FedUpUSA

Archive for January 16th, 2010

Financial Crisis Inquiry Commission – FCIC Needs to Recommend the Breaking up of Commercial and Investment Banking.

Posted by mybudget360

The Financial Crisis Inquiry Commission (FCIC) started hearings this week.  I was reading through a report they put out examining financial market and economic data and it is fascinating that many of the charts we are seeing in the report are covering aspects that are largely being missed by the regular media.  They cover the massive lopsided profits of the corporate banking sector and also examine the $11 trillion decline in household net worth.  Ideally the FCIC will come out with real reform that will restructure the banking system in the U.S. and not get caught up with lightning rod issues like bonus payments.  I am the first to agree that bonuses are downright disturbing given the bailouts these banks received yet the bonuses are merely the symptom, the not actual sickness.

Here is one chart put out in the FCIC report:

The financial services sector has grown as a share of GDP for a solid 40 years.  Even with the current crisis it doesn’t seem to have retreated all that much.  For the most part, this has to do with the corporatocracy running the country.  While virtually every average American has had to deal with the recession by watching home values plummet, stocks decline, and jobs disappear the financial services sector has somehow managed to maintain their share of the GDP pie.  This is something that needs to be vetted in the FCIC hearings.

Here is another chart driving the point home:

American households have lost $11 trillion in wealth since the peak in the bubble.  Much of this had to do with the bursting housing bubble.  The average American carries most of their net worth in housing values and not stocks.  That is why this 70 percent casino rally is benefitting the top 1 percent more than ever before and the average American is still licking their $11 trillion wound.  Take a look at some of the banking stocks since the lows last March:

Thanks to the wonderful bailouts, the banking system has picked up right where it left off after it destroyed the real economy.  Now, it doesn’t even need to bother with the real economy since it has unlimited funds from the government to gamble in what is now the new gambling hotspot, Wall Street.  Forget about Las Vegas, the new capital of gambling is in New York City and is headed by the investment banks.

Here are some prepared remarks from Lloyd Blankein from Goldman Sachs:

” Before the crisis and since, we have remained focused on providing advice, allocating capital, making markets, managing money and investing with and for our clients. We have all witnessed the consequences of having too narrow a business model. At the same time, we have resisted becoming a financial supermarket – concerned that being too big or dispersed would detract from our focus and expertise.

We have been particularly focused on fee income businesses, such as advisory, commissions and asset management fees, and since our IPO more than ten years ago, we have generated half of our income from them. We continue to see the benefits of a diversified revenue stream across a global franchise centered around integrating advice, execution, financing and co-investing with best-in-class risk management to a broad range of largely institutional clients.”

You are not their client so this doesn’t apply to you.  Basically many investment banks provide “advice” on the next quick bubble to exploit.  In the 1990s it was tech stocks and in the 2000s it was housing.  In the end the average American ends up with nothing yet Wall Street seems to grow.  However, the taxpayer has provided them the ability to survive and actually continue operating with your generous taxpayer money.  I heard an analysis saying that the Fed doesn’t receive taxpayer money so this is a moot point.  This point is such an egregious misstatement of facts that this person had to be a banking analyst (which he was).  In fact, the Fed by printing virtual money has systematically annihilated the value of the U.S. dollar.  Sure, they aren’t taking the money right out of your W-2 but the dollars you are being paid with are worth less each and every other day because of the irresponsible handling of the current crisis.

The FCIC needs to focus on this main thesis; how can banks make such irresponsible bets yet be expected to be bailed out when things go wrong?  The leverage they have is that they commingled bread and butter banking (deposits, checking, and mortgages) with nonsense financial engineering (derivatives, CDOs, credit default swaps) and this has led us to this point.  It should be abundantly clear that the first mission of the FCIC is to break up commercial and investment banking.  Period.  It should then be made explicit that any investment bank that reaches a breaking point will go the way of Lehman Brothers.

The Chairman Phil Angelides has big shoes to fill since he is working trying to match the power and charisma of Ferdinand Pecora during the Great Depression.  Mr. Pecora understood the theatrical and financial side of the issue and his hearings led to some of the most wide sweeping reforms to Wall Street.  These reforms were stripped out over 80 years and here we are, repeating the same mistakes.  Yet this time, it seem as if nothing is changing and the top 1 percent continue to control 42 percent of the nation’s wealth and what would appear to be 100 percent of our government.

People should be keeping a watchful eye on these hearings.  The website is at FCIC and you can keep up with what is going on there.  If this delves into Kabuki Theater and mere public hand slaps, we are going to find ourselves in another crisis rivaling the last.

ALT-A: “Here It Comes”

Posted by Karl Denninger

One of my favorite movies of all time…

I have often commented that we’re nowhere near done with the mortgage explosions, and that where subprime was bad, those loans made in 2005-2007 to people who lied about their incomes – which is 90% of those who took out “ALT-A” loans – were going to be a catastrophe.

Well, as Kirk said, “here it comes”

Moody’s Investors Service put $572.7 billion in Alternative-A residential mortgage-backed securities issued from 2005 through 2007 on watch for possible downgrade after it revised its loss provisions.

The rating agency said Alt-A loans that are 60 or more days delinquent “have increased markedly” since it last revised its loss projections. Alt-A mortgages, which sit between prime and subprime, typically were granted without the borrower showing proof of income or assets.

That’s a cool half-a-trillion worth.

And guess what this means for loss rates?

Moody’s said it now projects, on average, cumulative losses of 14% of the original balance for 2005 securitizations, 29% for 2006 securitizations and 35% for 2007 securitizations. The updated loss projections will have the greatest impact on senior securities issued in 2005, the firm said.

That ought to leave a mark.

No, the banks have not taken write-downs of some 27-30%ish on these securities in aggregate (that’s another $150-170 billion worth), nor has anyone else.

One wonders when our government will recognize that a loan made to someone who claims to have $200,000 in income but really makes $50,000 simply cannot be refinanced into anything the borrower can afford nor is there any way to prevent that loan from defaulting.  This is the ultimate fraud and outrage in “extend and pretend” and “mark to fantasy” – there is no possible way for these loans to be “made good” no matter what happens in the future – they were always going to blow up unless house prices continued to rise forever, thereby allowing the “borrower” to roll them over time and time again. 

Those who believe we can “make it all ok” are delusional beyond words.

Hope And Change’s Backlash

Posted by Karl Denninger

My only comment: Youtube appears to have taken this down several times, but it keeps reappearing.  I found several incantations along with people hosting the raw FLV file.

This appears to be created by some rather angry Democrats, and is one of the things I expected to start to see this year.

You better start listening to the people Washington.  Youtube is today’s version of handbills nailed to trees in the dark of night - in 1775.  Ripping down the handbills does not make them go away when the people are pissed – it makes them multiply and the people begin to consider that the first box of freedom – speech – may no longer be effective.

God forbid the path that could lead us toward.

Tonight (01/17/2010) we have Part II: