Living Reflections from a Dream

That the mortgage crisis has the potential to bring the financial system to it's knees, or that the crisis is being explained to Americans using Monopoly pieces and dominos - on PBS no less!

This is how things have to be dumbed down so people can understand? It makes me very pessimistic about this country.

I can't find it on You Tube (yet), but apparently Paul Solman prepared a similar report explaining the mortgage crisis last summer, using Monopoly pieces and ironically, It's a Wonderful Life:

Well I'm off to get all my errands done so I can watch hoops all afternoon and pretend this nightmare isn't happening.

The Fed announced a plan on Monday meant to prop up the financial system: they can take loans from the Fed to plump up their liquidity. Oh, what is the collateral you ask?

The central bank broadened the scope of collateral that borrowers can use to secure the loans to include federal agency debt and certain residential mortgage-backed securities. The Dow Jones industrial average soared more than 200 points on the news, as key credit spreads narrowed.

This means that we, the taxpayers of the US, will be handed the bill if the banks can't repay the loan and it's entirely possible the collateral (which includes 'certain residential mortgage backed securities') may not be worth that much.

Oh, yeah.. and these loans are up to almost 29 billion at the end of Weds. . And the Fed isn't telling us which banks are borrowing. How convenient.

hmmm.... Why do I feel like this is going to suck for us?

Why should all these banks just be bailed out this way? What is their motivation (after a certain period of time, when the economy begins to recover) to avoid returning to their risky behavior? After all, the government will just bail them out and give the taxpayers the bill.

I am NOT pleased.

This is chart of the Dow Jones over the last month..

What does it look like to you? I'll tell you what it looks like to me: a chart of a meds administered to a manic depressive.

Feds reduce rates: up 400 points. Feel nervous about Bear Sterns: down by 250 points. Fed reduces rates: up! Don't like the employment figures: down!

And it's not hard to predict. All you have to do is go to the Economic Indicators Calendar. Thurs. some sort of unemployment claim number comes out. If that goes up: Dow Down! Next week: Consumer Confidence is released. I'm no economist, but I'm thinking that will be down and so will the Dow.. probably by quite a bit.

Could we swing a little more with the wind? This is psychotic.

And let me tell you something else.. I am none too pleased as a taxpayer that we're picking up $30 billion in expense to take all the really scary assets off of Bear Sterns books for them. What could possibly be so scary in Bear Sterns books that even after taking away the worst $30 mil, they will only pay $2/share. Is Morgan feasting on the carcas or is there more scariness to come?

There is another article in the NYT today on the dreaded Credit Default Swaps I wrote about here, here, and here:

Credit default swaps form a large but obscure market that will be put to its first big test as a looming economic downturn strains companies’ finances. Like a homeowner’s policy that insures against a flood or fire, these instruments are intended to cover losses to banks and bondholders when companies fail to pay their debts.

The market for these securities is enormous. Since 2000, it has ballooned from $900 billion to more than $45.5 trillion — roughly twice the size of the entire United States stock market.

No one knows how troubled the credit swaps market is, because, like the now-distressed market for subprime mortgage securities, it is unregulated. But because swaps have proliferated so rapidly, experts say that a hiccup in this market could set off a chain reaction of losses at financial institutions, making it even harder for borrowers to get loans that grease economic activity.

It is entirely possible that this market can withstand a big jump in corporate defaults, if it comes. But an inkling of trouble emerged in a recent report from the Office of the Comptroller of the Currency, a federal banking regulator. It warned that a significant increase in trading in swaps during the third quarter of last year “put a strain on processing systems” used by banks to handle these trades and make sure they match up.

....

There is no exchange where these insurance contracts trade, and their prices are not reported to the public. Because of this, institutions typically value them based on computer models rather than prices set by the market.

Neither are the participants overseen by regulators verifying that the parties to the transactions can meet their obligations.

The potential for problems in sizing up the financial health of buyers of these securities leads to questions about how these insurance contracts are being valued on banks’ books. A bank that has bought protection to cover its corporate bond exposure thinks it is hedged and therefore does not write off paper losses it may incur on those bond holdings. If the party who sold the insurance cannot pay on its claim in the event of a default, however, the bank’s losses would have to be reflected on its books.