Bailout Suggestions to Hanky Bernanke from a Banker

[CA renter]

Let’s assume we go along with the above bailout (FDIC, MM funds, SIPC, PBGC, etc.) and let the rest fall.

What do you two think the consenquences will be? Who, exactly, will be hurt, and for how long?

[davelj]

[quote=Allan from Fallbrook]davelj/CA_renter: One of the most important aspects of this crisis, and one that certainly merits discussion on this thread, is the role of “off book” investments and derivatives.

Dave, I know your background is banking and thus the thrust of your posts. Mine is accounting and that informs mine. You astutely pointed out in another thread that the liquidity crisis had virtually nothing to do with actual liquidity, and everything to do with crappy assets.

Until such time as there is an acknowledgment as to the true nature of the liabilities riding on balance sheets throughout the world, we won’t have an actual picture as to how bad the potential threat (in terms of losses) truly is.

The notional value of potential derivatives (in terms of trading value) is somewhere north of $500 trillion. Granted, a huge amount of that is offset by swaps and other risk limiting vehicles, but AIG’s exposure to counterparty capital calls and reserve calls illustrates that virtually none of the commercial and investment banks, insurance companies, pension funds, hedgies, etc that dove into this market and leveraged themselves to the hilt to do so, has the capital base necessary to survive a margin call by trading partners or counterparties.

Full transparency is required as is accountability (in the form of proper due diligence, not this 11th hour shotgun wedding kind of crap that we saw with Bear Stearns/JPM). Right now, the balance sheets are opaque and therefore so is the risk. While systemic collapse is certainly worth averting, we’re just playing a shell game because we have no idea how many of those SIVs and off book investments are just waiting to explode.[/quote]

Agree with the transparency issue 100%. And the system can’t survive a global margin call. As I stated before, the single biggest issue right right now is a lack of confidence. Depositors are losing faith in the banks. Equally importantly, the banks are losing faith in each other. This is because the largest banks have NO IDEA what’s REALLY on each others’ balance sheets. And if you don’t know what’s on your counterparty’s balance sheet, you back away. Everyone doing so at the same time gets us to where we are now. Panic.

There are huge real losses in the system ($1.5 – $2 trillion globally?). The goal of any bailout proposal should be to recognize those real losses but not create more losses due to inaction or silly ineffective proposals. That’s an impossible balance to reach, but it should be the goal. I don’t think the current plan achieves anything close.

[davelj]

[quote=Allan from Fallbrook]davelj/CA_renter: One of the most important aspects of this crisis, and one that certainly merits discussion on this thread, is the role of “off book” investments and derivatives.

Dave, I know your background is banking and thus the thrust of your posts. Mine is accounting and that informs mine. You astutely pointed out in another thread that the liquidity crisis had virtually nothing to do with actual liquidity, and everything to do with crappy assets.

Until such time as there is an acknowledgment as to the true nature of the liabilities riding on balance sheets throughout the world, we won’t have an actual picture as to how bad the potential threat (in terms of losses) truly is.

The notional value of potential derivatives (in terms of trading value) is somewhere north of $500 trillion. Granted, a huge amount of that is offset by swaps and other risk limiting vehicles, but AIG’s exposure to counterparty capital calls and reserve calls illustrates that virtually none of the commercial and investment banks, insurance companies, pension funds, hedgies, etc that dove into this market and leveraged themselves to the hilt to do so, has the capital base necessary to survive a margin call by trading partners or counterparties.

Full transparency is required as is accountability (in the form of proper due diligence, not this 11th hour shotgun wedding kind of crap that we saw with Bear Stearns/JPM). Right now, the balance sheets are opaque and therefore so is the risk. While systemic collapse is certainly worth averting, we’re just playing a shell game because we have no idea how many of those SIVs and off book investments are just waiting to explode.[/quote]

Agree with the transparency issue 100%. And the system can’t survive a global margin call. As I stated before, the single biggest issue right right now is a lack of confidence. Depositors are losing faith in the banks. Equally importantly, the banks are losing faith in each other. This is because the largest banks have NO IDEA what’s REALLY on each others’ balance sheets. And if you don’t know what’s on your counterparty’s balance sheet, you back away. Everyone doing so at the same time gets us to where we are now. Panic.

