Oil's energy contribution has declined by about 12% since 1999. The world's economies have also declined by about 12%. (Using conventional metrics, which are time delayed determinations, this will only be seen in hind sight). The massive destruction of asset values now occurring testifies to it happening.
Peak is well behind us, world economies have peaked and will continue to decline.
Joined: Sep 25, 2004 Posts: 4725 Location: Boston, MA
Posted: Tue Sep 23, 2008 10:05 pm Post subject: Re: Bernanke lied, no bailouts is only a recession, not the
DantesPeak wrote:
So this plan may actually leave us worse off than if no plan was put into effect.
Was there any doubt about that?
This program is a logical contradiction.
If the assets are good, private companies would buy them. No government help needed.
If the assets are bad, the government shouldn't be buying them at the price of good assets. If they buy them at "bad asset" prices, the companies will still go bankrupt.
If we buy them at the price of good assets, the taxpayer is going to get hosed.
We are going to buy garbage at the price of gold and allow taxpayers to foot the bill for the difference.
Welcome to Amerika. _________________ "www.peakoil.com is the Myspace of the Apocalypse."
Posted: Tue Sep 23, 2008 10:05 pm Post subject: Re: Bernanke lied, no bailouts is only a recession, not the
jboogy wrote:
Foreign governments can see this and they may try to dump their dollars, it may be hyper-inflation. We have nuclear weapons now, and crazy megalomaniacs who want to lead.
We as a nation will not go quietly into the night.
That's my big concern, how will the American Empire end? And I do fear you are right in your assessment :/
Posted: Tue Sep 23, 2008 10:21 pm Post subject: Re: Bernanke lied, no bailouts is only a recession, not the
One way or another, I can't agree more. See that LIBOR lock up earlier this morning? Americans will start looting and shooting after 48 hours if their credit and debit cards stop working. That's really what this is most likely about.
Trying to impose any kind of control - forget spin control, the cat's out of the bag and everyone already knows who to blame - it will be futile.
Rob 300 million people and all of a sudden they realize they can't buy food, gas or water because of it? How long will that baby have to cry before a million years of instinct over rules social construct: someone stole everything you have, and law or not, your kid is starving.
Tick-tock-tick-tock...
You'd better run, squirrel.
jboogy wrote:
We as a nation will not go quietly into the night.
Joined: Nov 11, 2007 Posts: 121 Location: Portland metro, Oregon
Posted: Wed Sep 24, 2008 12:23 am Post subject: Re: Bernanke lied, no bailouts is only a recession, not the
seahorse wrote:
Lose respect for me because I still believe in the Constitution? Lose respect for me because in a panic you are ready to give up on the most basic ideas of gov't that were developed and instituted in time when there were no fossil fuels? My belief in our Declaration of Independence and the rights secured by the Constitution go beyond my selfish personal needs to survive PO. I find it difficult to understand how people can be so willing to throw away such core belief out of selfishness. Paulson is stealing more than taxpayer money. He is stealing your rights to a government of the people, by the people, for the people. We are little better than a dictatorship, we are an oligarchy. Your willingness to give up those rights in a selfish panic makes you no different than Paulson stealing our rights.
I'm against this bailout because these are evil men who are stealing not only our money, but more importantly, robbing from us and our children the rights and values which gave us such a great country, a country that I hoped my kids would grow up, love and share. But we are no longer democratic, and that greatly saddens me.
As a middle class father of three children, it is my responsibility and duty to protect my country, our rights, and pass the baton some day to my children. Like it or not, this is happening on my watch, and I have to be willing to sacrifice my life, otherwise I sacrifice their rights, their country, which is not mine to sacrifice. It literally means that much to me.
Don't confuse surving PO with the survival of your country. They are not mutually exclusing. Again, our Constitution was drafted and signed by men that never had the materialism produced by fossile fuels, which only means that those ideals can survive without fossil fuels, they are the one thing that PO can't take from us. The only way we could ever lose those ideals is if we let someone take them from us. We can adapt to PO, but we cannot adapt to men like Paulson taking our country. Allowing men to take our rights from us is far worse than anything PO could ever take from us.
Let there be no mistake, Paulson will get his money. As I have said in other threads, there has been a coup in Washington, so we will have carpet baggers leading our country and coming up with the solutions to PO and the like. So, should anyone take any heart at this? No. Just when the US needs a Lincoln or Jefferson at the helm, we have the Paulsons, so, somehow I don't think this is a postive move for survival of our democratic ideals. I could be wrong, but its more akin to the burning of the Reichstag, and I apologize for spelling that wrong.
Well, my respect for you has grown immensely.
I'm with every word you said.
Seahorse is demonstrating why Shakespeare wrote, "First, we kill all the lawyers." It's a few noble and honorable lawyers who make a stand for justice that are the only line between YOU and TYRANNY. If they/we are gone, your very last option is armed conflict or abject servitude.
Take your pick. And try not to let personal greed be the light that guides you.
