Defaulting banks - where will it stop?

[Peter Lemkin]

maybe they should shorten their name to Gold Sacs.

[Jan Klimkowski]

Karl Denninger on form:

Toxic Assets (PPIP) Death Rattle

Remember, folks, that the DOW surged by more than 500 points, a 7% gain, on the day the PPIP was announced. Now we find out that this plan to "rid the banks of toxic assets" is on its deathbed:

A look at why the program has stumbled underscores how difficult it has been to solve one of the economy's biggest problems: Mountains of bad debt sitting on the books of the nation's banks. As those loans and securities lose value, they are saddling the banks with losses and constricting their ability to lend.

The real problem is this: The banks have been and still are lying about the value of these loans.

Nowhere is this more evident in the mortgage arena. People are being "allowed" to remain in homes where they have stopped paying the mortgage and banks are sitting on the foreclosure process.

Why? Because if they foreclose and sell the house they are forced to book the loss. But if they "forget" to foreclose they can hide the fact that there's an embedded loss, sometimes as much as 50%, from both regulators and shareholders!

The same thing is going on in Commercial Real Estate. Rather than force the defaults that are occurring to be recognized and foreclosed, the banks are "pretending and extending" terms. That is, ignoring the default and extending the terms of loans even though they are not performing, as this way they can (and are) avoiding taking the write-down.

This is accounting fraud, by the way, but nobody in the regulatory or law enforcement apparatus of this country seems to care.

When PPIP was proposed I noted the fact that banks were not taking realistic marks; this has not changed.

Nor am I alone in this:

Citigroup’s $1.6 billion in first-quarter profit would vanish if accounting were more stringent, says Martin Weiss of Weiss Research Inc. in Jupiter, Florida. “The big banks’ profits were totally bogus,” says Weiss, whose 38-year-old firm rates financial companies. “The new accounting rules, the stress tests: They’re all part of a major effort to put lipstick on a pig.”

Further deterioration of loans will eventually force banks to recognize losses that their bookkeeping lets them ignore for now, says David Sherman, an accounting professor at Northeastern University in Boston. Janet Tavakoli, president of Tavakoli Structured Finance Inc. in Chicago, says the government stress scenarios underestimate how bad the economy may get.

The simple fact of the matter is that for the PPIP to "work" assets must be sold into it at somewhat of a realistic price.

But if banks do that, they will be forced to recognize losses they (in conspiracy with their regulators, including The Fed, OTS, OCC and Treasury) have been hiding for the last two years - losses that are sufficient to force all of them under critical Tier Capital Ratios and thus subject them to FDIC seizure and liquidation.

We should have done the right thing and forced recognition of fair-market-value of these securities and whole loans, sent in the FDIC and closed these institutions.

We still should.

Even if they're "big banks."

The longer we wait the more damage our economy will take when, not if, the mounting losses are recognized.

PPIP will do nothing to alleviate the problem, exactly as I predicted, because for it to "work" the banks would have to admit their insolvency, and there is zero political or regulatory will to make that happen.

But to clear the credit markets and allow the economy to truly recover, that admission and subsequent clearing must happen.

http://market-ticker.org/archives/1170-T...attle.html

[Peter Lemkin]

Karl Denninger on form:

Toxic Assets (PPIP) Death Rattle

Remember, folks, that the DOW surged by more than 500 points, a 7% gain, on the day the PPIP was announced. Now we find out that this plan to "rid the banks of toxic assets" is on its deathbed:

A look at why the program has stumbled underscores how difficult it has been to solve one of the economy's biggest problems: Mountains of bad debt sitting on the books of the nation's banks. As those loans and securities lose value, they are saddling the banks with losses and constricting their ability to lend.

The real problem is this: The banks have been and still are lying about the value of these loans.

Nowhere is this more evident in the mortgage arena. People are being "allowed" to remain in homes where they have stopped paying the mortgage and banks are sitting on the foreclosure process.

Why? Because if they foreclose and sell the house they are forced to book the loss. But if they "forget" to foreclose they can hide the fact that there's an embedded loss, sometimes as much as 50%, from both regulators and shareholders!

The same thing is going on in Commercial Real Estate. Rather than force the defaults that are occurring to be recognized and foreclosed, the banks are "pretending and extending" terms. That is, ignoring the default and extending the terms of loans even though they are not performing, as this way they can (and are) avoiding taking the write-down.

