patrick.net

justme,

I think the general idea is to sell of the waste at a price that leaves the bank somewhat solvent.

How can that happen? Don't the private asset managers want the assets at a good price for them? I believe banks haven't taken necessary haircut. For now, it looks like we are having a party.

All loans below the jumbo amount are backstopped by Fannie and Freddie, whose papers are bought by the Fed, ie, backstopped by Fed. There is no need for banks to charge interest rate based on risk, they can turn around and sell to two Fs.

That is why mortgage rate for conforming will stay low and can go lower if Fed goes all the way in.

sa,

>>How can that happen?

By sticking the taxpayer with the difference, naturally.

You're doing one heck'uva job, Timmy (and Larry)

http://www.nytimes.com/2009/03/22/opinion/22rich.html

Fed manipulates mortgage rate directly by buying MBS from F&F directly through open market operations.

So far, the Fed has already announced $1.2T purchase of MBS from the agencies. That is why mortgage rate is capped.

Basically, if you are buying with conforming loan, Fed will make sure your mortgage rate can only get better.

If you need jumbo loan, not so lucky, but obviously Fed is working at it so maybe not too distant in the future, they will come up with something as well.

Mortgage rates will be very good in the coming years. If you are waiting for housing price to tank due to mortgage rate spike, you will be very disappointed. However, one still needs a job no matter how low the interest rate is. Therefore, you will have a much better bet hoping that unemployment rate will go sky high - make sure you stay employed though.

Let's not forget that conforming loans have been upped to ~730k, which used to be well into the Jumbo loan ramge (was ~417k as late as 2008).

The biggest surprise about the Geithner plan:

Complete media silence from Congress this morning.

I really wonder what they are thinking? Perhaps a sigh of releief that the plan does not involve THEM?

justme,

that was a nice link.

I still don't understand how you stick the difference to tax payers. If I am Pimco, I would want to buy assets at lowest price and Govt has to price the same. Banks can decide to sell or not. Is there someway of going around with conflict of interest? like Pimco offering to buy at 60 cents when asset is worth only 40 cents?

Henry Blodget wrote a very good article about what the Geithner plan really means:

http://www.businessinsider.com/henry-blodget-geithners-three-big-misconceptions-2009-3

"But mortgage lending is very risky right now, so you’d think that mortgage rates would be very high"

We saw that before, yes it was the market reaction that the unguaranteed rates were at 8 or 9%. Keep in mind though that as values drop the risk on new loans is actually lower. All of a sudden banks have been infused with very cheap cash and are now competing for quality borrowers on cheaper/safer homes to lend.

Realized I'm just rewording and repeating Justme and OO, seems like we're all on the same page.

sa,

It is because the USG via FDIC is going to give subsidized and non-recourse (as in: they can walk away) loans to the very people that will buy the assets.

http://krugman.blogs.nytimes.com/2009/03/23/geithner-plan-arithmetic/#comments

On top of that there is all kinds of possibilities for conflicts of interest, such as banks lending money to partnerships that will combine their small money with USG big money and BID UP the assets. Because of the huge leverage of the private cash when combined with the USG (about 12x according to some, 6x according to others) the banks can spend $1 in loans to bid up the CDO paper by $12!! It;s insane. Even if the bank lose the money, they get a 12x-1x=11x payoff by gaming the process.

OK, I think I get it for conforming loans. Since the banks are just originators, they pass them on to Fannie and Freddie, who in turn sell them to the Fed, who will accept low interest rates even though the mortgages are likely to default.

So what we have here is the Fed effectively lending to house buyers at lower-than-market rates. But the Fed is so big, and others don't want to lend at those rates (and don't want F&F bonds) so the Fed IS the mortgage market, for now.

And the Fed doesn't give a hoot if the mortgage doesn't get repaid, since it can just print more money anyway. No skin off its nose.

And so the banks don't really need to pay me 7% on my CD. They don't need my deposits at all, really.

But there are probably some good corporate bonds that would actually be willing and able to pay me 7%. The trick is to figure out what those bonds are.

Or has the Fed done its communist price-fixing in the corporate bond market as well?

And the Fed doesn’t give a hoot if the mortgage doesn’t get repaid, since it can just print more money anyway. No skin off its nose

This is why Obama says: "This is America, we can do what ever we want"

The Timing of the plan is also rather suspicious. Diversion baby. Don't let Tax payers settle on one issue.

>> “This is America, we can do what ever we want”

I have to say, I do not think Obama said that.

