The Paradigm Shift : “Too Big to Bail Out”

Posted on September 15th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

The Paradigm Shift: “Too Big to Bail Out.”

Is anyone really set for this?  A friend, Bill Fleckenstein, told me “to win this game, all you have to do is recognize when other people finally ‘get it’.”

From what I have seen tonight from .gov and heard in the past couple of weeks from clients and the financial press, perhaps the proverbial ‘light bulb’ just went on. Is it possible? Does everyone finally get it? For example, do people finally understand this is not so much a liquidity crisis but a capital issue?

A paradigm shift back to ‘normal’ maybe occurring. Tonight sure looked like .gov is viewing these events as ‘too big to bail out’. That is more than a shift, that is a full 180.

‘Maybe its different this time’ was perhaps the past two decades of free money and ultimate leverage. Now, its time for some harsh reality. 

It looks like tonight that .gov decided to protect its balance sheet just like the banks have done for the past year. It is every bank for themselves. The Gov’t threw its balance sheet at the GSE’s just two weeks ago and here we sit. Nobody, and I mean nobody is prepared for this. And Nobody, and I mean nobody may be able to stop it. 

Step back a minute and just think about it. All the pieces fit including the $70bb bank consortium that will mimic a Fed facility used by member banks to fill each others balance sheet holes. In addition, the new Fed rule changes accepting stock and short-term notes at the various Fed facilities sure seems like a way of temporarily slowing failures with less risk to the tax payer. This, on the surface, looks in no way is as significant as the TAF when it was created. 

However, this little ditty that comes along with the loosened rules brings in some questions. Basically, this sets up for commercial banks to take out broker dealers. So, now money from from insured naive depositors can go to fund speculative brokerage operations.

“In a third step, the Fed said it would temporarily allow insured depository institutions to extend liquid funds to their affiliates for assets that would normally be accepted in tri-party repurchase agreements.”

Tomorrow’s AIG story will shed some more light on these thoughts. AIG asked for an unprecidented ‘bridge loan’ from the Fed before tomorrow. We will see if .gov stands up. -Best Mr Mortgage

48 Responses to “The Paradigm Shift : “Too Big to Bail Out””

  1. Mr Mortgage, was the subprime universe a signifigcant cause of this mess? If it was, what will alt-a universe do to it? When will the ALT-A wave come in full force again?

  2. What I want to know is, where are those banks each getting $7 Billion to toss into the furnace – I mean, plan? I thought they were hurting for capital.

  3. Nobody knows exactly what’s happened or what’s happening. It’s so goofy now, even the speculation doesn’t make a shred of sense. I think the only thing we know for sure is that whenever these BIG DOGS get together for these weekend meetings, it’s an active crime scene. The Fed may be doing shadow bailouts with LEH, MER and AIG. BAC may be conspiring with MER to buy both sinking wrecks a tiny bit more time. God doesn’t know, either. But criminal activity is afoot and we’re all victims. It’s Plunge Protection Team to the exponential power now in a desperate last stand. Maybe they manage to save another day, and CNBC and Cramer will be raving bottom calling lunatics again at tomorrow’s close, but it’s just a day. The market’s lost. The economy is in the crapper. The jig’s up. They’re all crooks and liars, and just as a fiat currency can plummet if confidence in it is lost, so has our entire fake fiat economy. We’ve already jumped the shark, only now EVERYBODY knows it.

  4. How is accepting equities something that implies “little risk to the taxpayer?” Equities can lose 10% of their value in a day. It seems like a pretty huge risk to me. Of course, equities may not be much worse than the crap the Fed has been accepting.

  5. Up front haircut is like 25%. That is decent. But I am still trying to get my arms around Super 23.

  6. Nate G- I concur on your take. We should start the prosecutions of the criminals immediately.We have all been sold a pile of dung while the elitist’s escape with all the jewels. There has never been a scam as big or successful as what we are experiencing right now. The corruption is pandemic at every level.

  7. So they are loaning out at 75% of the value? Hmmm … that certainly does help. Where did you get that info?

  8. I agree with the whole BAC and MER buy out BS. Just a way to keep people thinking MER is worth something. It keeps MS, and GS from getting pounded down a-la- LEH, MER, and Bear. Yes, BAC and CFC was proposed one way and when the deal closed…. yup… new info. I smell the same crap here.

    Why take equities, etc…. Because the .gov only accepts good rated paper or assets. Maybe there isn’t any good paper left to turn in because they’ve already done so. Big credit downgrades lowers paper to values the .gov won’t take. Hence, companies still need taxpayer money to waste, but have no good collateral left to use.

