Yearning to Learn writes:
I have a very basic finance question:

why is that BAC can take over Countrywide, but ONLY take the parts it wants (and not back the rest), when AMBAC wasn't allowed to split into two (the CDS insurance side and the muni side)?

and also: why don't companies do this more often? simply load up all their bad stuff into one new entity and spin it off.

I know there is an obvious reason for this, but I didn't sleep much last night.

TIA.
Yearning to Learn | 05.03.08 - 4:03 pm | #

sdtfs writes:
Gotta remember, a lot more damage because of the storm surge as it drags twelve feet of water inland.
sdtfs | 05.03.08 - 4:03 pm | #

ac writes:

The people I work with are literally becoming giddy. Somebody told me yesterday "everything is OK because corporate profits are strong".

Lots of people own Apple stock.

It's interesting to see the psychological waves.

It's distressing though that the number on the board is the only thing most people look at and you can't really do anything to get them to stop.

Mind Control 101

ac | 05.03.08 - 4:07 pm | #

mort_fin writes:
I'm in wild guess world wrt Countrywide/BAC, but reading the discussion on naked capitalism it looks like there is Countrywide the Finance Company, Countrywide the savings bank (thrift), and Countrywide, the holding company that owns both of them. It seems to be the case that BAC is somehow splitting up the two operating Countrywides and leaving the finance company out in the cold. So the Home Loan Banks and FDIC are safe, but anyone who's on the hook to the Finance company could be hosed. Or it could all be posturing to get the Fed to give them goodies, now that there is a precedent.
mort_fin | 05.03.08 - 4:10 pm | #

Tim writes:
You know in the eye of the hurricane its vary quiet and peaceful. Until Bam!
Tim | 05.03.08 - 4:10 pm | #

NC Jim writes:
I keep reading about how falling house prices are a problem whereas ,in my mind, falling prices are the solution not the problem. Until homes become affordable at current income levels without financial engineering then the market wil not clear. The Fed seems to be trying to hold up prices so as to protect the value of securities in the banking system but this strategy (however understandable) will ,IMO, fail because buyers are not there at current prices. This is the Japanese "zombie" model which will just drag the problem out for years.

When the median household can make the mortgage payment (30 year conventional loan) on the median home with one week's take-home pay, the crisis will be over. Not until.

Jim
NC Jim | 05.03.08 - 4:14 pm | #

iceman writes:
I've been watching the CA option arm thrifts like Downey Financial and FirstFed closely. Throughout last year, even as their fundamentals deteriorated severely and it was clear that CA real estate prices were beginning to collapse, their shares held up relatively well - as recently as early Feb 2008 there had been relatively minor capitulation given the dire straits of these banks. Needless to say, in the last three months, reality has set in hard and - despite the overall sharp rally in the financials - the stocks have caught up to the fundamentals (i.e. fallen 60% in 3 months).

What should be worrisome is that some of the largest banks in this country, such as Wachovia, WaMu, and Wells Fargo (add BoA if it swallows Countrywide whole), have a huge portion of their portfolio that resembles Downey and FirstFed writ large (exotic loans - often option ARMs - and a lack of diversification from the epicenters of the housing bubble - CA, AZ, NV, FL).
iceman | 05.03.08 - 4:14 pm | #

lendingmaestro writes:
DOW over 13K....It's all priced in.
lendingmaestro | 05.03.08 - 4:15 pm | #

Calculated Risk writes:
Yearning to Learn, I'm curious too. There are all kinds of ways to structure an acqusition (mostly because for tax reasons), but the general rule is the bondholders get paid before any equity is paid out.

So I don't know how BofA is going to do this. If they set up two companies and split the assets (debt into one, the good stuff - like servicing into the other) and then let get bad company go BK - that sounds to me like full employment for class action lawyers!

I think mort_fin's idea is likely - they are trying to get the Fed to sweeten the deal. Remember the CEO of Wells Fargo's comment after Bear Stearns:

"I would not be averse to a Fed-assisted transaction. Fixer-uppers don't bother us."

Pigs at the public trough!

Best Wishes.
Calculated Risk | Homepage | 05.03.08 - 4:16 pm | #

Anonymous writes:
AC writes

"It's interesting to see the psychological waves."

I think this is the crux of the matter. psychological cycles are a fact of life with individuals and herds, and it is these that cause these delusional wings in sentiment, even in the face of the elephant in the room.
Anonymous | 05.03.08 - 4:19 pm | #

bailey writes:
'02 prices for sure CR, it's GOT to them. The problem we face is, what then?
bailey | 05.03.08 - 4:20 pm | #

bond guy writes:
"Yearning to Learn writes:
I have a very basic finance question:

why is that BAC can take over Countrywide, but ONLY take the parts it wants (and not back the rest), when AMBAC wasn't allowed to split into two (the CDS insurance side and the muni side)?

and also: why don't companies do this more often? simply load up all their bad stuff into one new entity and spin it off."

The basic finance answer is that they still haven't done it, and it's unclear that they can get away with anything.

It's not as if BAC will be truly "splitting" the various arms of Countrywide. Any decent-sized corporation consists of thousands of individual corporate entities; it's just that they only publish consolidated statements of the parent.

The original bond debt covenants are between corporate entities at verious levels of the corporate tree. The change of ownership of the parent does not impact them. Thus, CFC would have been able to attempt exactly whatever plans BAC is alleged to be thinking of. Obviously, bond debt covenants prevent simple asset stripping maneuvers.

If BAC attempts to move assets before a bankruptcy occurs, the actions will be challenged. They could win the case (bond holders are unsecured and have less legal rights than a bank lender), but it's dangerous. Especially since BAC will be facing in court the very same people that BAC will try floating debt issues to.

If the takeover goes ahead, much would depend upon cross-default language in CFC and BAC paper. They would making a big gamble. Even if it works, it may be like Bear Stearn's "victory" in avoiding bailing out LTCM in 1998. In that case, other parties got their revenge, served cold, in 2008.
bond guy | 05.03.08 - 4:23 pm | #

mp writes:
"I would not be averse to a Fed-assisted transaction. Fixer-uppers don't bother us."

Clearly, it's time for the Fed to step in and provide some guidance, which was the point I was trying to make on the previous thread.

