officials they simply could not raise the money given both the general turmoil in credit markets and the specific fears of problems with A.I.G. The complexity of A.I.G.’s business, and the fact that it does business with thousands of companies around the globe, make its survival crucial at a time when there is stress throughout the financial system worldwide.

“It’s the interconnectedness and the fear of the unknown,” said Roger Altman, a former Treasury official under President Bill Clinton. “The prospect of the world’s largest insurer failing, together with the interconnectedness and the uncertainty about the collateral damage — that’s why it’s scaring people so much.”

It should never have gotten to this point. Hence the call for re-regulation.

Ah - this is what I've been looking for

Under the plan, the Fed will make a two-year loan to A.I.G. of up to $85 billion and, in return, will receive warrants that can be converted into common stock giving the government nearly 80 percent ownership of the insurer, if the existing shareholders approve. All of the company’s assets are being pledged to secure the loan. Existing stockholders have already seen the value of their stock drop more than 90 percent in the last year. Now they will suffer even more, although they will not be totally wiped out. The Fed was advised by Morgan Stanley, and A.I.G. by the Blackstone Group.

 

[Astronuc]

The NYTimes article I cited gives some background on AIG.

Here is an op-ed piece that provides additional info.


Wall Street’s Next Big Problem, MICHAEL LEWITT, Op-Ed Contributor

But there is a bigger potential failure lurking: the American International Group, the insurance giant. It poses a much larger threat to the financial system than Lehman Brothers ever did because it plays an integral role in several key markets: credit derivatives, mortgages, corporate loans and hedge funds.

Late Monday, A.I.G. was downgraded by the major credit rating agencies (which inexplicably still retain an enormous amount of power in the marketplace despite having gutted their credibility with unreliable ratings for mortgage-backed securities during the housing boom). This credit downgrade could require A.I.G. to post billions of dollars of additional collateral for its mortgage derivative contracts.

Fat chance. That’s collateral A.I.G. does not have. There is therefore a substantial possibility that A.I.G. will be unable to meet its obligations and be forced into liquidation. A side effect: Its collapse would be as close to an extinction-level event as the financial markets have seen since the Great Depression.

This last paragraph is interesting since the government felt that there was/is sufficient collateral to provide an $85 billion loan.

And here's the problem -

As a result, the credit default market is best described as an insurance market where many of the individual trades are undercapitalized. But even worse, many of the insurers are grossly undercapitalized. In one case in the New York courts, the Swiss banking giant UBS is suing a hedge fund that said it would insure nearly $1.5 billion in bonds but was unable to do so. No wonder — the hedge fund had only $200 million in assets.

As I been saying - the US economy (and much of the world's economy) is over-leveraged - and this has been allowed to happen because of lack of regulation - as well as bad business practices. Too many people took too much risk, i.e. gambled - and some big gamblers lost their shirts.

 

[Greg Bernhardt]

Near 2005 levels with the DOW. Tough times! MS -35% GS -20% C -12% GE -8% F -8% GM -8% Only positive is Sandisk. Props to those who saw that coming!

 

[Astronuc]

GE and UTC are down quite a bit. Maybe because of the concerns over the aircraft engine business. GE also has a lot of business in the financial sector.

I think the market over-reacted.

AIG should be a good buy now. If they do it right, they'll pay off that loan ASAP, and share price should recover. I'm curious about how the warrants will be executed and what will happen with the new stock, i.e. will AIG retire it or leave the common stock diluted? It's interesting that it is common and not preferred stock.

Uncle Sam seizes AIG to avert crisis

"A disorderly failure of AIG could add to already significant levels of financial market fragility," the Fed said in a prepared statement. Interest rates would likely have risen, lowering consumer buying power, and weakening the economy.

Edward Liddy, former chief executive of Allstate will replace Robert Willumstad, who was named AIG CEO in June. The Wall Street Journal reported Wednesday that Willumstad's ouster came at the insistence of U.S. Treasury Secretary Henry Paulson as part of the government's takeover of the insurance giant.

AIG shares fell 36% in early trade, to $2.38.

The government's deal dilutes current shareholders by giving the government a 79.9% stake in the insurance company, with the power to eliminate dividends.