This is accounting fraud, by the way, but nobody in the regulatory or law enforcement apparatus of this country seems to care.

When PPIP was proposed I noted the fact that banks were not taking realistic marks; this has not changed.

Nor am I alone in this:

Citigroup’s $1.6 billion in first-quarter profit would vanish if accounting were more stringent, says Martin Weiss of Weiss Research Inc. in Jupiter, Florida. “The big banks’ profits were totally bogus,” says Weiss, whose 38-year-old firm rates financial companies. “The new accounting rules, the stress tests: They’re all part of a major effort to put lipstick on a pig.”

Further deterioration of loans will eventually force banks to recognize losses that their bookkeeping lets them ignore for now, says David Sherman, an accounting professor at Northeastern University in Boston. Janet Tavakoli, president of Tavakoli Structured Finance Inc. in Chicago, says the government stress scenarios underestimate how bad the economy may get.

The simple fact of the matter is that for the PPIP to "work" assets must be sold into it at somewhat of a realistic price.

But if banks do that, they will be forced to recognize losses they (in conspiracy with their regulators, including The Fed, OTS, OCC and Treasury) have been hiding for the last two years - losses that are sufficient to force all of them under critical Tier Capital Ratios and thus subject them to FDIC seizure and liquidation.

We should have done the right thing and forced recognition of fair-market-value of these securities and whole loans, sent in the FDIC and closed these institutions.

We still should.

Even if they're "big banks."

The longer we wait the more damage our economy will take when, not if, the mounting losses are recognized.

PPIP will do nothing to alleviate the problem, exactly as I predicted, because for it to "work" the banks would have to admit their insolvency, and there is zero political or regulatory will to make that happen.

But to clear the credit markets and allow the economy to truly recover, that admission and subsequent clearing must happen.

http://market-ticker.org/archives/1170-T...attle.html

Well, if so, then where in the **** did all that BIG money given to these banks and non-banks GO?! Seems like it is only a matter of when, not if, the WHOLE thing [American style Casino finance/banking] collapses totally, taking what is left of the economy with it and into the toilet. Nice! - something to look forward to..... But this is only what Tarpley, Hudson and others have long been saying....we're ****ed!, and the worst is yet to come (i.e. ya ain't seen nuthin' yet!). Hey, I could make good money on total failure futures! Seriously, it seems that EVEN admitting the mess whould do nothing to change the results. The system needs scraping in the gabage heap of history, not reform and assistance!IMO

[Jan Klimkowski]

http://market-ticker.org/archives/1177-B...ation.html

Wednesday, July 1. 2009
Posted by Karl Denninger in Banking System at 15:35
"BOOM!" (More Obfuscation)

"Someone" paid 7% for overnight money on the Fed Trading system last night (that "someone" was a bank, by the way.)

This will be claimed to be "ordinary" end of quarter distortions for closing the books.

Don't believe it for a second.

Let's put this in plain language: The discount window is open for any bank that has good collateral at less than 1/10th of that interest rate.

Therefore there is absolutely no reason for any institution to go into the Fed Funds market for overnight money at 7% unless they have no good collateral to post against it and thus cannot go to the window.

So who is it? No idea. And while the amount borrowed overnight at that rate may be tiny, that's not the point - the point is that the last time we saw anything that dramatic was just before it all went "boom" last year.

Yes, I'm sure that end-of-quarter had something to do with it. In fact, I'd be stunned if it did not.

However, as I noted, there's no reason for anyone to pay that if they have good collateral to post at the discount window, given that you can do so for 1/10th or less the price.

Keep your nose to the ground and your eyes open.

Someone (or more than one someone) is in trouble.

[Jan Klimkowski]

Karl Denninger on form:

We'll Scam You Until Forced To Stop

The banks just never do quit, do they?

July 8 (Bloomberg) -- Morgan Stanley plans to repackage a downgraded collateralized debt obligation backed by leveraged loans into new securities with AAA ratings in the first transaction of its kind, said two people familiar with the sale.