They can minimize the moral hazard created by their new modus operandi if they do something now, rather than wait for the next fiasco.
mp | 05.03.08 - 4:26 pm | #

bond guy writes:
"I would not be averse to a Fed-assisted transaction. Fixer-uppers don't bother us."

The Fed really had no authority to deal with Bear directly; that's why it had to be done via JPM.

The regulators have much more pull with regards to Countrywide (it has a bank subsidiary), and it is not enmeshed in counter-party risk like Bear.

The Fed has a lot more ability to deal with Countrywide through standard channels. They should be able to face down BAC (whether they will - I don't know).
bond guy | 05.03.08 - 4:31 pm | #

ac writes:

"I would not be averse to a Fed-assisted transaction. Fixer-uppers don't bother us."

"We simply can't afford to lose the institutions that are critical to providing the failure and incompetence that makes this economy what it is."

ac | 05.03.08 - 4:33 pm | #

Sebastian writes:
"We can only speculate how deep and how long the recession in the United States will really be and how that in turn will impact banks," [JPMorgan Chase & Co CEO] James Dimon told "Welt am Sonntag".

"But we are not done with the crisis for a long time," Dimon said ...

More Excel recession research.:)

Looking at the last 10 recessions, when there was even a single occurrence of real GDP going negative on a quarter-over-quarter basis (since I've gotten so much trash over my use of year-over-year calcs, I thought I'd mix it up) it has *led* a recession by 1 to 3 quarters.

In one instance, it was a timely recession indicator (it came at the beginning of a recession).

Bottom line: If we get even a single quarter of negative real GDP, we're looking at a 70% probability of recession occurring within 3 quarters.

So since we still haven't even had a single quarter of negative real GDP, add Dimon's name to the list of recession predictors who have the odds going against them.


Sebastian
Sebastian | 05.03.08 - 4:36 pm | #

Terry writes:
Bond Guy said: "The Fed has a lot more ability to deal with Countrywide through standard channels. They should be able to face down BAC (whether they will - I don't know)."

But what practical options do they really have? It looks as though BofA might be setting up a game of 'chicken'. Two too-Big-to-Fail entities against the Fed. And the Fed didn't (in my estimation) exhibit any spine in the last game.

It will be interesting to watch this one unfold.
Terry | 05.03.08 - 4:42 pm | #

Nova writes:
I was talking to a women who processes concealed carry permits at my local courthouse. She told me that applications for CC permits took off like a rocket since the start of the year. They are processing 30+ a day.

This is a county were median income is 103K a year(approx). The police have a 2 min response time for 911 usually. Violent crime is minimal. So why I asked are they up?

Because people increasingly believe we are living in the eye of the storm. That societal breakdown is dead ahead (Scaggs). That soon there will be blood in the streets. We are not bitter here tho...
Nova | 05.03.08 - 4:44 pm | #

bond guy writes:
"But what practical options do they really have? It looks as though BofA might be setting up a game of 'chicken'. "

BAC is too big to fail, but CFC? They have a humongous mortgage servicing portfolio, but beyond that, they didn't have the toxic counterparty risk of Bear. Tanta may have discussed what happens to the mortgage servicing arm in bankruptcy, but it strikes me that it could be sold for $1 (or whatever) to someone else. The banking arm would be dealt with by the FDIC; standard procedure. (I assume; not my area of expertise.)
bond guy | 05.03.08 - 4:46 pm | #

Tranchefoot writes:
Pigs at the public trough!

What do you mean, CR, because ipodius has repeatedly said there hasn't been a bailout.

Contingent liabilities aren't liabilities!

:)
Tranchefoot | 05.03.08 - 4:46 pm | #

bond guy writes:
"So since we still haven't even had a single quarter of negative real GDP, add Dimon's name to the list of recession predictors who have the odds going against them."

I realize that Sebastien is a troll, but I will repeat - they don't use real GDP to define recessions. Current numbers will be revised completely over the next few years.

The current "growth" relies on weaknesses in the definition of the GDP deflator (higher import prices -> lower deflator) and _assumed_ growth of service consumption (and inventories). If those assumptions are changed - voila - negative GDP. All that's needed is a 0.2% change to levels move the 0.6% _annualized_ rate to negative.
bond guy | 05.03.08 - 4:51 pm | #

ac writes:

Clearly, it's time for the Fed to step in and provide some guidance, which was the point I was trying to make on the previous thread.

They can minimize the moral hazard created by their new modus operandi if they do something now, rather than wait for the next fiasco.

And the point I was trying to make in the previous thread is that while this may be a great idea, in practice it may not be possible to isolate the Fed from the effects of personal motives and special interests such that a beneficial modus operandi is possible.

If this is the case (I believe that the all the bubbles we've had in the past decade suggest that it is) then the Fed is simply going to be the source of the next fiasco, not the remedy for it.

ac | 05.03.08 - 4:52 pm | #

Sebastian writes:
bond guy said: "I realize that Sebastien is a troll, but I will repeat - they don't use real GDP to define recessions. Current numbers will be revised completely over the next few years."

And only down, right?

Until you've been referred to repeatedly as a moron, you don't even know what a troll is.:)


Sebastian
Sebastian | 05.03.08 - 4:55 pm | #

bond guy writes:
"Sebastian writes:
bond guy said: "I realize that Sebastien is a troll, but I will repeat - they don't use real GDP to define recessions. Current numbers will be revised completely over the next few years."

And only down, right?"

Under the assumption of a recession, service consumption will fall. So yes, the revisions will be one way.

Therefore, the preliminary GDP report is meaningless. If we're in recession, growth will be revised to negative. If not, it will revised up.

In other words, the preliminary GDP report and $4 will get you a latte at Starbucks.
bond guy | 05.03.08 - 5:03 pm | #

Anonymous writes:
"Because people increasingly believe we are living in the eye of the storm. That societal breakdown is dead ahead (Scaggs). That soon there will be blood in the streets. We are not bitter here tho..."

