The day the secondary markets died, truly a scary day.

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graphrix_IHB

graphrix_IHB

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It is really late, but I feel I need to post this regardless of how coherent it may or may not be. I had no idea how bad it had become. I even had some choice four letter words for Chris Cox in banning short selling on financials. But, if you or I knew, and if short sellers knew, that the secondary market had died, then you would want to sell short anyone and everyone involved. The secondary market refers to banks and lenders ability to sell mortgages and other asset backed securities on an open market. I have heard from other sources, as well as the source I cite, that the secondary market completely shut down this week. I even got an email from a friend who works for a lender that uses the secondary market to sell their mortgages, and he was wondering WTF was going on. As someone who truly and fully believes in free markets, what our government has done is try to stop a complete global collapse of the secondary market and a depression like free fall of the stock market. I don't know if it will work, but at least for the moment it postpones a total disaster that would rival the disaster that the great depression was. Like skek had posted, this is not something to blame the republicans or the democrats for, this is a problem much larger than anyone could ever imagine. No matter what your political affiliation is for, this is no time for partisanship. This is a time where the parties absolutely need to come together to figure out a way to fix it. I wish the markets (not the stock market) could fix themselves, but they need help. I hope this is the help that can fix it. I do believe that complete panic has set in on the secondary market, and if our government steps in to buy assets on the cheap, then they will come out ahead as a whole, and the taxpayer will not be paying but profiting from it.



Here is an exclusive email I got from housingwire. I have a tremendous amount of respect for Paul Jackson at HW. He has been in this business since he graduated college, and he comes from a family in the business as well. His sources may be anonymous, but they have always been solid sources, and sources much better than some of the twits who go battering on the financial networks.

<em>

As details emerge from our sources on the Street, it's becoming clearer just how close to an unraveling of the entire financial system we really came, and that's re-coloring our own perception of Treasury's actions on Friday. And make no mistake about it; the face of our financial markets will likely never be the same. One source told us late Friday that the story from the trenches was that the capital markets "died on Wednesday." Truly scary stuff.



Time will tell if the move by Paulson works, or if it is caught in partisan bickering; various media reports seem to suggest that Congress will walk on eggshells here, knowing that much of the financial markets hang in the balance. But Democrats will clearly look to bail out borrowers in addition to financials; the only question seems to be whether that sort of legislation is tacked onto the Paulson proposal or considered separately.



Reporting on this mess the past few days has proven hectic, as the details have changed pretty much hourly. We'd expect to see more details emerge over the next week, as well, and will provide real-time breakdowns as details emerge for our readers.



One interesting side-effect here is that Congress will likely pass over any immediate consideration of a much-contested elimination of FHA down-payment assistance programs, our sources say; their attention will be focused on broader economic issues. Recent legislation that eliminates most DPA goes into effect in October.



If there is something we should know or see, send an email to editor@housingwire.com.</em>



This isn't to be taken lightly, as this is serious meltdown like stuff. This not only effects us, but any country that holds any of our debt, any debt, from treasuries to mortgages. That means Europe, China, and any other country that holds any debt of ours could face a complete collapse. I stress China because of how much debt they hold of ours. The US is at risk of losing their AAA credit rating if they take on too much debt. Do you realize what that means for US, as well as anyone who holds our debt? China and anyone else who holds our debt would be in a world of hurt that would make them wish the depression were happening.



I hate, I mean I really hate being a doom and gloomer, but it is sh*t like this, that keeps getting worse than I ever expected, that puts me in this place. I hate it, I am sick of being a bear, but I just can't put the blinders up to reality. You all better hope that congress can find a way to help fix this, and I will be the first to criticize the democrats or republicans to make this fail. Schumer and Dodd are not going to fix this, and neither are Gramm or his pollyanna like friends. It will only be fixed by those who know what they are doing, and I believe in Paulson and Bernanke more than ever. They are doing what they have learned from the depression to not let it happen again.
 
Was this still going on Friday? Wednesday and Thursday we were in a liquidity trap, meaning that (essentially) all possible loans were expected to be worse deals than holding cash. That hadn't happened since the Great Depression. The massive worldwide central bank liquidity release, money market guarantees, and threats to monetize debts (i.e. inflate) lifted us out of the trap on Friday and so things should have improved. I'm waiting for the Fed report on Friday's commercial paper this morning to see if things improved there - on Thursday the spread between 1 month A2 (high quality) and P2 (medium quality) commercial borrowing rates jumped to 361 basis point, which is 3 times the level of the 1980's recessions and predicts a major depression.