Joined: Mar 25, 2008 Posts: 890 Location: Alif Lam Mim
Posted: Wed Sep 24, 2008 8:29 am Post subject: Re: Bernanke lied, no bailouts is only a recession, not the
Quote:
A deflationary credit meltdown caused by rising interest rates to finance all of this is IMO actually worse and more immeadiate than the so called alternative, letting finance companies sort out their losses.
How would flooding the world with another trillion dollars in a short period of time cause a deflationary credit meltdown? I would think that it'd be a hyperinflationary crisis. Wouldn't letting these banks go belly-up destroy hundreds of billions (trillions even) of dollars, thus causing deflation?
I've been kind of busy lately, so I haven't been paying much attention to this story that much nor had time for all of the details. It seems like everyone is in one of two camps: either we bail out the banks or we don't but either way, we end up with a financial meltdown and people are raping and pillaging in a matter of weeks or months.
From what I can gather, a lot of very wealthy people would lose their shirts without this bailout. Financial instruments grind to a halt, loans are nearly impossible from banks, bank failures galore, etc. However, not everyone's money is lost. Most people don't have money in Goldman Sachs or JPM. They have it in Suntrust or BB&T, and so forth. Or are we talking about the collapse of 99% of banks, large and small?
At this point, I'm ready to write my Congressmen and tell them to not vote for the bailout because it's illegal and immoral and I don't see how a failure of many of the large banks will cause crippling affects in every nook and cranny of the economy. I see the depression it will likely cause as something of a good thing from the environmental and resource standpoints.
Either way, looks like I made out like a bandit with 40 cent/lb spaghetti that I stocked up on. _________________ Riches are not from abundance of worldly goods, but from a contented mind.
Posted: Wed Sep 24, 2008 9:19 am Post subject: Re: Bernanke lied, no bailouts is only a recession, not the
American people says NO to bailouts:
Quote:
Sept. 24 (Bloomberg) -- Americans oppose government rescues of ailing financial companies by a decisive margin, and blame Wall Street and President George W. Bush for the credit crisis.
By a margin of 55 percent to 31 percent, Americans say it's not the government's responsibility to bail out private companies with taxpayer dollars, even if their collapse could damage the economy, according to the latest Bloomberg/Los Angeles Times poll.
...
Six weeks before the presidential election, almost 80 percent of Americans say the U.S. is going in the wrong direction, the biggest percentage since the poll began asking that question in 1991.
...
After market chaos this month drove Lehman Brothers Holdings Inc. into bankruptcy and prompted federal takeovers of American International Group Inc., Fannie Mae and Freddie Mac, most survey respondents said financial companies shouldn't expect taxpayers to rush to the rescue.
...
Almost two out of three people surveyed also oppose government loans to help automakers. Congress is set to vote on a bill this month that includes $25 billion in low-interest loans to General Motors Corp., Ford Motor Co. and Chrysler LLC to develop more fuel-efficient vehicles.
...
Americans are extremely pessimistic about the state of the nation. Eight in 10 people say the country is seriously off on the wrong track. Concern about the country's direction crosses party lines, shared by 83 percent of political independents, 90 percent of Democrats and 60 percent of Republicans.
Eight in 10 respondents say the economy is doing badly, and more than half say it's doing very badly. Seven in 10 of those with annual incomes above $100,000 say the economy's in bad shape, along with almost nine in 10 of those earning between $40,000 and $100,000, and eight in 10 of those making less than $40,000.
Joined: Oct 15, 2004 Posts: 2258 Location: Arkansas
Posted: Wed Sep 24, 2008 7:17 pm Post subject: Re: Bernanke lied, no bailouts is only a recession, not the
Bush just addressed the nation. Like Bernanke, he said "serious recession" if the bailouts aren't passed. Serious Recession? That's it? An unprecedented bailout which bails out the guys that got us in this mess and saddles taxpayers with untold liabilities to avert a serious recession? Not even a depression? Come on. That's b.s. Its classic fear mongering.
Joined: Oct 23, 2004 Posts: 5928 Location: New Jersey
Posted: Wed Sep 24, 2008 7:35 pm Post subject: Re: Bernanke lied, no bailouts is only a recession, not the
3aidlillahi wrote:
Quote:
A deflationary credit meltdown caused by rising interest rates to finance all of this is IMO actually worse and more immeadiate than the so called alternative, letting finance companies sort out their losses.
How would flooding the world with another trillion dollars in a short period of time cause a deflationary credit meltdown? I would think that it'd be a hyperinflationary crisis. Wouldn't letting these banks go belly-up destroy hundreds of billions (trillions even) of dollars, thus causing deflation?
I've been kind of busy lately, so I haven't been paying much attention to this story that much nor had time for all of the details. It seems like everyone is in one of two camps: either we bail out the banks or we don't but either way, we end up with a financial meltdown and people are raping and pillaging in a matter of weeks or months.
From what I can gather, a lot of very wealthy people would lose their shirts without this bailout. Financial instruments grind to a halt, loans are nearly impossible from banks, bank failures galore, etc. However, not everyone's money is lost. Most people don't have money in Goldman Sachs or JPM. They have it in Suntrust or BB&T, and so forth. Or are we talking about the collapse of 99% of banks, large and small?