It's always something, one thing or another, a short respite before the kneejerk reaction masquerading as wisdom...
Anonymous | 05.03.08 - 5:05 pm | #

Steve writes:
RE: S&P's Friday downgrade of Countrywide after BoA's S-4 bombshell. This is from Countrywide's 10-Q (as of 9/07):

`` Our ability to place custodial deposit accounts on deposit with our bank subsidiary could be affected if our credit ratings were reduced below investment grade. As of September 30, 2007, up to $5.5 billion of our custodial deposits may be subject to placement with another bank if our credit ratings were reduced below investment grade. We also expect that a reduction in our ratings below investment grade would have a negative effect on our ability to retain our commercial deposits. In addition, our broker-dealer may experience difficulty in conducting its trading operations if its parent is unable to maintain its investment grade credit ratings.''
Steve | 05.03.08 - 5:06 pm | #

David Pearson writes:
The Fed will tell BofA, "don't try to force a Bear Stearns-style bailout."

BofA will simply reply that they can easily walk away and leave the baby on the Fed's doorstep. In exchange for following through with the deal, they'll ask the Fed to take on $30b of the worst (AAA-rated, of course!) CFC paper.

The Fed will threaten all manner of things, but the reality is that they cannot force BofA to consummate a deal that is not in their interest.

So what's the endgame? BofA wins of course. The Fed can't afford to have its hard-won victory over credit spreads dashed by a CFC bankruptcy.

The only question is, will the Treasuries market survive another Fed moral hazard operation? At some point yields may give way, in which case the consumer will be faced with $4 gas and 7% mortgage rates: a double whammy from which they will not recover.
David Pearson | 05.03.08 - 5:12 pm | #

tj & the bear writes:
...the evidence for spillover effects...

The spillover effects were inevitable -- things simply don't happen in a vacuum.

Given that the economy was already a drought-ravaged, bark-beetle infested forest, it didn't take but a spark to start a wildfire... instead we got a napalm drop.

p.s.: BTW, you notice how Sebastian showing up is a fairly good sign of a new intermediate market top?
tj & the bear | 05.03.08 - 5:16 pm | #

tj & the bear writes:
David,

Lots of people are expecting a monster bond crisis within the next month or so.
tj & the bear | 05.03.08 - 5:17 pm | #

RayOnTheFarm writes:
We are now 1/3 of the way thru 2008. So far, we've only seen 2 bank failures (as per the FDIC press releases). NetBank was a 2007 bank failure.

Either the Fed's TAF is having the intended results, or the water is rising fast behind the levy (as more and more sandbags are piled on).
RayOnTheFarm | 05.03.08 - 5:17 pm | #

will rahal writes:
I have shown that the Business Equipment component of Industrial Production is about to deteriorate.

Commercial & Industrial Loans have skyrocketed even faster than consumer debt.
As Business follows the consumer in this slowdown, C&I Loans will also prove problematic. See
http://wrahal.blogspot.com/2008/...w- consumer.html
will rahal | Homepage | 05.03.08 - 5:18 pm | #

bond guy writes:
"David Pearson writes:
So what's the endgame? BofA wins of course. The Fed can't afford to have its hard-won victory over credit spreads dashed by a CFC bankruptcy."

Point conceded; but there's nothing stopping the Fed from handing CFC to a competitor for $1. Unlike the Bear situation, they have the authority to take CFC down.

"The only question is, will the Treasuries market survive another Fed moral hazard operation? At some point yields may give way..."

A $30 bn operation represents two weeks of Chinese Treasury accumulation. It's a rounding error in terms of the overall capital markets.

The risk to yields is that Sebastian is right. Treasurys were up 10 bps across the board in response to the Payrolls Report. If there is no recession, there's gonna be some pain in Treasury-land.
bond guy | 05.03.08 - 5:22 pm | #

Average Joe writes:
Hey all,

Just got back from a Disney Cruise...No recession on that ship for sure. Grand Caymen's money is worth more than ours by the way.


Anyway, in my neck of the woods forclosures are starting to move (So Cal). The first few houses that had been empty for months to over a year are now occuppied. While this may be good news for those of you who care about Volume of sales, it brings with it a realization of lower prices. Everyone who isn't a short sale or bank owned has withdrawn from the sales market. Very few open houses today. I used to see dead lawns only in houses that had for-sale signs in the yard for months. Now I see empty houses popping up where no stress had appeared before. They never even tried to sell.
It used to be just the very far east portion of the City that was largely under water (new built), but now as the prices drop the neighborhoods upsidedown slowly creep west into the older and older neighborhoods. Now those owners who bought newbuilt in 2002, and 03 are largely stuck since many have taken out money and prices are close enough to those years that the realtor fees would eat up any profits.

As for the stock market. I agree its in the eye of the storm. When I envisioned how this would all play out years ago, I never saw the dramatic damage in the financial sector. I pictured the damage due to the consumer who couldn't tap the ATM. I thought banks would bust but that it wouldn't affect, Costco, APPL, or RIMM etc. Only the consumer should affect those since they have cash. I pictured a long flat poorly performing market. Frankly that would do much more damage to long term investors. At least with a rapid deep drop in stock prices you get to make money on the rebound. Like I said....Nasdaq 5000 to Nasdaq 2500 was only palpable since it went through 1700. Imagine the damage to Average Joe's portfolio if he's never given the chance to buy any cheap stocks. Imagine Dow 13000 for years with a slow drift to 11000. It would kill any dollar-cost-averaging strategy and be subtle enough to boil maximum frogs. All you bears who want to beat the market should pray for flat stock prices held up for as long as possible. If we had gone from Dow 14000 last summer to today's 13000 in a straight downward line, never dipping below 13000 there be nobody who made money buying stocks over the last year. Dow 11700 seemed like bad news but was really a blessing for bulls in disquise. Now they have the huge returns over the last two months to brag about and give them hope. While there will no doubt blow-ups to come, ironically the bulls will fight stock price drops with hopefull talk and optimism, fighting tooth and nail to prevent the only event that will give them any longterm credibility.
Average Joe | 05.03.08 - 5:23 pm | #

Elvis writes:
"Anyway, in my neck of the woods forclosures are starting to move (So Cal). The first few houses that had been empty for months to over a year are now occuppied. "

By bandos, now doubt, planning clambakes.
Elvis | 05.03.08 - 5:28 pm | #

unirealist writes:
Leaving out shrinking gov't revenue. That's where the deadliest ax will fall. Half the jobs in this country are directly or indirectly gov't jobs.

