It Isn’t Over Until the Fat Lady Sings

Big caveat: even though we have very strong opinions, we do not give investment advice. What we provide (aside from commentary) might be regarded as investment hazard warnings. You may nevertheless decide to go ahead after reading what we offer, but we hope you will proceed with caution. One thing most investors fail to realize (and we have made this mistake ourselves) is the warning from mathematician and market maven Benoit Mandelbrot: “”Markets are very, very risky – more risky than the standard theories assume.”

The thought for today is that oversold does not necessarily mean undervalued. And a second thought is that the stock market increasingly seems to serve as a quick proxy for how the economy is doing, when it has a strong propensity to give false positives.

A lot of technically-oriented investors saw the market as oversold the week before last and got in, some of them taking some punishment but now sitting on very pretty short term gains. But for mere mortals, studies have repeatedly found that short-term traders do less well than those who take a longer-term horizon (like it or not, if you take a short-term focus, you are competing with folks who have better access to information than you do. And many of them probably have steelier nerves too). Even perennial bear Marc Faber, who has only 7-8% of his portfolio in stocks (and by the sound of it, not US ones either), thinks the market was primed for a technical rally but is not keen on the long-term prospects for the US economy:

“The governments in this world have no other option but to print money. That will lead down the road to inflation,” Faber said. “You don’t need to be an economist graduated from Harvard to know we’re already in a recession. They will just put white paint on a crumbling building….

“To rebuild economic health in the United States, you need a serious recession that will last several years,” he said. “The patient that got drunk on credit growth needs to go into rehabilitation. To give him more alcohol, the way the Fed and the Treasury propose to do, is the wrong medicine.”

So whether or not the market signal is correct, we don’t see the credit/economic crisis as close to resolution. The fact that we averted a systemic meltdown is not the same as saying the powers that be found a cure. Consider the factors that have not changed in the last two weeks:

Housing has another 10-15% to fall (see here for a reminder), and that assumes no overshoot or second leg down due to a sharp increase in unemployment. And this won’t happen quickly, either. Alt-A and option ARM resets continue at high levels through 2011 (in fact, 2009 is a bit of a lull, so we might have a false sense that the crisis here has passed midway through the year).

More banks are going to hit the wall, both midsized and large concerns. The stress on this front is far from over, even if we do not revisit the panic levels of the last month. Consider these observations from Chris Whalen of Institutional Risk Analytics, who has separately said that mid-sized and small banks will see a considerable amount of distress:

Rather than resolving the crisis, the government’s plan to inject capital into big banks is “merely the appetizer and soup course” in what will ultimate be a multi-course meal, says Christopher Whalen..

So what does Whalen see as the main course? Greater government control, if not outright ownership, of the nation’s biggest banks, including:

Citigroup, which Whalen says is the “riskiest” of the group because of its exposure to consumer loans.

Bank of America, which faces more Countrywide-related litigation and keeps more of its loans in house, meaning it has “whole loan” risk.

JPMorgan, which is heavily exposed to potential defaults by businesses and is what Whalen calls an “over-the-counter derivatives exchange with a bank attached.”

Whalen, lauded for forecasting the banking crisis when most others were sanguine, believes the U.S. banking system is going to face $250 billion to $300 billion in additional loan losses in the coming 6 to 9 months. In anticipation of such heavy losses, banks are now diverting capital into loan loss reserves rather than seeking to make new loans.

The dollar has remained unexpectedly strong (that view is based on disgruntled sounds I have heard from various sources). Most expected continued dollar weakness, although a minority saw the euro taking a big hit before a dollar slide resumed. An orderly fall in the dollar would hopefully not discomfit our trade partners unduly, but a disorderly slide would.

As an aside, I was very surprised to see Bush announce a currency summit, which appears to be on for early November. First, it’s a very big move for a lame duck president, and seems particularly odd at this particular juncture (the US is currently in a position of strength via having provided unlimited dollar swap lines to the EU and bailing out AIG, which saved Eu banks from massive writeoffs. One theory is that this is merely symbolic, particularly since not much beyond very general principals could be studied and pre-approved before the pow-wow. But a gathering of this sort, particularly if not well framed, has the potential to expose rifts. The political mavens I have pinged are at a bit of a loss as to what this was about, except perhaps a sop to Sarkozy, who has been very helpful to the US.

