Federal govenment will create entity to hold banks' debt

[cute fuzzy bunny]

Quote:

Originally Posted by Martha I heard that this was coming. What are your thoughts on it? I haven't had a chance to read up.

My thoughts are a) not too many money market fund operators have had to bridge a 'breaking the buck' gap, in fact I'll bet more money has been paid out in FDIC deposit insurance than money market spackling and b) I hope that covering MM's doesnt cause the MM operators to start taking more risks to shoot for higher yields...and more customers.

[al_bundy]

housing prices stunk from 1987 to 1997, yet most people think the 1990's was the best decade ever

[brewer12345]

Quote:

Originally Posted by Martha I heard that this was coming. What are your thoughts on it? I haven't had a chance to read up.

Its a way to get the money markets (short term funding market) working again, rather than to protect bad actors.

[socca]

I've been trying to come up with a catchy name for the new version of the Resolution Trust Corporation, but haven't had any luck. Here are some ideas:

FCB Corp: Fat-Cat Bailout Corporation
FTT Corp: F*** The Taxpayers Corporation
TLD Corp: Taxpayers Love Debt Corporation
PTI Corp: Punish The Innocent Corporation
RTG Corp: Reward The Guilty Corporation
MFA Corp: Mortgage Financing Alchemy Corporation

If anyone can think of something better, just pass it along.

[ChrisC]

The solution to this financial mess will be grounded in a comprehensive resque plan for homeowners and housing finance, which will make it politically expedient for swift enactment by Congress. That's the only certain thing we can count on these days. We'll probably get something named like the Home Owners' Financial Assistance Corporation. Here's an exceptionally good viewpoint on what caused the problem in today's American Banker:

Viewpoint: Finding a Way Out of the Lending Crisis

By: Emma Coleman Jordan*
American Banker, 9/19/2008 -- Wall Street financial wizards have conducted their businesses as though the complex financial products that generated billion-dollar compensation packages also created a protective moat beyond public accountability.

In the interdependent world of global finance that is now collapsing, home mortgages were abstractions. During this decade the basic human connection between lender and borrower in consumer finance was cut and thrown away as a quaint vestige of a bygone era.

In 1981, at the beginning of the era of retail banking deregulation, I wrote the first state consumer protection law for California to stop the practice of "playing the float" — holding customer deposits to earn money by delaying credits to the customer's account. This abuse crept into retail banking because the full market effects of lifting the previous interest rate ceilings were poorly understood. Follow-up regulation was necessary to close a window of market failure.

Just as in the current crisis with subprime loans, competition could not and did not do the job after deregulation.

Getting out of this mess will require four things: public recognition of the scope and scale of the backlog of mortgage-related defaults, a return to basic human connections in mortgage lending, aggressive consumer protection, and insistence on generous capital cushions (rainy day funds to buffer unexpected losses).

Bring all the bad loans out of the dark recesses of investment and commercial bank balance sheets and into the light of public review. We cannot fix it until we see it.

Next, back to basics. Remember that houses are homes, not abstract transactions that can be made profitable with unreasonable levels of leverage/borrowing.There is still a role for more conservative securitization, in which packages of home mortgages are sold to the restructured Fannie Mae and Freddie Mac, and a well-regulated private market. However, preserving the connection between originator and borrower is more likely to reduce fraud and consumer abuse.

This will require political and economic leadership to encourage Americans to return to the tough, unpleasant discipline of saving. At the heart of the current meltdown is a stark reality: America is the world's biggest debtor in both the public sector (budget deficits) and the private sector (financial institutions and corporations). The U.S. financial system is now at the mercy of foreign sovereigns and institutions sitting on enormous piles of cash, much of it from the sale of oil and other products to us.

Shifting the bad loans, and the financial instruments based on these loans, on to the balance sheets of commercial banks will not solve the problems we face.

