How to Bail Out Main Street....

[al_bundy]

and when businesses start laying people off by the thousands to conserve cash joe blow will be foaming at the mouth as to why the government didn't do anything to stop it

 

[Hamlet]

We're not going to have bank runs with FDIC insurance. Nobody started pulling their deposits from WaMu, since they know the government will back them.

We may have to bulk up the FDIC fund, but that isn't hard or complicated.

so why did Hoover get blamed for the Great Depression? until 1932 things were OK and it was just a recession. people could still get money from the bank. it was only in 1932 that the bank runs started and spread like wildfire and wiped out the banking system plunging the country into a depression.

 

[al_bundy]

history doesn't repeat itself, but it comes close

the money markets will be wiped out if the credit crunch goes on and companies go under and default on debt. you can move your entire 401k into cash/MM and it will be wiped out if enough companies go under. and this isn't wall street companies that will go under, it's businesses on main street because they can't get access to financing and will see a slowdown in business.

everyone is afraid to lend and adding more bad debt to the system isn't going to fix anything

 

[brewer12345]

We're not going to have bank runs with FDIC insurance. Nobody started pulling their deposits from WaMu, since they know the government will back them.

We may have to bulk up the FDIC fund, but that isn't hard or complicated.

Really?

"WaMu became ``unsound'' after customers withdrew $16.7 billion since Sept. 16, the Office of Thrift Supervision said yesterday."

Bloomberg.com: Worldwide

 

[audreyh1]

and when businesses start laying people off by the thousands to conserve cash joe blow will be foaming at the mouth as to why the government didn't do anything to stop it

It would seem like this could be reasonably easily (and convincingly) explained to Joe Blow. Some real world examples of the businesses right now that are having trouble getting financing would really help - fast food franchises, farmers, etc.

But this will then focus the shift to how to help companies get that short term financing they need to function.

Audrey

 

[Hamlet]

Sure, but I'm not entirely convinced that this "credit freeze" is going to impact businesses in that way to a large degree.

There are plenty of banks that are running business as usual. Main Street businesses may have to switch banks, but I don't think that they are going to be unable to get credit at all, as long as they have very solid credit and collateral.

If they don't, they probably shouldn't have been getting money in the first place.

Corporate America has a pretty strong balance sheet overall, right now. Most companies are in a pretty good position to weather a tightening of credit. The ones that aren't will cause problems, but problems are unavoidable at this point.

Trying to prop a credit binge up with more credit is not going to help us down the road.

Ummm - this is the problem. When Main Street businesses can't obtain the credit they need for their day-to-day functioning - not for expansion, not for anything fancy, just the basic inventory, payroll, etc. - the businesses start to shut down. This snowballs as people get laid off, suppliers are not paid, etc. Turns into a depression. You do not want this.

Thus something has to be done to unfreeze credit to these companies.

Audrey

 

[Hamlet]

Ok, but WaMu's been among the walking dead for months. There wasn't the kind of panicked withdrawls like before the Depression. And everyone is going to get their money.

I would be in favor of lifting the limits on FDIC insurance, though. The 100k limit seems a little archaic. I wonder how much of the 16.7 billion was in deposits over FDIC limits?

Really?

"WaMu became ``unsound'' after customers withdrew $16.7 billion since Sept. 16, the Office of Thrift Supervision said yesterday."

Bloomberg.com: Worldwide

 

[ziggy29]

Sure, but I'm not entirely convinced that this "credit freeze" is going to impact businesses in that way to a large degree.

There are plenty of banks that are running business as usual. Main Street businesses may have to switch banks, but I don't think that they are going to be unable to get credit at all, as long as they have very solid credit and collateral.

The problem is that it becomes a snowball rolling downhill.

A few banks tighten up their credit lines and a few businesses go under. A few creditors get stiffed.

In response, banks tighten a little bit more, and in turn that takes out a few more businesses. A few more creditors get stiffed.

Rinse, lather, repeat.

I believe it is this slow water torture -- drip, drip, drip -- which is constipating the credit market and, in fact, the housing market. As long as the belief persists that it's going to keep getting a little worse, and then a little worse, and then a little worse, people won't buy houses and skittish lenders with already low loss reserves won't lend.

In other words, there's a paralysis as long as entities conserve cash waiting for the other shoe to drop again and again and again -- constantly expecting another shoe to drop. I believe that to really free up the seized market, participants -- home buyers, businesses, lenders, savers -- need to believe that all the shoes (or at least the vast majority of them) have dropped.

