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On Price, Intrinsic Value, MBS, and Mark-to-MarketUser Forum Topic
Submitted by davelj on December 28, 2008 - 2:55pm
Since I’m watching football and have a little time I thought I’d offer some perspective on a couple of issues that have come up in other threads recently. One issue is Price vs. Intrinsic Value. One poster said that, “There is NO SUCH THING as intrinsic value,” and then acknowledged that, in fact, intrinsic value existed a concept, but not a useful one because we have prices (which, was suggested, are all that matters). Fair enough. In general I disagree completely, but specifically will acknowledge that the idea of intrinsic value has been bastardized by too many financial institutions via mark-to-model accounting. Belief that there is no such thing as intrinsic value is essentially a belief in the strong(est) form of the efficient market theory. The concept of intrinsic value is that there is a value to an asset based on its expected cash flows. Then there is a value that the market places on an asset – it’s price - that reflects not only expected cash flows, but also a “speculative component,” comprising expectations about where the security might trade in the short term (according to Keynes’ “animal spirits”) and the asset’s liquidity. The problem with intrinsic value is that it's theoretical and only known with precision with hindsight; the problem with price is that it's set at the whim of Mr. Market, who's notoriously moody and generally wrong by varying degree with hindsight. Two simple examples: (1) Let’s say you own an apartment building with 20 units that you believe you could sell for $3 million if you had six months to market it properly. And let’s further assume that your assumptions are reasonable. So, for argument’s sake, let’s assume that the value is $3 million. Now, what would the price be for the same apartment complex if you had a week to sell it? Probably not $3 million. Maybe $2 million. Maybe a little more. But there’s going to be a huge discount placed on that value if you must liquidate it quickly. (2) The standard deviation for returns on the US stock market has been about 19% annually since 1870. The standard deviation for earnings growth has been about 12% and for dividend growth around 6%. The fact that price volatility for US stocks is 150% of earnings volatility and 300% of dividend volatility suggests that maybe, just maybe, there’s a gap between price and value at work here. That is, the prices of US stocks have historically been considerably more volatile than there underlying values. I would argue that almost every financial asset is inefficiently priced at any given point in time, the only issue is to what degree it’s mispriced. Of course, we only discover in that in hindsight. Now let’s move on to MBS, which apparently many here believe to worthless as an asset class (no one offers up any analysis, but there’s been plenty of opinion). I believe that most of these securities were overvalued as recently as 6 months back – many WAY overvalued (and plenty are worthless). So, like most of you, I was offended by the mark-to-model accounting employed by many of the big banks that allowed them to keep similar private label mortgage securities on their books at levels above the market’s assessment. Obviously, times have changed in recent months. So, for a little perspective, let’s analyze one security that I’ve discussed with friends to see what’s imputed in its price. CWABS Asset-Backed Certificates Trust 2007-7 is comprised of almost 5,000 subprime mortgages with aggregate principal of just over $1 billion. There are two pools, both conforming and non-conforming, and 64% of the Trust is comprised of 1st liens, with the remainder second liens. There are 16 tranches, or certificates, the top 6 of which are rated AAA. In this particular deal, if the subordinated tranches are wiped out, principal payments are apportioned to the senior-most tranches until they are paid down completely. The current quote on the AAA certificates is 56. Three months ago the quotes were in the 80s. The expected yield is about 23% with an expected weighted life of 2.5 years. Now, here’s the critical part: Holders of the AAA certs will achieve this yield if 83% of the Trust’s remaining principal balances are liquidated at 71% loss severity. If the loss severity goes to 85%, the yield drops to the low double digits on the AAAs - not too bad. Now, I’ve omitted a lot of info for brevity, but you can delve into some of these securities yourself here: http://consusgroup.com/v2/landing_pages/.... Now, let’s assume for the sake of the argument that these AAAs are mispriced (that is, too low). The question is: Why? The answer is simple: Liquidity. Buying these securities to capture the cash flow yield requires time and, thus, patient capital. A bank that would otherwise buy this security can’t buy it because its price might decline thus impairing the bank’s capital via mark-to-market conventions. A hedge fund can’t buy it because its price might decline, thus impairing the fund’s performance, thus leading to more redemptions and the need to possibly sell into an increasingly illiquid market. For most potential buyers of these AAAs, even if they’re right about the value, they risk getting burned in the short term if they buy these things. The only folks who can buy these securities are private equity funds and other folks with long-term, locked-up capital. And these groups are few and far between and have their own fish to fry. In this environment, illiquidity trades at an enormous discount. Many professionals I know and trust are as highly confident as they’ve ever been that some of these MBS represent the best risk-to-reward they’ve ever seen, but outside of their personal accounts they don’t have the proper (long-term) vehicle to buy and hold the securities. So the selling continues, the prices decline, and there’s not enough long-term capital out there to reverse things. The old negative feedback loop. I’ve never been a fan of mark-to-model accounting. It’s been a big part of the problem. Having said that, in the current environment, mark-to-market accounting isn’t so hot either. Yes, assets and liabilities that trade in markets with enough liquidity to have meaningful prices should be reflected on companies’ balance sheets at those prices. But the vast majority of a commercial bank’s assets - loans to individuals and business, and other illiquid securities - can’t and shouldn’t be subject to the instant pricing whims of a speculative market. (See Example 1 above to see where that leads.) There’s gotta be some middle ground. Imagine if you put 35% down on a house in Chula Vista in ’05 and now you’re underwater by 5% on a mark-to-market basis and your bank came to you and forced you to sell the asset within a week to make them whole, current payments be damned. That’s a logical conclusion to mark-to-market accounting in the current environment and I don’t think it makes too much sense. I don’t have a good solution here, I’m just saying it’s not as black and white as some here would like to believe. Now, feel free to debate these issues, but please, please use data and math in making your points. As the good Professor says, “In God we trust. Everyone else bring data.” I have a tough time engaging in how people “feel” or “think” (with no supporting data) about issues, which is what I see a lot of here. I’m here at the Pigg in fits and starts, so I’ll try to participate in this thread in a semi-timely manner but make no guarantees.
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Here's the prospectus.
I still feel you need a hug. Intrinsic, belonging to a thing by its very nature. If housing by its very nature has an future expected cash flow, then why is housing in Detroit, or portions of it, basically free? My answer is, demand for housing is not intrinsic and therefor neither is its price. Its based on all sorts of factors that change over time, sometimes drastically.
You've now made a straw man argument against me. You've changed what intrinsic means, but I'm ok with that. What I'm not ok with is your supposition that I must believe in efficient market theory because I don't believe in intrinsic value.