A statement from the Federal Reserve stressed that taxpayer interests would be protected.

The government should suspend dividends until the loan is paid.

 

[edward]

Our whole financial system has become very bizarre. If I went to Las Vegas to gamble would AIG have insured me against any loss??

The answer of course is no, but at what point do we draw the line. Insuring against any speculative loss only guarantees more risky investment.

The problems at AIG stemmed from its insurance of mortgage-backed securities and other risky debt against default. If AIG couldn't make good on its promise to pay back soured debt, investors feared the consequences would pose a greater threat to the U.S. financial system than this week's collapse of the investment bank Lehman Brothers.

http://www.businessweek.com/bwdaily/dnflash/content/sep2008/db20080916_387203.htm?campaign_id=rss_daily

AIG must have had substantial involvement in the practice of insuring risky investments. The FED allowed lehman to tumble, yet bailed out AIG.

I wonder if AIG might have had had involvement with lehman, other than insuring that their rent would be paid.

Sept. 16 (Bloomberg) -- Lehman Brothers Holdings Inc.'s London landlord, Songbird Estates Plc, said rent payments for its largest tenant in the Canary Wharf financial district are insured by American International Group Inc.

http://www.bloomberg.com/apps/news?pid=20601102&sid=a6AZtcTRcqnE

Ironic that American taxpayers are now protecting foreign entities, and will probably have to borrow from China in order to do it.

 

[Astronuc]

Financial entanglement!

Interesting that LEH was allowed to fail because the markets expected it and could handle it, but they could not handle the failure of AIG. I'm guessing because AIG was the firewall for many customers being protected from big losses associated with companies like LEH.

I imagine there will be re-introduction of regulation on captilalization.

AIG has big business in Asia where it was founded - in Shanghai China.

Warning: IMF head: worst of financial crisis may lie ahead
http://biz.yahoo.com/rb/080917/gulf_union_imf.html

JEDDAH (Reuters) - The worst of the financial crisis may still lie ahead and more major financial institutions may face trouble in coming months, IMF director general Dominique Strauss-Kahn said on Wednesday.

"The roots of the crisis are behind us, the roots being the fall in housing prices. The consequences for some financial institutions are still in front of us. We have to expect that there may be in the coming weeks and coming months other financial institutions with some problems," he said.

http://www.businessweek.com/investor/content/sep2008/pi20080917_475626.htm

Just another day of volatile trading.

 

[Gokul43201]

With all the talk about AIG and the Fed bailout, no one seems to be commenting on the index that's talking the worst beating today - the Nasdaq!

I wonder if it's the new short selling regulations imposed by the SEC that's keeping tech stocks low today.

 

[Gokul43201]

Prescience:

The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear...[They] are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.

-- Warren Buffett, from his Letter to Shareholders, 2002 Berkshire Hathaway annual report

 

[Astronuc]

S&P ups AIG short-term ratings to 'A-1' from 'A-2', which should bolster AIG - maybe.

Interesting development to watch
Morgan Stanley shares hit by merger talk after earnings

BOSTON (MarketWatch) -- Shares of Morgan Stanley were down more than 30% in afternoon trading Wednesday after it pre-announced earnings and investors reacted to a speculation the company may be compelled to hunt for a suitor if the stock continues to fall.
. . . .
Morgan Stanley after Tuesday's closing bell announced its quarterly earnings ahead of schedule, and the results topped expectations even though profit fell from the year-ago period.

The Wall Street firm was not in merger talks as of late Tuesday, although more volatility in the shares may force Morgan Stanley to pursue a merger partner, most likely a well-capitalized bank, according to the report, which sourced people close to the matter.
. . .
CNBC.com reported Morgan was forced to announce quarterly results early after spreads on its credit default swaps rose sharply on Tuesday. Morgan Stanley shares lost more than 10% on Tuesday.
. . . .

All Dow30 components were down today.

Goldman's market capitalization sits at 45.09B, while Morgan Stanley is at 24.12B. Goldman seems in better shape, but I guess people are wondering about what has not been revealed about liabilities.

GE is getting battered by concern over the financial services division.

