Mish inspired leverage post

by JASON | 12:00 PM in |

Good post by Mish on banking leverage...
http://globaleconomicanalysis.blogspot.com/

If you are out to make a buck on the situation Russ is one of the best ones I've found for trading advice on it.
http://wallstreetexaminer.com/blogs/winter/2009/01/23/thinking-about-execution/

If I might add a little bit to the leverage issue...

The volume of outstanding loans provided by the home-loan banks has increased by 58 percent since the beginning of 2007, to more than $1 trillion at the end of September.

The 12 home-loan banks are collectives chartered by the federal government and owned by member financial firms. The government’s sponsorship allows the collectives to borrow money at low cost, which they lend to banks of all sizes, from giants such as Bank of America to small community lenders. Nearly all U.S. banks are members of at least one of the collectives.

As with other banks, federal regulators require the home-loan banks to keep a certain amount of money as a capital foundation to support their lending.

The home-loan bank in Seattle, which serves the northwestern United States, said this week that the declining value of its investments probably dropped its capital below a level required at the end of the year, though a final determination won’t be made until the bank completes its fourth-quarter bookkeeping.

The home-loan bank in Pittsburgh warned yesterday that it, too, was in danger of dropping below a capital threshold.

And Moody’s estimated that six more home-loan banks could follow Seattle and Pittsburgh.

The most immediate impact is that the collectives are paying less to their members. Several of the collectives have suspended dividend payments. The 12 collectives had paid about $1 billion in dividends to member banks during the first nine months of the year. The payments are an important source of revenue, particularly for smaller banks.

Many banks also hold relatively large amounts of stock in the collectives. In normal times, the banks can sell that stock back to the collectives, redeeming their investments. But several of the collectives have announced moratoriums on redemptions, freezing access to the money.

And if the situation continues to deteriorate, the collectives could require their members to make additional investments.

The collectives are a particularly important source of funding for troubled banks because the firms often can’t borrow from anywhere else. Washington Mutual increased its borrowing from the Seattle home-loan bank from $9.4 billion at the end of 2007 to $15.7 billion at the time of its September failure.

That has raised concerns that the collectives are propping up banks in a way that increases the eventual cost of the failure. Because the lending is secured, the collectives have a first claim on a failed bank’s remaining assets, draining money that might otherwise be available to depositors and creditors.
http://www.washingtonpost.com/wp-dyn/content/article/2009/01/16/AR2009011604268.html

Is the mortgage debt situation improving?

The wave of subprime delinquencies appears to have crested. But in October, for the first time, the number of prime mortgages in delinquency exceeded the subprime loans in danger of default, according to The Post's analysis.

This trend shows up most acutely in California and other high-growth regions, such as Arizona, Nevada, Florida and pockets of the Washington region, most notably in Prince William and Prince George's counties.

The recession has made it tougher for people to pay their mortgages, and crashing home prices have left many borrowers underwater, unable to sell or refinance their way out of trouble. One of every five mortgage holders now has a home worth less than the mortgage on it, according to First American CoreLogic, a firm that tracks mortgages and provided data for The Post's analysis.
http://www.washingtonpost.com/wp-dyn/content/article/2009/01/16/AR2009011604724.html

That trend will continue to get worse...


As pink slips mount, so do calls to state unemployment centers. Those calls are pouring in so fast that state unemployment claim systems are overwhelmed.
http://globaleconomicanalysis.blogspot.com/2009/01/unemployment-claims-crash-multiple.html

For the latest news on the housing front with the best statistics and analysis I've found on the web see the Calculated Risk blog...
http://www.calculatedriskblog.com/

The FDIC,the insurance for the US banking system, has roughly $43 billion to cover $6.5 trillion in obligations. How's that for leverage?

A little analogy if I may…


MOGADISHU, Somalia — The trouble started when government soldiers went to the market and, at gunpoint, began to help themselves to sacks of grain last week.

Islamist insurgents poured into the streets to defend the merchants. The government troops took heavy casualties and retreated all the way back to the presidential palace, supposedly the most secure place in the city. It, too, came under fire.

But now its leaders say that unless they get more help — international peacekeepers, weapons, training and money to pay their soldiers, among other things — this transitional government will fall just like the 13 governments that came before it.

In recent weeks, the Islamists have routed warlords and militiamen who have been absorbed into the government forces but are undermining what little progress transitional leaders have made with their predatory tactics, like stealing food. After 17 years of civil war, Somalia’s violence seems to be driven not so much by clan hatred, ideology or religiosity, but by something much simpler: survival.

“We haven’t been paid in eight months,” said a government soldier named Hassan, who said he could not reveal his last name. “We rob people so we can eat.”
http://www.nytimes.com/2008/03/29/world/africa/29somalia.html

There’s the endpoint of our current trend if its not routed.

Side note: The ironic thing about Madoff’s scam is that most of his investors invested with him because they thought he had insider information and was cheating the system.

Their due diligence came up empty handed but they went along with it anyways out of pure greed thinking he was cheating someone else when the whole time he was cheating them.

Pure sweet irony!

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