Let me state up front what I believe and then you can attack it or let it stand as you please. I believe that at an given time any investment(s) value is the sum of all information available to the buyer about that investment, coupled to the alternatives that buyer has either at the moment or in the expected future. That doesn't mean that there aren't huge asymmetries in information. It also assumes that there is no past and of course no future to model. That is as close to intrinsic value as I come. The reason I say that its not intrinsic is that past performance is itself based on a series of factors which are constantly changing.
Now to an example of MBS "data." As you can see this is a 2007 vintage MBS and as of Mish's last post on it was already 12% delinquent. Why would anyone take a risk on an investment so toxic? Sure there may be real underlying value that can be realized by buying and holding till the market recovers, but the trick is, you have to be understand whats in the pool. Part of the panic out of these instruments is that they were designed to be opaque and facilitate fraud. So far as I know, nobody really understands most of them. If they do, they stand to make a lot of money buying them on the cheap. All accounting systems have their flaws, mark to model as well as mark to market. Defending mark to model though is irresponsible, seeing as how the banks have used it to try and hide not only their losses, but their culpability in creating these monstrous securities. You argue bring data, but thats been impossible. Trust has been destroyed exactly because of the opacity of many of these instruments and the fraud they enabled.
When we can bring data, then the market can clear!
CWABS Asset-Backed Certificates Trust 2007-7 is comprised of almost 5,000 subprime mortgages with aggregate principal of just over $1 billion. There are two pools, both conforming and non-conforming, and 64% of the Trust is comprised of 1st liens, with the remainder second liens. There are 16 tranches, or certificates, the top 6 of which are rated AAA. In this particular deal, if the subordinated tranches are wiped out, principal payments are apportioned to the senior-most tranches until they are paid down completely. The current quote on the AAA certificates is 56. Three months ago the quotes were in the 80s. The expected yield is about 23% with an expected weighted life of 2.5 years. Now, here’s the critical part: Holders of the AAA certs will achieve this yield if 83% of the Trust’s remaining principal balances are liquidated at 71% loss severity. If the loss severity goes to 85%, the yield drops to the low double digits on the AAAs - not too bad. Now, I’ve omitted a lot of info for brevity, but you can delve into some of these securities yourself here: http://consusgroup.com/v2/landing_pages/....
Where did you get those loss severity numbers? Since your whole thesis that this TLA is undervalued rests on those numbers surely you have some basis upon which to believe the loss severity is going to be 71% versus 98%? You've used math, but as far as I can tell, you're using "feel" to get the loss severity numbers. I thought we weren't supposed to do that.
You've done a top-down analysis. What I would like to see is someone identify each of those 5,000 properties and then value each of those properties based on some type of equivalent-rent multiplier. Once that is done, you could get a value for the entire pool (minus some percentage for foreclosure costs and what not). Are there people doing this? If not, why not? If there is truly the potential for 25% returns, surely the work involved in dong something like this would be worthwhile, wouldn't it?
If housing by its very nature has an future expected cash flow, then why is housing in Detroit, or portions of it, basically free?
I believe that at an given time any investment(s) value is the sum of all information available to the buyer about that investment, coupled to the alternatives that buyer has either at the moment or in the expected future. That doesn't mean that there aren't huge asymmetries in information.
Now to an example of MBS "data." As you can see this is a 2007 vintage MBS and as of Mish's last post on it was already 12% delinquent. Why would anyone take a risk on an investment so toxic? Sure there may be real underlying value that can be realized by buying and holding till the market recovers, but the trick is, you have to be understand whats in the pool.
You argue bring data, but thats been impossible. Trust has been destroyed exactly because of the opacity of many of these instruments and the fraud they enabled.
When we can bring data, then the market can clear!
Regarding the hugs that you keep saying I need, I'm not Marvin the Mindreader so won't venture at what you're trying to get at, although I happen to be heterosexual (not that there's anything wrong with being otherwise, of course).
Detroit is obviously one example, and one at the extreme end of the spectrum. Extrapolating from Detroit's example that housing generically has no cash flow value would be the same as my extrapolating something equally bullishly silly based on San Diego's market alone.
Yes, there are huge assymmetries in information. That was part of my point. That you appear not to believe that inefficiencies are also created by liquidity considerations puts you at odds with almost 100% of the finance profession, but so be it.
Why would anyone take a risk on anything so toxic, you ask? Which risk? Which security? At what price? With what terms? Under what set of assumptions? Your question is so generic as to be meaningless. I happen to love 98% of Mish's posts (and this one's fine, but I haven't looked at the security in question closely, so I have no opinion on it), but I wouldn't base my opinion on an individual tranche of a MBS on anything in his post. I will say that it appears that most of the tranches will be worthless. But this has nothing at all whatsoever to do with the tranche of the MBS I discussed or of the securities that individual banks have because we have to compare the results with current prices, which aren't supplied.
I'm not saying that handicapping the value of MBS is easy, but for any of these securities a knowledgeable professional can sit down and make a set of assumptions - as apocalyptic as you like - and decide whether there's likely to be value or not. It ain't rocket surgery. In many cases there isn't any value. And banks have marked down a lot of these securities to zero and thereabouts. But you have to be specific, otherwise you're just engaging in a fool's errand.
What you apparently want is not just data, but "perfect" data, which doesn't exist and never has. There's plenty of data out there for handicapping. Boatloads of it. Certainly better and more voluminous data than there is for stocks, which are really just call options on highly uncertain future dividend receipts. And yet stocks still trade... at least the liquid stocks do.
I already stated that I thought the banks' mark-to-model behavior has been bad. But mark-to-market in many instances is flawed as well. (If you can't acknowledge that, then you're again at odds with almost 100% of the finance profession. Even its proponents acknowledge that it's flawed at times.) I acknowledge that there's a problem and further acknowledge that I don't have an answer. If your answer is back to 100% mark-to-market, then that's ok. But we may as well close up shop, get some guns and canned goods and start all over as an agrarian society and rebuild from there. If that's where you want this crisis to lead, then your position is perfectly defensible. Personally, I'd rather not go down that road. But then again I've actually got something to lose in the deal, so I'll acknowledge my bias.
CWABS Asset-Backed Certificates Trust 2007-7 is comprised of almost 5,000 subprime mortgages with aggregate principal of just over $1 billion. There are two pools, both conforming and non-conforming, and 64% of the Trust is comprised of 1st liens, with the remainder second liens. There are 16 tranches, or certificates, the top 6 of which are rated AAA. In this particular deal, if the subordinated tranches are wiped out, principal payments are apportioned to the senior-most tranches until they are paid down completely. The current quote on the AAA certificates is 56. Three months ago the quotes were in the 80s. The expected yield is about 23% with an expected weighted life of 2.5 years. Now, here’s the critical part: Holders of the AAA certs will achieve this yield if 83% of the Trust’s remaining principal balances are liquidated at 71% loss severity. If the loss severity goes to 85%, the yield drops to the low double digits on the AAAs - not too bad. Now, I’ve omitted a lot of info for brevity, but you can delve into some of these securities yourself here: http://consusgroup.com/v2/landing_pages/....