Patrick,

Yeah, The Fed is the mortgage lender for conforming loans until the 1.2T runs out. Then maybe they will print more.

I know he didn't say that, he just meant that. LOL!

Diversion and obfuscation is definitely the name of the game. The bottom line is that falling housing prices means losses for the banks, and trouble paying back the depositors.

Mish connected the dots. "500 Billion for FDIC" Legislation was basically for this plan.

Watching Geithner and Summers making separate appearances on CNBC and PBS today was quite disturbing.

Geithner is looking like all his dishonesty is getting to him, and his big cranium is about to explode.

Summers is looking like an evil industrialist from a movie based on a Charles Dickens novel.

It is getting bad.

Here's my problem:

Suppose we ditch the whole Geithner plan and instead allow FDIC to take all the big banks into receivership. How much money does the taxpayer stand to lose? Do we have to do a 1T PPIP/PPIF experiment just to fond out?

Shadows on the mountain, and the night begins to fall;
Gather up the children, 'fore the darkness takes us all.
Tribe has come together, standin' naked against the night;
Twenty feet from the fire, the evil waits with zombie eyes.

In last week's H.4.1, the Fed went back over $2 trillion by buying up over $150 billion in MBSes.

Oh! Sneakin' through the long grass on leopard feet silently,
A beast already dead comes to join the dance on the zombie.
Ooh! Time has come again - again the moment of truth;
The terror is at hand, and there's nothin' you can do.

Why don’t banks offer loans at 15% to high-risk buyers?

They do, ever heard of a 'credit card'?

From out of nowhere he's there, flashing hideous teeth,
Panic in the crowd, helter-skelter, we're brought to our knees.
Back to the darkness, back on the mountain he stands,
You can't fight a shadow, you can't kill a dead man.

It's kind of funny how the IMF (International Monetary Fund) has gone from irrelevance to center stage in just a matter of months. Following quickly on the heels of last week's news that the Federal Reserve plans to print up another trillion dollars came this announcement that a UN panel wants to replace the greenback with a shared basket of currencies.

Today, according to this Reuters report (hat tip MA), China loudly seconded the plan. Earlier today, China’s central bank governor, Zhou Xiaochuan, offered a bold proposal to overhaul the global monetary system and replace the dollar with the IMF SDR (Special Drawing Right).

The SDR, an international reserve asset created by the IMF in 1969 but little used since that time, has the potential to act as a super-sovereign reserve currency, eliminating risks inherent in any single currency used for that purpose.

EBGuy,

how are East Bay fortresses doing?

Oakland as it is really doesn't need much publicity, but every once in a while, it just has to jump into the limelight by identifying itself as the most dangerous place to live in the Bay Area. Given that Lake Meritt, Richmond, Oakland and even Hayward are all getting out of control, east bay fortresses should be even more fortified because those with money and have to work in east bay locations will have no choice but to huddle together in Berkeley Hills or Piedmont.

On our side, fringe East Palo Alto - the part bordering 101 seems to be quite successfully gentrified. I even heard from a few new worker bees out of grad school considering condo projects next to IKEA. That was unthinkable a decade ago, crossing that bridge was like a journey to hell.

Regarding the east bay, I see it only getting worse in the coming years. The unemployment rate is much too high for the dangerous age range of the east oakland type. It's a powder keg ready to blow. People in certain neighborhoods will become targets and have no escape. They will not be able to sell the house and move when the crime wave covers their "hood".
A to the mutha F-ing K homeboy. Fremont is a BART ride away.

how are East Bay fortresses doing?
Berkeley is definitely cracking in the South and to the West... at the same time, I was talking to a neighbor and the local elementary school will be adding another kindergarten class next year (and portable class rooms were added to the high school this year). So give us your poor, tired double income earning wage slaves yearning for a good education for their children.
I must now confess that all of those 100% financing disasters that I posted as being in the Berkeley Hills (rebuilt after the 91 firestorm) are actually not in Berkeley proper -- they have the Berkeley mailing address but Oakland schools. Buh-bye...
Eye-eye-eye eye of the zombie!

>>You don’t have to be a Kreskin to see where this is going.

Russia and China are tired of US being irresponsible, and want to be more irresponsible themselves?

Ok, let me get this straight:'

First Goldman Sachs received 10B in USG TARP money in 2008.

Then GS received 12.9B in USG bailout money as a beneficiary of the AIG 180B bailout

Then GS *still* wants to sell ICBC stake to raise money to pay off the TARP.