Morgan Stanley is selling $87.1 million of securities that it expects to receive top AAA ratings and $42.9 million of notes graded Baa2, the second-lowest investment grade by Moody’s Investors Service, according to marketing documents obtained by Bloomberg News. The bonds were created from Greywolf CLO I Ltd., a CDO arranged in January 2007 by Goldman Sachs Group Inc. and managed by Greywolf Capital Management LP, an investment firm based in Purchase, New York.

Let's translate this into english for the less-financially-literate.

We're going to take this trash that was originally rated "AAA" by all the major ratings agencies that we bought the rating from (and paid for it too - booya!), got downgraded, and cost investors millions, and wave our arms around.

Through the magic of re-securitization (while extracting a few more basis points in a second set of fees for ourselves!) we will make this Baa2 (nearly junk) debt back into pristine "AAA" credit once again, according to the bought-and-paid for (again) ratings agencies, and then we will sell it to the same suckers that got ripped off the first time!

The sad part is that they will probably find people who are dumb enough to get screwed not once, but twice, even though the bank has managed to extract a second set of fees from the original credit margin in the deal.

Back to basics folks - when a set of loans are made the true risk-adjusted return is a fixed amount. Every person who touches the deal demands something for their trouble, as nobody works for free.

Therefore the more levels of indirection and complexity are layered on the lower the total return of the deal has to be, because the fees have to come out of the total income stream.

It cannot be any other way; you cannot create more value than was originally there (claims otherwise are equivalent to claiming to have discovered perpetual motion) and as such there is no possible way in aggregate for anyone except the bank that does the securitizing to benefit from securitization, and in fact everyone who owns that "stuff" is giving up some of what they could otherwise obtain by buying this crap.

P.T. Barnum was right.

http://market-ticker.org/archives/1190-W...-Stop.html

[Jan Klimkowski]

BOHICA time.

So California is now issuing "registered warrants" - a fancy name for IOUs.

This is occurring as a consequence of the cash flow finally catching up with them, and it serves as a warning to not only other states but also to The Federal Government - you can only lie about how much money you really have for so long; eventually you will start bouncing checks!

Major banks have said they will "accept" them through Friday. How much of this "deadline" is a pressure tactic to try to force the legislature to solve the budget problem is unknown, but this much is known about their "acceptance" - if you deposit one of these things it is a recourse deposit - that is, not only is it subject to holds but in addition if the state defaults on it the bank will come back at you for the full face value.

.....


In truth there is no hamburger; the cow was slaughtered and eaten six months ago. It has long since been "recycled" into fertilizer, yet the charade continues onward for another day, with the sheeple believing that somehow these pieces of worthless paper make it "all ok."

The banks, assuming they stick to their Friday deadline, understand this. They're saying "uh, you know, come October those things might not actually BE good!" That's a problem, you see, as someone's going to be stuck with the bill if that happens.

A "trading environment" has almost instantly sprung up for these things, including on eBAY and Craigslist, which has led to rumblings that the government may have petitioned the SEC to deem these things "securities." Huh? Securities? Like hell; these are nothing more or less than a post-dated check, and a potentially-rubber one at that. But this hasn't stopped the government from trying to make sure that you, the person owed, are the one stuck with the worthless toilet paper, has it?

http://market-ticker.org/archives/1189-C...-Come.html

if the state defaults on it the bank will come back at you for the full face value.

:bootyshake:

[Jan Klimkowski]

Hmmmmm - the British taxpayer is unfortunate enough to own Bradford & Bingley....

July 9 (Bloomberg) -- Bradford & Bingley Plc’s failure to pay interest on some of its subordinated bonds is a credit event, the International Swaps and Derivatives Association said.

The ruling will trigger credit-default swaps linked to the Bingley, England-based company. The contracts cover about $416.5 million of the nationalized mortgage lender’s debt, according to data from Depository Trust & Clearing Corp., which runs a central registry that captures most trading. The contracts will be settled in an auction.

Morgan Stanley asked for the ruling from a committee of default swaps dealers and investors after Bradford & Bingley last week missed the final deadline to pay interest on 125 million pounds ($202 million) of 6.625 percent subordinated bonds maturing 2023.

The lender, which was taken over by the U.K. government in September, missed a payment due on June 16 and the 14-day grace period expired without the interest being paid. The lender said in May it didn’t intend to pay interest on the notes, which form part of its so-called lower Tier 2 capital.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.

http://www.bloomberg.com/apps/news?pid=2...bpbqvFP.3s

[Jan Klimkowski]

Nationwide offers 125% mortgage

The Nationwide Building Society has introduced a mortgage allowing borrowers to take loans worth 125% of the value of the home they are buying.