Where did you get those loss severity numbers? Since your whole thesis that this TLA is undervalued rests on those numbers surely you have some basis upon which to believe the loss severity is going to be 71% versus 98%? You've used math, but as far as I can tell, you're using "feel" to get the loss severity numbers. I thought we weren't supposed to do that.
You've done a top-down analysis. What I would like to see is someone identify each of those 5,000 properties and then value each of those properties based on some type of equivalent-rent multiplier. Once that is done, you could get a value for the entire pool (minus some percentage for foreclosure costs and what not). Are there people doing this? If not, why not? If there is truly the potential for 25% returns, surely the work involved in dong something like this would be worthwhile, wouldn't it?
My friends use things called "spreadsheets" and make simplifying (bearish) assumptions about the characteristics of the different portions of the pools. It's not feel, but rather math. But, more specifically, you do have to make assumptions. That's necessary for modeling purposes. And those (loss) assumptions will be based on default, foreclosure, and recovery assumptions. But if you define every assumption in the financial world as a "feeling" - which is fine - and therefore not to be used or trusted (which is the implication of your post), then I assume all of your money is in your mattress at home. Because assumptions ("feelings" in your parlance) are how assets get valued. By all means, feel free to do your own analysis on this pool. Yes, there are people doing this. (Wasn't that obvious from my post?) Yes, it's worth doing (again... not obvious from my post?). Well at least to some folks apparently.
My friends use things called "spreadsheets" and make simplifying (bearish) assumptions about the characteristics of the different portions of the pools. It's not feel, but rather math. But, more specifically, you do have to make assumptions. That's necessary for modeling purposes. And those (loss) assumptions will be based on default, foreclosure, and recovery assumptions. But if you define every assumption in the financial world as a "feeling" - which is fine - and therefore not to be used or trusted (which is the implication of your post), then I assume all of your money is in your mattress at home. Because assumptions ("feelings" in your parlance) are how assets get valued. By all means, feel free to do your own analysis on this pool. Yes, there are people doing this. (Wasn't that obvious from my post?) Yes, it's worth doing (again... not obvious from my post?). Well at least to some folks apparently.
How do they get the recovery assumptions? Are they actually evaluating the individual properties in each pool or are they doing something else? Do you agree that using some type of rent multiplier is a good way to value a property?
Did I understand your original post correctly, in that there are the potential for 25% annual returns? And the reason banks can't buy this stuff and get those 25% returns is because if the marks keep going down then they will have to engage in some kind of fire sale? Interesting. So are you investing with your own private capital then?
Since you think mark-to-market is a bad idea, do you think the creation of a US Prime Mortgage Security Index as described by Mr. Mortgage in this post is a bad idea?
http://mrmortgage.ml-implode.com/2008/12...
By the way, I'm not trying to be a smartass here, I'm just trying to reconcile your view with Mr. Mortgages, as both of you seem to be knowledgeable in this area.
Put your mind at ease. A hug is just a symbol of breaking down defensiveness, no slight intended.
I'm not particularly interested in heading back to an agrarian society. I grew up on an apple farm, an unsuccessful one. Manual labor sucks ass. Thats why I am a software engineer.
You kinda dodged my question then answered another one. I asked why someone would buy an investment as toxic as the one that Mish highlighted. I get the concept of MBS in general and its not like I disapprove. You see what I'm getting at and you've essentially admitted as well is that there is a large amount of inefficiency in this market. I'll just take it a step further and call it fraud. What I'd really like to see is us avoiding this in the future. The only way that will happen is if:
I wrote a lot more here originally, but Alexander Valley Vineyards cab from Costco (14.50/bottle) finally got the best of me.
Josh
irst Lien Credit Grade Category: “A”
Loan-To-Value Ratio: Maximum of 100%
Debt-To-Income Ratio: Maximum of 55%
Loan Amount: Maximum of $1,000,000
Credit Bureau Risk Score: Minimum of—
500 for loan amounts up to $700,000,
560 for loan amounts of $700,001 to $750,000,
580 for loan amounts of $750,001 to $850,000, or
600 for loan amounts of $850,001 to $1,000,000.
Mortgage History: No more than 1 non-consecutive delinquency of 30 days during the past 12 months.
Bankruptcy: At least 1 day since discharge or 2 years since dismissal of Chapter 7 or 13 Bankruptcy.
Foreclosure/Notice of Default: At least 3 years since foreclosure/notice of default released.
(They call that Grade A?)
i'd buy these at 3 cents on the dollar,
But, more specifically, you do have to make assumptions. That's necessary for modeling purposes. And those (loss) assumptions will be based on default, foreclosure, and recovery assumptions.
How do they get the recovery assumptions? Are they actually evaluating the individual properties in each pool or are they doing something else? Do you agree that using some type of rent multiplier is a good way to value a property?
Did I understand your original post correctly, in that there are the potential for 25% annual returns? And the reason banks can't buy this stuff and get those 25% returns is because if the marks keep going down then they will have to engage in some kind of fire sale? Interesting. So are you investing with your own private capital then?
Since you think mark-to-market is a bad idea, do you think the creation of a US Prime Mortgage Security Index as described by Mr. Mortgage in this post is a bad idea?
http://mrmortgage.ml-implode.com/2008/12...
By the way, I'm not trying to be a smartass here, I'm just trying to reconcile your view with Mr. Mortgages, as both of you seem to be knowledgeable in this area.
In order:
The recovery assumptions are based on what's happening in the market at the moment, then discounted further by how bad things are likely to get (obviously, there's some art in this process). No, they don't actually evaluate the individual properties but rather evaluate large groups of properties with similar characteristics (geography, FICO, LTV at origination, etc), just as an insurance analyst isn't going to analyze every single life insurance policy that a company underwrites to determine the company's value. You let the law of large numbers work for you.
Yes, it appears that there is the potential for 25%+ returns in some of these pigs. But there is also the likelihood of -100% returns in a lot of them. And there's the rub. I cannot buy these securities personally because they tend to trade in multiple $million blocks. Neither of my two partnerships can buy them either because they are outside of what my charter allows. But I'm currently working with a group to raise money for a new partnership which would allow us to buy some of these securities, among other things. One of the guys I'm working with on this project actually structured over 100 of these securitizations while at Morgan Stanley. He was one of the chief sausage makers (and was fully aware that the sausage was stinky) and he's seeing value in some of these securities (in others he's seeing additional big losses, but that's another issue.)
