Capitol Hill Blue Forums Political Issues Finance, the economy & Economics Banks in trouble?

itstarted,
I am deeply concerned by this development, and also the method by which it was accomplished. Fed Invokes Little-Used Authority to Aid Bear Stearns And how was that "good news" received? Uh oh,....

NWP... yes... exactly

...and to take it a little further from your quoted article...

... and while it should self evident, this is the problem:

First, the brokers or banks have to make public their financial statements. This means that they must total their assets and liabilities. In the assets column is what they hold, and what they are owed, and that's the part that is causing the uncertainty in the markets. The dollar amount assumes that the banker/broker actually considers these amounts to be real, and based on values that are updated to be current. This current valuation is called "marking to market"... and means that the amounts claimed are the best estimate of the current value.

That's the part that isn't happening... "Marking to Market". If the asset is correctly rated, it means that it should be redeemable at that amount.

Because of the slicing and dicing and hedging and derivatives and credit swaps that are included in the "assets" there is no way to estimate the actual value... and depending on who you listen to, the current redemption value of the questionable assets is estmated by some sources to be anywhere from 50% to 80% and possibly even less.

Now, as long as the bank doesn't properly "mark to market", and if the investors consider the assets to be as stated, there is no problem.

The problem arises when investors don't trust the stated assets. Afraid of not getting their money back, they try to "cash out" before the firm declares bankruptcy. This is the "RUN" on the banks.
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Yeah... that's pretty self evident, right? As the article states:


Well that's it! Almost every CEO who has been questioned, stated that their asset position was safe, and they were not involved in the liquidity crisis. Now it appears that nearly every firm that was "in question"... is having more exposure than originally stated.

Now, here's one more problem that no one has yet spoken about... and that's the fact that the actual liquid assets that the firms are required to hold, has been reduced fivefold in the past ten years. The actual cash (liquid assets) on hand, is very, very small, considering the liability (the amount that depositors or debtors can legally expect to receive on demand).

Now that's so simple that it sholdn't require explanation... but that's exactly what the problem is. No cash on hand to pay debts. Theoretically, the bank or broker should be able to just sell of some of their holdings to pay these debts.

It took about 20 minutes to bring down Bear Stearns. How long would it take to place Citigroup in jeopardy? How long to drain the few remaining liquid dollars from ETrade Bank? Who believes that Morgan Stanley, or Lehman Brothers could liquidate enough holdings to withstand a loss of confidence?
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So back to the point NWP makes... how far will the Fed go to stabilize a market that may very well be beyond saving. How far will the government go to stretch or reinterpret the law to save the bankers at the full cost to the taxpayers?

A clue to the future should come during the next two weeks, because there are already 6 or 7 medium sized hedge funds with negative balance sheets that should mean bankruptcy, without a very substantial rescue, or merger.

It looks as if the five major banks may not be prepared to resolve these initial "failures". It remains to be seen if sovereign funds will enter into this risk pool.
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The problem for you and me, is that the Fed may very well use our taxes/natrional debt to bail out the banks. In effect, by bailing out Bear Stearns the Fed is paying the Bear Stearns investors for debt that is likely to be worth only a small percent of the stated value.

As to blame? My own feeling is that Congress is complicit through it's easing of protections, and lack of oversight of the actions of the SEC. Many of the problems began during the last two years of the Clinton Administration, but the past seven years of negligence falls on both parties.

Here's another opinion as to "BLAME".

The Villain?

Everything you say I agree with, Itstarted, and it scares the bejesus outtame. Bear Sterns has assets "valued" at $400 Billion - about the same as our annual deficit. The problem, as I have complained about numerous times, is that our "economy" has been entirely skewed to protect "investors" and hang everyone else - labor, taxpayers, consumers - out to dry. Now that these investors are at risk, they are getting bailed out - again - by the government which means that once again you and I will bear the brunt of the costs of "other peoples' risk." So to save: Bear Stearns - Wikipedia
We're going to pick up the tab. Again, the government gives an advantage to billionaires at the expense of the workers. I'm f'n tired of it. Of course, we're screwed either way, because our pension accounts are tied up in these investments as well. What a bunch of incompetents. Greedy incompetents.

