March 9, 2008To: naked capitalism.comFrom: Earl L....

tag:blogger.com,1999:blog-3782644139927778760.post-66191504268943570172008-03-09T18:30:00.000-04:002008-03-09T18:30:00.000-04:002008-03-09T18:30:00.000-04:00March 9, 2008To: naked capitalism.comFrom: Earl L....March 9, 2008 To: naked capitalism.com From: Earl L. Crockett Re: Sat. March 8, 2008 article, “Covert Nationalization of the Banking System” Through the Looking Glass, and Down the Rabbit Hole. It seems that we’ve all been forced into having to think macro-economics to a new level. At least that is the case for me. And it has seemed in the last ten days as if I’ve gone through the “looking glass” and down the “rabbit hole” day by day with announcements like Bernanke’s suggestion to member banks that they consider a “reduction of capital” on mortgage loans in their portfolios, etc. In a way, and these matters are still trying to sink into my head, Bernanke is passing on his “28 day loan if you’re able to pay” “equity” infusion practices to member banks who would then would be making after the fact, voluntary, equity contributions to their mortgage loan holders by reducing a percentage of the mortgage loan rather than having to dump the whole loan amount into a “non-performing’ loan status. Not really a bad idea as bizarre as the idea first seems. On the macro side I’ve wound up with note pad sheets with 10 and 11 zeros spread across my desk having to think in “Trillions” for the first time in my life, and I am 70 years old. Here are some of the numbers that I’ve come up with: It is reported in the last few days that there are 900,000 homes presently in foreclosure. Taking a “what if” and/or “bigger than a bread basket” business approach, lacking any “for certain” data, I’ve assumed a $200,000 to $400,000 per home amount for those homes in foreclosure. So…current non-performing mortgages industry wide could be in the range of $180 billion to $360 billion. If the current estimated national bank equity is “2.0 Trillion”, as given in the above referenced article, then this would be a 9.0% to 18% industry wide reduction in total bank equities/assets, and as suspected in the above article these amounts are probably tilted in the direction of a few “big time” lenders rather than being industry wide. Now this is a big impact for sure, but then one could ask why has Bernanke seen fit to lay out $140 billion in Jan. and Feb. 2008 (I think), $200 billion in March, with the further advice that this could go on “for another six months”? If you add these potential Fed “loan” numbers through the “another six months’ the number comes out to be $1.540 trillion which is approaching 75% of the “bank industry-wide equity”. I think the answer might be in the following: “Economy.com estimates 8.8 million homeowners, or about 10 percent of homes, will have zero or negative equity by the end of the month. Even more disturbing, about 13.8 million households will be "upside down" if prices fall 20 percent from their peak. The latest Standard & Poor's/Case-Shiller index showed U.S. home prices plunging 8.9 percent in the final quarter of 2007 compared with a year earlier”. If you apply the former hypothetical “$200k to $400k per house” numbers to the potential near term foreclosure homes the numbers become $1.76 Trillion to $3.52 trillion (8.8 million homes), on to $2.76 trillion to $5.52 trillion (13.8 million homes). My guess is that these are the numbers that Bernanke has written on his office blackboard. While my natural proclivity is far from being a “nay-say-er” or “down-side-bottom feeder”, it does looks to me like our national banking system is approaching bankruptcy, another “through the looking glass and down the rabbit hole” distinction. And, and this is a very big AND, if that happens then what can be said about the Federal Reserve itself to say nothing about our whole economy? My advice to myself, and to all of you, is to pay close attention to what the “Standard & Poor's/Case-Shiller index” says about home prices for the first quarter 2008 that will come out sometime in April. And yes I do understand that a lot of this mortgage debt has been “laid off” to International markets, but that number is presently “unseen” by me from my position at the bottom of the “rabbit hole”. I applaud “naked capitalism”, and the many respondents for their “to the bone” knowledgeable assessments of “what the hell is going on?” with our economy. My only question of Bernanke is his same day announcement, a week or so ago, that followed and was seemingly in support of Bush’s “were not in a recession it’s only a slow down”, press release, causing none other than Warren Buffet to announce the next day “We’re in a recession”. Thanks Warren! A former Stanford Business School graduate (circa 1983) intern, and then associate of mine, Steve Garfink, had Bernanke as a Prof., and says “Bernanke is a really smart guy.” I certainly hope so! And I also hope that Bernanke has “This Could Happen” written boldly in the middle of his office black board under the above statistics. But as much as I try, I can’t see what he could do about it. Earl L. CrockettAnonymousnoreply@blogger.com