I looked at the Mr. Mortgage piece and agreed with a lot of what he wrote, although two things stuck out: (1) "The Market is fully functional at the right price." Factually true and completely useless statement. If forced to, I can sell my condo tomorrow "at the right price." But if I have a year to sell it, I'm thinking the price will be much better. (2) "There are plenty of funds who will buy hundreds of millions of loans..." Again, factually true, but due to the scale of the situation, completely useless. The residential MBS market is in the $trillions. Let's assume that there's $50 billion of long-term capital looking to take advantage of some of these purportedly mispriced securities. That $50 billion in demand is a tiny drop in the bucket compared to what's out there in supply. His argument appears to be that because he anecdotally knows of funds that want to buy this paper, then therefore there's plenty of demand out there and the prices are efficient. If you look at the scale of the market, that's just complete nonsense.
I don't have an opinion on his index idea. Maybe it's a good idea, maybe not. I just don't know.
Here's the real problem that must be acknowledged. Since the advent of "modern" banking (I think in Italy in the 15th century or something like that), not a day has passed during which the world's financial system could have marked its assets to market (that is, the price at which the assets could be sold within a week, let's say) and not been completely, totally insolvent. Pick the most prosperous period you can find in modern history and there's no way on earth that there would be enough buyers out there to take on such an enormous deluge of assets given the leverage involved, even if leverage were cut in half. That's axiomatic if you think about it for 5 seconds. We're seeing a micro example of this phenomenon in our efforts to liquidate Bear Stearns and AIG. Now they have some crappy assets and were overleveraged. No doubt. They deserved to fail. But if you force these folks to sell even the "good" assets immediately, well the prices are going to be a fraction of what they'd get given a little breathing room. Our financial system is not, and has never, been able to accommodate everyone's desire to get liquid at the same time. A slavish adherence to mark-to-market accounting does not recognize this fact. Again, I don't have a good answer. I'm just saying that it's a lot more complicated than many would have you believe. And anyone who believes otherwise is either (1) lying, or (2) doesn't understand how the pieces fit together.
You kinda dodged my question then answered another one. I asked why someone would buy an investment as toxic as the one that Mish highlighted.
Josh
Ok, I think I understand. I thought you were asking why someone would buy a slice of that particular MBS and I was asking you, well, what are the prices, parameters, etc. Now I think what you were asking was why someone would have bought that security at par in its original form given how horribly pathetic the collateral was. Which is a more logical question.
Lots of answers, all bad ones. Pure stupidity, for one. Two, choosing to hedge short-term career risk over longer-term problems. (Some guy's boss: "Look, Chet, the guys at Bear are making money hand over fist on this stuff. Why aren't you diving in? Maybe this isn't the right job for you." When you're making a couple a million a year, lots of folks will take what they can get in the short term and assume that the long term will work itself out.) Three, group think. Can so many folks be so wrong about such a huge segment of the market? Surely not!! Oops! I'm sure there are others, but that's off the top of my head.
The recovery assumptions are based on what's happening in the market at the moment, then discounted further by how bad things are likely to get (obviously, there's some art in this process). No, they don't actually evaluate the individual properties but rather evaluate large groups of properties with similar characteristics (geography, FICO, LTV at origination, etc), just as an insurance analyst isn't going to analyze every single life insurance policy that a company underwrites to determine the company's value. You let the law of large numbers work for you.
True, but the insurance analyst's valuation opinion is only going to be as good as the underwriting on each of those individual policies. For banks, the underwriting has been atrocious for the last several years. Garbage in, garbage out.
Here's the real problem that must be acknowledged. Since the advent of "modern" banking (I think in Italy in the 15th century or something like that), not a day has passed during which the world's financial system could have marked its assets to market (that is, the price at which the assets could be sold within a week, let's say) and not been completely, totally insolvent. Pick the most prosperous period you can find in modern history and there's no way on earth that there would be enough buyers out there to take on such an enormous deluge of assets given the leverage involved, even if leverage were cut in half. That's axiomatic if you think about it for 5 seconds.
No one is making the banks sell their assets within a week, so this is hyperbole on your part. Asset prices will likely continue going down throughout 2009 (absent massive government stimulus) so banks could be given a year or more to sell and they would still be insolvent. Banks are insolvent because they are insolvent.
In an ideal world where there wasn't all this financial "innovation", banks would borrow long at x% and lend for the same time period at x% + y%. Further, banks would value collateral conservatively and only lend against a portion of that collateral (say 80% maximum). If banks did this, and the borrower stopped paying, then they could liquidate the collateral in a reasonable period and pay off their obligations.
But they didn't do that. What banks did during the recent "bankster" era is borrow short, lend long against 100+% of collateral, and push for crappy underwriting (stated income, inflated appraisals, etc). I'm no bank historian, but I would imagine that any time banks get away from sound money management principles you get these types of bubbles.
So the problem isn't that banks are being forced to sell their assets within a week, the problem is that the assets are feces and, like you say below, everyone is trying to liquidate their feces at the same time.
We're seeing a micro example of this phenomenon in our efforts to liquidate Bear Stearns and AIG. Now they have some crappy assets and were overleveraged. No doubt. They deserved to fail. But if you force these folks to sell even the "good" assets immediately, well the prices are going to be a fraction of what they'd get given a little breathing room. Our financial system is not, and has never, been able to accommodate everyone's desire to get liquid at the same time.
Maybe the market recognizes that the "good" assets were only "good" during a housing bubble? Who's to say what assets are going to be "good" on the other side of this recession/depression?
A slavish adherence to mark-to-market accounting does not recognize this fact. Again, I don't have a good answer. I'm just saying that it's a lot more complicated than many would have you believe. And anyone who believes otherwise is either (1) lying, or (2) doesn't understand how the pieces fit together.
What happens if we just let all the bad banks fail? Obviously we have massive unemployment, but the government could just extend unemployment benefits and do massive public works projects to help reduce that. To me, this is preferable to propping up the value of crappy assets as it will force people into productive work.
Philosophically, I'm opposed to the government getting involved in propping up asset prices as it just further distorts the market and keeps people employed in unproductive jobs. Capitalism is all about creating efficiencies and propping up the prices of crappy assets is not efficient. I would rather see the government invest in research, alternative energy, infrastructure improvement, or something that is likely to benefit society (DARPANet anyone?) than get involved with propping up the prices of crappy assets. Maybe the government makes money on those assets, but buying crappy assets is more likely to benefit banksters than society as a whole.
Thanks for your responses on this.