At this point, I'm ready to write my Congressmen and tell them to not vote for the bailout because it's illegal and immoral and I don't see how a failure of many of the large banks will cause crippling affects in every nook and cranny of the economy. I see the depression it will likely cause as something of a good thing from the environmental and resource standpoints.
Either way, looks like I made out like a bandit with 40 cent/lb spaghetti that I stocked up on.
Of course we don't how this very complicated sitaution will develop over time.
One possibility is that so much new debt is issued interest rates rise rapidly. Although I fully expect the Fed to issue incredible amounts of new money, the Fed realizes that they can not just monetize the new Treasury debt - that is buy all debt with new Fed fiat money - least inflation will go out of control.
To clarify my view, what I think will actually happen is that the plan will pass - but will not be fully implemented because of a failure of the plan or the failure of other financial firms. If they do borrow the $700 billion fast, I will finally change my position that we will eventually see hyperinflation first, then economic depression, to temporary monetary deflation and depression first, then to hyperinflation. _________________ It's already over, now it's just a matter of adjusting.
Posted: Thu Sep 25, 2008 8:02 am Post subject: Re: Bernanke lied, no bailouts is only a recession, not the
pup55 wrote:
Translation:
"I've been pumping money into this pig for a year now, and guess what, it only made the problem worse.
But I am covering my ass by letting you, congress, know that if you drag your feet on giving me and Hank absolute non questionable non-judicial reviewable power, and an unlimited power to print as much money as possible, so I can bail out my banker buddies, who have contributed heavily to the campaigns of everyone in this room, the crap is going to hit the fan, and I am going to blame YOU for making it happen.
Never mind the fact that Hank and his wall street cronies have themselves been looting the widows and orphans for years, and only now have the chickens come home to roost.
And whatever you do don't tie any of this to CEO Pay, or anything that happens is YOUR fault.
Since I already know you are gutless, you will back down, and I will have the last laugh. When Hank and I are out of here in a couple of years, it is we who will cash in on the book deal.
A recession doesn't justify pushing capitalism aside and socializing debt of the wealthy, forcing taxpayers to pay for it. Recessions and even worse, depressions, are a part of capitalism, and the wealthy need to learn to live with it.
This bailout is bullshit and not intended to help the average American that they are just trying to scare. For example, Bush tried to scare Americans last night by saying if the bailout wasn't done immediately, there would be more bank closings even in their communities, implying that the bailout would prevent more bank closings in their communities. Here's what Bush said:
Quote:
The government's top economic experts warn that without immediate action by Congress, America could slip into a financial panic, and a distressing scenario would unfold:
More banks could fail, including some in your community.
This isn't true. The bailout won't prevent community banks from failing. In fact, the FDIC is asking for another $150 billion in insurance based on an estimated 100 banks that are going to fail next year. So, Bush is full of crap. The bailout is indentured servitude prohibited by the Constitution.
Bloomberg The Bloomberg article is long, but worth the read.
Quote:
FDIC May Need $150 Billion Bailout as Local Bank Failures Mount
By David Evans
More Photos/Details
Sept. 25 (Bloomberg) -- Deborah Horn tugs on the handle of the glass-paned entrance of the IndyMac Bancorp Inc. branch in Manhattan Beach, California. The door won't budge. The weekend is approaching, and Horn, 44, the sole breadwinner in a family of three, needs cash.
A small notice taped to the window on this Friday afternoon in mid-July tells her why she's been locked out. IndyMac has failed, the single-spaced, letter-sized paper says; the bank is now in the hands of the Federal Deposit Insurance Corp.
``The Receiver is now taking possession of the Bank,'' the sign says.
``I'm physically shaking,'' says Horn, an academic tutor, as she peers into the bank. Inside, an FDIC examiner is talking to six stone-faced IndyMac employees. ``I don't know when I'm going to be able to get my money,'' Horn says. ``I'm a single mom. This is the money I live on.''
Don't worry about Horn. She'll be all right, as will most of Pasadena, California-based IndyMac's 200,000-plus customers.
That's because the FDIC, created in 1934, insures all accounts up to $100,000 at its member banks, and it has never failed to honor a claim. The people to worry about are U.S. taxpayers.
The IndyMac debacle is taking a large bite out of FDIC reserves, and if scores of other banks fail in the year ahead, the fund will be depleted. Taxpayers will have to step in.
Worst Wave
Americans have gotten used to the idea that bank failures were as rare as a category five hurricane. No banks went bust in 2005 or 2006. Seven collapsed in 2007 as the credit crisis began to exact a toll. So far in 2008, 12 more, with total assets of $42 billion, have fallen -- that's the worst wave of bank failures since 1992.
IndyMac, which had $32 billion in assets when it went into receivership, is the most expensive bank failure the FDIC has ever covered. And that record may not stand for long.