 

[turbo]

It's tough for some people like myself who don't have the income to grab bargains during market upsets, and who have to watch the real value of our savings and investments be eroded by all the corporate welfare being doled out. Even if the FDIC were properly capitalized (and Warren Buffett's recent pull-out of the deposit insurance business indicates doubts on his part in the face of likely commercial bank failures) those of us with FDIC insured deposits are faced with the prospect of watching our hard-earned savings (with minimal interest, thanks to the Fed cutting the rates to the bone to keep Wall Street happy) be further eroded by the devaluation of the dollar against foreign currencies. There are a lot of shoes that remain to be dropped, and I don't think the US economy is going to look too good for at least a couple of years or more.

I hate to be a wet blanket, but living with a medical disability with NO income aside from the meager interest on our savings, and my wife's paycheck makes me a helpless bystander to this train-wreck. McCain's cave to lobbyists, the Keating affair, the Savings and Loan debacle, and Phil Graham's further deregulation of US finance companies convince me that we need a real house-cleaning in Commerce and heavy and honestly-applied re-regulation to inspire confidence in our economy and re-energize it. I re-iterate, though, that re-regulation of banks (investment banks in particular) will never happen unless the shareholders of those banks are made to endure some heavy losses as they fail. Bail-outs subvert re-regulation and saddle the US taxpayers with the responsibility of paying for the mistakes that made the executives of those banks so rich. I have mutual funds in my 401K and IRA accounts that hold shares of some of these banks. I would much rather lose value incrementally as some of these holdings fail than to watch the value of all of our currency fall as it is diluted by bail-outs.

 

[Astronuc]

http://finance.yahoo.com/tech-ticker/article/56994/Top-Economist-Americans-Should-Worry-About-Bank-Deposits-if-Congress-Doesn't-Act]Top[/PLAIN] Economist: Americans Should Worry About Bank Deposits if Congress Doesn't Act

With the "financial storm of the century" hitting financial institutions, many Americans are worried about the safety of their bank deposits. While the FDIC insures individual accounts up to $100,000, the reaction to IndyMac's failure this summer -- lines outside retail branches -- shows Americans have limited faith in the Federal Deposit Insurance Corp., which guarantees individual accounts up to $100,000.

Update: "The banking system is safe and sound," Treasury Secretary Hank Paulson declared at a mid-afternoon press conference Monday, seeking to ameliorate such concerns.

"Nothing is more important than the stability and orderliness of our financial markets [and] regulators remain vigilant," Paulson continued. "We're working through a difficult period in our financial markets right now as we work of some of the past excesses, but the American people can remain confident in the soundness and resilience of our financial system."

But

That "run" could accelerate as people realize the FDIC fund has about $50 billion to "insure" about $1 trillion in assets at the nation's financial institutions, says Roubini. "They're going to run out of money" unless Congress acts soon to recapitalize the FDIC.

But the Treasury doesn't have the funds! So they'll have to issue more T-bills. But how much $100 billion, $200 billion, . . . ? What is sufficient to cover the deposits?

Whose going to buy them?

I wonder what's up with Citigroup?

It would help if people didn't panic, but realize that it will work itself out.

 

[nuby]

Bush said Wall Street is just having a "hangover", and McCain said the economy is fundamentally strong.

These guys running our country are so damn oblivious to the real world, it is no wonder the economy and stock markets are taking a hit.

But the real problem is, imo... They pissed the world off (and most Americans).

 

[LowlyPion]

Prescience: -- Warren Buffett, from his Letter to Shareholders, 2002 Berkshire Hathaway annual report

This would have been obvious to Buffet at least back in 2002 that Bush's stewardship of the financial oversight was breeding a malignancy that has now blossomed dramatically.

And who has been on the deregulatory bandwagon since the Keating Scandal and the Savings and Loan Fiasco - right through the recent prime rate disaster and now the mortgage meltdown - taking campaign funds from the industry these last two decades?

All those surpluses turned to a red ink crisis now in under 8 years. And this was supposed to be the President with an MBA?

 

[Astronuc]

I was listening to Terry Gross interview Michael Greenburger about the economy. Michael Greenberger calls the government bail-out of insurance giant AIG a "50-50 proposition."