    Pundits said some reductions were taking place at the auctions by ibanks. Yea… maybe because all they had to turn in was already used.

  9. Was the equities reporting mistaken? This guying is saying that the Fed announcement doesn’t mention equities as collateral:

  10. A bit off topic , but anyone want to wager a guess on how the market reacts to this come Monday? Could the media somehow spin this once again into a “good thing event” From my logical standpoint this is not good news but who says the market was logical these days?

  11. Total derivatives at $455 Trillion…WTF?? What is this, the global finance version of Amway?

  12. I think the “equities as collateral” rumor is a mistake. The Fed, in their statement, said nothing about changing the rules to accept equities.

  13. It seems BAC must have some back-stage understanding with the Feds. There is no other reason I can think of to pay so much for so little so too soon. There can be no bottom until all this crap is put out in the sun and marked to market! The market’s going down tomorrow, but wherever things end up in a few days you can short it or just sell while you can. I think Citi is the best, safest short and AIG the most dangerous. One more thing: BAC has been too soon before–with Countrywide. Think about this: 44 billion for MER?! Where is the value? Why isn’t Buffett stepping up to the plate and smacking these choice chickens flying by?

    short C, but only a very little.

  14. So the Subprime wolf huffed and puffed and blew down Wall Street’s houses of straw. The Alt-A wolf will blow down the Wall Street houses of sticks. Does anyone think the Wall Street houses of brick can withstand the Credit Bubble wolf?

    “Fasten your seat belts, it’s going to be a bumpy night.”
    – Bette Davis

  15. Goldman’s out with it’s earnings today. So if they post badly could hammer the banks further.

  16. what happens if WaMu fails? FDIC doesn’t have enough money, European stocks getting hammered right now.Some are down 5%.

  17. Apparently, you haven’t been paying close attention. This is hardly a matter of “too big to bail out.”

    When the Fed Reserve became far more generous with their loans, the gov embedded people inside all the IBs and large broker-dealers. These folks were given unprecedented access to their inner workings and activities.

    When Bear Stearns was faulting which occurred before this embedding, the gov was at a significant disadvantage knowledge-wise. They had to rely on Wall Street titans telling them the entire financial system would meltdown unless the Fed Reserve backstopped a buyout. After gaining internal access to all these players, the gov gained a far better idea on the impact of allowing any of these companies to fail and can call the titans’ bluffs when they won’t participate without a gov backstop.

  18. This ‘Super 23 Provision’ could be ugly.

    “In a third step, the Fed said it would temporarily allow insured depository institutions to extend liquid funds to their affiliates for assets that would normally be accepted in tri-party repurchase agreements.”

    Basically sets up for commercial banks to take out broker dealers. So they use money from insured naieve depositors to fund speculative brokerage operations.

  19. If you look for an investible bottom today a la that hysteric Cramer, good luck! Don’t underestimate this LEH damage or how long it will take to play out.

  20. How can we have believed that the banking sector was self-regulating?. that no having any rules would have been the best way to have efficiency?
    I wouldn’t have a meal in a non regulated restaurant, I wouldn’t send my kids to a non-regulated school… why did we give our money to non-regulated financial insitutitions then?

    brin them to justice!

  21. Viv: You never know what kind of report you will get as these guys (all of them) lie so much about there “assets”
    Should be an interesting day.

  22. Viv, you are correct that the FDIC doesn’t have enough money to “Bail Out” WaMu and I am surprised nobody else has mentioned this alon with the other companies names being thrown around today and yesterday. It is IMO simply a matter of tim before they are on deck. The FDIC does have a LOC with the Treasury, but only for $70 Billion. So if they tapped all of that then along with the $45 Billion they already have they would then have a total of $115 Billion. Small problem however… WaMu has deposits totalling roughly $143 Billion.

    I suppose the FDIC will need to go to Congress / Treasury and ask for some of that $800 Billion that was partly for this very reason IMO. It is certainly getting interesting around here!!!

  23. Can we still vote for Ron Paul? Clearly our over leveraged, fractional lending, smokey mirrored system does not work.

  24. “Basically sets up for commercial banks to take out broker dealers. So they use money from insured naieve depositors to fund speculative brokerage operations.”

    I assumed banks did this already with CD’s etc. Where else would they get the money that they over-lend, and over-leverage themselves from?

  25. Right now the Fed is dumping large amounts of cash into the market to prop it up. Anyone want to guess on the size rate cut?