By the end of 2009, about 100 U.S. banks with collective assets of more than $800 billion will fail, predicts Christopher Whalen, managing director of Institutional Risk Analytics, a Torrance, California-based firm that sells its analysis of FDIC data to investors.
``It's not going to be Armageddon,'' says Mark Vaughan, an economist and assistant vice president for banking supervision and regulation at the Federal Reserve Bank of Richmond, Virginia. ``But it's going to be bad.''
FDIC's Secret List
The FDIC knows which banks are at risk; it has a watch list with 117 institutions. The agency won't disclose their names because doing so could cause depositors to panic and pull out all of their funds.
It won't take many more failures before the FDIC itself runs out of money. The agency had $45.2 billion in its coffers as of June 30, far short of the $200 billion Whalen says it will need to pay claims by the end of next year. The U.S. Treasury will almost certainly come to the rescue.
Regardless of who wins control of the White House and Congress in November, no politician is likely to vote in favor of leaving federally insured depositors out in the cold.
A taxpayer bailout of the FDIC would come on the heels of intervention by the U.S. Treasury Department and Federal Reserve to save investment bank Bear Stearns Cos., mortgage giants Fannie Mae and Freddie Mac and the world's largest insurer, American International Group Inc.
Uninsured Deposits
Emergency federal funding of the FDIC could swell the cost of government rescues of failed financial institutions to more than $400 billion -- not including the $700 billion general Wall Street bailout now under discussion in Congress.
That number would be even higher if the government were on the hook for uninsured deposits -- which amount to $2.6 trillion, 37 percent of the total of $7 trillion held in the U.S. branches of all FDIC member banks.
The subprime crisis -- which started in the suburbs of California and Florida and migrated through the alchemy of securitization to Wall Street investment banks -- has come almost full circle, spreading its toxins to the very lenders who first extended those teaser-rate, no-document mortgages to homeowners.
In 2006, IndyMac was the largest provider of mortgages that didn't require borrowers to provide proof of their incomes. And as of mid-September, investors were worried that Washington Mutual Inc., the biggest thrift in the U.S., would be the next bank to go belly up.
A federal takeover of Washington Mutual, which has assets of $310 billion, could cost taxpayers $24 billion more, according to Richard Bove, an analyst at Miami-based Ladenburg Thalmann & Co.
Slower To Hit
The reckoning that has run through Wall Street, claiming investment banks Lehman Brothers Holdings Inc. and Bear Stearns among its victims, has been slower to hit Main Street. In mid- 2007, Wall Street firms began disclosing losses on their packages of securitized home loans.
From August 2007 to September 2008, banks worldwide wrote down more than $500 billion. Regional banks, by contrast, have waited to write off their bad mortgages, hoping the housing market would improve and defaults would level off. Instead, they've risen.
FDIC-insured banks charged off $26.4 billion of bad loans in the second quarter of 2008, the most since 1991.
U.S. lenders, in their embrace of subprime lending, committed the same analytical fallacy as their Wall Street counterparts. When it came to assessing risk, they relied on the recent past to predict the near future.
Living in the Past
They were blinded by years of rising home prices and low mortgage default rates.
The FDIC fell into the same trap. As recently as March, an internal FDIC memo estimated the cost to cover bank collapses in 2008 would be just $1 billion, dropping to $450 million in 2009. It wasn't even close.
The IndyMac failure alone, which happened four months after that memo was circulated, will cost the FDIC $8.9 billion -- and the bill for all 12 collapses will be about $11 billion, the FDIC says.
FDIC Chairman Sheila Bair says the agency's forecast was based on models using data from the past 20 years, which included long periods with few bank failures.
``Given the change in economic conditions, we need to weight the more recent data more heavily,'' Bair says. ``You also need a good dose of common sense.''
Bair says depositors shouldn't fret about their banks. ``We do have a handful with some significant challenges,'' she says. ``Overall, banks are quite safe and sound.''
Bair is duty bound to say that, says Joseph Mason, an economist who worked for the Treasury from 1995 to 1998. Part of the FDIC's job is to reassure the public and prevent runs on banks. Mason says Bair's rhetoric masks the agency's inability to grasp the scope of the coming crisis.
`Ignoring the Problem'
``The FDIC and the banking regulators are ignoring the problems, hoping they'll go away,'' he says. ``They won't.''
The quake that shook markets in September may make the FDIC's task more complicated and expensive. With investment banks in eclipse, deposit-taking institutions will now play a larger role in financing the economy.
Earlier this month, Bank of America Corp. agreed to buy Merrill Lynch & Co. for $50 billion, and Wachovia Corp. and Morgan Stanley were in talks about a potential merger.
'Would Be Miraculous'
From 2002 to 2007, U.S. lenders made a total of $2.5 trillion in subprime mortgages, according to the newsletter Inside Mortgage Finance. ``Given the magnitude of the bad loans still on bank balance sheets, it would be miraculous for the FDIC to squeak by with losses of less than $200 billion,'' Whalen says.