 

[brewer12345]

There are plenty of banks that are running business as usual. Main Street businesses may have to switch banks, but I don't think that they are going to be unable to get credit at all, as long as they have very solid credit and collateral.

That isn't the problem. Sure, there are some banks still plodding along as they always have. But those banks have to comply with regulatory capital ratio requirements so they cannot endlessly expand their balance sheets to accomodate all the demand that is out there for credit. Where is all this demand coming from? Partially from the banks that are hurting and frantically trying to shrink their balance sheets. But a lot of this demand is from the sudden withdrawal of capital market funded lenders that generaly are/were not banks ("shadow banking system"). Like it or not, the shadow banking system provided a huge amount of credit and now it is gone. The remaining healthy banks cannot replace all that supply on their own, at least not without large capital infusions. The capital infusions would be OK, except nobody wants to give banks capital any more, especially smaller institutions that might give a rat's patoot about Main Street businesses.

But I think you have already made up your mind, so this is probably a waste of my time.

 

[brewer12345]

Ok, but WaMu's been among the walking dead for months. There wasn't the kind of panicked withdrawls like before the Depression. And everyone is going to get their money.

I would be in favor of lifting the limits on FDIC insurance, though. The 100k limit seems a little archaic. I wonder how much of the 16.7 billion was in deposits over FDIC limits?

Wanna bet there is a slow mo run going on right now on institutions that have been in the news? I am talking about banks that might well make it if left alone, but vulnerable to deposits running. How many of those can the FDIC absorb or find a willing partner for?

 

[Hamlet]

I didn't say that this is going to be pleasant. You can't allocate capital this badly on this large a scale and not have horrible repercussions.

I just think that comparing to the Great Depression before we've even officially gone into recession (not that I doubt we will) is a little pre-mature.

The housing market will recover once we stop trying to prop up housing prices. When price fall to the point that it is cheaper to buy than rent, then the market will recover. All this stimulus/bailout stuff is just going to make it take longer.

The problem is that it becomes a snowball rolling downhill.

A few banks tighten up their credit lines and a few businesses go under. A few creditors get stiffed.

In response, banks tighten a little bit more, and in turn that takes out a few more businesses. A few more creditors get stiffed.

Rinse, lather, repeat.

I believe it is this slow water torture -- drip, drip, drip -- which is constipating the credit market and, in fact, the housing market. As long as the belief persists that it's going to keep getting a little worse, and then a little worse, and then a little worse, people won't buy houses and skittish lenders with already low loss reserves won't lend.

In other words, there's a paralysis as long as entities conserve cash waiting for the other shoe to drop again and again and again. I believe that to really free up the seized market, participants -- home buyers, businesses, lenders, savers -- need to believe that all the shoes (or at least the vast majority of them) have dropped.

 

[OAG]

So is this "program" going to solve the problem? I wonder, since none of the major players I have said it will. At best it might, but also may just prolong the agony.

 

[audreyh1]

Sure, but I'm not entirely convinced that this "credit freeze" is going to impact businesses in that way to a large degree.

There are plenty of banks that are running business as usual. Main Street businesses may have to switch banks, but I don't think that they are going to be unable to get credit at all, as long as they have very solid credit and collateral.

If they don't, they probably shouldn't have been getting money in the first place.

I suppose that's the disagreement at this point. How badly might the credit freeze impact corporate america and could it snowball.

How bad will credit be to get. It might be very difficult to get, no matter how "solid" a company. How does one compel a lender to lend? Companies are already having problems. Credit is the engine oil of the US economy. I didn't say easy credit, just regular business-as-usual credit.

So only the companies that have a lot of cash on their balance sheet right now should survive? Boy - that sure will cause companies to pull back and rein in quickly! Layoffs, canceling plans, new orders, etc. It's so easy to see how this stuff could snowball, taking down the "good" guys along with the bad apples.

Audrey

 

[Hamlet]

Hey, I'm just trying to exchange ideas.

You're right that the good banks can't endlessly expand their balance sheets without access to capital, but they seem to have that access.

JPMorgan looks like it will get $10 billion no problem. Goldman Sachs just got $10 billion (5 from Buffet, 5 from elsewhere), and will probably get 5 billion more from Buffett's warrants.

I'm pretty sure Wells Fargo and US Bank could get capital if they wanted it.

Two of my Reits just announce secondary offering (O and NNN). It seems like there is access to capital for companies that don't look too risky to the market.