And we can't expect a WPA to come to the rescue of the labor force, because we would have to borrow the funds for it from the Arabs and BRIC, who will have their own problems to deal with.
unirealist | 05.03.08 - 5:33 pm | #

km4 writes:
You have 7 years to learn Mandarin
http://money.cnn.com/2008/04/29/...hinese.fortune/

(Fortune Magazine) -- Back in 2001 when the International Olympic Committee chose Beijing as the site of this summer's games, the event was meant to mark China's debut as a player on the global economic stage. But a recent study by the economist Angus Maddison projects that China will become the world's dominant economic superpower much sooner than expected - not in 2050, but in 2015.
km4 | 05.03.08 - 5:37 pm | #

El Cliffo writes:
It was about 20 years ago that authors and pundits were predicting that Japan would become the world's dominant economic superpower. What happened with that?
El Cliffo | 05.03.08 - 5:52 pm | #

Ethan writes:
km4:
I think you're on to something here. When I was growing up during and right after WW II, none of us kids wanted those cheap shit toys from occupied Japan. How rapidly things changed in the next few years -- Sony, Honda, Yamaha, Komatsu, and their local cousins ALL outdid the rest of the world.
Now China has more brilliant students than the USA has students.
My old home town in Ohio was once a great place to work -- steel foundry, heavy equipment manufacturer, refiner, electric motor manufacturer, ordinance depot, locomotive manufacturer etc., etc. Now the two biggest employers are the two hospitals and the third biggest employer is the Ohio State University branch.
Personally, I think the US needs more mechanical, electrical, civil, aeronautical, marine, automotive, computer, nano, solar, petroleum, nuclear, mining, you name it engineers, and fewer MBAs.
Otherwise we're gonna get trounced.
Ethan | 05.03.08 - 6:02 pm | #

Ethan writes:
El Cliffo:
Financial engineering and debt IIRC.
Ethan | 05.03.08 - 6:04 pm | #

rich writes:
>"But we are not done with the crisis for a long time," Dimon said ...

This may be a polite corporate way of saying the U.S. economy is about to change permanently in not-so-pleasant ways.

Yes, there will be a cycle, a recession and a rebound. But then what? Maybe another, even deeper or longer recession shortly after. Maybe several.

The Wall Street epicenter financial world clearly has changed for a long time to come. Wall Street collectively is the Enron of this
fiasco.

Populism is coming. Taxes on the rich and corporations are going a lot higher. Peak oil is real. Parts of the exurbs will return to farmland.

FDIC will never be the same again, and PBGC will soon be broke.

Municipal bond insurance will never be the same again, and people will never again take for granted that most municipal bonds are as safe, with or without insurance.

The manufacturing base of the U.S. will continue to deteriorate, unless the government takes action to rebuild it.

The three core rustbelt states (MI, OH, and IN) will soon be on life support, as people move away to find work, escape crumbling govt. services and higher taxes.

Medicare and Medicaid will have to be replaced by universal health care, or governments everywhere will go broke.

The dollar will stop falling but it will never again be taken for granted as a rock solid currency.

Real estate will not soon be taken for granted as a sure-fire great investment.

After the Olympics, there will be a steady deterioration in U.S.-China relations and it will probably continue for the rest of your life.

People do live and learn. And people in the U.S. are going to have to work harder, produce more, save more money, pay more taxes, and stop spending so much.
rich | 05.03.08 - 6:05 pm | #

Outsider writes:
Rich - Do you have psychic powers?

Just wondering.
Outsider | 05.03.08 - 6:09 pm | #

tj & the bear writes:
Leaving out shrinking gov't revenue. That's where the deadliest ax will fall.

No doubt. Outside of the REIC, government has been the major source of jobs this century, and continues to account for the majority of new jobs created. That has to reverse soon, and in a big way.
tj & the bear | 05.03.08 - 6:28 pm | #

seriously writes:
'can haz ponies?' is the funniest thing i've seen in a long time... where did this come from, snl?
i walk around like a lunatic saying it all the time, lmao.
seriously | 05.03.08 - 6:47 pm | #

Cal writes:
OT: It is amazing to read how many people were really dependent on HELOC. You know consumption and remodeling is going to cliff dive when you read the following blog comments:

http://latimesblogs.latimes.com/...lowers- lim.html

http://www.queercents.com/2008/0...f-credit-heloc/

http://www.fatwallet.com/forums/...finance/811530/
Cal | 05.03.08 - 6:49 pm | #

Anonymous writes:
Ethan- "Otherwise we're gonna get trounced."

Sorry, but you must have missed the memo. We've already been trounced.
Anonymous | 05.03.08 - 6:51 pm | #

BIS Balloon writes:
People do live and learn. And people in the U.S. are going to have to work harder, produce more, save more money, pay more taxes, and stop spending so much.
rich


I'm was with you until the (pay more taxes) part. in an environment that oyu describe, mo taxes won't fly. And if they did , where are they flying to?
BIS Balloon | 05.03.08 - 6:51 pm | #

ipodius writes:
I honestly don't know how BAC could do this without having their shorts sued off, frankly. I've read all the relevant material and I have no idea what they are thinking...unless, as some posters posit, they are just doing a lot of chest-thumping. There are the entities under one holding company, but if BOA tried to stiff bondholders, as CR said, it would be payday for class-action attys.

As far as posting for the Fed goes, again, the Fed doesn't care about any stakeholders. It cares about the system. And as many have said, the bank entity can be taked over by the FDIC and sold off, the servicing unit could be sold to JPM for $1 (which is exactly what I would do to BAC if I were the Fed as a reward for the BSC cooperation) and the mortgage company liquidated BK. Again, there is nothing in any of those that the Fed would be as worried about as they were BSC. So I'm not getting BACs game. If I were Jamie, I'd start making noises about the servicing unit, because that's what's throwing off cash at this time...they only thing that is.

Contingent liabilities? I will stop saying that no bailout has occured when you can show me a Federal report that shows that collateral pledged was seized and did not meet the threshold. Until then, you're a lot of air and little else. Get over what the Fed did, because I guarantee you, they're going to do something like it as needed until the system is stable.
ipodius | 05.03.08 - 6:53 pm | #

mp writes:
Anonymous | 05.03.08 - 6:51 pm | #

Sorry, that was me.
mp | 05.03.08 - 6:53 pm | #

ipodius writes:
Sorry, that was me.