  26. So once again it has been proved that the real issue is insolvency, so how is the Fed loosening it’s lending standards yet again going to help solve the issue? Lenders do not need loans but rather capital. Loans are merely allowing them to exist a tad longer and is doing nothing for their balance sheets. How is giving loans going to prop up the capital for all of these distressed and troubled companies? Last I checked without capital lenders don’t exist and as a result they will default on these loans. So who is left holding the bag yet again? You guessed it… The American “Tax Payers” will be on the hook once again!!! This Government we elected into office is so damn good to us aren’t they???

  27. Treasuries are through the roof today. Hats off to (I think I recall) Tony for predicting this.

  28. Question for MM. What’s your estimate of how long the Shadow foreclosure’s cant be hidden any longer and the banks have to start reporting the carnage? If Wells keeps extending the range for non-performing loans, it could take quite a while, no? Could they all take a page from F/F and make them 2 years? Doesnt general accounting principles have to kick in some time on this? Seems like this is at the crux of a lot of why the market is still not crashing yet.

  29. Looks like Thain called Lewis early Saturday to pre-empt any possibility of BAC buying LEH by offering him what BAC really wanted.

  30. Hi Peter – who the hell knows but they have to be very careful dumping everything because it becomes a snowball effect. For example if in certain markets the REO is really high and they have multiple homes they cant release inventory for fear of canabalizing the market and themselves. It is a mess and yet, these idiots won’t sell anything of size in bulk. I have an investor right now who will buy $500 mil in CA vacant REO and my bank sources are giving me a bad time about the price.

    Screw it…let them hold over the winter then and we will pay slighly higher prices after values are down another 20% next March going into the selling season I say.

  31. […] Full Analysis Here […]

  32. NY State just gave a $20 Billion loan to AIG and strongly urged the “Tax Payers” of America via the Fed to do the same!!!

    I guess we are starting to see how this is all going to play out…

  33. Some rumors flying around that Warren Buffet is “thought” to be in talks with AIG. Today I thought I saw Jim Morrison talking to Elvis at the mall. Don’t you just love the main stream media.

  34. Mr. M. you asked what I think was the most important question above.

    Does everyone finally get it?

    I don’t think so by the actions we are seeing today, but I do believe you are 100% correct that until that happens nothing will change.

    No more false bottoms being called!

    No more silly, we are not in a reccesion statements being made!!

    No more talk of containment or recovery!!!

    People need to own up to the problems at hand and realize WTF is going on. Stop giving out loans with only 5% down. Hell, that small amount down is lost before closing in terms of it’s value. We need 20% down for every loan made. Also these lenders need to stop taking on more risk at the “Tax Payers” via the FDIC’s expense. We are the ones ultimately insuring this risk in the end. FHA and FHOC STOP IT already!!! F & F STOP!!! MG, what is wrong with all of these people? They cannot really be this stupid!!!

  35. If AIG does not get a loan from the Fed it has been suggested that they will only have 48-72 hours to survive as they will be downgraded. So if they are really and truly in that bad of shape, then why would we want to give them any money?

  36. Mr. Mortgage

    Very astute observation – ”to win this game, all you have to do is recognize when other people finally ‘get it’.”

    IMO, people don’t yet get it – the Greenspan put – which is that the Government will bail it out and buy on the dips is still prevalent although its clearly not working. Notice that the market is only down 2-3% today. A rate cut will come soon and that will goose the market – there’s an election coming up – so Congress will also feel quite generous. We’ve got more hope and denial yet and some ways before we see resignation and capitulation.

  37. Yank-Our-Chain Paulson just said:

    “Our banking instututions are a safe one and a sound one”

    There is nobody on Earth that can believe even 1 word out of this guy, and his co-conspirators, say.

    Get ready for the wild, wild west up in here!!!

  38. Paulson’s not saying anything.

  39. Why is the government allowing banks and brokers to become (or remain) too big to fail? Jeez, we’re in a hole, why doesn’t anyone stop digging?

  40. Brant, well Paulson said clearly “NO” to helping AIG so that was something…

  41. So which way does AIG head as we go further into the week? They are currently down 56% and their stock has lost more today than it is currently valued at. Now that is saying something. This N.Y. allowed loan comment today was none other than lifting restrictions so that AIG could tap it’s own assets to raise $20 Billion in capital. So it basically didn’t raise any capital and it is really just smoke and mirrors if you ask me. I see the 48-72 hour window in play and they will be next weekends soup dujour…

    WaMu is down 26% as is WA today. Look for these two firms to get in trouble soon as well. WaMu is really in trouble because they cannot raise any future capital without paying a serious premium that would not fiscally make sense for them to do. They piegon holed themselves last time they raised capital. Without it they are bleeding a slow death. A small run on this bank would wipe out it’s ability to function and it will be over for them same day if that takes place.