The big unresolved issue now is that even though we appear to have avoided a financial meltdown (even Nouriel Roubini thinks that risk has passed), we are still going to see considerable deleveraging, due primarily to the fact that lenders are in no mood to take risk, but compounded by the fact that consumers and businesses are feeling plenty shell-shocked.

We have noted before that even if the Fed gets Libor and the interbank risk measures associated with it down to less stressed levels, that does not mean we are back to status quo ante. First, rates could improve at diminished levels of activity. Second, even if banks do lend to each other, that does not mean that they are going to resume extending credit on anything other than very cautious terms to customers.

Remarkably, Anna Schwartz, who with Milton Friedman, was the author of the pathbreaking monetary study of the Depression that concluded the worst would have been averted had central banks injected more liquidity, said in an interview with the Wall Street Journal that the Fed was using the wrong remedy to this crisis, and was treating it as a liquidity crisis when it is in fact a solvency crisis. Indirectly, that bolsters the view that the relief in the interbank markets may be limited despite the extreme measures taken:

Credit spreads — the difference between what it costs the government to borrow and what private-sector borrowers must pay — are at historic highs.

This is not due to a lack of money available to lend, Ms. Schwartz says, but to a lack of faith in the ability of borrowers to repay their debts. “The Fed,” she argues, “has gone about as if the problem is a shortage of liquidity. That is not the basic problem. The basic problem for the markets is that [uncertainty] that the balance sheets of financial firms are credible.”

So even though the Fed has flooded the credit markets with cash, spreads haven’t budged because banks don’t know who is still solvent and who is not. This uncertainty, says Ms. Schwartz, is “the basic problem in the credit market. Lending freezes up when lenders are uncertain that would-be borrowers have the resources to repay them. So to assume that the whole problem is inadequate liquidity bypasses the real issue….

. Today, the banks have a problem on the asset side of their ledgers — “all these exotic securities that the market does not know how to value.”

“Why are they ‘toxic’?” Ms. Schwartz asks. “They’re toxic because you cannot sell them…” The only way to “get rid of them” is to sell them, which is why Ms. Schwartz thought that Treasury Secretary Hank Paulson’s original proposal to buy these assets from the banks was “a step in the right direction.”

The problem with that idea was, and is, how to price “toxic” assets that nobody wants. And lurking beneath that problem is another, stickier problem: If they are priced at current market levels, selling them would be a recipe for instant insolvency at many institutions. The fears that are locking up the credit markets would be realized, and a number of banks would probably fail.”…
[H]e’s shifted from trying to save the banking system to trying to save banks. These are not, Ms. Schwartz argues, the same thing. In fact, by keeping otherwise insolvent banks afloat, the Federal Reserve and the Treasury have actually prolonged the crisis. “They should not be recapitalizing firms that should be shut down.”

Anna Schwartz is arguing for something pretty close to the Swedish model: figure out how underwater various banks are. liquidate or sell the worst ones, recapitalize the ones that are impaired but are strong enough to pull through (the Swedes nationalized them; it might be possible to keep them private, but with with substantial government oversight and upside participation), and spin bad assets off into a Resolutions Trust type liquidation vehicle.

So not surprisingly, with an economy on the downturn, even if banks do decide to become freer with lending to their peers, evidence is mounting that they are not going to be as accommodating with their customers. From Andrew Ross Sorkin at the New York Times:

“Our purpose is to increase confidence in our banks and increase the confidence of our banks, so that they will deploy, not hoard, their capital,” Mr. Paulson said in a statement Monday. “And we expect them to do so, as increased confidence will lead to increased lending. This increased lending will benefit the U.S. economy and the American people.”…

But Mr. Paulson is making a big assumption about confidence, because until the real economy recovers — which could take more than a year — lending to Main Street is unlikely to return rapidly to normal levels.

“It doesn’t matter how much Hank Paulson gives us,” said an influential senior official at a big bank that received money from the government, “no one is going to lend a nickel until the economy turns.” The official added: “Who are we going to lend money to?” before repeating an old saw about banking: “Only people who don’t need it.”

From Robert Reich:

The Dow is see-sawing but the reality is that the Bailout of All Bailouts isn’t working. Credit markets are largely still frozen. Despite all the money going directly to the big banks, despite all the government guarantees and loans and special tax breaks, despite the shot-gun weddings and bank mergers, despite the willingness of the Treasury and the Fed to do almost whatever the banks have asked, the reality is that credit is not flowing. It’s not flowing to distressed homeowners. It’s not flowing to small businesses. It’s not flowing to would-be homeowners with good credit ratings. Students are having a harder time borrowing for their tuition. Auto loans are drying up.