On Sept. 18, in yet another stunning turn of events, Paulson proposed a plan that would cost the government, if not necessarily the FDIC, hundreds of billions of dollars more.
The Treasury secretary says the government will purchase toxic mortgage debt from banks in an effort to cleanse the financial system. In an unprecedented move, the Treasury also pledged $50 billion to insure nonbank money market funds.
Bair says Paulson's plan won't reduce the number of banks on the FDIC's watch list.
One reason the rolling financial crisis is hitting regional banks later than it walloped Wall Street is because the very system that is meant to protect depositors -- federal insurance -- has also served to prop up weak lenders. So has the ready supply of credit extended to banks by another government- chartered group, the Federal Home Loan Banks.
Because all deposits up to $100,000 are insured, most savers can be agnostic about where they put their money. They don't have to know -- or care -- whether a bank is making sound or foolish loans.
Unlike buyers of stocks or bonds, people who put their money in banks rarely do research about the soundness of the institution. That makes it easy for banks -- both prudent and reckless ones -- to raise cash.
Brokered Deposits Loophole
Banks have taken the FDIC's protection and run with it, thanks to the phenomenon of brokered deposits -- and a giant loophole in federal regulations.
As of June 30, Whalen says banks held $644 billion from brokers who offer customers a way to gain FDIC insurance for multiple accounts.
Promontory Interfinancial Network LLC, an Arlington, Virginia-based company founded in 2002 by former federal officials --including some from the FDIC itself -- has figured out how to help wealthy clients insure as much as $50 million each by putting their money into separate accounts at 500 different banks.
While the law does limit insurance to $100,000 per account, it places no ceiling on the number of different banks where an individual can hold accounts -- a loophole Congress failed to close even after the savings and loan debacle of 1984- 1992.
Missing Discipline
Bair says brokered deposits can provide quick cash but also create potential danger.
``It is quite easy to get brokered deposits, and there's not a lot of market discipline with the brokered deposits,'' she says. ``When there's excessive reliance on them, particularly to fuel rapid growth on the balance sheet, that's definitely a high-risk factor.''
The other big source of money for banks is the FHLB, an under-the-radar network of 12 regional banks created by Congress in 1932 to help lenders finance mortgages. Lenders had borrowed a total of $840.6 billion from the FHLB system as of June 30, up 38 percent from $608 billion in the same period a year earlier.
Treasury Secretary Henry Paulson, in a little-noticed action on Sept. 7, the day after he announced the bailout of Fannie and Freddie, extended a secured credit line to the FHLB to provide an emergency source of funding if needed.
FHLB Advances
Vaughan says credit from the FHLB is keeping some sick banks afloat and postponing the inevitable.
`What's going to happen,'' he says, ``is that weak banks will use FHLB advances to avoid discipline from funding markets. In some cases, that will keep their doors open longer than they otherwise would, all-the-while offloading more and more potential losses onto the FDIC and taxpayers.''
Normally, the FDIC is no more than four initials customers see when they walk into their banks. In recent years, the agency hasn't had to close many banks, as it collected small amounts of insurance premium payments.
President Franklin D. Roosevelt signed the law creating the FDIC in the middle of the Depression. As part of the New Deal, Congress created a system of federal insurance to end bank runs by reassuring the public that depositing money in banks was safe. All banks paid the same rate for insurance.
Wave of Failures
The FDIC shares regulatory authority with other agencies. The Office of Thrift Supervision oversees federally chartered savings and loans, the Comptroller of the Currency monitors national banks, and state banking regulators review state- chartered banks.
The FDIC is the only one of these agencies that insures deposits.
By and large, the government's insurance system worked until the 1980s, when thrifts went on a commercial real estate lending binge, triggering a wave of failures and consolidation that lasted from 1984 to 1992.
In 1991, Congress changed the way FDIC premiums were assessed, requiring banks to pay rates based on how well capitalized they were for the risks they faced. As bank failures subsided to less than a dozen a year by 1995, the FDIC's reserves began to swell.
As a result, the agency cut to zero the premiums it charged to the 90 percent of the banks deemed safest. That free ride continued for 10 years.
`No Good Way'
In 2006, Congress increased insurance payments for most banks, averaging $5-$7 per $10,000 of deposits.
The insurance premiums imposed by the FDIC on the riskiest banks -- running as high as $43 per $10,000 -- are still far below the rates private insurers would charge, says Sherrill Shaffer, former chief economist of the Federal Reserve Bank of New York.
At the same time, charging struggling banks a fair price for insurance premiums may drive them into insolvency, he says.
``That can be destabilizing,'' says Shaffer, who's now a professor of banking at the University of Wyoming in Laramie. ``There's really no good way around that. It's an issue that policy makers and analysts have wrestled with for decades.''
Bair says the FDIC is gearing up for the coming wave of bank failures. She says she's developing a plan to raise insurance premiums.
The agency's Division of Resolutions and Receiverships has boosted authorized staffing levels by 48 percent, to 331, this year. It has hired 178 new financial specialists and called up 65 retirees for temporary service under a special program.