I looked at the Mr. Mortgage piece and agreed with a lot of what he wrote, although two things stuck out: (1) "The Market is fully functional at the right price." Factually true and completely useless statement. If forced to, I can sell my condo tomorrow "at the right price." But if I have a year to sell it, I'm thinking the price will be much better. (2) "There are plenty of funds who will buy hundreds of millions of loans..." Again, factually true, but due to the scale of the situation, completely useless. The residential MBS market is in the $trillions. Let's assume that there's $50 billion of long-term capital looking to take advantage of some of these purportedly mispriced securities. That $50 billion in demand is a tiny drop in the bucket compared to what's out there in supply. His argument appears to be that because he anecdotally knows of funds that want to buy this paper, then therefore there's plenty of demand out there and the prices are efficient. If you look at the scale of the market, that's just complete nonsense.
I read his argument as something like this: "The smart buyers out there do not yet see value at the prices these things are selling for\marked at." Presumably, their valuations are based on the future income streams of the TLAs. So yes, I agree that the funds Mr. Mortgage speaks of can't soak up all the supply, but they can put a value on these things based on expected future income streams.
I don't have an opinion on his index idea. Maybe it's a good idea, maybe not. I just don't know.
Since the banks don't want this, that makes me think that this index is a very good idea. :)
I read his argument as something like this: "The smart buyers out there do not yet see value at the prices these things are selling for\marked at." Presumably, their valuations are based on the future income streams of the TLAs. So yes, I agree that the funds Mr. Mortgage speaks of can't soak up all the supply, but they can put a value on these things based on expected future income streams.
I can't speak to this individual investment in IndyMac because I don't know enough details, but John Paulson, the one guy who's made more money on the real estate/banking decline than anyone else, is buying...
http://www.nytimes.com/2008/12/29/busine...
It's completely anecdotal, but at least one guy that folks have universally deemed to be "smart" on the credit front is now taking the other side of the trade in some manner. Of course it could still blow up on him, but someone out there is seeing value in these turds. Only time will tell.
True, but the insurance analyst's valuation opinion is only going to be as good as the underwriting on each of those individual policies. For banks, the underwriting has been atrocious for the last several years. Garbage in, garbage out.
No one is making the banks sell their assets within a week, so this is hyperbole on your part. Asset prices will likely continue going down throughout 2009 (absent massive government stimulus) so banks could be given a year or more to sell and they would still be insolvent. Banks are insolvent because they are insolvent.
In an ideal world where there wasn't all this financial "innovation", banks would borrow long at x% and lend for the same time period at x% + y%. Further, banks would value collateral conservatively and only lend against a portion of that collateral (say 80% maximum). If banks did this, and the borrower stopped paying, then they could liquidate the collateral in a reasonable period and pay off their obligations.
But they didn't do that. What banks did during the recent "bankster" era is borrow short, lend long against 100+% of collateral, and push for crappy underwriting (stated income, inflated appraisals, etc). I'm no bank historian, but I would imagine that any time banks get away from sound money management principles you get these types of bubbles.
So the problem isn't that banks are being forced to sell their assets within a week, the problem is that the assets are feces and, like you say below, everyone is trying to liquidate their feces at the same time.
Maybe the market recognizes that the "good" assets were only "good" during a housing bubble? Who's to say what assets are going to be "good" on the other side of this recession/depression?
What happens if we just let all the bad banks fail? Obviously we have massive unemployment, but the government could just extend unemployment benefits and do massive public works projects to help reduce that. To me, this is preferable to propping up the value of crappy assets as it will force people into productive work.
Philosophically, I'm opposed to the government getting involved in propping up asset prices as it just further distorts the market and keeps people employed in unproductive jobs. Capitalism is all about creating efficiencies and propping up the prices of crappy assets is not efficient. I would rather see the government invest in research, alternative energy, infrastructure improvement, or something that is likely to benefit society (DARPANet anyone?) than get involved with propping up the prices of crappy assets. Maybe the government makes money on those assets, but buying crappy assets is more likely to benefit banksters than society as a whole.
Thanks for your responses on this.
In order:
You completely missed the point in my insurance company analogy. Yes, it's garbage in, garbage out in the case of these mortgage securities. But the manner in which you determine the value of that garbage (maybe it's 50 cents, maybe it's -50 cents) is by doing the same sort of statistical analysis that you'd do on any large pool of policies, assets, etc. that have similar characteristics. You use the same process to determine value. Even if the value is negative.
Ok, let's give every financial institution a year to sell all its assets (as opposed to a week). Who's going to buy them? You think the majority will need bank financing? Do you really think there's enough private long-term capital to buy all of these assets (you pick the time period)? "Banks are insolvent because banks are insolvent"? Really? I will agree that some banks are insolvent and most of these will ultimately fail. But do you think ALL banks are insolvent? And how are you defining insolvency in the case of banks? Please be precise.
Most banks actually followed the time-honored precepts of good lending, even during this bubble (it would probably surprise you to know how many folks weren't reckless - but you won't read about them in the paper). But certainly almost all of the bigger banks did not. So, I'll assume, unless you tell me otherwise, that when you refer to "banks" generically, you're really referring to the largest (and most careless) US banks. The vast majority of community banks in this country will sail through this crisis largely unscathed.
I think we should let the vast majority of the bad banks fail. But not all at once. And the biggest banks need to survive in some form, although I have no issue with wiping out all the common and preferred equity of these pigs. I want to let the creative destruction process work, but I don't want to let it work in such a hurried manner that it completely undermines faith in the financial system and blasts us back to an agrarian society. Although perhaps that's your preference.
I don't disagree with your last paragraph, but we're trying to get from A to B with the system in tact. I don't have all the answers. The Officialdom doesn't have all the answers. And you don't have all the answers. We'll muddle through... after some serious pain. Frankly, I spend less time thinking about the details of how we're going to get from A to B, but rather more time on how to take advantage of the dislocations. Shit's always going to happen. The outcome's always going to be unfair. I just accept it and plan accordingly.
davelj wrote:
Ok, let's give every financial institution a year to sell all its assets (as opposed to a week). Who's going to buy them? You think the majority will need bank financing? Do you really think there's enough private long-term capital to buy all of these assets (you pick the time period)?
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And therein lies the problem with leverage...it relies on ever-expanding leverage and debt.
At what point do we decide to actually make good on all our debts and bets? Is this not **exactly** what a Ponzi scheme is? Has there ever been a Ponzi scheme that didn't implode when its upper-most limits were reached? Do we believe in "infinite upper limits," and how would that work?
I agree with Josh and The Breeze. It would be much better for our society to allow the banks to fail, and let the government fund infrastructure and other projects that would actually benefit society in the long-run -- even if we have to run deficits to counter the destruction caused by the financial industry.
Perhaps the choice isn't just agrarian society/economy vs. F.I.R.E. economy. Maybe there is a better way altogether. Our economy should be based more on production and innovation rather than financial Ponzi schemes.