Bernanke has been stellar during the crisis. Paulsen has not. Paulsen is a driving force behind the "Hope now" joke - and the fact that more serious measures to clean up the bad debts weren't done a year ago, before the crisis. And while the mortgage buyback plan will certainly make Paulsen's old company Goldman Sachs a phenomenal amount of money, I don't think it will fix the liquidity trap. The liquidity trap is being driven by uncertainty about who's going to be dragged down in a CDS/repo chain reaction; mortgage securities aren't the only problems, and in any case Paulsen's plan isn't big enough to fix all the debts so the uncertainty will still be there.
 
Ok, the secondary mkt failed for a day. Would that mean it would

fail for a week, a month, a year, 10 years.



The worthless crap is still worthless. No matter who is holding it.



The holders of the worthless crap have been fighting like demons to

not have it valued. In order to get rid of it, they have to offer it

to the gov't, right? Calculated Risk blogsters were discussing a reverse

auction, if Ihave that right. So Bank X has to come out of the woodwork

and say, ok, I have this following worthless crap and I want Y dollars

for it. Do I have that right? Does the gov't have to buy, no matter

whether Y dollars demanded are an extravagant amount?



And who is going to be the first to belly up to the bar and admit they

have all this worthless crap?



I understand you are scared $hitle$$ and rightfully so, and do think

that B & P are trying. But wouldn't an actual RTC vehicle be better.



Possibly I don't understand what it is they are doing.



But the hub & I are going up to Obama headquarters and offer help.

Not that I think he knows what to do either.
 
I don't know what Bernake and Paulson saw when they peered behind the curtain. Nor do I know what they told Pelosi and the rest in their office meeting. What I do know is it shut their mouth.



What doesn't Joe average know? I don't know. But I suspect, B&P saw the line to where Joe's credit cards would get closed cause the banks can't risk the float. Imagine American without credit cards...



25% unemployment because there are no credit cards to float purchases, no home building, no capital improvements and huge string of small busines failures because they can't manage monthly cash flow and make payroll without credit lines.
 
If you buy a BBB tranche for 30 cents on the dollar today, how much do you think it will be worth in three years?



What exactly do you think the TARP will be buying?



This kool-aid will impoverish and economically enslave the next generation of Americans. You think something must be done? It has already been done. The government, the Federal Reserve, and the banks did it, and now you think they are the ones to fix it?



Do you ever wonder why this generation thinks it is the government's job to fix everything?



The Federal Reserve works for the banks which own it. It does not work for the American people. It is designed to enrich the owner banks at the expense of the populace and it is very effective. It is, right now, transferring the banks debt onto the present and future citizens of the USA, and it is using fear, lies, and coercion to attain it's goals.
 
[quote author="awgee" date=1221951746]If you buy a BBB tranche for 30 cents on the dollar today, how much do you think it will be worth in three years?



What exactly do you think the TARP will be buying?



</blockquote>


It'll be worth what it is worth today. Exactly $0.00. Which is why when TARP buys it, they better get 30 cents on the dollar of perferred stock ownership.



That's what I've written both Senators, my Rep, and spammed all others I can think of.



If they don't get equity to recapitalize the worthless junk they're buying, it's a giveaway.
 
I don't know how many of you read Prof. <a href="http://delong.typepad.com/">Brad DeLong</a> (UC Berkeley Prof and former Deputy Asst Secretary of the Treasury), but I like his economic analysis quite a bit. (Be warned, most of you will hate his politics.) He has a couple of really great posts. The first, <a href="http://Understanding the Three Ways of Dealing with Financial Crises">Understanding the Three Ways of Dealing with Financial Crises</a>, discusses the policies relating to liquidity traps, employment and price stability, and monetizing assets. He also looks at the current market and writes

<blockquote>That gets us to last spring, when the Federal Reserve had done almost all that it could do in the way of reducing interest rates on safe assets, of trying to recreate the good equilibrium. Yet as we see now financial markets were still not calmed, were still not confident that the good equilibrium exists.



So the Fed moved on to Stage III policies . . . [to keep us from a depression]. </blockquote>


It's a good read. He also gives his opinions on those with objections to a bailout.



Another post, "<a href="http://delong.typepad.com/sdj/2008/09/thoughts-on-the.html">Thoughts on the Big Buyout</a>," discusses just that. I thought this was interesting:





<blockquote>Can the government do this? Can it, by buying risky assets, simply extinguish risk? Isn't the risk simply transferred to Treasuries?



The answer is no. First of all, the size of the equity and risk premia we see in normal times tells us that the private market is really lousy at mobilizing the risk-bearing capacity of the economy. The government--or at least a government that balances its budget--mobilizes that risk-bearing capacity automatically, spreading it out via the tax system rather than having risk-bearing concentrated on equity, junk debt, and derivative holders.