    Today is the beggining of this mess unraveling and unravel it shall… IMO!!!

  42. News out – ‘Too Big to Bail Out’… Gov’t begs JPM and GS to bail out AIG with a $75bb bailout. My paradigm shift theory still in tact.

  43. Cramer: “AIG must not be allowed to fail.”

  44. Mr. M. do either of them actually have the financial resources available (liquid)to even do that? If they did wouldn’t it make much more sense to use it to strenghten themselves. Maybe mark to market some holdings and take the write downs and even keep or better their market ratings.

    What chance do the auto and airline industries now have at a “Bail Out” in the near future? I would say about ZERO!!!

  45. Amazing times …
    There is a more important issue than people ‘getting it’. Eventually everybody will get it whether they want to or not. For me, the question is what happens then? Which will win out, deflation or inflation?

    One scenario is that the .gov will have printed so much money that inflation, or even hyper-inflation, will be inevitable. This is easy to understand. Among other things, it leads to the collapse of the dollar in absolute terms. Of course, other fiat currencies could follow it down, leaving relative values mostly unchanged. Gold is a logical investment in this scenario.

    The second scenario is massive asset deflation will over whelm inflation pressures. Obviously, we have massive deflation in real estate prices right now. This what happened in Japan in the 1990’s and here during the depression. Contrary to the popular belief that the Fed didn’t do enough in the depression, they actually flooded the market with liquidity, just like today. The problem was it didn’t help. Banks used it to cover losses and wouldn’t lend it out. We had to wait for WW-II to jump start the financial system. In a deflationary scenario, gold could decline along with other hard assets, and, ironically, cash would be king.

    Clearly, as anyone who reads this blog regularly knows, banks will be facing huge losses for years to come. The credit problems are spreading through the tranches of mortgages, to autos, credit cards, student loans, soured private equity deals, corporate bonds, commercial real estate, derivatives, munis etc. etc. The consequent collapse in asset values will be huge and persistent.

    The fed will throw money at it, perhaps even drop it from helicopters, but it’s just going to take a long time to unwind.

    I am out of depth here, but I believe that massive deleveraging in a fractional reserve banking system, with its money multiplier effect, destroys more money than is created by the fed in bailing it out. Ultimately, the money supply declines despite running the printing press full blast, and you get falling prices and deflation.

    Of course, it probably be a mistake to underestimate the size of Ben’s press. His famous helicopter remark constitutes a warning to those who thinks he’ll ever run out of ink. Besides, today’s money is just bits on a disk drive; more money doesn’t even require more bits, just a different pattern.

    Very strange.

    So as an investor I have to decide, after everyone has gotten it, whether I think this crisis will lead to deflation or inflation. The two cases call for very different investment strategies. Gold being just one example. In the meantime I have some gold, and a lot of cash (and too much real estate, but I have to live somewhere).

    And if the world decides that gold is really the ultimate reserve currency, and not just a useless commodity, then it could go up in any kind of desperate situation. BTW: if it’s not a currency, then why does the fed still have over 8000 tons of the stuff?

  46. No link needed for this. For those of you who missed “Bazooka” Hank Paulson’s press conference today, you missed a doozy. He looked like a rabbit who had undergone bazooka blast after bazooka blast just over his head before coming on stage. Visibly shaking, twitching, stuttering trying to calm the world down, he did none of these.

    As he was speaking the DOW tanked forty points.

    I understand that he didn’t cause the mess, but he surely didn’t help anything.

    Hank, go polish your bazooka.


  47. Wells Fargo admits exposure to Lehman and WaMu geeting hit after hours. I assume others will announce exposure thoughout the evening. A lot of people staying up late tonight.

    Last time the Dow fell by such an amount it had a 3 digit increase the following day… thoughts? I don’t see it…

    Credit will get really tough to come by now and some are suggesting that F & F (“Tax Payers”) will now truly dominate the housing market. Is this a good thing or bad thing? I think if proper risk measures are taken by high downpayments we should be alright. I just don’t see that happening however, so it is more than likely a very bad thing.

  48. WaMu downgraded to “Junk” by S&P

    AIG Downgraded to A by Fitch

    Boy, you couldn’t get these guys to rate the value of sand a few months ago and now they are just whacking the crap out of everybody!!!

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