What's the date on this article?

2006? 2007?

Uh - it's July 9, 2009.

It will only be available to existing customers in negative equity who want to move house.

Negative equity means that the value of someone's home is less than the amount they owe on their mortgage.

Nationwide said the deal was a very "niche offer" and that not everyone in negative equity would qualify.

The Financial Services Authority is considering limiting mortgage loans to 100% of a property's value.

'No more risk'

The Nationwide only offers new customers mortgages worth 85% of the value of the home they want to buy.

Under its new arrangement, existing borrowers would take out a loan for 95% of the value of their new house at a fixed rate of 6.73% for three years or 7.48% for five years.

They would have to put down a 5% deposit from their own funds.

They would then be able to add on the negative equity from their old home, up to another 25% of the value of the new property, at a higher fixed rate of 7.23% for three years or 7.98% for five years.

As well as having their incomes and outgoings assessed by Nationwide, borrowers will also have to pass a stress test.

This will ensure they can still afford the mortgage repayments if interest rates have risen to 9% or 10% once the fixed-rate element of the loan has expired.

No takers yet

A Nationwide spokeswoman said although the deal was first made available in June, it was not being actively marketed.

So far none of its customers have taken up the offer.

It was, the spokeswoman said, aimed at helping only a few existing customers who came to the society and asked for help because they found they were in negative equity but were being forced to move house.

"Borrowers in these unique circumstances are simply able to transfer part of their existing negative equity with them when they need to move home - the actual value of the negative equity and the loan-to-value will reduce in all circumstances," she said.

"The borrowers have to meet our own affordability criteria," she added.

Wrong again?

There has been much criticism of the loans above 100% that were available at the peak of the housing boom, which immediately placed borrowers in negative equity.

The most notorious were those offered by the now nationalised Northern Rock bank.

The Nationwide's deal was a "really consumer-friendly move" said Ray Boulger at mortgage broker John Charcol .

He added that at least two other major lenders were looking at introducing something similar for existing customers.

But financial planner Jonathan Davis, of Armstrong Davis, said the building society's new policy was a "joke", and that it exposed the lender to further losses if house prices continued to fall.

"You are taking people in negative equity, pushing more money down their throat to back an asset that is still going down in value," he said.

"All the banks and building societies thought they were going to get their money back when they lent gargantuan sums in the run-up to 2007 - they were clearly wrong then and they are wrong again," he added.

http://news.bbc.co.uk/1/hi/business/8141584.stm

[Dawn Meredith]

[quote=Jan Klimkowski]

Nationwide offers 125% mortgage

The Nationwide Building Society has introduced a mortgage allowing borrowers to take loans worth 125% of the value of the home they are buying.

What's the date on this article?

2006? 2007?

Uh - it's July 9, 2009.



WTF??? This is one of the things that started this mess we are in. I am convinced that our government is not just stupid but insane.

(Or worse: they want the country to go under and all of us starve to death).
Ever since hearing about the California IOU's I have been on pins and needles as when the welfare checks do not arrive there will be blood in the streets. Literally.

Dawn

[Peter Lemkin]

[quote=Jan Klimkowski]

Nationwide offers 125% mortgage

The Nationwide Building Society has introduced a mortgage allowing borrowers to take loans worth 125% of the value of the home they are buying.

What's the date on this article?

2006? 2007?

Uh - it's July 9, 2009.



WTF??? This is one of the things that started this mess we are in. I am convinced that our government is not just stupid but insane.

(Or worse: they want the country to go under and all of us starve to death).
Ever since hearing about the California IOU's I have been on pins and needles as when the welfare checks do not arrive there will be blood in the streets. Literally.

Dawn

Next time you send in your taxes to the USG [if you do at all], send an IOU! Next time you take a 125% loan on your depreciating home, have a brainscan for tumors. As for the blood in the streets, it is more-or-less in many client and tampered-with countries and LONG in our innner-cities and in poor and non-white communities...why not spread it around to suburbia and urbia...even to the beltway...and halls of Congress et al....[i.e. spread the 'good fortune' evenly]