Why? Because the underlying problem isn’t a liquidity problem. As I’ve noted elsewhere, the problem is that lenders and investors don’t trust they’ll get their money back because no one trusts that the numbers that purport to value securities are anything but wishful thinking. The trouble, in a nutshell, is that the financial entrepreneurship of recent years — the derivatives, credit default swaps, collateralized debt instruments, and so on — has undermined all notion of true value.

Roubini now foresees a deep recession of at least two years’ duration. That does not appear to be part of the newfound stock market cheer. Given Roubini’s success in calling this credit crisis, I’d be loath to take a long-term bet against him.

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  1. Anonymous

    Insolvency is a good reason for a currency summit. Forget the little investor, whole Countries want assurances that they can get their investments fulfilled.

    If Congress suspends the market to market rule, nobody will know what the outstanding debt is worth. Maybe they don’t want anyone to know.

    The first order of business at the summit will be, “How much are we talking about here?” They are going to have to use the BIS quadrillion number as a guide.

  2. wintermute

    Yves. Another excellent article which gets to the very nub of the credit crisis. There are two distinct sides of the same coin.

    Heads: there is lack of transparency of balance sheets.Hence, financial institutions no longer trust each other to repay loans because they might be dealing with an insolvent counterparty. So they are not lending. Toxic assets are hard to value and will continue so for years until they are sold, written off entirely or “come good”.

    Tails: interest rates cannot be properly determined anymore. They should be high (as Libor is pointing) to encourage lenders to lend to counterparties of doubtful worth (as they will be compensated for extra risk). This is what happens in the high street. But interest rates should also be low to prevent zombifcation of the housing market and an economic depression.
    Governments can’t have it both ways. Low rates for the economy but high rates to compensate lenders for increased loan risk in this environment.
    It is getting impossible to see a controlled way out of the crisis.

  3. fresno dan

    I agree. Booms last much longer than seems logical with hindsight. It takes years for assets to inflate (internet, real estate) – and those asset bubbles fueled consumer spending. I really don’t think there can be another bubble (but who knows), but spending has to come down. There are consequences to defaults.

  4. Anonymous

    Very nice blog.

    I will bet against Roubini. He is
    completely underestimating the severity of the coming crisis.

    Two years is like saying this is just a minor hiccup. It is almost certainly not. This crisis will change the political and economical landscape completely, and the time scale is so long that it is absurd to make guesses about the duration.
    Most companies will go bankrupt or be restructured. The stock markets will collapse.

  5. DD

    “Anna Schwartz is arguing for something pretty close to the Swedish model: figure out how underwater various banks are….”

    Everyone keeps throwing this out, in passing, like it’s just another item on a “things to do list”.

    How do we figure this out? Aren’t financial statements supposed to tell us this? Of course—but FASB/GAAP standards don’t really help in this regard.

    Do we simply ask the banks to tell us?

    Do we develop new accounting standards—very quickly—to account for the alphabet soup combos of complex derivatives….If so, would FASB require accountants to be trained at MIT in higher level quantitative modeling?

    Also, did the Swedes have to contend with trillion dollar balance sheets laden with these derivatives?

    I love it when people have it all “figured out” by imbedding the the problem that really needs to be figured out—right in the middle of their “solution”—as if it’s that simple.

    “Eureka! I have it figured out. See…all we need to do is figure out which banks are insolvent, we’ll call them ‘the bad ones’…and then, we’ll just recapitalize ‘the good ones’. Yeah, just like the Swedes. That should do the trick!

    “And then…this is the best part: We can cure cancer. All we have to do is figure out who’s prediposed to get cancer—and then we’ll employ the Chineese Model–and we’ll replenish them with extra preventative measures!

    “I’m gonna solve global warming next!”

  6. Anonymous

    “the US is currently in a position of strength via having provided unlimited dollar swap lines to the EU”

    Not so sure that’s right! It’s true that European banks have loaded up tons of dollar toxic waste, and finance this partly with dollar commercial paper. But when push comes to shove, who can cause the most pain? If the EU lets the European banks go down, US banks suffer just as much, so to that extent everybody’s in the same boat. Nobody is going to do that. And if the US doesn’t give the Europeans the dollars in currency swaps, the Europeans are probably strong enough to go and buy or borrow them on the open market – the consequence would be a massive dollar revaluation. Not something the US would like…

    It would be all out war, but who would win?