Bair vs. Enron
Bair, 54, an attorney who graduated from the University of Kansas School of Law, has challenged financial institutions as a regulator for more than a decade. President George W. Bush nominated her as chairman, and she was sworn in on June 26, 2006.
She replaced Donald Powell, a former Texas banker. In 1992, as a member of the Commodity Futures Trading Commission, Bair cast the lone vote against Enron Corp.'s effort to exempt certain energy contracts from the agency's anti-fraud and anti- market manipulation enforcement powers.
Nine years later, Enron blew up in one of the biggest financial scandals in U.S. history.
As assistant secretary of the Treasury for financial institutions in 2002, Bair criticized abusive subprime mortgage brokers.
``Lenders have made loans with little or no regard for a borrower's ability to repay and have engaged in multiple refinance transactions that result in little or no benefit to a borrower,'' she told the Pittsburgh Community Reinvestment Group on March 18, 2002.
`Rock and Brock'
Bair has published two children's books. One of them, ``Rock, Brock, and the Savings Shock'' (Albert Whitman, 2006) is a tale of two twins -- Rock the Saver and Brock the Spender -- that encourages thrift and explains the benefits of compound interest to elementary school readers.
Some of those lessons seem to have been lost on America's bankers and lawmakers, starting with the dangers of brokered deposits. During the S&L crisis, banks financed their lending spree by raising billions of dollars by selling FDIC-insured CDs, often at high interest rates, through brokers.
When banks rely on brokers to garner as much as 15 percent of their deposits, it's a red flag calling for closer examination by regulators, Yeager says.
'I Was Death'
William Isaac, who chaired the FDIC from 1981 to '85, tried to ban brokered deposits.
``I was death on brokered deposits,'' says Isaac, 64, now chairman of Vienna, Virginia-based Secura Group of LECG LCC, a bank consulting firm. ``I waged a major war against them. I lost that battle with courts and the Congress.''
In 1991, Congress passed a law banning banks that weren't classified as ``well capitalized'' by the FDIC from using brokered deposits. The law left open a loophole, and the FDIC made it wider. Banks that are just ``adequately capitalized'' are allowed to petition the agency for exemptions from the law.
From 2005 to 2007, 88 banks asked the FDIC for waivers, according to agency records. The FDIC granted approval to all of them.
``There are always financial incentives for banks in the U.S. to use brokered deposits to take on excessive risk without having to pay for it,'' Shaffer says. ``It allows them to bring in large chunks of money relatively quickly.''
In 1980, following lobbying from the S&L industry, Congress raised the ceiling on accounts that qualified for FDIC insurance to $100,000 from $40,000. That ceiling has holes in it.
$2 Million FDIC-Insured
A family of two adults and two children can get up to $2 million of FDIC insurance at just one bank.
Here's how: Each person opens an individual account, insuring a total of $400,000. They can hold four more insured joint accounts, each in the names of two family members, protecting another $400,000.
The family can protect $600,000 more if each spouse opens an account that's payable upon death to family members. Each adult can also insure $250,000 for individual retirement holdings in the same bank.
And a family-owned incorporated business qualifies for another $100,000 of insurance.
Banks don't always explain these rules to customers. They might not even know about them.
``They're very complex for depositors to understand,'' says Alan Blinder, 62, a former vice chairman of the Federal Reserve. ``My mother every once in a while asks me a question, and I don't always get it right. I have to scurry back to the rule book. It is complicated.''
Biggest Loophole
Blinder is now vice chairman of Promontory Interfinancial, the deposit broker that exploits the biggest FDIC loophole of all -- the one that allows individuals to have insured accounts at an unlimited number of banks. Isaac serves as an adviser to Promontory.
Along with the flood of brokered deposits that flows into their coffers, banks can also tap another source of money: loans from the Federal Home Loan Banks.
They lend money to banks at low interest rates, accepting mostly real estate debt worth as much as twice the value of the bank loans as collateral.
In 1989, until which FHLBs lent just to savings banks, Congress expanded the charter to allow most commercial banks to tap into the inexpensive source of loans. New York-based Citigroup Inc., the largest U.S. bank by assets, was the largest borrower this year, with $84.5 billion from the FHLBs as of June 30.
Lacks Staff
Former Fed economist Tim Yeager says FHLB offices lack the staff to keep up with financial conditions of their thousands of member banks.
``The Federal Home Loan Banks cannot effectively control or monitor the risks that are in these institutions,'' says Yeager, now a finance professor at the University of Arkansas at Fayetteville. ``As long as they have collateral, they're just going to lend.''
Behind the scenes, the surge of FHLB lending has created a clash of federal authorities. Bair says the ability of struggling banks to borrow billions from FHLB branches is likely to lead to large losses for her agency.
The FDIC can't start recovering assets from a failed bank until after the FHLB collects 100 percent of its loans.
``We really get a double whammy,'' says Bair, who has short dark hair and is dressed in a well-tailored gray suit, with a pearl necklace, as she speaks in San Francisco before participating in a panel discussion on financial education.