What it means: GS badly needed the TARP money, and even after being made whole by AIG, they still cannot pay back TARP outright. In particular, it means that all the propaganda about "they forced the TARP money upon us, boohoo" is provably false.

All the banks etc that are "threatening to return the TARP money" are just posturing about getting restrictions removed on executive pay and bonuses. There is no way they can return TARP money unless they get another bailout, which is where PPIP (Geithner) fits in.

In general, much of the Geithner plan is really about moving the bad assets from The Fed (where the banks have parked them at face value) to the FDIC (where the taxpayers will be directly liable).

Let me make a cruel observation here.

All those cool-headed savers who have a solid buying power in the housing market, and particularly those who waited on the sideline in the last few years, can ONLY get back ahead if they take a gamble at this point. Gambling on commodities, equities, whatever, just sitting their ass in CD won't get them closer to the goal of buying a home.

If they just keep saving, put it away in USD CD, sorry, I am afraid their previous waiting strategy will turn out very stinky. The Fed will artificially lower the mortgage rate for as long as it can (the current reset rate is even better than the mortgage rate) to slow down the decline, and if they are looking at nice areas, well, they probably have to wait much longer than they want.

I am not saying that such a group cannot afford to buy, they can, but the "deal" they are getting now cannot justify their waiting in the last few years, all because the government is actively and obsessively screwing them.

No doubt, the price has softened (in good areas). But has it softened enough to compensate for not buying in the last few years? No. It is particularly a big No for someone who won't meet the lending guideline today due to lack of dp. Normally when dp requirements become stringent, it should be accompanied by skyrocketing mortgage rate which should have lowered the housing price much further. Now that the government is controlling the mortgage rate, the only measure of safety becomes the dp requirement, which is getting higher and higher as we speak, while those homeowners under water can afford to hold out longer and longer.

This must be the same guy that got fired from BofA today. Nice parting shot.

-----

Bank of America’s Bernstein Says Sell Bank Stocks After Rally
By Eric Martin

March 23 (Bloomberg) -- Investors should sell bank stocks after they rallied 12 percent today because the Treasury Department’s plan to buy toxic assets won’t stop profits from dropping, Bank of America Corp.’s Richard Bernstein said.

OO,

I don't think there's anything "cruel" about it? Not to say there 'isn't' a place for CD's it's just that I can't recall meeting (1) person that claimed "I made all my money in CD's!" Can anyone else?

But has it softened enough to compensate for not buying in the last few years? No. It is particularly a big No for someone who won’t meet the lending guideline today due to lack of dp.

If you did not buy a few years back, but instead rented and saved, you now have the advantage of lower price and lower rates. If you do not have the "dp" (down payment), then you are not a saver.

As long as down payment and eligibility requirements are kept in place, house prices will continue to fall. The lower rates only puts a temporary false hope in the sellers mind, but a little time will correct that. When the lower rates do not have the intended effect, I worry that the gov will initiate policies to eliminate down payments and enhance loose lending. But until then, watch the prices fall.

Another issue is that after the banks have been thoroughly made whole at taxpayer's expense - when the gov owns all bad loans - nobody will care about falling house prices.

DinOr,

I can’t recall meeting (1) person that claimed “I made all my money in CD’s!”

No, but I can say I made my money by working for it and I put my savings in CDs. (I consider owning rental property "work," not investment, along with the taxi job).

Have you met a person who said "I lost all my money in CD's?"

I see your point, but I think people should put retirement funds into insured accounts. Only after the retirement is funded should one take any spare money and gamble on stocks, gold, mutuals, forex, junk bonds, and the race track. Use any winnings to buy that 'vette or woo that hot babe. But, save enough from your losses to drown the sorrow in San Miguels.

Full Commanding Denial

If central casting called for a poised, straight-talking, and capable-seeming president, it would be hard to come up with someone better than the Barack Obama who walked and talked around the White House grounds with Steve Croft on "60-Minutes" Sunday night. He may perfectly represent the majority who elected him, though, because he also appears to be in full commanding denial of the realities overtaking our American experience.

Those realities include the fact that we can't possibly return to the easy credit and no money down "consumer" economy no matter how many nominal dollars get shoveled into the fiery furnaces of banks too-big-to-fail. As Treasury Secretary Geithner's underling, Stephanie Cutter, said last week, "Our singular focus is on increasing lending to support economic recovery. Everything we do to stabilize the financial system is done with that goal in mind."