  7. eh

    People can “invest” now in good companies that are selling near multi-year lows — there is no shortage — if they have a long time horizon and don’t mind, or can afford, dead money for a while, e.g. in an IRA. But right now I prefer to trade, both long and short, but at this point my focus is almost always on looking for good entries on the short side.

  8. Richard Kline

    I’m in accord with a point made by wintermute: Lending isn’t profitable and hence isn’t functional at super-low neg real rates. Nor are present low rates helping the housing market in the US in any way; the game has changed there, better credit and money upfront are now required to get funds, and the banks are NOT passing on low spreads to Mr. or Ms. Homebuyer USA. We need higher policy rates, but that so flies in the face of ‘conventional macroeconomic wisdom’ that it will only happen way too late. We need a complete rethink of how to balance a dynamic macroeconomic stimulus. I’m too tired to kick any cans down the road on that one tonight, but it’s something on my mind for awhile now.

    On another note, I am much in agreement with Roubini’s current take. A bad, longish recession with very poor ‘growth’ on the other side seems to me the more likely outcome than a genuine depression, given the variables and vectors in view at present. That could change, but than most anything can. CDSs didn’t go pyrotechnical. Banks _are_ failing, but serially not systemically. Housing is ugly, but as far as the _employment_ side of it that sector may be tracing the sump of its trough. And so on, and so on. Personally, I’m more worried about disastrous macrofinancial decisions with unanticipated side effects—like blowing the dollare devaluation we know is coming but the US is NOT preparing for—than I am regarding the immediate problems of decline in the real economy. To fix a problem, you have to see the problem. Our government has too little revenue and is issuing TOO MUCH DEBT as its prescription for the present problem of having allowed too much private debt. In the crisis, it may be necessary to act, but our public officials are looking in the rearview mirror and trying to save their past advantages, rather than looking ahead to see how to block out a redesign. That generally leads to a fall . . . .

  9. Yves Smith


    The fact that the regulators do NOT have a handle on the real condition of bank balance sheets is scandalous. The Swedes DID develop models to determine who would make it and who wouldn’t. Our regulators just, for the most part, sit on the sidelines.

    In the 1987 crash, in less than 2 weeks, Reagan had signed the executive order establishing the Brady Commission to figure out what happened and why. he had a report that included recommendations in two months and a few days after that.

    Now this crisis was more episodic, but by the Bear collapse, even economists friendly to Bernanke like Paul Krugman were writing that if all these interventions weren’t bringing the market back to its senses, then the market was probably right and things were really pretty serious. There was NO excuse for not requisitioning an international effort to get a better grip on the crisis, particularly since it involved so many opaque markets and products. But no, this Administration doesn’t do fact gathering or study.

    Similarly, when Citi nearly went under in the early 1990s, 160 bank examiners went over its real estate portfolio with a fine-toothed comb. Have any of the banks that went under or are teetering on the brink gotten remotely this level of attention? I doubt it.

  10. Anonymous

    Part of solving the depression was getting banks to lend again. I am confused as to why people say this time it is different.

    The big difference this time seems to be that when the US banks were finally recapitalized after the depression the government took voting equity and had the votes to force the issue. This time they have asked for non voting equity for what seems to be ideological reasons.

    If banks don’t start lending I bet that goes out the window.

  11. Independent Accountant

    I am a veteran of the 1979-86 S&L crisis. Why believe "the regulators do not have a handle on the real condition of bank balance sheets"? I think, at best, they are wilfully blind to the fact that many large banks are insolvent. They let "zombie thrifts" survive for years. Today's game is: since banks borrow short and lend long, suppress short-term rates for years, if need be, to recreate bank solvency. Paulson, Bernanke, Cox, et. al., do not want anyone to scrutinize the banks financial position. Suppose a bank examiner concludes Citigroup is insolvent? What then? Will Paulson call a press conference announcing Citigroup was put into receivership? I remember the pressure put on the Big 87654 during the S&L crisis by Washington to "look the other way" during audits. Imagine, to that limited extent, I'll defend the Big 87654. Who is pressing to suspend "mark-to-market" accounting? The Big 87654, or the banks?