Ok, let's give every financial institution a year to sell all its assets (as opposed to a week). Who's going to buy them? You think the majority will need bank financing? Do you really think there's enough private long-term capital to buy all of these assets (you pick the time period)?
----------------------
And therein lies the problem with leverage...it relies on ever-expanding leverage and debt.
At what point do we decide to actually make good on all our debts and bets? Is this not **exactly** what a Ponzi scheme is? Has there ever been a Ponzi scheme that didn't implode when its upper-most limits were reached? Do we believe in "infinite upper limits," and how would that work?
I agree with Josh and The Breeze. It would be much better for our society to allow the banks to fail, and let the government fund infrastructure and other projects that would actually benefit society in the long-run -- even if we have to run deficits to counter the destruction caused by the financial industry.
Perhaps the choice isn't just agrarian society/economy vs. F.I.R.E. economy. Maybe there is a better way altogether. Our economy should be based more on production and innovation rather than financial Ponzi schemes.
Leverage, in and of itself, doesn't "rely on ever-expanding leverage and debt." That sentence doesn't make any sense. But I think what you mean - and correct me if I'm wrong - is that growth in our economy over the last couple of decades has been overly reliant on increasing debt levels, which I agree with and which is obviously bad.
This is not, however, "exactly what a Ponzi scheme is" although there's a ponzi-like element to it. In the classic Ponzi scheme - a la Madoff - by the time the scheme unwinds, there are precious few assets left for anyone - the assets have been lost, squandered or spent. In the US, we have real assets backing up the debt, but too many of these assets are of dubious quality. That's a distinction with an important difference. Having said that, the ponzi-like element is, as I pointed out, that we've relied on ever-increasing levels of debt to keep the machine moving forward. So unlike in the case of a true Ponzi scheme, we won't end up with zippo, but rather a serious case of indigestion and pain as we deleverage. But we live to fight another day.
So you ask if we believe in "infinite upper limits" for debt? Apparently not. I think the markets have spoken and we've determined that the upper limit is around 350% of GDP and we gotta work way down from there to get back to anything approximating normalcy. And hopefully we won't revisit that number again anytime in our lifetimes.
As I've stated here a few times, I also want to see many banks fail. It's necessary. But I don't want to see them fail all at once in a series of cataclysmic events. What the "optimum" timing is, however, I don't pretend to know.
Threadjack!
Josh
And therein lies the problem with leverage...it relies on ever-expanding leverage and debt.
Our monetary system is based on debt and compound interest, which results in an ever expanding amount of “money” chasing dwindling natural resources on our finite planet.
To put another way: All money is born of debt and all interest on debt has yet to be created and is preferably created out of more debt. Got it, infinite debt has to be possible for it to work out. Faith-based economics.
The Chinese are starting to wake up that this might not work out.
http://www.bloomberg.com/apps/news?pid=2...
This is not so much financial bad weather as financial climate change
arraya wrote:
To put another way: All money is born of debt and all interest on debt has yet to be created and is preferably created out of more debt. Got it, infinite debt has to be possible for it to work out. Faith-based economics.
-------------------
Yes, you've got it. Leverage/debt needs more leverage/debt in order for all the previous debt to be paid off (in our financial system). I fail to see how this is a viable economic system over the long run.
Most importantly, a nation's monetary system (money creation) should not be controlled by private parties (banks and the Federal Reserve). The U.S. Treasury should control all aspects of our national currency (actual dollars, not debt), and it should be based on population and productivity trends, IMHO; and the U.S. Treasury should be accountable to the U.S. citizens, not banking interests.
As it stands, there are two markets in our economy. One is the creation of money, which is not necessarily tied to production or population growth/shrinkage, but based on "faith" and leverage.
The other market is that of the real economy (goods and services traded), and this market is beholden to the first, as we are not legally allowed to barter or use other forms of payment.
It seems to me that it's the financial markets that control the real economy instead of the reverse.
I can't speak to this individual investment in IndyMac because I don't know enough details, but John Paulson, the one guy who's made more money on the real estate/banking decline than anyone else, is buying...
http://www.nytimes.com/2008/12/29/busine...
It's completely anecdotal, but at least one guy that folks have universally deemed to be "smart" on the credit front is now taking the other side of the trade in some manner. Of course it could still blow up on him, but someone out there is seeing value in these turds. Only time will tell.
Some excerpts from the article:
Well, this dude either sees value in the turds or value in being backstopped by taxpayers coupled with the ability to operate with loosened regulations. My bet would be on the latter. Plus, I don't trust any "federally-financed" deals that occur in the waning weeks of the Bush administration. This just looks like more of the same to me - the gains will go to private parties and the taxpayers will be stuck with the losses.
Our monetary system is based on debt and compound interest, which results in an ever expanding amount of “money” chasing dwindling natural resources on our finite planet.
To put another way: All money is born of debt and all interest on debt has yet to be created and is preferably created out of more debt. Got it, infinite debt has to be possible for it to work out. Faith-based economics.
That first quote looked suspiciously canned, and indeed it can be found verbatim on many "green" websites on the internet, including this one: http://www.grassrootsnetroots.org/articl.... Next time, do the authors a favor and use quotes. Or better yet, state a position using your own words, if possible. But, to your point, have you noticed that as time and technology progress that humans have managed to become increasingly more efficient in their use of the "dwindling natural resources on our finite planet," thus allowing both populations and standards of living to grow at the same time? Basically, Malthus called and he wants his theory back.
The "All money is born of debt..." bit comes almost verbatim from Paul Grignon's "Money as Debt" animated piece, which I imagine many Piggs have watched at some point or other. Again, quotations would be in order.
But, again, to the point you're trying to make, let's use a quick micro example to show that debt, in fact, can be paid down without one's micro economy collapsing. People who are in debt regularly cut back on spending and/or earn more money in order to pay down debt. Happens all the time. Their lives don't necessarily require ever-expanding debts to keep their micro economy, as it were, expanding. And if the debts do expand, more often than not (the last few years excepted, of course), the expanding debt is accompanied by expanding earnings. There's nothing wrong with debt expansion, per se, so long as it's accompanied by an equal degree of earnings expansion.
We, as a nation, can pay down debt relative to GDP and still have GDP expand. But because our debt levels are so great relative to GDP (because we've been irresponsible with debt for the last 20 years), GDP will expand at a much lower rate (via lower consumption) than it has in the past as we pay down that debt. It's simple economics. But we cannot pay down the debt all at once. It will take some time.
On a general note, when folks just use other peoples' quotes verbatim (and don't acknowledge them as such) to make their points I sometimes wonder whether they really believe what they're quoting or whether they just think it "sounds good." I suspect that many folks feel the same way. I don't know where you stand, specifically.