I think there are things that the government can do to help--

1. Remove the 100k limit on FDIC insurance so that small business don't have to start worrying about their payrolls
2. Remove the new mark-to-market rules so that banks can treat these loans as held-to-maturity
3. Re-instate the uptick rule on short-selling overall, rather than this silly ban on financials

If they do try this Paulson plan, I hope it works as Buffett described it. He envisioned the government buying these assets cheap enough to make money.

I'm just having a hard time thinking of this as the 2nd Great Depression when the actual effects so far have been just a very, very mild recession.

That isn't the problem. Sure, there are some banks still plodding along as they always have. But those banks have to comply with regulatory capital ratio requirements so they cannot endlessly expand their balance sheets to accomodate all the demand that is out there for credit. Where is all this demand coming from? Partially from the banks that are hurting and frantically trying to shrink their balance sheets. But a lot of this demand is from the sudden withdrawal of capital market funded lenders that generaly are/were not banks ("shadow banking system"). Like it or not, the shadow banking system provided a huge amount of credit and now it is gone. The remaining healthy banks cannot replace all that supply on their own, at least not without large capital infusions. The capital infusions would be OK, except nobody wants to give banks capital any more, especially smaller institutions that might give a rat's patoot about Main Street businesses.

But I think you have already made up your mind, so this is probably a waste of my time.

 

[cute fuzzy bunny]

So is this "program" going to solve the problem? I wonder, since none of the major players I have said it will. At best it might, but also may just prolong the agony.

Nope. It doesnt fix the economy, it doesnt boost earnings, it doesnt do much for inflation, etc, etc, etc.

Its a fix for a very bad symptom. Maybe.

Goes back to what I said a few days ago about having a set of goals, a strategy and then tactics to bring that strategy to meet the goal.

We're just flailing away with tactics and hoping for the best.

And a bunch of people are going to walk away from mismanagement and deliberate wrongdoing with 7 and 8 figures.

 

[Gone4Good]

I suppose that's the disagreement at this point. How badly might the credit freeze impact corporate america and could it snowball.

Very badly. It's not just banks that are shutting down but the plain vanilla bond market is too. Even Coca-cola had a difficult time pricing a new bond deal yesterday. And the oil company Anadarko issued bonds at spreads typically reserved for junk credits. I don't think people fully appreciate what is happening in the world of credit . . . or how much the US economy relies on it . . . or how badly they will miss it when its gone.

 

[Hamlet]

Where can I go to get info on that stuff? I'd be interested in seeing the terms of the two deals you mentioned.

Very badly. It's not just banks that are shutting down but the plain vanilla bond market is too. Even Coca-cola had a difficult time pricing a new bond deal yesterday. And the oil company Anadarko issued bonds at spreads typically reserved for junk credits. I don't think people fully appreciate what is happening in the world of credit . . . or how much the US economy relies on it . . . or how badly they will miss it when its gone.

 

[Gone4Good]

Where can I go to get info on that stuff? I'd be interested in seeing the terms of the two deals you mentioned.

I'm guessing you don't have access to a Bloomberg terminal?

If the deal is SEC registered you'll eventually be able to find the prospectuses in an SEC filing at FreeEDGAR or some similar site.

 

[HFWR]

I have a hard time supporting anything called a "bail-out". I'm not sure that's an accurate term. Then again...

As for "rescuing" Main Street, I think a change of mindset is in order for both Main Street and Wall Street. We're getting a lesson in that now, but we have short memories.

The pool halls, the hustlers, and the losers, used to watch them through the glass
Well I'd stand outside at closing time, just to watch her [-]shake her ass[/-] walk on past...

Bob Seger, Main Street

 

[audreyh1]

How about "shielding" Main Street from the aftermath of credit destruction?

Audrey

 

[al_bundy]

Where can I go to get info on that stuff? I'd be interested in seeing the terms of the two deals you mentioned.

i learned not to rely on news from the traditional sources like yahoo or marketwatch that simply rewrite AP and reuters.

CNBC has become an excellent source and they have videos of interviews for free on the website an hour after air time. unlike the past where it was buy buy buy, they have some excellent stuff now. especially from charlie gasparino and andrew ross sorkin.

and i found a bunch of blogs that link to stuff that the mainstream media picks up on later on when it becomes a big problem

 

[jIMOh]

Brewer, so far most of this "purging" has had very little negative impact on Main Street. I'm not certain that letting things run their course will be disasterous.

People will still trust banks, since for the most part their failures are not going to affect depositors. WaMu's demise appears to have been seamless.

Credit has become harder to get, but that is probably a good thing long term. Credit can be a dangerous tool. Many people may be better off with it not being available.