In addition to the nearly $9 trillion federal debt (from chronic deficits), the federal government has assumed another $5 trillion or so debt from Fannie Mae and Freddie Mac. And of course, the Fed has recently pick up more obligations on behalf of Bear Stearns and AIG. In principle, the Fed will recover and actually earn money on AIG - in theory even if AIG goes bankrupt. Then the Federal gov could in theory still recover its loan, but a lot of other people will loose big time.

Could Wall Street Woes Set Off A Global Crisis?
http://www.npr.org/templates/story/story.php?storyId=94686428

It's interesting what he says about McCain who was one of the big proponents, along with his buddy Phil (you're a bunch of whiners) Gramm, of de-regulation (which really meant essentially no regulation if possible).

Bush and McCain have no credibility on this matter. To say the fundamentals are strong is absurd, given the clear evidence that they are not! To assert the economy is strong or great is pure delusional thinking.

And for McCain (who with his wife has multiple houses and millions of dollars) to talk about Wall Street greed now is the height of hypocrisy.

 

[gravenewworld]

All of the nonsense going on on wall street is just that--wall street. The economy is much bigger than just how the stock market and big firms are doing on wall street. Top 3 biggest problems right now with the economy


1.) Ridiculous budget deficits over the last 8 years

2.) The pathetic savings rate of Americans (compare ours to Japan's or China's)

3.) The big S word---stagflation

 

[mheslep]

I also heard most of the Michael Greenburger interview. He clarified the reason for the AIG bailout: AIG has acted as a hedge by insuring mortgage and other securities against default around the world, and that is a major reason they're in trouble. The flip side to this is that the firms covered by AIG, which with good insurance are not really in trouble, become in trouble if AIG can no longer backstop. Greenburger also said he had advised both of then Treasury Secretaries Reich and Ruben of the over leverage problem, that the dept instruments needed more capital reserve requirements, neither were persuaded.

Regards McCain's role in oversight of the lead up to the sub-prime problem, look up the "http://www.govtrack.us/congress/bill.xpd?bill=s109-190&tab=summary"".

Mr. President, this week Fannie Mae's regulator reported that the company's quarterly reports of profit growth over the past few years were "illusions deliberately and systematically created" by the company's senior management, which resulted in a $10.6 billion accounting scandal.
...
I join as a cosponsor of the Federal Housing Enterprise Regulatory Reform Act of 2005, S. 190, to underscore my support for quick passage of GSE regulatory reform legislation. If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole.

http://www.govtrack.us/congress/record.xpd?id=109-s20060525-16&bill=s109-190#sMonofilemx003Ammx002Fmmx002Fmmx002Fmhomemx002Fmgovtrackmx002Fmdatamx002Fmusmx002Fm109mx002Fmcrmx002Fms20060525-16.xmlElementm0m0m0m

While this from Rep Barney Frank:

''These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''

http://query.nytimes.com/gst/fullpage.html?res=9E06E3D6123BF932A2575AC0A9659C8B63&sec=&spon=&pagewanted=print
The bill was killed.

Finally note that the CEO of Fannie during the period that prompted the bill and McCain's statement about gross malfeasance was http://www.businessweek.com/magazine/content/05_02/b3915646.htm" . Raines previously worked in the Clinton Whitehouse an is now a prominent economic adviser to Sen Obama.

 

[Gokul43201]

Regards McCain's role in oversight of the lead up to the sub-prime problem, look up the "http://www.govtrack.us/congress/bill.xpd?bill=s109-190&tab=summary"".

http://www.govtrack.us/congress/record.xpd?id=109-s20060525-16&bill=s109-190#sMonofilemx003Ammx002Fmmx002Fmmx002Fmhomemx002Fmgovtrackmx002Fmdatamx002Fmusmx002Fm109mx002Fmcrmx002Fms20060525-16.xmlElementm0m0m0m

That's odd. This, from an interview he gave in 07 to the Keene (NH) Sentinel.

Q: “Well the dimension of this problem may be surprising to a lot of people, but to many people, to many others there were feelings that there was something amiss, something was going too fast, something was a little too hot. Going back several years. Were you one of them? Or, I mean you’re a busy guy, you’re looking at a lot of things, maybe subprime mortgages wasn’t something you focused on every day. Were you surprised?

