Let's talk about the banking crisis

[mantis308]

The average mortgage only runs 7 years - everybody gets 30 years, but they sell out or refinance before then.

This is part of the problem we are facing as a nation. Between this culture of debt and the Fed manipulating interest rates, people had the ability to refinance and cash out the equity of their house. The notion that housing prices will increase indefinitely was bogus, because they rose disporportionately to the income levels, at some point the bubble had to burst. Some people can't refinance now, their houses aren't worth as much as the mortgage is.

We're in the process of refinancing now and feel lucky to have gotten a great rate, low fees.  My dad tried 2 weeks later and was basically told they could only help him if he was late on his payments.  The man has one paid for property, one property that costs 12% of income and enough cash + retirement to cover the entire loan.  But -- the bank is only working on lower cost loans for those who can't afford it.

Get thee to a credit union... 

[mantis308]

We just got hit with another $350K. NCUA is running out of money and it's bleeding us dry. Every time a credit union fails, all the other credit unions pick up the slack when the depositors are paid off.
We were actually planning on expanding this year, because we are doing great. But now... We are $2M in the red because of the NCUA's fees.

[Atash Hagmahani]

This is the problem with the supposed "insurance": it is a moral hazard, and a tax on honest and well-run institutions to subsidize fraudulent or irresponsible ones.

It's not really insurance; bank failures are not an insurable event. It is a confidence-building scheme, that is now backfiring.

I hope your credit union weathers this, Mantis. This is unfair.

[mantis308]

Fortunately so far, we are having the best year in our history. We are at 50% of our goals for the year, in April. And due to our expected expansions, our goals were lofty, and seemed unattainable during the crisis. I suspect there is a trend to move towards credit unions because of bank failures, but also because of the rock bottom interest rates. Everyone that can, is refinancing their mortgages.

[MountainMeg]

Mantis - how reliable do you think this stress test leak is?

http://turnerradionetwork.blogspot.com/2009/04/leaked-bank-stress-test-reults.html

The debt crisis is much greater than the government has reported. The FDIC`s "Problem List" of troubled banks includes 252 institutions with assets of $159 billion. 1,816 banks and thrifts are at risk of failure, with total assets of $4.67 trillion, compared to 1,568 institutions, with $2.32 trillion in total assets in prior quarter.

Put bluntly, the entire US Banking System is in complete and total collapse.

[Atash Hagmahani]

Mantis, feel free to answer, but having had a look at the link, here are my comments:

The overall gist of it looks correct. The numbers are in the right ballpark. So the blog entry is on the up-and-up as far as it goes. The banking system really is exceedingly fragile, and unfortunately the rest of us are locked into it, particularly, if we have to do significant transactions, as those of us who are small business owners must. 

I would guess the overall financial system is also rather fragile, including the bond markets.

Be aware that the guy who posted the entry is a spook and more specifically, an informant to the FBI:

http://pastebin.com/f640d724d

He was infiltrated by "ethical hackers" (not really, but that's what they call themselves), who found his email exchanges with his handlers, and posted them.

[mantis308]

I think your question is - is this an accurate report on the "stress test" results? I don't know. Maybe, it seems likely.

More to the point, I question the motives of even conducting the "stress test". Realistically, what's the point other than to scare people? I smell a rat here - the entire process seems like a disinformation campaign. In fact, I'm suprised Goldman is on the report with negative comments, given the connections it has to the Feds.

[Atash Hagmahani]

The "rat" might be the need for something "scary" enough to justify sweeping new policies that might otherwise be controversial.

[Eddie]

Should I get my money out of BECU and move it elsewhere?

[Atash Hagmahani]

Not necessarily.

You might want to keep more cash than you are used to, as a precaution. Depending on your circumstances, you might want some precious metal coin, with the understanding that its purpose is to hold value over long periods of time, and not for speculation or dreams of quick profits (aside from occasional catch-up moments, the primary cause of precious metals going up in price, is debasement of the currency they are measured in--or in other words, inflation).