There are huge real losses in the system ($1.5 – $2 trillion globally?). The goal of any bailout proposal should be to recognize those real losses but not create more losses due to inaction or silly ineffective proposals. That’s an impossible balance to reach, but it should be the goal. I don’t think the current plan achieves anything close.

[davelj]

[quote=Allan from Fallbrook]davelj/CA_renter: One of the most important aspects of this crisis, and one that certainly merits discussion on this thread, is the role of “off book” investments and derivatives.

Dave, I know your background is banking and thus the thrust of your posts. Mine is accounting and that informs mine. You astutely pointed out in another thread that the liquidity crisis had virtually nothing to do with actual liquidity, and everything to do with crappy assets.

Until such time as there is an acknowledgment as to the true nature of the liabilities riding on balance sheets throughout the world, we won’t have an actual picture as to how bad the potential threat (in terms of losses) truly is.

The notional value of potential derivatives (in terms of trading value) is somewhere north of $500 trillion. Granted, a huge amount of that is offset by swaps and other risk limiting vehicles, but AIG’s exposure to counterparty capital calls and reserve calls illustrates that virtually none of the commercial and investment banks, insurance companies, pension funds, hedgies, etc that dove into this market and leveraged themselves to the hilt to do so, has the capital base necessary to survive a margin call by trading partners or counterparties.

Full transparency is required as is accountability (in the form of proper due diligence, not this 11th hour shotgun wedding kind of crap that we saw with Bear Stearns/JPM). Right now, the balance sheets are opaque and therefore so is the risk. While systemic collapse is certainly worth averting, we’re just playing a shell game because we have no idea how many of those SIVs and off book investments are just waiting to explode.[/quote]

Agree with the transparency issue 100%. And the system can’t survive a global margin call. As I stated before, the single biggest issue right right now is a lack of confidence. Depositors are losing faith in the banks. Equally importantly, the banks are losing faith in each other. This is because the largest banks have NO IDEA what’s REALLY on each others’ balance sheets. And if you don’t know what’s on your counterparty’s balance sheet, you back away. Everyone doing so at the same time gets us to where we are now. Panic.

There are huge real losses in the system ($1.5 – $2 trillion globally?). The goal of any bailout proposal should be to recognize those real losses but not create more losses due to inaction or silly ineffective proposals. That’s an impossible balance to reach, but it should be the goal. I don’t think the current plan achieves anything close.

[davelj]

[quote=Allan from Fallbrook]davelj/CA_renter: One of the most important aspects of this crisis, and one that certainly merits discussion on this thread, is the role of “off book” investments and derivatives.

Dave, I know your background is banking and thus the thrust of your posts. Mine is accounting and that informs mine. You astutely pointed out in another thread that the liquidity crisis had virtually nothing to do with actual liquidity, and everything to do with crappy assets.

Until such time as there is an acknowledgment as to the true nature of the liabilities riding on balance sheets throughout the world, we won’t have an actual picture as to how bad the potential threat (in terms of losses) truly is.

The notional value of potential derivatives (in terms of trading value) is somewhere north of $500 trillion. Granted, a huge amount of that is offset by swaps and other risk limiting vehicles, but AIG’s exposure to counterparty capital calls and reserve calls illustrates that virtually none of the commercial and investment banks, insurance companies, pension funds, hedgies, etc that dove into this market and leveraged themselves to the hilt to do so, has the capital base necessary to survive a margin call by trading partners or counterparties.

Full transparency is required as is accountability (in the form of proper due diligence, not this 11th hour shotgun wedding kind of crap that we saw with Bear Stearns/JPM). Right now, the balance sheets are opaque and therefore so is the risk. While systemic collapse is certainly worth averting, we’re just playing a shell game because we have no idea how many of those SIVs and off book investments are just waiting to explode.[/quote]

Agree with the transparency issue 100%. And the system can’t survive a global margin call. As I stated before, the single biggest issue right right now is a lack of confidence. Depositors are losing faith in the banks. Equally importantly, the banks are losing faith in each other. This is because the largest banks have NO IDEA what’s REALLY on each others’ balance sheets. And if you don’t know what’s on your counterparty’s balance sheet, you back away. Everyone doing so at the same time gets us to where we are now. Panic.