In the new pea and shell game, Bank of America has become the new private shell of choice. B of A, the nation's largest bank, holds 10% of all deposits. It first absorbed Countrywide Financial, the biggest and most problematic subprime mortgage lender, with a loan from the Fed; this week it absorbed Merrill Lynch, with benefit of a waiver of a Fed rule designed to prevent the bank holding companies with FDIC-insured banks from lending to investment bank subsidiaries.

Bank of America, its depositors, and the FDIC are not the long-term solution to the accumulated pile of loans in default.

In August the inventory of unsold foreclosed houses reached 750,000. With the takeover of Fannie and Freddie, the federal government will be the owner of some of these properties.

The relationship between the house as collateral for a loan and the many layers of complex new financial products grew ever more strained in the rapidly changing environment. Regulatory ground rules became a passive backdrop as three factors converged to turn routine home loans into an international financial crisis: unregulated brokers, complex financial instruments, international financial integration. I know that it is not fashionable to talk about human values in the same sentence as global money, but maybe that is the real problem.

Modern financial titans, like Sherman McCoy, the central character of "The Bonfire of the Vanities," have unwound with a single wrong turn, carrying them from the heights of money, power, and privilege on Wall Street to the anger and rage of the ordinary folks in the South Bronx.

The wrong turn took place more than 10 years ago, when the first experiments with bad loans were pushed on poor and unsophisticated borrowers who lived in communities that had previously been starved, through redlining, from receiving any loans at all. Target practice in poor communities proved the viability of the abusive terms: no exit fees, pay-what-you-want ARMs, liars loans, low teaser rates, and balloon payments. These same terms were then quickly adapted to middle- and upper-middle-class borrowers in search of a vacation home or home equity for college tuition.

Within five years Wall Street hedge funds perfected the lending techniques first used in poor communities. In the new structure for housing finance, unregulated, independent brokers sold loans by misrepresentations. Houses that people depend on for shelter became chips in a high-stakes game of liar's poker.

The late Gov. Edward Gramlich of the Federal Reserve warned that the introduction of "huge new sources of capital and financing of largely unsupervised subprime mortgage lenders" had caused problems with subprime loans.

He argued for re-establishing the connection between the lender and the borrower through banning the most objectionable provisions and through a mandatory "suitability rule" which would require lenders to make loans that are matched to borrowers' economic profile and "in the borrower's best interest." The link between the borrower and the ultimate holder of the loan could be further strengthened by expanding existing rules to impose on the holder liability for fraud or other problems with the process.

The current crisis has been driven by the lack of adequate levels of cash to absorb the losses from defaults. Sovereign wealth funds have filled this cash gap, becoming the lender of last resort for cash-strapped commercial and investment banking companies like Citigroup and Merrill Lynch only nine months ago. The sovereign funds of Abu Dhabi, Singapore, and China were among a collection of funds that came to the rescue of these companies. China's four biggest listed banks decided to scale back drastically their purchase of Fannie and Freddie securities, triggering the government takeover just five days later.

Describing the mortgage meltdown is easy, but proposing a solution is less so.

For all the talk of "moral hazard" and "market discipline," these after-the-fact buzzwords are a Rorschach test of whether you believe the government should play an active, aggressive role in controlling the risk-taking and profit-seeking party, just as the guests have started to arrive and loosen their ties.

*Prof. Jordan teaches banking, economic justice, and commercial law at Georgetown University Law Center. She is the co-author of "Beyond Rational Choice: Alternative Perspectives on Economics" and "When Markets Fail: Race and Economics."

[ziggy29]

I was worried this thread was headed to the Soap Box for a moment...

[laurence]

Quote:

Originally Posted by Retire Soon In my book, you've hit another home run. I read an article in yesterday's San Diego Union that average home prices in San Diego County are down to an average of $350,000, a number unseen since March 2003. Further, DataQuick predicts average prices to fall another $100,000 in the next couple of years. Part of the reason is that nearly 43% of recent sales are foreclosures. Now, what will happen when unemployment goes up? Many homeowners in that county live from paycheck to paycheck. Things really are going to get worse in the housing industry.