You might also want to store more dry food like flour, beans, rice, lentils, split peas, and that sort of thing, than you are probably used to.

[Eddie]

Eric DeCarbonnel said:

London’s role in the financial crisis
I have come to view London as the center of the financial underworld and the root of all financial evil.

The off-balance-sheet SIVs of US banks were set up in London
Credit Derivative Product Companies (ie: ”most idiotic financial instrument ever created”) are all located in London
Mayfair's hedge-fund industry (80% of all European funds) is located in London.
London is by far the largest global centre for over-the-counter (OTC) transactions.
The majority of the world’s gold trading/ leasing takes place through the London Bullion
Marketing Association
GLD’s gold “supposedly” is stored in HSBC’s London vaults
AIG’s financial division is based in London
Etc…
British meltdown as a possible trigger for a dollar collapse

While I am certain the dollar will collapse in 2009, it is an open question what will be the event which triggers the chain reaction leading to this collapse. Here are a few of the events I am watching for evidence that the dollar’s end is beginning:

Default on COMEX gold contracts
Soaring world food prices (which would lead China breaking dollar peg)
Failed auctions for long dated US treasuries
Collapse of the British pound
Etc...
The fate of Britain and the US are tied together. Both are deeply involved in the suppression of gold for example, which means both countries are heavily short gold. The collapse of the pound would create severe doubts about the dollar and lead to an exit from the currency.

Me:
Looks like some people out there are figuring it out.

[mantis308]

Biggest thing to look for is a dislocation in the bond market. It's happening slowly to some degree (see the thread on TIC flow trends: http://mutuallyassuredsurvival.com/smforums/index.php/topic,1919.0.html), but the dollar hasn't moved much. This seems to be primarily due to FRB purchasing treasuries: latest example http://www.reuters.com/article/bondsNews/idUSNYD00048320090423

[Atash Hagmahani]

The bond market is being aggressively defended. I agree it is worth watching; we actually need higher rates but all hell will break loose when they do rise.

I think the Fed is not the only organization monetizing treasury debt. They are using layers of indirection to make it less obvious.

[wander]

I realize it's been over a year, but I just read through this thread, and have a couple comments.

1. The fed is clearly monetizing the debt - more on this later
2. The fed is also clearly engaging in massive money printing through zero interest rate lending - and failing spectacularly at that
3. The bond market is probably teetering on the edge... see the VIX index for evidence

I would say we are approaching another very volatile time, very similar to what happened in 2007-2008.

Regards to the Fed, I see a very clear pattern here
* The borrowing rate of large banks is .25%
* The banks are aware they are holding toxic assets
* FAS 157 requires them to mark to market but this is not being enforced
* Banks are using the .25% rate to borrow free money and buy treasuries, earning a guaranteed 3-4%
* Banks need this cash to offset the toxic assets or they go belly up
* The Fed and Congress is aware of this and trying to pass the "financial reform bill"
* The financial reform bill has a bailout plan built into it (the funeral plan)
* It also has a clause creating a new regulatory body to oversee the banks... it's housed at the (guesses anyone?) Federal Reserve!!
* I would be remiss if I failed to point out that the Fed is made up of the to 12 or so biggest banks

Question- where is the inflation in the economy when the M3 is shooting up? I think it's not happening (at least as much) primarily because it's locked up in treasuries and bonds. The banks are trying like heck to stay alive, and are pulling out all the stops to keep on top everything. They are using the Fed to their fullest capability. But they are losing! They are losing because its fractional reserve lending is a ponzi scheme, and now that the public is trying to pay off their debts (not to mention just walking away from them) the banks are becoming zombies.

The next year or so will certainly be interesting, as the last year was too consumed with that monstrosity health care bill.

[Mike]

Isn't M3 contracting?

I believe treasuries are not part of M3.  So that might explain how printing can fail spectacularly in having an affect on M3: the money is 'disappearing' into Treasuries and is not contributing to M3.