I got that memo...I think it was the one that started with smack!. And you are right about the Fed. At the first inkling that BAC was backing out, I'd start the process of taking down Countrywide. That would get rid of any "moral hazard" issues by showing BAC who their daddy really is. Then I'd audit the piss out of them.
ipodius | 05.03.08 - 6:57 pm | #

MLM writes:
I will stop saying that no bailout has occured when you can show me a Federal report that shows that collateral pledged was seized and did not meet the threshold.

Go to the kitchen, get out your roll of tinfoil, and make a hat. Put the hat on your head (I'll explain optional battery connections at a future date).

Seriously, you are old enough to know better than to trust the government even if they do give you a report. Instead they have given you their heartfelt assurances that things are fine. While increasing the TAF and expanding the collateral types for the TSLF.
MLM | Homepage | 05.03.08 - 7:06 pm | #

ipodius writes:
Go to the kitchen, get out your roll of tinfoil, and make a hat. Put the hat on your head (I'll explain optional battery connections at a future date).

I put a big feather in it, and it looks rather dashing, if I do say. Do I need the batteries? All I get is a faint humming...it sounds sort of like klaatu barada nikto...
ipodius | 05.03.08 - 7:10 pm | #

ipodius writes:
``The worry was that there would be contagion; it was a very real worry,'' Buffett said. ``If Bear Stearns had gone, the next day, somebody else would have gone. It could've been a very, very, very chaotic situation.''

I guess Warren is totally wrong about the Fed acting properly. But hey, what does he know anyhow, right? (snark snark)
ipodius | 05.03.08 - 7:16 pm | #

MLM writes:
That's weird, with mine I get the Blues Brothers soundtrack...
MLM | Homepage | 05.03.08 - 7:17 pm | #

bruce writes:
Re: Medicare and Medicaid will have to be replaced by universal health care, or governments everywhere will go broke.


Most every other industrialized country has government-run universal healthcare with much better outcomes for much less money.

The only thing preventing us from moving in that direction are healthcare lobbyists more concerned with profits than healthcare.

Some facts:

The US pays far more for health care than any other country in the world, at 15.3% of GDP (next highest is Switzerland at 11.6%, 30-country average is 8.9%) and at $6100 per person (next highest is Luxembourg at $5090 per person, the 30-country average is $2550)

The two major outcomes for measuring healthcare are infant mortality and life expectancy, and in both we fall well below the 30-country average. To quote:

"Most OECD countries have enjoyed large gains in life expectancy over the past 40 years. In the United States, life expectancy at birth increased by 7.6 years between 1960 and 2003, which is less than the increase of over 14 years in Japan, or 8.6 years in Canada. In 2004, life expectancy in the United States stood at 77.5 years, below the OECD average of 78.3 years. Japan, Iceland, Switzerland, Sweden and Australia were the 5 countries registering the highest life expectancy."

Infant mortality rates in the United States have fallen greatly over the past few decades, but not as much as in most other OECD countries. It stood at 6.9 deaths per 1000 live births in 2003, above the OECD average of 5.7. Among OECD countries, infant mortality is the lowest in Japan and in the Nordic countries (Iceland, Sweden, Norway and Finland), with rates all below 3.5 deaths per 1 000 live births.

In OECD countries with no observed waiting times for elective surgery – such as the United States, France, Switzerland, Japan, Belgium and Germany – all insured individuals enjoy timely access to care irrespective of whether their main form of coverage is public or private health insurance. These countries generally include insurance-based systems (public or private), where money follows the patient, specialists are paid fee-for-service rather than on the basis of salaries, and there are lower overall constraints on activity than occurs in health systems with tighter caps on activity and spending (Siciliani and Hurst, 2003).

What is the primary difference in our system and 28 of the 30 others? They all have single-payer, non-profit, government-run systems. Most also have additional private insurers for those that want and can afford them.

Sources:
http://www.oecd.org/dataoecd/29/...52/ 36960035.pdf

http://www.oecd.org/dataoecd/34/...56/ 33698043.pdf

Our healthcare system is focused on profits rather than actually helping sick people. Even the WSJ has figured that out, as a recent article showed:
http://online.wsj.com/public/ art...d=2_1566_topbox

"When Lisa Kelly learned she had leukemia in late 2006, her doctor advised her to seek urgent care at M.D. Anderson Cancer Center in Houston. But the nonprofit hospital refused to accept Mrs. Kelly's limited insurance. It asked for $105,000 in cash before it would admit her...When Mrs. Kelly called M.D. Anderson to make an appointment, the hospital told her it wouldn't accept her insurance, a type called limited-benefit...Mrs. Kelly, 52, signed up for AARP's Medical Advantage plan, underwritten by UnitedHealth Group Inc., three years ago...One day, Mrs. Kelly says, nurses wouldn't change the chemotherapy bag in her pump until her husband made a new payment. She says she sat for an hour hooked up to a pump that beeped that it was out of medicine, until he returned with proof of payment...Once, Mrs. Kelly says she was on an exam table awaiting her doctor, when he walked in with a representative from the business office. After arguing about money, she says the representative suggested moving her to another facility..."


Yep, the USA has the best healthcare in the world.

WRONG. We are in the mid-30's, down by Cuba.
bruce | Homepage | 05.03.08 - 7:20 pm | #

ipodius writes:
I think we're probably picking up satellite radio MLM. I got the science fiction channel, you got the Harley channel.
ipodius | 05.03.08 - 7:21 pm | #

CRead writes:
Avrge Joe - Grand Cayman's dollar is pegged (and has been for many years) at 20% above the US $. So our $ going down sucks for them as well - there has been talk of switching to the Euro but I doubt that will happen.
CRead | 05.03.08 - 7:28 pm | #

Anonymous writes:
Has anyone here read Bernard Lietaer's work? It seems alternative local currencies could have a role to play in working ourselves out of this crisis.
Anonymous | 05.03.08 - 7:36 pm | #

rich writes:
>I'm was with you until the (pay more taxes) part. in an environment that oyu describe, mo taxes won't fly. And if they did , where are they flying to?