I agree with the both of you. My house in San Diego has fallen from a peak of $580k to $370k (approximately) and shows no sign of slowing. This mega-billion dollar bailout will not keep my next door neighbor in her house, as her mortgage resets in a year and there is no way she can afford the payment on her $500k mortgage plus the $80k HELOC. And lots of others in my neighborhood are in the same place. The house behind me is already empty and abandoned. None of these moves change a thing for the troubled homeowner.

I do think it's a good move on net, like Nords said, if several hundred thousand people lose their jobs due to a sustained panic and freeze, how are we better off? The tax revenue losses alone offset some of the costs.

[FIRE'd@51]

Quote:

Originally Posted by brewer12345 Amazingly, now the gummint will guarantee money market funds.

Yesterday there were $180 billion of money market fund redemptions, or about 9% of the $2 trillion total. So this action should prevent any kind of "run on MMF's", certainly a distinct possibility in the panic that is going on these days.

However, I suspect this will lead to a lower rate of return on MMF's for a couple of reasons.

The first is that an insurance fee will be paid by the MMF's to the Treasury for this insurance. I don't know how much this fee will be. Does anyone know?

Secondly, I heard someone say on CNBC that to qualify for this insurance, MMF's will have to hold a portion of the fund (maybe 25-35%) in Treasury securities, which will further lower the yield on the fund. Can anyone verify this?

[cute fuzzy bunny]

We'll be better off because that pool of unemployed people will be ready to take ramp-up jobs quickly when the economy picks up, and they may be willing to work for less than they used to.

Not good for them, but having been forced to look at unemployment charts a lot lately, it looks to me like periods of high unemployment are always followed by economic booms. Maybe theres a correlation there...

[Bestwifeever]

Quote:

Originally Posted by FIRE'd@51 Yesterday there were $180 billion of money market fund redemptions, or about 9% of the $2 trillion total. So this action should prevent any kind of "run on MMF's", certainly a distinct possibility in the panic that is going on these days. However, I suspect this will lead to a lower rate of return on MMF's for a couple of reasons. The first is that an insurance fee will be paid by the MMF's to the Treasury for this insurance. I don't know how much this fee will be. Does anyone know? Secondly, I heard someone say on CNBC that to qualify for this insurance, MMF's will have to hold a portion of the fund (maybe 25-35%) in Treasury securities, which will further lower the yield on the fund. Can anyone verify this?

I imagine at least some of the MM redemption yesterday was people who decided to get back into equities, rather than a panic situation.

I wonder if MMF insurance would be limited to $100,000 as in FDIC insurance.

[FinanceDude]

Quote:

Originally Posted by cute fuzzy bunny We'll be better off because that pool of unemployed people will be ready to take ramp-up jobs quickly when the economy picks up, and they may be willing to work for less than they used to. Not good for them, but having been forced to look at unemployment charts a lot lately, it looks to me like periods of high unemployment are always followed by economic booms. Maybe theres a correlation there...

It will work again unless the folks who create jobs should "feel patriotic and pay more taxes"..........

[Retire Soon]

Jack Bogle was interviewed on Fox Business a few minutes ago. He said he was in favor of MM Fund insurance with some reservations.

He stated that he was not surprised that the first MM Fund to go under was the exact same fund that was bragging at the end of 2007 about having the highest annual return of any MM fund. He went on to add that they had the highest yields, only because their investments were the riskiest.

He said the purpose of a MM fund is to preserve the dollar, not to lose it.

The main reservation that he had with the insurance is that it should not be used to rescue MM funds such as the two that just went under because of their investment in risky paper. He said, "you would not buy life insurance for a dying person."

Further, he said that he was "for" the current government rescue plan.

Edit: typo

[Nords]

Quote:

Originally Posted by Retire Soon One thing we can count on when all of this is over with, is that we'll all face a lower standard of living.

My standard of living has risen every year of ER.

Our biggest parenting concern is that our standard of living doesn't get translated by our teenager into a "standard of entitlement"...

Quote:

Originally Posted by brewer12345 And now the SEC has banned short selling on a list of 799 financial stocks for 10 days. If you are short, this will be extremely ugly.