The question, I think, is on what terms to do the nationalization, and on what terms thereafter to run the financial markest. I believe that we have to see a substantial expansion of the government's role. Organizations that promise liquidity--whether commercial banks, money market funds, insurance companies, investment banks, hedge funds, whatever--that do not match their assets and liabilities in duration need to be buying some kind of government-provided insurance. Thus not only the level of short-term interest rates becomes an administered, government-determined price, but the price of lower tail risk becomes the government's business to set as well.</blockquote>


I'm not sure I agree with it, but I thought it was an interesting theory.
 
[quote author="EvaLSeraphim" date=1221956275]I don't know how many of you read Prof. <a href="http://delong.typepad.com/">Brad DeLong</a> (UC Berkeley Prof and former Deputy Asst Secretary of the Treasury), but I like his economic analysis quite a bit. (Be warned, most of you will hate his politics.) He has a couple of really great posts. The first, <a href="http://Understanding the Three Ways of Dealing with Financial Crises">Understanding the Three Ways of Dealing with Financial Crises</a>, discusses the policies relating to liquidity traps, employment and price stability, and monetizing assets. He also looks at the current market and writes

<blockquote>That gets us to last spring, when the Federal Reserve had done almost all that it could do in the way of reducing interest rates on safe assets, of trying to recreate the good equilibrium. Yet as we see now financial markets were still not calmed, were still not confident that the good equilibrium exists.



So the Fed moved on to Stage III policies . . . [to keep us from a depression]. </blockquote>


It's a good read. He also gives his opinions on those with objections to a bailout.



Another post, "<a href="http://delong.typepad.com/sdj/2008/09/thoughts-on-the.html">Thoughts on the Big Buyout</a>," discusses just that. I thought this was interesting:





<blockquote>Can the government do this? Can it, by buying risky assets, simply extinguish risk? Isn't the risk simply transferred to Treasuries?



The answer is no. First of all, the size of the equity and risk premia we see in normal times tells us that the private market is really lousy at mobilizing the risk-bearing capacity of the economy. The government--or at least a government that balances its budget--mobilizes that risk-bearing capacity automatically, spreading it out via the tax system rather than having risk-bearing concentrated on equity, junk debt, and derivative holders.



The question, I think, is on what terms to do the nationalization, and on what terms thereafter to run the financial markest. I believe that we have to see a substantial expansion of the government's role. Organizations that promise liquidity--whether commercial banks, money market funds, insurance companies, investment banks, hedge funds, whatever--that do not match their assets and liabilities in duration need to be buying some kind of government-provided insurance. Thus not only the level of short-term interest rates becomes an administered, government-determined price, but the price of lower tail risk becomes the government's business to set as well.</blockquote>


I'm not sure I agree with it, but I thought it was an interesting theory.</blockquote>


His thinking is 180 degrees backwards, because he fails to realize that a financial system based on a fiat currency created by and interest rates controlled by a government sponsored central bank is not a private market financial system. It is a socialist or probably more accurately described as a fascist system without free market limits. In a free market which sets interest rates, risk is assumed 99% by he or those who initiate it.
 
[quote author="EvaLSeraphim" date=1221958613]Awgee, I have to admit, you have me totally confused. Do you believe that The Fed is part of the government or a cabal of private bankers?</blockquote>


It is a private bank owned by private bankers, chartered and brought into existence by the federal government legislation, and given the authority to regulate banks, create money, and set certain interest rates amoung other things. What do you think it is?
 
[quote author="No_Such_Reality" date=1221954860][quote author="awgee" date=1221951746]If you buy a BBB tranche for 30 cents on the dollar today, how much do you think it will be worth in three years?



What exactly do you think the TARP will be buying?



</blockquote>


It'll be worth what it is worth today. Exactly $0.00. Which is why when TARP buys it, they better get 30 cents on the dollar of perferred stock ownership.



That's what I've written both Senators, my Rep, and spammed all others I can think of.



If they don't get equity to recapitalize the worthless junk they're buying, it's a giveaway.</blockquote>


Get stock ownership? Dream on. You can read the text of the bill here:

<a href="http://calculatedrisk.blogspot.com/">wealth transfer bill</a>
 
OMG! Just when I think I have seen everything! If I read the bill correctly, (I know, not likely), it appears to me that Paulson has to report to Congress, but he can pretty much make any decision he wants regarding these "mortgage-related assets", and to top it off, he can hire the banks to manage this new bureacracy.



Boy, it is a good think we have the Fed and the Treasury Dept to fix things.
 
[quote author="awgee" date=1221958894][quote author="EvaLSeraphim" date=1221958613]Awgee, I have to admit, you have me totally confused. Do you believe that The Fed is part of the government or a cabal of private bankers?</blockquote>


It is a private bank owned by private bankers, chartered and brought into existence by the federal government legislation, and given the authority to regulate banks, create money, and set certain interest rates amoung other things. What do you think it is?</blockquote>


The reason I'm confused is because - from what I recall, which may be faulty - half the time you say it's private and the other half you say its public (i.e., government). From your description above, however, it sounds like you believe it is private. Is my understanding of what you think correct?
 