Dave
People in here don't want to learn, they just want to spread more negative energy to things they don't understand. This is something I have learned the hard way, so I no longer try to help people who don't want to learn, and just criticize anything that comes from someone with more knowledge in a particular subject than they have.
I for one appreciated your post, thanks for providing that analysis. I don't claim to be an expert in everthing like so many in here do, so there was some good information for me in your post.
Our monetary system is based on debt and compound interest, which results in an ever expanding amount of “money” chasing dwindling natural resources on our finite planet.
To put another way: All money is born of debt and all interest on debt has yet to be created and is preferably created out of more debt. Got it, infinite debt has to be possible for it to work out. Faith-based economics.
That first quote looked suspiciously canned, and indeed it can be found verbatim on many "green" websites on the internet, including this one: http://www.grassrootsnetroots.org/articl.... Next time, do the authors a favor and use quotes. Or better yet, state a position using your own words, if possible. But, to your point, have you noticed that as time and technology progress that humans have managed to become increasingly more efficient in their use of the "dwindling natural resources on our finite planet," thus allowing both populations and standards of living to grow at the same time? Basically, Malthus called and he wants his theory back.
The "All money is born of debt..." bit comes almost verbatim from Paul Grignon's "Money as Debt" animated piece, which I imagine many Piggs have watched at some point or other. Again, quotations would be in order.
But, again, to the point you're trying to make, let's use a quick micro example to show that debt, in fact, can be paid down without one's micro economy collapsing. People who are in debt regularly cut back on spending and/or earn more money in order to pay down debt. Happens all the time. Their lives don't necessarily require ever-expanding debts to keep their micro economy, as it were, expanding. And if the debts do expand, more often than not (the last few years excepted, of course), the expanding debt is accompanied by expanding earnings. There's nothing wrong with debt expansion, per se, so long as it's accompanied by an equal degree of earnings expansion.
We, as a nation, can pay down debt relative to GDP and still have GDP expand. But because our debt levels are so great relative to GDP (because we've been irresponsible with debt for the last 20 years), GDP will expand at a much lower rate (via lower consumption) than it has in the past as we pay down that debt. It's simple economics. But we cannot pay down the debt all at once. It will take some time.
On a general note, when folks just use other peoples' quotes verbatim (and don't acknowledge them as such) to make their points I sometimes wonder whether they really believe what they're quoting or whether they just think it "sounds good." I suspect that many folks feel the same way. I don't know where you stand, specifically.
The first quote I did steal from somebody else who quoted from somewhere else on another blog. The problem is I don't even remember where I specifically got it. I suppose I could have said "unknown source" from an unknown blog.
The second quote is mine and I never saw that film so there you have it.
Here is another quote for you. This was from M King Hubbert who modeled the rise and fall of oil production back in the 50s.
The preachers keep on preaching but the congregation is losing faith. (Ok, admittedly I stole this from somewhere but I don't remember it's been years)
No matter how hard you try you can't have exponential growth on a finite planet.
"The greatest shortcoming of the human race is our inability to understand the exponential function."
-- Dr. Albert Bartlett
No matter how hard you try you can't have exponential growth on a finite planet.
Our planet's population growth is no longer exponential. In fact, the world's population is increasing at a decreasing rate (in calculus terms, a positive first derivative and a negative second derivative). See: http://en.wikipedia.org/wiki/File:World_population_(UN).svg
Therefore, as long as productivity increases (that is, we're becoming more efficient with each human and each unit of resource), the population can increase and standards of living can rise. Basically, human history is one of increasing efficiency and adaptation.
There will always be occasional disruptions in supply and demand for certain resources (see oil, most recently), but humans adapt... eventually.
I don't know why that's so hard to grasp. While I'm bearish, I'm not a hardened pessimist. My concern isn't population growth and resources, it's that we blow each other up.
People in here don't want to learn, they just want to spread more negative energy to things they don't understand. This is something I have learned the hard way, so I no longer try to help people who don't want to learn, and just criticize anything that comes from someone with more knowledge in a particular subject than they have.
I for one appreciated your post, thanks for providing that analysis. I don't claim to be an expert in everthing like so many in here do, so there was some good information for me in your post.
Well, I want to learn too. And I'm willing to listen and alter my thinking. As I've said many times, I don't have all the answers. Unfortunately, however, I've found John Kenneth Galbraith's observation to be all too true: "When faced with the choice of changing one's mind and proving there's no need to do so, almost everyone gets busy on the proof." If I turn out to be largely wrong in my current thinking, I'll acknowledge it and move on. Wouldn't be the first time and it won't be the last. For example, I thought we'd see a peak-to-trough decline in housing prices here in SD of 35%-40% (that was before they started falling). Now it looks like it'll be 45%-50%. I was too optimistic. Mistake made, mea culpa, acknowledge it, adjust accordingly, move on.
Hey, by the way, in as simple terms as you can put it, what's your current thinking on the market? I recall that you got a bunch of market turn calls right in a row a couple of years back, but I haven't seen anything recently. I'm in private equity (and I don't trade in my personal account) so I don't pay too close attention to the day-to-day machinations of the market, but I still follow things from afar. If you don't mind sharing, in very general terms, what's your outlook?
My gut (which is not to be trusted) is that we ultimately head down to S&P 600 or thereabouts at some point, although that may be after a big rally from here for all I know. S&P 600 gets us close to lows reached in prior crises in terms of Tobin's Q. But, hell, I don't know...
Well, this dude either sees value in the turds or value in being backstopped by taxpayers coupled with the ability to operate with loosened regulations. My bet would be on the latter. Plus, I don't trust any "federally-financed" deals that occur in the waning weeks of the Bush administration. This just looks like more of the same to me - the gains will go to private parties and the taxpayers will be stuck with the losses.
Fair enough. I share your skepticism. My point was that a few purportedly smart folks are out there looking seriously at deals, which hasn't been the case recently. That's not debatable. As much fun as it is to speculate, why don't we wait and see what the deal actually looks like after it closes, then we'll know what kind of assumptions are imputed into it by the investors. Then we can comment more intelligently on what kind of risks they're bearing and what their thinking is.
Ok, let's give every financial institution a year to sell all its assets (as opposed to a week). Who's going to buy them?
No idea. Question about the banking system: My understanding is that banks can loan out at 10:1 against deposits. Is that correct? Is there a reason for the particular leverage ratio (whatever it is)? How do U.S. banks get to the 10:1 (or whatever) leverage ratio? Who do they borrow from? Is it just private parties generally? I know they can borrow from the Federal Reserve, but that's not the normal SOP, correct?
Now, if a bank goes under, then the FDIC is on the hook for a percentage of the deposits. Does the FDIC have preference over the failed bank's creditors in that they can sell off assets until the depositors are paid back and then the banks's creditors get what's left?