Gosh, I wonder if that explains why the regional banking ETF (KRE) is up over 20% in a couple days to over $43/share.

Whoever was calling that ETF's "fair value" at $28/share early this year to nearly-unanimous derision, well... I hope you had the strength of your convictions to back up the truck, go on margin, buy options, and take out a home-equity loan.

[OAG]

Quote:

Originally Posted by cute fuzzy bunny Easy. The government will take ownership of all the foreclosed homes, and then use them all for free housing for people on welfare.

Or relocate everyone that used to live too close to the water that the Government is going take the land back. Or relocate all the Texans that need housing. Or relocate whoever is left in NO that need housing. Or all of the foregoing. Have to also give them some Government vouchers so they can replace all the wiring, piping, appliances, doors and other stuff that has been removed from the houses. As long as the vouchers keep coming that should create more jobs, etc., to help the economy. I am feeling the tugging at my right rear pocket already (I am left handed).

[Notmuchlonger]

Quote:

Originally Posted by ziggy29 I was worried this thread was headed to the Soap Box for a moment...

Its all GB's fault!

[al_bundy]

Quote:

Originally Posted by Retire Soon Jack Bogle was interviewed on Fox Business a few minutes ago. He said he was in favor of MM Fund insurance with some reservations. He stated that he was not surprised that the first MM Fund to go under was the exact same fund that was bragging at the end of 2007 about having the highest annual return of any MM fund. He went on to add that they had the highest yields, only because their investments were the riskiest. He said the purpose of a MM fund is to preserve the dollar, not to lose it. The main reservation that he had with the insurance is that it should not be used to rescue MM funds such as the two that just went under because of their investment in risky paper. He said, "you would not buy life insurance for a dying person." Further, he said that he was "for" the current government rescue plan. Edit: typo

i read that the insurance is not going to be required. either way most firms had several MM funds and the higher yielding ones all had disclaimers because they would invest in things like ARS's

[ladelfina]

Did Bogle say how/whether it was possible to sort out 'dying' MMFs from the ones that are merely ill? This is just mind-boggling to me.. a completely open-ended commitment to private accounts where it is not even clear what is in them on any given day? They've never been regulated items so who is going to sift through it all and figure it out?

And even if someone tries to assess them.. people had looked at these other firms and declared "AAA". Nothing was wrong.. until there was.

Another question is what about the global nature of some of these entities? US taxpayers cannot backstop the entire financial universe.. it's just an impossibility. Where is the 'coalition of the willing', as it were?

[OAG]

Quote:

Originally Posted by cute fuzzy bunny My thoughts are a) not too many money market fund operators have had to bridge a 'breaking the buck' gap, in fact I'll bet more money has been paid out in FDIC deposit insurance than money market spackling and b) I hope that covering MM's doesnt cause the MM operators to start taking more risks to shoot for higher yields...and more customers.

Not sure about MMA but Chase Bank has sent me THREE letters very recently; two to "Our close friends" and ONE to me, by name, offering a total of $500 cash if I will open a Checking account with them. All I have to do is deposit $100 and move a direct deposit to them for 6 months. Hunting for new clients?

[Purron]

Here's an idea - We have lots of retired people with brilliant financial minds on this board. Why not take a temporary job with the new organization Treasury creates? They might let you telecommute from where you live. Just think of the advantages - paycheck coming in, TSP matching funds, health insurance and a cool Treasury Department name badge to impress your friends and neighbors

[FIRE'd@51]

Quote:

Originally Posted by Purron Here's an idea - We have lots of retired people with brilliant financial minds on this board. Why not take a temporary job with the new organization Treasury creates? They might let you telecommute from where you live. Just think of the advantages - paycheck coming in, TSP matching funds, health insurance and a cool Treasury Department name badge to impress your friends and neighbors

Telecommute? Naw, I want to sit on the new trading desk, right next to you

Seriously though, with all these "brilliant minds" bidding for these distressed securities, aren't you afraid we might bid too low and force the banks to mark down their paper even lower, resulting in more failures.