    "As a huge fan of Warren Buffett's style of investing, I wonder: Why doesn't Hank Paulson's team seek the same type of deal as Buffett just did with Goldman Sachs and GE?". Tim Looney letter to Barron's, 20 October 2008. I have asked this question ever since Buffett did his deals. I have an answer.

  12. SlimCarlos

    Yves, others:

    No thoughts on the currency get-together? Bretton Woods III, or whatever you want to call it? Seems pretty heavy, yet…. not a lot of noise here on the subject.

    For my part, it has become all too apparent that the rest of the world lives and dies by a made-in-USA monetary policy. And when that screws up — as it so clearly has — one’s only recourse is to go cap-in-hand to the Fed (for a currency swap line or what have you.)

    This is monetary imperialism by another name. Is it sustainable? I mean, how would you feel if you’re Korea? Or France? A “currency conference” should provide a forum for fireworks.

  13. DD


    I’m not saying we shouldn’t bother trying to get a grip on the financials. Far from it.

    I’m saying, the “solutions” offered by people like Schwartz manage to be both useless and painfully obvious at the same time.

    If we knew “how underwater” each bank was, the issue of whether this is a liquidity issue vs. a solvency issue would be rendered moot.

    Everyone—from the current blundering Administration to the most insightful economic commentator wants this information. The question has been–do we achieve discovery at the asset level–ie Paulson’s reverse auction, or at the institutional level? At the end of the day, though–does it really matter? All roads lead to the following:

    The collateral in the system, doesn’t equal the debts of the system.

    We can come up with a model to value either the institutions—or the exotic securities. It’s just that when we do, most would agree, the model will cause a massive problems for somebody from GE to C….among MANY others.

    It’s a Hobson’s choice, and everywhere we turn, we’re faced with companies too big to fail– or save—as you have insightfully pointed out.

    There simply is not enough high quality collateral to offer solace and protection to those who are creditors….nor is there enough high quality collateral to induce those who might become creditors to take that leap.

    That is the problem, and there’s nothing that any Schwartz-Swiss- Swede Plan is going to do about it. It’s too late. Either artificially inflate the assets (been there, done that and got the F’in T-shirt) or artificially deflate the debt.

    Liquidity or Solvency? It does not matter:

    We’re all Gutenbergers now!

    {Schwartz-Swiss-Swede to be said in succession 3 times…and fast!}

  14. Market Seer


    We are getting passed the huge amount of arm resets but a much bigger problem is going to be the option arm resets which peak in mid 2009. The numbers are bigger than the arm resets and more painful for banks for various reasons. Check out Whitney Tilson’s presentation that covers this approaching problem.

  15. AC

    I am trying to understand why it is important to kill the more insolvent banks and do it in Swedish way.

    I remember reading a post that explained the reason why, but I cannot find it.

    Can someone kindly point me to the post or give me a quick reason why?

    Thank you.

  16. Anonymous

    ‘studies have repeatedly found that short-term traders do less well than those who take a longer-term horizon’

    I am a long term investor who started to put money in mutual funds since the late nineties. Sofar I have had no gain. And if I have to belief the doom sayers, I will not earn anything with stocks in the next 5-10 year. So what is exactly long term when 15-20 years does not give a good return? Recently I started to take a look at the history of the Dow index and this has learned me that this period is not unique: between 1965 and 1985 investors didn’t earn anything either. In fact, the up trends are much shorter then the down or no net gain trends of the stock index. So I came to the conclusion that these studies of long term horizons must be based upon periods of above 25 years, but most people are not having the luxury waiting 25-30 years before getting a reasonable return. so all that talk about long term horizons is starting to sound pretty shallow to me. I think the stock market is increasingly a casino and long term investors have little to expect.

  17. hbl

    For the sake of concrete quantitative comparisons, I’ve been trying to understand the magnitude of the various relevant crises. One goal of this is for a sense of what to expect even if the US follows the “best case” Swedish practices in dealing with the crisis. Several months ago I sent Yves Smith my rough estimate of Japan’s number (which she posted). I finally got around to digging for Sweden’s… Unfortunately I can’t vouch for the accuracy of these for sure.