`I Have a Beef'
``The Federal Home Loan Bank has priority over us in the claims queue if we have to close the bank,'' she says. ``I have a beef with excessive reliance on Federal Home Loan Bank advances.''
John von Seggern, president of the Council of Federal Home Loan Banks, a nonprofit trade association that lobbies Congress on behalf of the 12 independently operated regional offices, says the FHLB provides an essential service, quickly dispatching low-interest loans to member banks.
``We are not the regulator,'' he says. ``Our role is to be the liquidity provider.'' He says the FHLBs would halt lending to a weak bank if a bank regulator asked; he doesn't remember that ever happening.
``If we turn off the tap, that bank would positively fail,'' he says. ``Even healthy banks would fail.''
Von Seggern opposes Bair's efforts to increase insurance premiums for FDIC member banks that rely on FHLB advances for a large share of their funding.
`Making Good Loans?'
``The question should be, `Are you making good loans?' as opposed to `Where did you get the money to fund those loans?''' von Seggern says. ``This is a tough issue. We are very interested in working with the FDIC in coming to an agreement that works for both of us.''
Vaughan of the Richmond Fed says the FHLBs will be stretched with more banks on the cusp of failing.
``U.S. bank supervisors barely have the staff to handle routine bank exams,'' he says.
``Now, when a bank falls into problem status, there's a lot of stuff you got to do,'' he says. ``You've got to monitor the condition of that institution continuously, put all kinds of enforcement on them and stay in contact with the bank to make sure they're doing what they need to do. Dealing with a long list of problem banks takes resources, and there aren't a lot of bodies to spare.''
As FDIC examiners find the truth about a bank's deteriorating condition, the agency faces a conundrum. It knows which banks are on the verge of failure, but in order to avoid customer panic, it doesn't make its watch list public.
No Warning
The FDIC gave no warning to the public or depositors that IndyMac was nearing collapse. The agency knew that IndyMac was at risk a month earlier when it placed it on the watch list, the FDIC says.
Still, as recently as May 12 -- two months before it failed -- IndyMac declared it was ``well capitalized'' by FDIC standards as of March 31.
When IndyMac collapsed, $10 billion, or a third of the bank's assets, were funded by FHLB advances. Another $5.5 billion came from brokered deposits.
Indymac specialized in so-called Alt-A loans, also known as liar loans because they didn't require borrowers to provide documentation of their income. The bank accepted whatever borrowers said they had in annual wages.
Bundled Loans
From 2003 to 2007, the bank had bundled many of its loans into securities and sold them to Wall Street firms. As the credit crisis took hold on Wall Street, the bank could no longer offload its mortgages.
It had $2.7 billion in bad loan reserves on its books on June 30, up from $813 million a year earlier. Over its final nine months, the bank reported losses totaling $896 million.
The agency almost always closes banks on Friday afternoons, after the close of the U.S. stock market. That timing allows FDIC examiners a weekend to prepare the bank to reopen the next business day.
Customers generally have uninterrupted access to their insured funds over the weekend through the use of debit cards and checks.
No Buyers
The FDIC shut down IndyMac at 6 p.m. New York time on Friday, July 11. The FDIC tried to find a buyer for IndyMac, as it had for every other bank that failed this year. That usually is the least-expensive solution.
No bank was willing to purchase IndyMac for a fair price, the FDIC says. So the FDIC took over bank management itself -- just the 13th time in the agency's 74-year history that it has taken control of a bank, spokesman Andrew Gray says.
The agency is now working to sell IndyMac's assets. One of its goals is to recoup customer losses of uninsured deposits from remaining bank holdings, Bair says.
The FDIC told 10,000 customers that it wasn't certain it could repay their $1 billion in deposits in excess of the $100,000 insurance limit. The agency told these depositors it would pay them 50 percent of their uninsured money in so-called dividends.
Further recovery of those uninsured assets will depend on the salvage value of the bank's holdings.
`A Big Mistake'
One IndyMac customer who had uninsured funds is Jeff Capistran, an architect undergoing chemotherapy for colon cancer. Capistran, 46, had planned to close his $127,000 account at the bank a few days before it was shut down, but he was unable to because of his medical treatment.
``I'm somewhat worried,'' he says. ``I made a big mistake.'' Still, the FDIC has told him he'll get half of his deposit above $100,000. ``I have faith they will come through with the rest,'' he says. ``This is an election year.''
On Monday, July 14, three days after the FDIC closed IndyMac, the bank reopened under FDIC supervision. More than a hundred depositors lined up to pull their money from the bank's Manhattan Beach branch.
Horn, the single mother who had shown up the previous Friday to find the branch shuttered, transferred all of her funds to a new account at Wells Fargo & Co. She says her new bank allowed her to withdraw just $5,000 and held the balance, $27,000, for two weeks.
``The mere fact that it was from IndyMac, they put a hold on it,'' she says. Wells Fargo spokeswoman Julia Bernard says her bank wouldn't have placed a hold on an IndyMac check unless it was unable to verify it.