I agree we are going to see a huge number of tax protest or tax boycotts. You are seeing one already in Jeff County, AL.

So, it will be a real tug of war for a lot of state/local govts. whether they go against taxpayer sentiment and raise taxes or go against Wall Street and default.

The federal govt. will find creative ways to nickel and dime higher taxes, especially on the rich and corporations, while continuing to run up the federal deficit. The younger generation will get stuck paying the Social Security of the longest-lived Boomers and their own retirements, too.
rich | 05.03.08 - 7:41 pm | #

rich writes:
bruce,

That was a well researched post that you wrote on healthcare. Telling it like it is.
rich | 05.03.08 - 7:42 pm | #

ipodius writes:
That was a well researched post that you wrote on healthcare.

too bad it was in a post whose topic was the eye of the credit crunch debacle.
ipodius | 05.03.08 - 7:47 pm | #

jm writes:
Those who expect the Chinese economy to become dominant fail to consider the implications of the fact that it is shot through with fraud, and that the greatest of those frauds is the pegged exchange rate, at which the government currently buys dollars for 7 yuan each (after having bought an enormous number earlier at 8.2 yuan).

The Chinese government has to do that, because a dollar isn't worth anything close to 7 yuan in buying power.

One of the effects of this is to greatly reduce the export prices of Chinese manufactured goods well below the true cost of producing them. That in turn has the effect of greatly increasing the volume of their sales.

If the dollar:yuan exchange rate were decided in a free market, the prices of Chinese export goods would rise, and unit volume would fall.

Because printing the yuan to buy the dollars is causing inflation, and that in turn is causing political unrest (intensified by horrific pollution due to too-rapid growth), an all-too-likely outcome will be the fall of the communist regime, and intense internal strife. If so, it will be intensified by the loss of employment as the subsidized export manufacturing sector collapses.

It's much more likely that by 2015 China will once again be the same kind of chaotic politico-economic basket case it has been for most of the last 100 years.
jm | 05.03.08 - 8:16 pm | #

jm writes:
Someone wrote above that China has more brilliant students than the US has students.

That may be true.

And if it is, it has also been true for the last 100 years.

Chaos and corruption are quite effective at negating the value of intelligence.
jm | 05.03.08 - 8:19 pm | #

NC Jim writes:
Re: Paying more taxes.

Please remember that inflation is a tax - a very regressive tax. And inflation is the only mathematical solution I see to the current mess and has the added advantage of not having to be voted. Politicans can blame China, Iran, Liberals or whoever their ememies are for rising prices. I am reasonably certain that Uncle Ben is buying time and waiting for inflation to stabilize nominal prices. The trick is to conceal the true extent of inflation from voters and foreign investors who might just dump the dollar. Will be interesting to watch the drama play out. If all else fails, bomb,bomb,bomb - bomb,bomb Iran.

Jim
NC Jim | 05.03.08 - 8:25 pm | #

RE writes:
For ipodius:

Fed `Rogue Operation' Spurs Further Bailout Calls

``It is appalling where we are right now,'' former St. Louis Fed President William Poole, who retired in March, said in an interview. The Fed has introduced ``a backstop for the entire financial system.''
RE | 05.03.08 - 8:27 pm | #

ipodius writes:
For RE:

Buffett, the world's richest man according to Forbes magazine, said the Fed acted properly when it arranged a $2.4 billion buyout in March of New York-based Bear Stearns by JPMorgan Chase & Co.

Hmmm...the world's richest man or a Fed governor. You decide.
ipodius | 05.03.08 - 8:29 pm | #

RE writes:
Buffet must have been sweating his CDS exposure. He does talk his book and what's good for Buffet may very well not be good for everybody. Pool does have a much more neutral perspective.

I also don't confuse Berkshire with a charity organization even if I appreciate Buffet's huge personal contributions to the Gates foundation.
RE | 05.03.08 - 8:35 pm | #

ipodius writes:
Pool does have a much more neutral perspective.

Yes, god only knows that no federal official would have an agenda of his/her own or a party-line now, would they? Sort of like Buffett talking his book. And if you read what he said about his exposure, he said they will make money in the long run, clealy implying that the current conditions do not reflect end value.

So, you know, lots of opinions. I happen to be on Buffett's side of the fence on this one. Your mileage obviously varies. We'll see once the destination is reached who had the better mileage.
ipodius | 05.03.08 - 8:41 pm | #

unirealist writes:
I will stop saying that no bailout has occured when you can show me a Federal report that shows that collateral pledged was seized and did not meet the threshold. Until then, you're a lot of air and little else.

Okay, ipodius. Not to be pedantic, but bail-outs are exactly what is occurring. The word bail-out in no way implies costing money for the agent who does the bailing out. If you are arrested, and I bail you out, I put up cash which is returned to me when you appear in court. That, my friend, is a bail-out.

And it is virtually identical to what the Fed has done with the commercial banks and primary dealers, IMO.

Your point is that the Fed isn't actually giving money away to keep the financial system functioning, but to assert that what they're doing isn't bailing-out is mistaken.
unirealist | 05.03.08 - 8:45 pm | #

RE writes:
Did you notice that Pool has retired. He is not on the board anymore. This gives him a lot more freedom, don't you think?
RE | 05.03.08 - 8:46 pm | #

John Stark writes:
To those wondering how BAC could buy CFC but not its debts:

http://www.bloomberg.com/apps/ne...uukA& refer=home

Key excerpt:

Whalen expects a transaction in which Bank of America will absorb the best assets, including Countrywide Bank, while the debt remains with a new company created by the merger, Red Oak Merger Corp. Red Oak may then file for bankruptcy, shielding Bank of America from liability, Whalen said.
John Stark | 05.03.08 - 8:51 pm | #

RE writes:
ipodius,

I assume you didn't miss this little newsbit last week. Don't you think that a significantly lower projected recovery rate might influence the value of the collateral that the Fed holds? These are after all AAA rated securities. How can you still deny a bailout? Risk free treasuries for dented collateral.

