It Happened

Maybe the bankers at Goldman Sachs were on to something. In July 2008, the CEO LK Chaudhry of the Indian (The country to any prowling PC police) company Graziano Pvt. Ltd, was beaten down and killed by fired workers inside the office premises.
Don't piss off desperate people.

"It's a Trap" Part I - Sterling Trap

Admiral Ackbar where are you when the world needs you? China has increased their foreign reserves to over $2.4 TRILLION at the end of 2009 up from $1.9 TRILLION dollars on September 2008 (over half in US Dollars). The Financial Times claims this partly comes from the Euro and Yen declining. Nevertheless, this is shocking.

China previously has called for a new international currency reserve to replace the dollar, and yet, continues to acquire dollars (Treasury Bills) to increase reserves. A March 23, 209 NY Times article articulated Chinese concerns:

"Nicholas Lardy, an economist and China specialist at the Peterson Institute in Washington, said that through its proposal, China was indicating that the dollar’s long dominance was unfair, allowing the United States to run huge deficits by borrowing from abroad, and that the risks to holders of Treasuries were growing.

'Chinese are quite concerned that the large U.S. government deficits will eventually lead to inflation, which will erode the purchasing power of the dollar-denominated financial assets which they hold,' Mr. Lardy said. 'It is a legitimate concern.' "

Paul Krugman (not necessarily my favorite economist) provided some background in an April 3, 2009 NY Times Article:

"In the early years of this decade, China began running large trade surpluses and also began attracting substantial inflows of foreign capital. If China had had a floating exchange rate — like, say, Canada — this would have led to a rise in the value of its currency, which, in turn, would have slowed the growth of China’s exports.

But China chose instead to keep the value of the yuan in terms of the dollar more or less fixed. To do this, it had to buy up dollars as they came flooding in. As the years went by, those trade surpluses just kept growing — and so did China’s hoard of foreign assets."

I wish there was an example from history we could examine to enlighten us all. Teh internets (sic) save the day once again!

Post WWI was a time with great economic uncertainty. Governments were mostly adhering to a gold standard for their currency valuations and France's goal was to become a financial power house. Some guy named John Maynard Keynes in "Essays of Persuasion- Open Letter to the French Minister of France" noted that France was experiencing a large trade outflow and foreign investment inflow. France's government was artificially keeping internal prices low. France achieved this by diversifying reserves with foreign currency focused on dollars and the sterling.

France accumulated over half of the world's reserves by the 1920's. Confidence in the Sterling and, later, the dollar eroded forcing France to attempt to diversify their reserves, converting into gold assets. Because reserves were concentrated in these two particular currencies at such magnitudes, France could not diversify without accepting a huge loss and crippling other currencies (oh yeah and eventually it's own). IT WAS A TRAP!

If you have dusted your statistic skills off lately, please read Olivier Accominotti's paper "The Sterling Trap Foreign reserves management at the Bank of France, 1928 – 1936"

It explains The Sterling Trap in great detail and makes my skin crawl.

Let's examine the best investment strategies during the depression:

Pay down debt

Investments during German hyperinflation

Stocks

We'll look at Japan's Trap in Part II

Now for some Admiral Ackbar outtakes:

Lookin' Like a Fool With Your Head In The Sand

Today's expression of the day is "pretend and extend". Retailtrafficmag.com goes on to explain: "'pretend and extend' describes an ongoing phenomenon in commercial real estate finance: as the level of distress mounts, lenders have been loath to seize properties from troubled borrowers. Instead, in many cases banks are generously granting extensions or other modifications even in situations where it appears unlikely that borrowers will be able to pay back the loans. lenders are attempting to avoid recognizing writedowns and losses on their commercial real estate loan books. Loans originated at the height of the market were done at near 100 percent loan-to-value ratios and underwritten with generous assumptions on increasing occupancies and rents. But in the past two years commercial real estate values have dropped considerably and fundamentals have weakened. Rents and occupancies are now dropping quickly, not rising. On top of everything, a major source of financing, the commercial mortgage-backed securities (CMBS) market, remains locked down."

This article is from July 2009. Even then, loan modifications outnumbered new loans 2-1. Fast forward today, and it looks like banks are not only putting their heads deeper into the sand, but trying to breath it in as air.

CNN Money reports on 02.14.10: "After 13 months of consecutive declines, overall commercial property values climbed 1%, according to the most recent monthly reading by Moody's/REAL Commercial Property Price Index. Even well-respected bankers have offered a glass half-full outlook on the state of the commercial real estate market. 'Commercial real estate is a train wreck, but it's already happened,' JPMorgan Chase (JPM, Fortune 500) chief executive officer Jamie Dimon said during a company-sponsored conference last month."