Credit is still available to people who are solid risks. I'm pretty sure that I could walk into US Bank, or Wells Fargo and get all of the money that it would be prudent for them to lend to me.

I think that the people in banking see this as a much bigger problem than it is to the country as a whole.

Years ago I knew we were in a credit bubble. I didn't see the mortgage thing coming- just saw people spending more than they earn all around me- and knew that sooner or later it would come to a head.

I think Banks are greedy and find a way to make money, then they took on a little more risk (by extending more credit) to make a little more money. Then the banks decided to take on even more risk (by extending credit even more) to make incrementally more money.

You keep overextending yourself and you will forget where your foundation is. Banks should not be able to invest in "anything they want" or do "what they want" to make a little extra money.

If I as an investor want to make money, I know I can make ~3% investing in CDs. If I take on a little more risk, I can make ~5% investing in bonds. If I take on significantly more risk I can make 8-9% investing in equities. If I extend myself beyond that most of us here would call that speculation or gambling. Somehow our system allowed banks and lenders to extend themselves to try and make more money than they could reasonably earn and grow...

I know banks have a margin requirement, but the fact mortgages were issued when people could not repay them suggests too much risk was taken in the name of a higher profit margin. There needs to be better rules in place for the banks to operate within.

just wow on my part- we get to bail the banks out, yet when individuals do the same thing we just tell them to work longer and keep paying taxes.

 

[Independent]

I suspect it's not being spelled out for Joe Blow.

If Joe's employer is a capital-intensive business that relies on borrowed money to flourish, turning off the spigot of credit puts Joe out of a job.

If Joe has a 401K or IRA, he can look forward to watching his retirement feel farther and farther away as it shrivels in value.

If Joe has a pension, he can watch as his pension fund crashes in value, threatening its solvency -- and perhaps that of his previous employer.

If Joe is retired and on Social Security, he can worry about how a collapsing economy and massive job losses will allow SS to continue taking in enough payroll taxes to pay benefits.

All those things could happen. The question is whether they will happen suddenly if we don't pass this particular bill this week (and that this bill will be all it takes to head them off.)

Take the first item. There's a wide range of borrowing strategies among US employers. Some don't borrow at all. Others are constantly in fear that their bank won't renew their loans.

It seems to me that a "credit crunch" should hit the heavy borrowers first. We should be hearing today about companies with fine sales and healthy profit histories who have to lay off workers simply because they can't get loans renewed. This should be happening months, even a year, before the "average" companies are impacted. When those stories add up, and someone with credibility can show that we've got a million unemployed (less than 1% of the labor force) just because their healthy employers can't get loans, then Joe Sixpack will conclude that his job is at risk due to credit problems.

Right now, it's difficult to convince skeptics like me that we (everyone except the financial companies) are about to walk off a cliff.

 

[Independent]

Since the major risk right now is the seizing up of the credit markets with banks not willing to lend resulting in businesses not able to finance their operations.....

Why not have the Govt open a temporary line of short term credit to companies so they can continue to finance their operations. Just bypass the private financial system entirely while it self-destructs and/or is hoarding cash and unwilling to lend. It's probably easier to monitor the credit worthiness of business balance sheets than all the bizarre complex instruments used to package mortgage securities etc.

I see that this idea has taken some flak. I'd like to modify it a little, based on that input.

Suppose the banks that have been supplying mainstreet credit say "We've got good customers who have been getting loans from us in the past, who won't get loans this year because we simply don't have the lending room." If there are a significant number of them, the gov't offers to make the loans instead, with the bank acting as a servicing agent. The bank certifies that these borrowers have borrowed these amounts in the past, and the bank has no reason to believe the borrowers have suddenly become poor risks. With those assurances, the bank pays the money out, collects the interest/principal on the loans, adds up the ins and outs, and settles up with the gov't periodically. The gov't is on the hook for some of the banks poorer risks (the bank is probably keeping the best on its own books), but the gov't charges a "market" interest rate, and the bank doesn't charge for the processing.

The bank gets to keep the relationships with past, decent borrowers. When credit frees up, they take the loans back. The borrowers get the credit today, the banking system survives, the gov't isn't "bailing out the rich bankers".

 

[audreyh1]

Yep - a very reasonable modification. I don't have a problem with the first line bank being a pass through for govt credit as long as they are compelled to lend. I don't like the banks standing in the way and being able to hoard cash to the detriment of main street businesses with good credit ratings.

Um - I'm sure the bank can't do anything for free - there has to be some fee.

Audrey