McCain: “Yeah. And I was surprised at the dot-com collapse and I was surprised at other times in our history. I don’t know if surprised is the word, but...

Q: “S&Ls?”

McCain: “I don’t -- what did you say?”

Q: “The S&Ls."

McCain: "Yeah, the S&Ls."

Q: "Is this bigger than that?

McCain: “I don’t know the dimensions of this. It’s hard to know what the dimensions are. As I say, I never thought I’d pick up the paper and see a city in Norway is somehow dramatically impacted by it. When I say ‘surprised’ I’m not surprised when in capitalist systems that there’s greed and excess. I think it was Teddy Roosevelt who said ‘unfettered capitalism leads to corruption’ or something like that, that people have disputed for years.

“But so, in this whole new derivative stuff, and SIBs and all of this kind of new ways of packaging mortgages together and all that is something that frankly I don’t know a lot about.

"But I do rely on a lot of smart people that I have that are both in my employ and acquaintances of mine. And most of them did not anticipate this. Most of them, I mean I can find some that did. But, a guy that’s on my staff named Doug Holtz-Eakin, who was once the head of the Office of Management and Budget, said that there was nervousness out there. There’s nervousness. There was nervousness that we had such a long period of prosperity without a downturn because of the history of our economy. But I don’t know of hardly anybody, with the exception of a handful, that said ‘wait a minute, this thing is getting completely out of hand and is overheating.'

"So, I’d like to tell you that I did anticipate it, but I have to give you straight talk, I did not.”

http://www.nhelects.com/NHPrimaryVideos.asp?MultiID=77&HTitle=VLTitle

 

[mheslep]

That's odd. This, from an interview he gave in 07 to the Keene (NH) Sentinel.http://www.nhelects.com/NHPrimaryVideos.asp?MultiID=77&HTitle=VLTitle

'It' in that conversation appears to be all the dimensions of the sub-prime problem as of that interview, and McCain rightly does not take credit for foreseeing the scope of that. McCain's co-sponsored S 190 just addressed Freddie/Fannie for which there had been frequent calls for reform for some time including Greenspan[1], but most loudly from the WSJ editorial page starting in 2001.

[1]

In February 2005, the House Financial Services Committee heard testimony from Chairman Greenspan on the condition of the economy. After his prepared testimony, in response to a question about the GSEs' portfolios, Greenspan noted, "We have found no reasonable basis for that portfolio above very minimum needs." He then proposed "a $100 billion, $200 billion--whatever the number might turn out to be--limit on the size of the aggregate portfolios of those institutions--and the reason I say that is there are certain purposes which I can see in the holding of mortgages which might be helpful in a number of different areas. But $900 billion for Fannie and somewhat less, obviously, for Freddie, I don't see the purpose of it." Greenspan then articulated his reasons for limiting the GSEs' portfolios: "If [Fannie and Freddie] continue to grow, continue to have the low capital that they have, continue to engage in the dynamic hedging of their portfolios, which they need to do for interest rate risk aversion, they potentially create ever-growing potential systemic risk down the road." He added, "Enabling these institutions to increase in size--and they will, once the crisis, in their judgment, passes--we are placing the total financial system of the future at a substantial risk."

http://www.aei.org/publications/pubID.22514/pub_detail.asp
http://online.wsj.com/article/SB121677050160675397.html

 

[russ_watters]

In addition to the nearly $9 trillion federal debt (from chronic deficits), the federal government has assumed another $5 trillion or so debt from Fannie Mae and Freddie Mac.

You are equating two things that are not equal. The $9 trillion federal budget debt is debt: money spent that the government does not have, but spent via the government getting loans This money is already gone. And it's the worse kind of debt: debt with no collateral.

The $5 trillion is credit. It is money loaned by Fannie and Freddie. But this isn't credit card debt - it has collateral. $5 trillion in loans backed by somewhere around $5 trillion in real estate. The potential exposure here (ie, assuming every single home owner in America walked out on their mortgage) is nowhere near $5 trillion. It's off by at least an order of magnitude, probably more like two.

We discussed the fact that these exposure numbers the media likes to throw around are bogus in the other thread. Shock value only.

 

[russ_watters]

You can calculate the real potential for loss by taking the value of the loans, multilplying by the increase in foreclosure rate, and multiplying by loss from the sale of the homes.