Tranche warfare may yield 60 pct CDO recovery

"... Standard & Poor's said on Monday that it has revised its recovery-upon-default assumptions for subprime mortgage debt and now assumes 60 cents on the dollar recovery for the most senior holders.

Investors known as senior "AAA" tranche holders, who are first in line to recover their investment on collateralized debt obligations, or CDOs, are expected to recover the most, followed by junior "AAA" holders who are expected to recover about 35 cents on the dollar. ..."
RE | 05.03.08 - 8:55 pm | #

toobigtofail writes:
ipodius writes:
I think we're probably picking up satellite radio MLM. I got the science fiction channel, you got the Harley channel.
ipodius | 05.03.08 - 7:21 pm | #

ipodius writes:
That was a well researched post that you wrote on healthcare.

too bad it was in a post whose topic was the eye of the credit crunch debacle.
ipodius | 05.03.08 - 7:47 pm | #

And why do you look at the speck that is in your brother's eye, but do not notice the log that is in your own eye?

mathew , i think (therefore i am) hahahah
toobigtofail | 05.03.08 - 8:59 pm | #

mock turtle writes:
unirealist

bailout

word

right on
mock turtle | 05.03.08 - 9:02 pm | #

ipodius writes:
Did you notice that Pool has retired. He is not on the board anymore. This gives him a lot more freedom, don't you think?

I think that being retired allows him to now say whatever his political pre-dispositions slant him towards. Sort of like what you do on an exit interview when you don't have to worry about political fallout.
ipodius | 05.03.08 - 9:02 pm | #

ipodius writes:
toobigtofail, that would be Mat 7:5 and reads:

Thou hypocrite, first cast out the beam out of thine own eye; and then shalt thou see clearly to cast out the mote out of thy brother's eye.

This, as the example you gave, was cross-talk and a little witty banter between posters. Not posting off-topic. But, as you now know, the devil can quote scripture :)
ipodius | 05.03.08 - 9:06 pm | #

rww writes:
nc jim -- only wage inflation can stabilize prices and that's not happening.
rww | 05.03.08 - 9:07 pm | #

Pablo Escobar writes:
And when we stop buying all the stuff from China because we've run out of money, and the only thing that disposable income goes towards is food, fuel, shelter, and utilities, then China is in a world of hurt too.

Plan to start seeing whining from China about overcapacity in their mfg facilities.
Pablo Escobar | 05.03.08 - 9:20 pm | #

un autre Canadien avec popcorn writes:
From a previous thread:

so if i read one more "printing money post" i swear I'm taking the ammo out of the bunker and up to a tower.


If the Fed loans are 28 days in duration and have been going on for a few months some of them must have been paid back by now right? Do we know if they are being paid back as planned? Seems to me that if they are not being paid back and are just rolled over every 28 days, which seems frankly much more likely, that there is indeed a defacto stealth printing of money that is occurring. A few hundred billions worth so far. No?
un autre Canadien avec popcorn | 05.03.08 - 9:33 pm | #

franz writes:
As far as the BoA and CFC merger, it could be done easily.

For example, if CFC(thift and other good and safe parts) were merged into BoA and the other part (financial arm with MBS and other debt) were established as a third party entity with BoA supplying capital; it would satisfy all the legal and accounting requirements for the merger. BoA could provide the financing conditional to the the servicing portion of CFC in case of bankruptcy.

In this case, BoA could easily handle the seperation of financial and legal obilgations while protecting their shareholders (ie CYA). It would suck and people would sue but BoA would get away with it.
franz | 05.03.08 - 9:35 pm | #

zirpy the pinhead writes:
"America has never lost a war. Americans love a winner."

Gen. George C. Patton
zirpy the pinhead | 05.03.08 - 9:39 pm | #

bond guy writes:
"John Stark writes:
To those wondering how BAC could buy CFC but not its debts:
...
Whalen expects a transaction in which Bank of America will absorb the best assets, including Countrywide Bank, while the debt remains with a new company created by the merger, Red Oak Merger Corp. Red Oak may then file for bankruptcy, shielding Bank of America from liability, Whalen said."

It's a theory, but it's a big risk. Bonds have cross-default clauses; if any entity within a corporate family goes under, all the bonds within the family may have their cross default clauses triggered.

Remember that every "corporation" you see is really a collection of corporate subsidiaries. Bond covenants reflect that fact; you can't easily move assets around and then selectively default. Red Oak is owned by BAC; it should be hard to keep the cross default clauses from blowing.

If you are a leveraged financial institution like BAC, you do not want your bonds rated "D" and people seizing your assets based on a theory cooked up by your investment bankers.

Meanwhile BAC's investment bankers are usually near the bottom of annual rankings. Would the top brass of BAC really want to base their survival upon their advice?
bond guy | 05.03.08 - 9:43 pm | #

ipodius writes:
Canadien avec, if i come to you and pawn my car, and you give me 10,000, is the price of the car on the market 10,000? have you placed 10,000 in circulation and increased the money supply? No the exact same amount of money exists, it's just been transferred temporarily. If you didn't pay me back i would quickly find out what the car was actually worth when i went to the market with it. But until that happens, nothing has been created or destroyed.

franz, i suppose it is possible, but then again, i expect that the first time BOA went to the bond market for an issue, all you'd hear is crickets chirping. The point about BSC and their comeuppance on LTCM is very real. And I'd be surprised if they got away with it without costly delays and legal proceedings.
ipodius | 05.03.08 - 9:47 pm | #

toobigtofail writes:
But, as you now know, the devil can quote scripture :)
ipodius | 05.03.08 - 9:06 pm | #

do tell
toobigtofail | 05.03.08 - 10:00 pm | #

un autre Canadien avec popcorn writes:
But until that happens, nothing has been created or destroyed.


thanks for the explanation ipodius. Do you think that there is a snowballs chance in hell that the collateral for these loans is worth what the Fed says it is.
un autre Canadien avec popcorn | 05.03.08 - 10:06 pm | #

ipodius writes:
Do you think that there is a snowballs chance in hell that the collateral for these loans is worth what the Fed says it is.