Lending on the scale that became normal over the last decade is for sure the one thing that we will not recover. We turn around in 2009 to find ourselves a much poorer nation than we thought we were a year ago, especially among that broad range of formerly middle-class wage-earners who lived so luxuriously until yesterday. The public can't process this reality and the president, for all his relaxed charm, is either not ready to articulate it, or can't process it himself.

Everything that we're doing right now is engineered to avoid reality, to sustain the unsustainable, to recover the unrecoverable, when the mandate of reality compels us to face our losses in order to move on to the next chapter of a collective American life. The next chapter would be a society that runs on a much more local and modest scale, centered on essential activities like growing food, requiring harder physical work, and focused attention -- in other words, the opposite of a society lost in abstractions, long-range daisy chains of off-loaded responsibility, and incessant pleasure-seeking.

In retreat from this reality, we've set in motion two forces that are pretty certain to bring us to grief. The first proceeds from the fateful FMOC decision last week at the Federal Reserve Bank to begin buying massive amounts of our own treasury bonds and bills. This is predicated on the idea that the mechanisms of wealth production -- even of illusory wealth, such as the fortunes created by trading securitized unpayable debt -- can keep chugging along, spinning off limitless additional suburban villas, chain stores, car trips, and deep-fried snacks. It would be sententious to explain how this destroys currencies, but wherever "monetizing debt" has been tried before in history, that is the outcome. The result would be ruinous at every level and would lead straight to the second terrible force: social upheaval brought on by the conversion of economic problems into political turbulence.

Those two forces are underway right now, in fact, since the overt monetizing of last week was preceded by the shoveling of bail-outs, which tacitly guaranteed a collapse of credibility in US debt instruments. I'm not in favor of violence and anarchy, but after the AIG bonus affair, it's hard to imagine that we are not one more corporate misdeed away from a rocket-propelled-grenade, or something like that, being fired into a glass office tower somewhere -- and then the "first-broken-window" rule of social disintegration comes into play. Meanwhile, I stick to my time-table of six-to-eighteen months before the reckless creation of new money-for-nothing filters through the system, overcomes even compressive mass bankruptcy, and starts expressing itself in the sinking value of dollars and the revved up velocity of their circulation in pursuit of tangible commodities.

We're already seeing the first twinges of that in the up-creep of oil prices, busting through the $50-a-barrel barrier last week. Since scarcity tends to express itself in gross volatility, it's easy to imagine oil prices rising swiftly beyond the $147-per-barrel record level of last year. As that occurs, the most basic premises of everyday life in the USA will be called into question. If you think car sales have been bad lately, with oil in the $35-a-barrel range most of the winter, just wait. The newly-minted unemployed will be marooned in their subdivisions. They will not be buying GMC Yukons on 48-month installment contracts, let alone X-boxes on their Visa cards. They might be very very hungry, though. All bets are off as to how these social classes may organize themselves to alleviate their hunger (and express their anger about it).

Given all this, it's kind of hard to believe that the savvy, thoughtful Mr. Obama is going along with such a disastrous program as the one his "team" is rolling out. Perhaps his ease and confidence masks a tragically conventional world-view, an incapacity to imagine "change" outside a very narrow range of possibility. I must say I doubt this is the case. I think, he is going along, for the moment, with a consensus of wishes to prop up life as we know it at all costs. This consensus emanates from the top down and the bottom up. The millions of "Joe-the-Plumber(s)" out there don't want to rethink the terms of existence anymore than the lords of Goldman Sachs. I also think that circumstances will force Mr. Obama's hand before long -- specifically that a moment will arrive when he goes on TV and tells the American public that things have changed way beyond the scope of what they even imagined when they pulled the levers last fall and voted for an uncharted future.

Capable observers are calling, meanwhile, for a robust bear market rally moving through Spring, on technical grounds that have little to do with the greater forces roistering in the background. Reality is a cruel mistress. If the stock market rally rolls out as predicted, it will surely fake-out the mainstream media. They'll conclude wishfully and foolishly that something like "recovery" is underway. They may even interpret rising oil prices as a "positive sign" that the great groaning enterprise of the something-for-nothing economy is back "on track."

They'll be shocked sometime after Memorial Day when it all comes off the rails again. We have a lot to sort out and very little time to get on with job. Notice, I haven't even mentioned the potential for mischief and instability coming out of the rest of the world -- enough black swans to blot out the sun. Want some concrete advice? For those of you sitting on US Treasury bonds and bills, now would be a good time to get out.

I just noticed the blog part of the site was down, and that there were no comments from 10am to 7:30pm. Anyone have a problem getting to it today, or was it just down for a moment?