- Joined
- Dec 22, 2005
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@patpsycho, @andyjohnson, @offthegrid
Great comments all on the financial crisis, though offthegrid is even more bearish than I am about the future.
A few quick comments:
It's impossible to understate the role that the government played in inciting the crisis. This goes beyond Fannie and Freddie and ends up squarely in the lap of a Democratic Congress and a Republican White House which found mutual benefit in pushing the two market makers to expand the universe of home ownership.
The largest banks in this country are either insolvent or destined for a decade of under-performance. The 10% of the problem that is Credit Card debt is probably fully reserved, but no one has any idea of the losses that are still buried in the 90% of the problem that is composed of Mortgages and various derivative instruments. If you want to get ill, go to the 10K of any major bank and use the PDF "find" function to locate "Level 1, 2 and 3" Assets. Carefully read the definition of a Level 2 or 3 Asset and see how much of them are still carried on the Balance Sheet as "Trading Assets." Then look at how much has already been written down. Then go to the "Goodwill" of any bank that has made multiple acquisitions in the last ten years and see its relationship to Shareholder Equity; add that to a portion of the Level 2 and all of the Level 3 Assets that are carried on the Balance Sheet and realize how much of that Equity is funny money. These banks will never again be able to earn more than 7 or 8% on that total equity.
Housing Prices are far from bottoming out. An entire decade's worth of Home Equity growth has been wiped out; the economy is unable to create jobs at a sufficient pace to create enough new buyers; there are untold hundreds of thousands of homes that will go into foreclosure as ARM's reset; consumers are deleveraging and have started saving at unprecedented rates for the US; 401k's have been seriously depleted. It's a regional phenomenon, but I personally believe that an overall drop of another 15--20% in home values is not unrealistic; in places it will be a lot higher.
It's a lot more fun to talk football.
Great comments all on the financial crisis, though offthegrid is even more bearish than I am about the future.
A few quick comments:
It's impossible to understate the role that the government played in inciting the crisis. This goes beyond Fannie and Freddie and ends up squarely in the lap of a Democratic Congress and a Republican White House which found mutual benefit in pushing the two market makers to expand the universe of home ownership.
The largest banks in this country are either insolvent or destined for a decade of under-performance. The 10% of the problem that is Credit Card debt is probably fully reserved, but no one has any idea of the losses that are still buried in the 90% of the problem that is composed of Mortgages and various derivative instruments. If you want to get ill, go to the 10K of any major bank and use the PDF "find" function to locate "Level 1, 2 and 3" Assets. Carefully read the definition of a Level 2 or 3 Asset and see how much of them are still carried on the Balance Sheet as "Trading Assets." Then look at how much has already been written down. Then go to the "Goodwill" of any bank that has made multiple acquisitions in the last ten years and see its relationship to Shareholder Equity; add that to a portion of the Level 2 and all of the Level 3 Assets that are carried on the Balance Sheet and realize how much of that Equity is funny money. These banks will never again be able to earn more than 7 or 8% on that total equity.
Housing Prices are far from bottoming out. An entire decade's worth of Home Equity growth has been wiped out; the economy is unable to create jobs at a sufficient pace to create enough new buyers; there are untold hundreds of thousands of homes that will go into foreclosure as ARM's reset; consumers are deleveraging and have started saving at unprecedented rates for the US; 401k's have been seriously depleted. It's a regional phenomenon, but I personally believe that an overall drop of another 15--20% in home values is not unrealistic; in places it will be a lot higher.
It's a lot more fun to talk football.