`What's Going On?'
Which will be the next bank to fail? Depositors like Capistran and Horn have no way of knowing. Even the experts can be stumped.
``How are people supposed to know what's going on in the depths of the bank's balance sheets when the regulators, as we've learned in this crisis, don't even know?'' Blinder asks.
One warning sign may be the size of a bank's brokered deposits, Shaffer says.
``Banks that are in distress, facing a reluctance by the general public to place money in these banks, may be forced to turn to brokered deposits,'' he says.
Six of the 12 banks across the U.S. that failed this year relied on brokered deposits for more than 15 percent of their customer holdings. The average rate among all U.S. banks is 7.5 percent.
ANB Financial NA of Bentonville, Arkansas, had received 87 percent of its deposits from brokers; Columbian Bank & Trust Co. of Topeka, Kansas, had received 44 percent; and Silver State Bank of Henderson, Nevada, had received 41 percent.
Bite the Dust
In mid-September, investors were signaling that Seattle- based Washington Mutual, the nation's largest thrift, would be the next big lender to bite the dust.
It had reported losses totaling $6.3 billion during the previous three quarters.
WaMu, which has 2,300 branches, has a 98 percent chance of defaulting on its debt over the next five years, according to credit-default-swap traders, as of yesterday.
On Sept. 8, Washington Mutual fired CEO Kerry Killinger and disclosed that the Office of Thrift Supervision had heightened scrutiny of the bank.
Five percent of WaMu's $182 billion of residential mortgage holdings were in default on June 30, according to Moody's. On Sept. 11, Moody's reduced WaMu's senior unsecured debt rating to Ba2 from Baa3.
Since November 2007, Moody's has slashed that rating by six grades, to Ba2 from A2.
Tripled FHLB Loans
WaMu owns $53 billion of option-adjustable-rate mortgages, according to Moody's. Because these mortgages allow the homeowner to skip payments by adding them to their existing loans, WaMu failed to receive about $2.5 billion of interest payments in 2006 and 2007.
As of June 30, WaMu had gathered $34 billion through deposit brokers, which amounted to 18 percent of all its deposits, according to the FDIC. As bad loans grew, the bank raised cash by tripling its borrowing from the FHLBs during a 12-month period to $58.4 billion.
Advances as of June 30 represent 19 percent of WaMu's assets, up from 7 percent a year earlier.
About $45 billion of the deposits at WaMu aren't insured by the FDIC.
Across the U.S., still-standing banks large and small have similarities to the 11 that have failed.
Florida's Largest Bank
BankUnited Financial Corp., based in Coral Gables, Florida, is the state's largest bank. Hard hit by the collapse of the state's real estate market, BankUnited for the first time began using brokered deposits in the quarter ended on June 30.
It raised $268 million through such long-distance deposits in three months, according to its SEC filings, which showed $7.6 billion of total deposits on June 30. It brought in another $506 million the same way during the next six weeks.
BankUnited has borrowed $5.1 billion from the FHLB of Atlanta, amounting to 36 percent of its $14 billion in assets. The bank reported delinquent payments on $982 million, or 8 percent, of its loans as of June 30.
Fifty-eight percent of the bank's loans are option- adjustable-rate mortgages. Customers took advantage of that deferral option in 92 percent of those loans, filings show.
BankUnited reported losses of $117.7 million in the quarter ended in June. On Sept. 5, the OTS reclassified the bank to ``adequately capitalized'' from ``well capitalized.'' Without a waiver, the bank will be banned from receiving brokered deposits.
`Prospects Fraying'
The bank's stock has lost more than half of its value since it began trying unsuccessfully in June to raise $400 million in a stock sale.
``We see the prospects for viability increasingly fraying,'' says analyst David Bishop, who follows the bank at Stifel Nicolaus & Co. in Baltimore. BankUnited spokeswoman Melissa Gracey didn't return calls and e-mails requesting comment.
Investors may or may not be right about which banks will fail next. Only the regulators know, and even they may not be sure. What's in little doubt, though, is that more collapses are on the way.
Banks still hold too much toxic debt, says Kenneth Rogoff, chief economist of the International Monetary Fund from 2001 to 2003.
``Like any shrinking industry, we're going to see the upset of some major players,'' says Rogoff, who's now a finance professor at Harvard University in Cambridge, Massachusetts.
`Doesn't Make Sense'
``The only way to put discipline into the system is to allow some companies to go bust,'' he says. ``You can't just have an industry where they make giant profits or they get bailed out. That doesn't make any sense.''
Horn, the IndyMac depositor, has already experienced the fear of being separated from her life savings and watching hundreds of anxious fellow customers lined up outside her branch -- like a scene from a 1930s newsreel.
Even with FDIC insurance, she no longer takes it for granted that making a bank deposit is risk free.
``I just don't know if any investment -- even a bank deposit -- is safe anymore,'' she says.
To contact the reporter on this story: David Evans in Los Angeles at davidevans@bloomberg.net
Last Updated: September 25, 2008 00:40 EDT
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