    Sweden ~1990: ~127% debt-to-GDP (private sector only)

    Japan ~1990: ~250% debt-to-GDP

    US ~1929: ~180% debt-to-GDP (before GDP contraction took it higher)

    US 2008: ~350% debt-to-GDP

    Iceland 2008: ~530% debt-to-GDP (excluding external debt!)

    While debt-to-GDP measures may be a very imperfect indicator of degree of unsustainable leverage, I’m still surprised to have seen so little in the way of quantitative analysis. Unfortunately the numbers relevant to 2008 are not reassuring…

  18. tompain


    1) I bet you are forgetting to count your dividends

    2) There is no particular reason to believe the doomsayers who say you will not earn anything in the next 5-10 yrs. They don’t know.

    3) What do you think you should have had your money in during the time period you are talking about. Have you checked to see how you would have done in bonds?

    4) It is not true to say that the uptrends are much shorter than the downtrends. Try looking on a different time scale. The trend has been permanently up.

    5) Why do you say most people don’t have the luxury of waiting 25-30 yrs? Someone who is retiring today could live to 95. That’s 30 yrs. If you are 25 yrs old, your life expectancy is another 50 yrs or so.

  19. Anonymous

    Anon @12:35:

    The reference is to the Big Accounting/Audit firms. For a long time until the early eighties their were 8, so it was the Big 8. Then mergers started in quick succession until it was the Big 5. Then Arthur Andersen was forced out of business following their involvement with Enron, so we now have the “Big 4.”

  20. tompain

    Here is a good follow up question that Sorkin should have asked of the senior official at a big bank: Banks are in the business of making money by taking on risk, yet you say banks won’t lend until the economy turns. Is that true regardless of how big a spread you can charge on the loans, and if it is true, then why are banks suddenly completely unwilling to take any risk? Could it be that they are frightened by Treasury’s actions to date, in which the penalty for being viewed as weak is death?

  21. Independent Accountant

    The Big 87654 are the major accounting firms. Once the Big Eight, now after Ernst & Ernst merging with Arthur Young; Coopers & Lybrand merging with Price Waterhouse; Deloitte Haskins & Sells merging with Touche Ross and and Arthur Andersen folding, there are four large firms left. They are:
    Ernst & Young
    Deloitte & Touche
    These firms audit about 98% by market cap of all publicly-held companies.

  22. Chris

    It seems the US didn’t have a choice because the conference(s) were going to happen anyway. Staying aloof would have been even more strange than going as an opponent. No opportunity to play cooptation games. So the change in public presentation from Perino and Fratto on Thursday and Friday to Bush on Saturday.

    What follows is from Sarkozy to the Euro Parliament today. by way of Le Point. There are other accounts. He announced that he and Barroso are off to China and India to invite them to the conference.

    There is material in this write up about off shore tax havens, new regulatory approaches and other goodies.

    Nicolas Sarkozy a aussi plaidé de nouveau pour que “le système monétaire soit repensé”, en lançant une pique aux États-Unis régulièrement accusés de vivre à crédit du reste du monde du fait de l’importance du dollar. “Peut-on continuer, nous (en Europe, NDLR), à porter les déficits de la première puissance mondiale sans avoir un mot à dire ? La réponse du président de l’Union européenne est : Clairement, non .”

    The last sentence reads “Can we continue to to carry the deficits of the world’s most important power without having anything to say about it? The response of the President of the European Union est: Certainly, not.”

    This link is to the full article, which also contains a sub-link (serie de sommets mondiaux) to Le Point’s coverage of the weekend discussions.

    It must have been almost as great a shock for some to realize that Brown was not present at Camp David.

    Not clear how, but out of the fine shadings of the way this is being discussed in non-English language or English sourced news outlets, the issue will no doubt come to focus on the dollar’s role and US indebtedness.

    It is interesting that the oil/gold ratio has held over the last few weeks, and that the Euro, the ruble and the Arab dinar are baskets which include some gold.

    Oh, the Russians are not so enthusiastic about jumping on board Sarkozy’s train. They are concerned about scheduling conflicts (see Moscow Times from Sunday).

  23. wintermute

    tompain asks “why are banks so unwilling to take any risk?”
    Answer – because they look into a mirror and don’t like what they see.

    Consider a not-so-frivolous analogy: you are told by your doctor that you have a sexually transmitted disease. You are shocked, horrified. You always took care and don’t really know how it happened. So from that time onward everyone else becomes suspect. “If I have a STD, and I know how cautious I am – then everyone else must be completely infested!” You don’t like what you see in the mirror anymore.