...from itstarted's link:

'Rushing through an ill-prepared intervention' is straight out of The Shock Doctrine by Naomi Klein.

I know there will be other threads on the current market upset, but I'd like to keep the sequence on this thread.

Today in the 16th... and by tomorrow, my thinking may change, but it looks as if we may be on the verge of a very big sea change in the global market.

The thing that was so unthinkable may very well be here... a total market meltdown. Since nobody has been right yet, perhaps this is premature, but the nervousness in the international markets looks to be ready to cause a run on Brokerages.

Here's an interim report, that may or may not be valid.

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/17/ccbear117.xml

The part that's scary , is that there seems to have been more of a cash position in Bear Stearns than what I or others may have thought. If this is the case, and other brokerages have been under the gun with investors turning to a cash position as well, then investors could be on a crash program to get out with whatever cash they can.

No one wants to be left out.

At this time...11PM Sun ET... the Asian markets are already down about 6%.

The Fed has dropped the rate .25% for liquid loans (Discount rate t0 other than banks), and it looks as if this isn't making a dent.

Also...Carlysle is being liquidated.

The Fed has Panicked!

stay tuned...

Guess it's time for another chat with my bank. Being as illiterate as I am about the workings of big financial markets as a whole, this sort of thing scares the bejeebers out of me.

I don't have a lot of money, but I'd like to make sure I keep what I do have

Is this a matter of what goes up must come down? Aren't hedge funds by their very inception high risk? And why the heck do 'we' have to keep bailing out the very wealthy and their high risk ventures?

Or is my lack of understanding making my questions sound incredibly stupid?

just moved EVERYTHING into cash, after listening to GWB.


(I did this for the good of the country, as whatever I do, it's always the wrong thing.)

I'd like to add another point about the why..
Why no one trusts the banks' estimate of how liquid it really is.

It has to do with "Mark to market"

Very simply it is the question as to whether the bank should tell the public about it's worth.

Simple?... no!

As of last November, because of the problems with sub-prime loans didn't have the value that was on the books, the law FAS157 was enacted.

This required that banks make visible on their asset sheets, the estimated value of the assets that they claim.

Becuase this is not as somple as it seems, the requirement is to classify the assets (loans) in one of three ways.

#1. Actual current and measurable values.
#2. Value according to similar and comparable assets.
#3. Where value is not obvious, it must be assessed according to an estimate backed by an actual current review of the loan.

Banks don't like this because they have been piling huge $$$ in loans into the third category, and estimating the value, based on marking to models, or marking to history.

In effect, this third category gave the banks carte blanche to value loans any way they wished, without having to provide proof to an auditor... (or shareholders).

It is because of #3 that there is such illiquidity in the market.
The banks have kited that figure as being valid and collectible loans. As long as everyone agreed there was no problem.

When it became apparent that the only way to restore trust in the banking system, pressure is on to make the banks divulge the calculated value of their clamied assets. The Banks do not want to do this. They want to be allowed to use historical data (IMHO cowdung).

The banks claim that if they have to do an actual mark to market, it will bring down the financial system.

In other words, they claim that if they are just allowed to lie, then the global markets will be ok.

The problem is... until investors believe in what the banks say... the liquidity will be frozen.

Watch for more on this. Especially watch to see WHO wants to go along with the LIES. A good chance to pick out the crooked Congressmen.

This is just an opinion... Opinions to the contrary are welcome... I'd really like to be convinced that I'm wrong.

More here:
Mark to Market FAS157

Wow, that is scary stuff, Itstarted. Fascinating information. I only wish I was reading it about some other country's banks.

Another reason your post is interesting is that I listen to the BBC World Service on and off almost everyday. Today they talked about the U.S. economic situation and Bear Stearns and interviewed a number of authorities, experts and opposing views. For the first time ever that I can recall experts and learned people are saying "recession or worse" or "deep recession or worse". OR WORSE! Yikes! "Or worse" in my limited economic vocabulary means - depression.

Further, the disagreement among experts interviewed seemed to concern what to do about the situation; throw money in or not, bail banks out or not and why. No one seemed to disagree that "deep recession or worse" was incorrect. Holy smokes!

Its no less depressing Mick