There are huge real losses in the system ($1.5 – $2 trillion globally?). The goal of any bailout proposal should be to recognize those real losses but not create more losses due to inaction or silly ineffective proposals. That’s an impossible balance to reach, but it should be the goal. I don’t think the current plan achieves anything close.

[davelj]

[quote=Allan from Fallbrook]davelj/CA_renter: One of the most important aspects of this crisis, and one that certainly merits discussion on this thread, is the role of “off book” investments and derivatives.

Dave, I know your background is banking and thus the thrust of your posts. Mine is accounting and that informs mine. You astutely pointed out in another thread that the liquidity crisis had virtually nothing to do with actual liquidity, and everything to do with crappy assets.

Until such time as there is an acknowledgment as to the true nature of the liabilities riding on balance sheets throughout the world, we won’t have an actual picture as to how bad the potential threat (in terms of losses) truly is.

The notional value of potential derivatives (in terms of trading value) is somewhere north of $500 trillion. Granted, a huge amount of that is offset by swaps and other risk limiting vehicles, but AIG’s exposure to counterparty capital calls and reserve calls illustrates that virtually none of the commercial and investment banks, insurance companies, pension funds, hedgies, etc that dove into this market and leveraged themselves to the hilt to do so, has the capital base necessary to survive a margin call by trading partners or counterparties.

Full transparency is required as is accountability (in the form of proper due diligence, not this 11th hour shotgun wedding kind of crap that we saw with Bear Stearns/JPM). Right now, the balance sheets are opaque and therefore so is the risk. While systemic collapse is certainly worth averting, we’re just playing a shell game because we have no idea how many of those SIVs and off book investments are just waiting to explode.[/quote]

Agree with the transparency issue 100%. And the system can’t survive a global margin call. As I stated before, the single biggest issue right right now is a lack of confidence. Depositors are losing faith in the banks. Equally importantly, the banks are losing faith in each other. This is because the largest banks have NO IDEA what’s REALLY on each others’ balance sheets. And if you don’t know what’s on your counterparty’s balance sheet, you back away. Everyone doing so at the same time gets us to where we are now. Panic.

There are huge real losses in the system ($1.5 – $2 trillion globally?). The goal of any bailout proposal should be to recognize those real losses but not create more losses due to inaction or silly ineffective proposals. That’s an impossible balance to reach, but it should be the goal. I don’t think the current plan achieves anything close.

[davelj]

[quote=CA renter]Let’s assume we go along with the above bailout (FDIC, MM funds, SIPC, PBGC, etc.) and let the rest fall.

What do you two think the consenquences will be? Who, exactly, will be hurt, and for how long?[/quote]

I think if this is handled correctly, we do a “Half Japan.” A couple of years of deep recession followed by 5 years or so of “below trend” real GDP growth as the ratio of debt-to-GDP drops.

If it’s handled incorrectly we get “Japan 2.0” which is something on the order of exactly what Japan when through in the 90s. Long recession, low growth, followed by recession, followed by low growth, etc. for a dozen years. We can’t get out of our own way.

We don’t have to go down the Japan 2.0 road because our bubbles (property and stock), although large, were small (as a % of GDP) compared to the Japanese property and stock market bubbles (which also both occurred at the same time). Also, I think our economic system, despite its many flaws, is better able to cope with these problems than was Japan’s. But, of course, I could be wrong.

[davelj]

[quote=CA renter]Let’s assume we go along with the above bailout (FDIC, MM funds, SIPC, PBGC, etc.) and let the rest fall.

What do you two think the consenquences will be? Who, exactly, will be hurt, and for how long?[/quote]

I think if this is handled correctly, we do a “Half Japan.” A couple of years of deep recession followed by 5 years or so of “below trend” real GDP growth as the ratio of debt-to-GDP drops.