Eva - One more tidbit regarding the Federal Reserve. It is accountable to no one and no government. Bernanke "reports" to Congress, but neither Congress nor any branch of the government has present or existing authority to direct the Federal Reserve.
 
[quote author="EvaLSeraphim" date=1221959428][quote author="awgee" date=1221958894][quote author="EvaLSeraphim" date=1221958613]Awgee, I have to admit, you have me totally confused. Do you believe that The Fed is part of the government or a cabal of private bankers?</blockquote>


It is a private bank owned by private bankers, chartered and brought into existence by the federal government legislation, and given the authority to regulate banks, create money, and set certain interest rates amoung other things. What do you think it is?</blockquote>


The reason I'm confused is because - from what I recall, which may be faulty - half the time you say it's private and the other half you say its public (i.e., government). From your description above, however, it sounds like you believe it is private. Is my understanding of what you think correct?</blockquote>


It is private and when it chooses, it works with the Treasury Dept. It funds much of the Treasury debt with created currency. Sorry if my references in the past have confused. Can you give me an example? What do you think the Federal Reserve is? Private? Part of the government?
 
and the wealthy elite bankers effectively own the congress, and the executive branch. The United States really is "The Bank of America." We are the lowly tellers who make $9 dollars an hour and deal with all the bullshit.
 
If you look back over the history of the creation of all the different Banking Systems in the last two hundred years (and prior), you'll see smart people arguing against the problems of central banking. "A cabal of private bankers" or "A cabal of private bankers in collusion with a few special guys in the government." But, over history, other options were also tried and those options were also miserable failures that collapsed in fairly short order. Not to say other alternatives wouldn't work, but so far none have shown the robust ability to resist greed. For those that think the Fed is an unworkable system that will destroy us all, If you truly are going to move to a constructive solution, you need to start working, and working hard, with a group of like minded people to create an alternative system. "Someone else" is not going to step up and do it. That includes your congressman. They're busy trying to get re-elected instead of priortizing national issues.



Free markets are brutal. Mother nature is brutal. Completely unfettered markets are charachtrized by euphoria and panic. All animals attempt to eat themselves to oblivion. The system corrects itself usually through starvation. Feast, famine, feast famine. Go to any area where there is no government and the "law of the jungle", the "law of mother nature", "True unfettered market" is what you'll find. We created systems because we were trying to live a life of more stability. The system we chose clearly has problems. But guess what? There's no utopia out there. 10,000 years since the last ice age, and corruption and greed still exists in the heart of men.



The only alternative system that I have seen that works is the Amish system. That is neighbor placing checks and balances on neighbor. But the Amish system works because they are surrounded by a group of law abiders (a stable country... for now). Eventually, the Amish system could take over the world.... except that humans don't want to work that hard.



Let's be frank here. Nobody has the experience, or even the history, to know what's going to work or not going to work in this situation. Bernanke is guessing, and he has the brain to guess just about as well as anybody else. The best thing we can do is get as many trustworthy people as possible to get together and really try to think through the ramifications. And once again, hope they put the interests of the country before their own self interests. Do I think any other nation in the entire world has an infrastructure or brain trust in place to handle what's to come better then the U.S.? I don't. They might have the brains, but they don't have the resources or infrastructure in place to make it work. We're it. Can anyone point to a country that kept their cool in the last 8 years? Show me a country that hasn't experienced a doubling of value in their housing market (that has a stable political system).



The U.S. financial market is it. We either figure this out, or there are no financial markets left to trust. Everyone in the world has been giving out bad loans. We go down, we're going to have to start from scratch. The last time we had a truly free market, the state banks kept failing miserably, and so everybody just kept their money at home, and trade devolved to a very local level. Which means we're back to a world where petty dictators live by well run democracys... who then typically get robbed and raped by the petty dictators. I don't know about you, but I wouldn't have wanted to live in the Dark Ages. I like order. I like organization. I like it when people say you simply cannot charge someone more than 20% interest a year. Why? Because systems doomed to failure would be better to stop before they even started. Let them have their head, and they always come back to hurt you the most, not the stupid people who were involved in them.
 
Basically this "Bailout" is in the best interests of the Federal Reserve.

WHICE IS PRIVATE.

The "Federal Reserve" is about as much a part of the "Federal Government" as "Federal Express".



They are going to make bank on this. Take all the bad debt. Put it on the backs of the Taxpayers and increase the deficit. Life is great for the Federal Reserve. They always win.

Its a rigged game. The Bankers are seizing control of this country and the Congress

with this action. BE AFRAID. BE VERY AFRAID.
 
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