    Same with banks, insurance companies, hedge funds, finance companies – anyone who might have toxic assets in their balance sheets. (Pun unintended!)

  24. Anonymous

    I recomment other people who read this blog to search Google for “Big 87654”. You find interesting results. (I’m not sure what it is exactly, except it’s linked to an auditing scandal in the 80s’).

  25. tompain

    Winter, your STD analogy might explain why banks are not lending to anyone with murky balance sheets, but not their general unwillingness to lend to businesses or consumers. I believe the answer there is that the consequences of making mistakes are too large. If you make loans today and to many of them go bad on you, Treasury shows up at your door to confiscate your equity. Its one thing to risk some principal in pursuit of a good spread. It is another thing entirely to bet your entire firm on the next few billion of loans you make. Why take the risk

  26. Anonymous

    Yves @ 8:18 – Bullseye! I was just discussing this yesterday. It is nothing short of scandalous that a Commission has not been established.

    We need to know Why and How (to fix) and to look forward otherwise America’s role in the future will be greatly diminished (including its own economic landscape). If the problem is not fixed NOW, and another bandaide just plastered on, the problems will be even greater the next time (we should have learnt from Enron, if not much much earlier).

    To fix a problem, you need to see a problem.

    All the current actions are doing is deferring a well considered fix.

    I agree that new (effective adn meaningful) regulation takes time but we need to start making the right noises now by imposing temporary (until the formal solutions can be worked out) increased regulations to start to change the financial sectors behaviour…and influence.

    I am shocked that people are not marching in the streets protesting the mooted bonuses to be paid to excutives of bailout recipient institutions!!! What is wrong here???

  27. jkiss

    'Roubini now foresees a deep recession of at least two years' duration.'

    Roubini originally thought, and may well have been correct, that the recession began 12/07… so, if the recession lasts two years, then we might expect a santa rally end 2009.

    BUt, markets try to anticipate, in which case we might see equity bottom somewhat earlier. SOmething to remember is that GD and dotcom were both equity bubbles, this is a real estate bubble… most indexes were right at, or just above, their long-term trend lines at the peak last oct 9.

    dotcom saw the worst decline in the nasdaq, center of the vaporware companies, down 78% while the major indexes were only down 50%. In this case subprime and other debt collapse is centered in banks/builders, LBO's plus consumer discretionary likely troubled, the rest of the economy might do much better…

    Assuming, as Roubini is, that system collapse is avoided, then we might have seen the worst of equity decline, maybe just one more downleg to, say, 7500 DOW/820 S&P, i.e. the bottom of dotcom, which anyway is likely a strong resistance level.

  28. Anonymous

    Sy Krass said…


    I’m sure this has been suggested before, and I think lehman was going to try it, but didn’t have the credibility anymore, but instead of doing something cumbersome, clumsy, and arbitrary like picking winners and losers, taking stocks, getting x% of return or not and having people complain about it, why not just split EVERY bank into a good bank and bad bank. Make Goldman Sachs GS and GS federal bank, BAC and BAC Fed bank and so on placing ALL questionable assets, liabilities into the federal part with federal ownership. The “fed” banks won’t necessarily be banks, though they could lend out, but a mechanism to cancel out, wind down, etc. bad debts. This would free up the existing system without the hindrance and ambiguiities of federal ownership. Any thoughts?

  29. SlimCarlos

    “Peut-on continuer, nous (en Europe, NDLR), à porter les déficits de la première puissance mondiale sans avoir un mot à dire ? La réponse du président de l’Union européenne est : Clairement, non .”

    Wow! Thanks for this. And no, the english press has yet to catch up, even as this puts a fine point on the issues at hand.

    Yves, still nothing to say about the monetary 12 car pile-up we are witnessing in slo-mo?

  30. john bougearel

    To Anna Schwartz’s idea that “They should not be recapitalizing firms that should be shut down.”


    Anna’s notion is no different than any simple-minded person such as myself! And to which this simple-minded yokel might add, we should not allow banks we are re-capping to pay dividends to common shareholders. It is WRONG on every level conceivable!

    If anyone wishes to argue otherwise on paying dividends and recapping insolvent firms, I say, take me on!~

    George Soros, you can step to the head of the line!

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