If you can point me to a good source that explains all this, I would appreciate it. I would basically like to know what the taxpayer is on the hook for when a bank fails in the normal circumstance (i.e, absent all these bailouts). If my understanding is correct, then the taxpayer is pretty well protected in all these bank failures and the only reason for the bailouts is to prevent a theoretical massive deleveraging wave from sweeping through the system and bankrupting 'everyone' at the same time. However, if the taxpayer is on the hook for more than the deposits when a bank fails, then it could be argued that federal bailouts of banks benefits the taxpayer in some way and it would likely alter somewhat my perception of the bailouts.
You think the majority will need bank financing?
Do you really think there's enough private long-term capital to buy all of these assets (you pick the time period)?
I guess that depends on the price. If the assets sell cheaply enough (very close to zero), I'm sure that there is enough private, long-term capital out there. So, I think your argument is really something like "Is there enough private long-term capital out there to get a fair price?" Well, who's to say what's fair? You argue that some of these assets are under-valued. Mr. Mortgage seems to think many of these assets are still overvalued. No one really knows what the future income streams on these assets are going to be, so no one really knows for sure if the assets are over-valued or under-valued right now. Further, according to Mr Mortgage:
http://mrmortgage.ml-implode.com/2008/12...
So banks aren't interested in even trying to value these things. What does another extremely knowledgeable blogger (Yves from Naked Capitalism) think about this:
http://www.nakedcapitalism.com/2008/12/b...
Question: If my understanding is correct that taxpayers are pretty well protected in the normal circumstance of a bank failure, then why should I, as a taxpayer, care what the bank assets sell for? So the insolvent institutions fail and someone else supposedly benefits by getting assets on the cheap. Big whup. That's capitalism. Now, there will be massive unemployment, but the government can step in to help with that.
It seems that where I differ with you is in what step the government should step in. You seem to think the government should step in to help insolvent institutions. I think the government should let the institutions fail and then step in to help with unemployment. I believe the latter solution would force people into more productive areas as opposed to allowing them to keep earning a living by being employed by an insolvent institution.
"Banks are insolvent because banks are insolvent"? Really? I will agree that some banks are insolvent and most of these will ultimately fail. But do you think ALL banks are insolvent? And how are you defining insolvency in the case of banks? Please be precise.
Dictionary.com defines insolvency as being "unable to satisfy creditors or discharge liabilities, either because liabilities exceed assets or because of inability to pay debts as they mature." My understanding is that most of the insolvent financial institutions are insolvent because they can't pay their debts due to the fact that they borrowed short and lent long. That is a failed business model. Let the institutions who did that fail. Surely you would agree that if a bank can't pay debts as they mature, that they are insolvent?
Do you know of any financial institutions that were shut down because the value of their liabilities exceeded the value of their assets? If not, then the only banks that have been shut down are those that can't meet their obligations.
And no, I don't think that all banks are insolvent. However, as I understand it, several more financial institutions (Goldman Sachs, BofA, etc) would be insolvent due to failure to pay their debts as they mature if they weren't allowed to borrow from the Fed (i.e., taxpayer).
Most banks actually followed the time-honored precepts of good lending, even during this bubble (it would probably surprise you to know how many folks weren't reckless - but you won't read about them in the paper). But certainly almost all of the bigger banks did not. So, I'll assume, unless you tell me otherwise, that when you refer to "banks" generically, you're really referring to the largest (and most careless) US banks. The vast majority of community banks in this country will sail through this crisis largely unscathed.
Good. If a bank isn't insolvent, then it shouldn't fail.
I think we should let the vast majority of the bad banks fail. But not all at once. And the biggest banks need to survive in some form, although I have no issue with wiping out all the common and preferred equity of these pigs. I want to let the creative destruction process work, but I don't want to let it work in such a hurried manner that it completely undermines faith in the financial system and blasts us back to an agrarian society. Although perhaps that's your preference.
I'm not sure about the "not all at once" thing. Who's to say that's not a better solution? Maybe that allows the system to rebuild sooner and more efficiently? It does seem like allowing a massive cascade of failures all at once could cause problems. However, I'm not sure that over-paying for bank assets (i.e, paying more than the 'market' would) is the solution.
As for the 'agrarian society' thing, you are a finance guy so I guess you think that the finance industry is the be-all-end-all. Some are thinking that portions of the finance industry could disappear completely with no ill effects:
http://www.paulgraham.com/divergence.html
I missed this one:
And the biggest banks need to survive in some form, although I have no issue with wiping out all the common and preferred equity of these pigs.
Why is it important for the biggest banks to survive? What essential service do they provide that we can't live with out?
And the biggest banks need to survive in some form, although I have no issue with wiping out all the common and preferred equity of these pigs.
Why is it important for the biggest banks to survive? What essential service do they provide that we can't live with out?
I mean survive... for now. The only essential service they provide is that we'd have a financial panic if they were allowed to simply fail at once. (The impact of such a failure on all the various businesses that these banks serve is beyond imagination. Take Lehman and AIG and multiply by 20.) My suggestion is that once banks get larger than, say, $50 billion in size - that is, large enough to be a serious concern for The (Financial) System - we require them to hold larger and larger amounts of capital against their assets as they grow. So, for example, small community banks which pose no threat to the greater system would continue to operate under current capital restrictions (say 10 to 1 leverage on risk-based capital), but the largest banks would be required to carry twice as much capital (5 to 1). In other words, banks that are, indeed, "too big to fail" would have to carry enough capital (a boatload more than they carry now) such that the odds of failure would only occur in the event of an alien invasion.
Submitted by davelj on December 30, 2008 - 9:46am.
arraya wrote:
And therein lies the problem with leverage...it relies on ever-expanding leverage and debt.
Our monetary system is based on debt and compound interest, which results in an ever expanding amount of “money” chasing dwindling natural resources on our finite planet.
To put another way: All money is born of debt and all interest on debt has yet to be created and is preferably created out of more debt. Got it, infinite debt has to be possible for it to work out. Faith-based economics.
That first quote looked suspiciously canned, and indeed it can be found verbatim on many "green" websites on the internet, including this one: http://www.grassrootsnetroots.org/articl.... Next time, do the authors a favor and use quotes. Or better yet, state a position using your own words, if possible.
=======================
Actually, that was MY quote, and it's something I've been saying for years (the link you've provided was written in 2008...perhaps they should give me credit?).
I'll try to dig up old posts of mine to prove it.
Don't ever accuse me of plagerism unless you know what you're talking about!!! I've actually seen some of my posts from the HBB used, almost verbatim -- paragraphs even -- in newspapers just a couple of days after my posting. I never got any credit, but my point is to get information and a different perspective out to the public.