If it’s handled incorrectly we get “Japan 2.0” which is something on the order of exactly what Japan when through in the 90s. Long recession, low growth, followed by recession, followed by low growth, etc. for a dozen years. We can’t get out of our own way.

We don’t have to go down the Japan 2.0 road because our bubbles (property and stock), although large, were small (as a % of GDP) compared to the Japanese property and stock market bubbles (which also both occurred at the same time). Also, I think our economic system, despite its many flaws, is better able to cope with these problems than was Japan’s. But, of course, I could be wrong.

[davelj]

[quote=CA renter]Let’s assume we go along with the above bailout (FDIC, MM funds, SIPC, PBGC, etc.) and let the rest fall.

What do you two think the consenquences will be? Who, exactly, will be hurt, and for how long?[/quote]

I think if this is handled correctly, we do a “Half Japan.” A couple of years of deep recession followed by 5 years or so of “below trend” real GDP growth as the ratio of debt-to-GDP drops.

If it’s handled incorrectly we get “Japan 2.0” which is something on the order of exactly what Japan when through in the 90s. Long recession, low growth, followed by recession, followed by low growth, etc. for a dozen years. We can’t get out of our own way.

We don’t have to go down the Japan 2.0 road because our bubbles (property and stock), although large, were small (as a % of GDP) compared to the Japanese property and stock market bubbles (which also both occurred at the same time). Also, I think our economic system, despite its many flaws, is better able to cope with these problems than was Japan’s. But, of course, I could be wrong.

[davelj]

[quote=CA renter]Let’s assume we go along with the above bailout (FDIC, MM funds, SIPC, PBGC, etc.) and let the rest fall.

What do you two think the consenquences will be? Who, exactly, will be hurt, and for how long?[/quote]

I think if this is handled correctly, we do a “Half Japan.” A couple of years of deep recession followed by 5 years or so of “below trend” real GDP growth as the ratio of debt-to-GDP drops.

If it’s handled incorrectly we get “Japan 2.0” which is something on the order of exactly what Japan when through in the 90s. Long recession, low growth, followed by recession, followed by low growth, etc. for a dozen years. We can’t get out of our own way.

We don’t have to go down the Japan 2.0 road because our bubbles (property and stock), although large, were small (as a % of GDP) compared to the Japanese property and stock market bubbles (which also both occurred at the same time). Also, I think our economic system, despite its many flaws, is better able to cope with these problems than was Japan’s. But, of course, I could be wrong.

[davelj]

[quote=CA renter]Let’s assume we go along with the above bailout (FDIC, MM funds, SIPC, PBGC, etc.) and let the rest fall.

What do you two think the consenquences will be? Who, exactly, will be hurt, and for how long?[/quote]

I think if this is handled correctly, we do a “Half Japan.” A couple of years of deep recession followed by 5 years or so of “below trend” real GDP growth as the ratio of debt-to-GDP drops.

If it’s handled incorrectly we get “Japan 2.0” which is something on the order of exactly what Japan when through in the 90s. Long recession, low growth, followed by recession, followed by low growth, etc. for a dozen years. We can’t get out of our own way.

We don’t have to go down the Japan 2.0 road because our bubbles (property and stock), although large, were small (as a % of GDP) compared to the Japanese property and stock market bubbles (which also both occurred at the same time). Also, I think our economic system, despite its many flaws, is better able to cope with these problems than was Japan’s. But, of course, I could be wrong.

[larrylujack]

what’s funny is that none of your opinions matter one bit, and none of you even recognize that! the folks with money have already decided how to use taxpayer money.

better luck next time.

[larrylujack]

what’s funny is that none of your opinions matter one bit, and none of you even recognize that! the folks with money have already decided how to use taxpayer money.

better luck next time.

[larrylujack]

what’s funny is that none of your opinions matter one bit, and none of you even recognize that! the folks with money have already decided how to use taxpayer money.

better luck next time.

[larrylujack]

what’s funny is that none of your opinions matter one bit, and none of you even recognize that! the folks with money have already decided how to use taxpayer money.

better luck next time.

[Author]

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