Well, that only matters if the loan is never paid back, doesn't it? Or the amount of the collateral in the trade isn't discounted enough when that happens. So unless there is a further IB default, or a bank goes comepletely down (fed is first in line for payback) that is not an issue. Is there risk? Sure. But there's risk an asteroid will hit us too, do you have a contingency plan for that? ;)

toobigtofail...lol...well, i do wear prada!
ipodius | 05.03.08 - 10:10 pm | #

toobigtofail writes:
yes i too am guilty...

Ipodius hope you have a good evening
toobigtofail | 05.03.08 - 10:25 pm | #

unirealist writes:
ipodius, I suppose the argument could also be made that if we are in a deflationary process, and the Fed is artifically supporting asset prices by backstopping all manner of securities (which it is), then by not allowing their prices to shrink it is in effect inflating the money supply.

But it's not an argument I care to advance. To me, the question of whether the Fed is or isn't boosting the money supply by its actions is irrelevant, in the overall scheme of things. Clearly what it is doing is intefering with the "primal forces of nature," and the consequences are dead certain to make matters worse.
unirealist | 05.03.08 - 10:48 pm | #

RE writes:
"... Well, that only matters if the loan is never paid back, doesn't it? Or the amount of the collateral in the trade isn't discounted enough when that happens. ..."

Not quite. The fact is that when the Fed exchanges dented, unsalable collateral (subprime rmbs)for real, tradable goods (treasuries) at significantly below cost, you have been bailed out. Any twisting of words does not change that fact.

Let's see. You get angry when people talk about walking away from their homes. We could solve that problem really quite easily.

Let's apply the same theory here. The borrowers in these houses are in slight difficulty in that their houses presently don’t trade at their expected price. It impacts their ability to conduct their business of living as before, i.e. obtain credit.

If they only could exchange, temporarily of course (but with unlimited rollover until the home regains its value), their house note for treasuries, at a slight discount (say 90% of their note), then they would be in a much better position.

I am certain that you would not call this a bailout because as you say: “it only matter if the loan is never paid back, doesn't it?”
RE | 05.03.08 - 11:00 pm | #

mock turtle writes:
unirealist

check it out

over at prudent bear doug nolan writes

:M2 (narrow) “money” supply jumped $27.9bn to $7.693 TN (week of 4/21). Narrow “money” has expanded $231bn y-t-d, or 10.0% annualized, with a y-o-y rise of $469bn, or 6.5%."

hummmmm
somebody is increasing the money supply...now i wonder who might that be 8-)
mock turtle | 05.03.08 - 11:01 pm | #

pd130 writes:
FDIC Historical Stats on Bank Failures

Very interesting stuff.
pd130 | 05.04.08 - 1:14 am | #

unirealist writes:
mock turtle, 11:01, thanks.

I read Noland often on Kitco.com.
unirealist | 05.04.08 - 2:19 am | #

D. writes:
If the Fed is lending full amount for securities that might be worth pennies on the dollar, I call that printing money.

They are injecting money because they are stopping the write-off that would force deleveraging.
D. | 05.04.08 - 9:20 am | #

silvertoes writes:
Yesteray a car called the "Scion" had a promotion at my drinking spot-a brew pub. For taking a ride around the block in the company of a pleasant yound person, you got a gift certificate for redemption at the brew pub worth $15 dollars. So many cartificates were provided the brewpub had to find some cash to pay the difference to the holders after the certificates purchasaed menu and many rounds of beer. The register was overflowing with certificates, and the manager was asking where can we get so more cash.?

You also got a key fob, and a cd of mostly modern punk. Last summer you got a tee but this year they had none.

I was surprised to see regulars decide that to participate on grounds of moral objection of some vague kind related to frivilous consumption. I was offering to purchase any gift certificate for ten bucks even.
silvertoes | 05.04.08 - 10:28 am | #

Wall St writes:
RE:

What you said makes no sense regarding homeowners trading their home note for treasuries. If you are talking their mortgage, they don't own this, they owe it. If you are talking their deed, it has already been pledged as collateral to their mortgage lender.

If the homeowner has any valuable lien-free assets there is a facility that lets them free up liquidity. It is called the pawn shop.
Wall St | 05.04.08 - 11:32 am | #

Anonymous writes:
Ah another weekend, another CR/Bloomberg parallel universe moment (i.e., we're on the brink of disaster/the danger has passed.)

Maddening....
Anonymous | 05.04.08 - 12:59 pm | #

Anonymous writes:
Perhaps The Fed should seriously consider bailing out those student loans. Within limits such as:

No more than 10% spent on beer and liquor
No more than 15% spent on parting at bars
No more than 20% spent on general entertainment.
No more than 4% spent on miscellaneous entertainment.

Ok, that comes to 49%. And some sort of waiver form, say signed by an expert at the designated learning institution, preferable a business expert, which declares, that as far as they know those spending limits are true.

If those following conditions are met then I say BAIL 'EM OUT.
Anonymous | 05.04.08 - 1:01 pm | #

Anonymous writes:
"Bottom line: If we get even a single quarter of negative real GDP, we're looking at a 70% probability of recession occurring within 3 quarters." - Seb

All semantics. If they had not cooked the books with respect to inflation measures in 1991-1992 to lessen Federal Government COLA based expenditure increases, we would have been inegative to 2 quarters now.

The simple truth is that if we had continued to measure inflation as we always had...we would be categorically in negative growth.

Seb, do you really believe the GDP deflator they used? 2%? Please...on what planet. All (and more) economic growth measured is just inflation with a coat of paint.
Anonymous | 05.04.08 - 1:22 pm | #

RE writes:
"... If the homeowner has any valuable lien-free assets there is a facility that lets them free up liquidity. It is called the pawn shop. ..."

I love the imagery. The banks get to visit the TAF where they get rewarded with negative interest rates and the homeowner gets to visit the pawnshop at usury rates. Life is fair on Wallstreet… Oh, and the bill will likely have to be paid by the tax payer for that lounge at the TAF.
RE | 05.04.08 - 2:44 pm | #

squeezed writes:
For Sebastian:

http://bigpicture.typepad.com/co...erating- ho.html
squeezed | 05.04.08 - 2:55 pm | #

nowaywalker writes:
The Fed is lowering the prime rate but my card's interest is never going to let me take a breath in. Fed should have more power to control and rule things on the credit market
nowaywalker | Homepage | 05.05.08 - 7:47 am | #