I call shenanigans! No one bank, no one market, no one industry can completely realize a loss UNLESS all lenders fully disclose their losses. Even though banks are reporting Non-Current Loans, I would be willing to wager a large amount of money that a significant percentage of current loans are being propped up artificially. Borrowers are playing a shell game, using other loans to pay other loans in a vicious cycle. Hell, Visa reported a 33% gain fiscal first quarter as more consumers used cards than cash. Anyone else see a small issue with this?



Your average community bank can't bear to call a loan on their golfing buddy's business. Multiply this scenario by a few hundred thousand. This is why you'll see more banks go under. With $1.4 trillion dollars of commercial loans coming due in the next three years, it will only get worse. No one is buying commercial paper. What will change that?

Bankers With Guns

It must be a heavy burden carrying a guilty conscience. It might even be a heavier burden having a private security team and gates around your residences. Bloomberg reported today that many Goldman Sachs employees are taking extraordinary measures to protect themselves against a potentially angry public.

NYPD has revealed many bankers are applying for gun permits. You must possess a spine before firing a gun, however. Where could you get a permit for that in NYC?

Wouldn't it be easier to own up to your mistakes and quit milking the government's (empty) coffers? Nah!

I Love Australia

Who says bankers aren't fun. Watch wealth adviser Martin Lakos on the financial market’s reaction to the Reserve Bank keeping interest rates on hold at 2.30pm while an associate watches porn in the back ground.



VIDEO: Banker busted

Love how he turns around at the last second.

If my borrowers failed before, I am sure I can do better

Banks are trying to play builder. This should work out well.

Banks%20take%20over%20where%20builders%20left%20off

HSBC Head Sees Western Banks Returning to Asian Lending Model "Turning Japanese"

The Bloomberg report quotes HSBC Holdings Plc Chief Executive Officer Michael Geoghegan believing that more countries will adopt the mortgage lending caps that protected Asia during the collapse in the U.S. and U.K. housing markets.

“The fact that Asia does guide you to the sort of loan-to-value ratio you should have has certainly helped Asia through this crisis,” Geoghegan said in an interview with Bloomberg Television today. “Making sure people have their own skin in the game as well as the bank’s skill in the game is important."

Bravo! Bravo! I am sure Mr. Michael "Notradamas of my time" Geoghegan was shouting this from the mountain tops in 2005. Oh, he wasn't and was "confident that we have the management skills to manage any deterioration in the overall market"?!? Poser.

Truth of the matter is that the U. S. had the 20% down 80% mortgage long before the current hangover. Hell, we even had a 50% down payment requirement before 1934.

So why did the U. S. change these tried and true underwriting standards?

Banks are racist! Stan Liebowitz, the Ashbel Smith professor of Economics in the Business School at the University of Texas at Dallas, opines in the NY Post (beware of racy side pics).

His argument essentially states that banks did not lend to areas typically populated by minorities because their socio economic status generally had weaker finances. Discrimination was obvious and forced passage of the Community Reinvestment Act, Fair Housing Act, Fair Equal Credit Opportunity Act, Home Mortgage Disclosure Act, CRA ratings of the Financial Institutions Reform Recovery and Enforcement Act, Federal Housing Enterprises Financial Safety and Soundess Act, and the Riegle-Neal Interstate Banking and Branching Efficiency Act to make sure any future public policy was escalated to a national level.

Note: a 1996 paper by Raphael W. Bostic, Division of Research and Statistics Federal Reserve Board of Governors states that default rates between races were equal in previous years (p.6) and that discrimination occurred with minority applicants in regards to debt-to-income ratio in marginal applications(p. 20). However, minority applicants actually fared better in loan-to-value requirements (p.20)

But back to Liebowitz's angle: Community activists (ACORN and others) called out banks in the 80's, and later shook them down to get their way in the 90's and 00's. So there you go.

What ever good happened from initial efforts led banks to find ways to profit. George W. Bush, Bill Clinton and a Democratic Congress are to blame for "opening the doors to home ownership". I see you Barney Frank!

Banks started lending, creating creative mortgages (NO/LOW Doc, Alt -A, 100% LTV, 110% LTV, etc...) to accommodate this movement and quickly shifted risk on others. This was done by syndication/packaging loans and selling them to investors. Burn and churn baby!

And yet, as banks are flailing from the fallout of their follies, the federal government, via FHA loans, is perpetuating the cycle.*

So this "Asian" financial model we are returning to was initially American. We just wanted to open the doors of home ownership at all costs. Unfortunately, these earlier attempts to empower minorities have caused unemployment in minorities to hit 25 year highs; double the white unemployment rates.




*Albert Einstein once said “The definition of insanity is doing the same thing over and over again and expecting different results”.