Googling, I find that the foreclosure rate is about 0.2% per month and that is roughly double what it usually is. Now assuming the trend covers 5 years of bad policy, a number equal to about 6% of current mortgages could fail during this crisis. And let's say the average foreclosure sale loses 25% of the value of the mortgage (I'll look, but that will be tough to find...). That would make the loss $75 billion.

 

[Astronuc]

You are equating two things that are not equal. The $9 trillion federal budget debt is debt: money spent that the government does not have, but spent via the government getting loans This money is already gone. And it's the worse kind of debt: debt with no collateral.

The $5 trillion is credit. It is money loaned by Fannie and Freddie. But this isn't credit card debt - it has collateral. $5 trillion in loans backed by somewhere around $5 trillion in real estate. The potential exposure here (ie, assuming every single home owner in America walked out on their mortgage) is nowhere near $5 trillion. It's off by at least an order of magnitude, probably more like two.

We discussed the fact that these exposure numbers the media likes to throw around are bogus in the other thread. Shock value only.

You're right Russ, I should have been careful and represented the $5 trillion in mortgages as potential obligations, not debt. In theory, over time, Freddie Mac and Fannie Mae will recoup that money. I was reflecting on the government so deeply in debt, and then backing the mortgages, essentially.

As for the $5 trillion, given the housing prices have dropped about 20%, it may be that the value of collateral (the real estate) is less than that.

 

[Astronuc]

The futures on the US exchanges are pointing up this morning. There appear to be bargains.

Why the government helped AIG.
http://marketplace.publicradio.org/display/web/2008/09/17/aig

It's basically, an $85 billion bridge loan from the federal government. In exchange for that, the federal government will get warrants, pieces of paper that say, if you don't pay this loan back, AIG, in two years, we'll take over up to about 80 percent of the company.

So if AIG doesn't pay the loan back in 2 years, the government can take 80% of the company. Based on that, now is the time to buy AIG at about $2/share. It should recover once things settle down, especially when they sell off some assets.

WaMu and Morgan Stanley are in talks with Citigroup and Wachovia, respectively, to merge.

 

[Astronuc]

Kraft Foods to replace AIG on Dow Jones Industrial Average.

AIG is up this morning.

Well AIG has been beaten down and Kraft Foods is a reflection of the consumer market.

Apparently WaMu is talking to institutions other than Citibank.


Does McCain or Obama get it?

Commentary: Next president should keep Paulson, end bailouts

NEW YORK (MarketWatch) -- To borrow a line, it's not that I think Barack Obama and John McCain don't care about what's happening on Wall Street. I think they just don't get it.

Or, maybe they do get it but are unwilling to talk about what's really a complicated problem that calls for a solution requiring everyone to pitch in.

Instead both candidates have offered "blame game" rhetoric on the stump and little more in the form of written policy.

Listen to the Democrat talk about Wall Street, and you'll hear what the Republican thinks and be told that the crisis is the Republican's fault. See full story.

Listen to the Republican talk, and you'll hear him call the economy "fundamentally sound," blame Wall Street's woes on "unbridled corruption and greed" and propose the formation of a commission.

Sorry, guys, but how about a plan?

Yeah - how about a solution? All I hear is both sides talking about the other guy and why his plan will fail. I'm not hearing anything credible that indicates a solution.

I have heard that foreign investors are looking rather unsure to the point of pulling capital out of the US. Not that there is really any better place to put it.

 

[Alfi]

Not that there is really any better place to put it.

Canada.




:)

 

[Astronuc]

This mornings rally mostly faded after a brief and partial recovery from yesterday's rout and after Fed injects $180 billion into the global financial system. Another volatile day on the stock markets.

On Monday Sept. 22, Kraft Foods Inc. will be added to the Dow Jones Industrial Average, replacing troubled insurance giant American International Group, which has lost 96% of its value this year, mostly in the past week!

Our products are present in more than 99% of U.S. households, so it's only natural that we are now present in the cupboard of leading stocks in the Dow Jones Index," the company said in a written statement.

The addition of Kraft, the world's second-biggest packaged food and beverage maker, now leaves the battered blue-chip index under-weighted in financial stocks.