[seahorse]

About once a month I end up in bankruptcy court on behalf of a creditor. During the lunch break, I eat lunch with the "debtors and creditors attorney bar" and visit. None of the attorneys or trustees have anything positive to say about things. It always makes me extremely pessimistic, puts me in "doomer mode" that we are going to collapse. In about 48 hours, I will recover and think I was over reacting.

In 2007, Bernanke told Congress the housing crisis would be contained. One year later, for all practical purposes, it has completely decimated our financial system. What better proof than Bernanke now asking Congress to give the Federal Reserve the authority to issue its own bonds/money (backed by what, by who, doesn't matter. Its worthless). However, hearing Bernanke cry he needs more money should send chills down your spine, because if Bernanke is screaming for his own authority to issue more money, that means but one thing, the once unsinkable US economy is flat ass broke and sinking.

Unfortunately, just like the third class on the sinking Titanic, we here are all locked down in the bowels of this sinking ship by the first class. All we can do is listen to the cold waters of deflation filling the floors below us trumpeting our demise, listen to Bernanke scream he needs more money to plug the holes, and listen to the footsteps of the rich running above deck for the safety of treasury lifeboats that pay negative yields, which means, they don't float very well. They certainly won't be enough to keep anyone holding them dry from the cold waters of deflation setting in.

And, in case things weren't bad enough, you may have also just heard the ship as it hit a second ice berg, yes, a second. It was bigger and the cut is deeper. The Bernanke crew was so busy trying to stem the flow of deflation rushing in from the first iceberg, that they didn't have time to cry out iceberg dead ahead for the second, but Donald Trump did last night on CNBC. Its the commercial loan bust which just struck the ship. If you thought the last hit was a deal killer, just look at the look on Trump's face as he is sued, personally, to pay back $40 million plus interest on a commercial loan gone bad that he personally guaranteed - oops. He's pissed at the Bernanke banking crew for steering us into these waters and also calling it an Act of God because it happened to him. People will soon be throwing each other overboard if they think it will help, certainly locking the rabble below decks seems reasonable.

If my small cabin on the ship is any gauge of how things are going, then, we still haven't bottomed in the housing market, meaning the water is still rushing in and we are still sinking. The cold water around our waist line is definitely causing "shrinkage" of the economic muscle. Keep in mind, all I can report are the residential side of things, but they are bad enough and getting worse, but I do know we hit a second iceberg, because I heard the hit.

On the ongoing residential bust, I always wondered why banks weren't simply willing to pull the trigger and get rid of the foreclosed homes for whatever they could get. Well, its not that simple, bc in the end, they don't have enough capital to allow them to get rid of them. They have to hold the houses and claim a false value on the defaulted properties hoping they can sell them later at the price they have in the properties - Enron banking style.

Why must they show them on their books with false inflated values? Keep in mind the assets and liabilities of a bank. Deposits are liabilities that in addition they have to pay interest on. Loans are considered assets, as long as they are good. Basically, the assets and liabilities of a bank must maintain a certain proportion, otherwise, they are bankrupt. So, when a bank forecloses, they take the house back, replacing the asset value of the good loan with the asset value of the home they are holding - if they take a loss on the home or mark it down to its true deflated value, it reduces their assets.

The problem is, with this housing crisis and so many houses in default, the banks cannot possibly take the losses or mark the homes they hold down to their true value. If the banks told the truth and wrote the value of these assets down or sold them for less than owed, the banks would effectively bankrupt themselves. Thus, out of economic necessity, the banks do not mark the value of the houses down. Even though they show these homes as an asset on their books, they are really a liability because the bank has to maintain insurance on them and pay taxes. Ouch!

The bank regulators, the FDIC or the OCC can't possibly do their job and "examine" the books, otherwise, most banks would go into receivorship. So, the regulators turn a blind eye to all but the most egregious.

This little charade leads to a very real practical problem which is this, they can't keep making loans. They are effectively out of capital to lend (compounded even further by deposits going down bc of job losses etc). This is true in my area. The banks all here say, no worries, we're doing fine. They all say they are still making home loans. But, actions speak louder than words. So, what are they doing? They aren't making home loans. A bankruptcy trustee said a realtor had 21 contracts to buy with qualified buyers, but not a single one of them "qualified" for a loan. What does that mean? It means the banks are effectively all bankrupt, even though the FDIC hasn't closed them yet. Its a charade. Don't believe it. Get your money out.

[nobodypanic]

nice writing.

[green_achers]

For the first time in years I think my ex might get out of the huge financial hole she dug herself into over many years trying to make a living as a massage therapist. First, she finally faced reality and filed for bankruptcy. Second, she got a job ib her old profession as a legal assistant.

For an attorney that specializes in bankruptcies.

I think she's secure for the foreseeable future.

[mos6507]

Why must they show them on their books with false inflated values? Keep in mind the assets and liabilities of a bank. Deposits are liabilities that in addition they have to pay interest on. Loans are considered assets, as long as they are good. Basically, the assets and liabilities of a bank must maintain a certain proportion, otherwise, they are bankrupt. So, when a bank forecloses, they take the house back, replacing the asset value of the good loan with the asset value of the home they are holding - if they take a loss on the home or mark it down to its true deflated value, it reduces their assets.

So you're saying that the banks are locked into just holding onto houses that are presumably for sale, but with no intention of ever selling? What do they expect to ultimately do with these things?

[seahorse]

Mos,

I asked that same question. The best answer I got was the banks feared being taken over by the FDIC and this was the best way to protect shareholder value, by keeping assets on the books.

As I understand it, its a damned if you do damned if you don't. If they sell the properties, they go bankrupt, so they can't and hold onto them for as long as possible, hoping that in an FDIC liquidation they can get value from them (No one believes it will work).

But, keep this in mind too, what would the banks loan money to buy?

The, why take a hit on a house on your books just to loan someone else money to buy the house at a lesser value? Further, credit standards are way up which means there are less people they can loan to anyway. So, as I see it, they are opting to simply hold the houses and give them an articifically inflated value to protect their balance sheet, even though this means they aren't making any loans right now, or significantly reduced number of loans.

[seahorse]

Burn them down, insurance companies then pay, and then they go broke.

[pedalling_faster]

nice writing.

yeah, that iceberg stuff WAS pure poetry.

[eXpat]

nice writing.

yeah, that iceberg stuff WAS pure poetry.

+1, I really enjoyed reading that [s]doomerism[/s] reality with style!!!!

[ColossalContrarian]

Burn them down, insurance companies then pay, and then they go broke.

It’s only prolonging the inevitable. Let the homes sit empty for a year or two? It works for me, the maintenance costs will at least keep some people employed!

I always think twice when hearing of fire in Southern California. Of course it can be random occurrence but I always wonder if someone’s trying to clear out inventory. A similar story could be true for commercial.

Today I did some xmas shopping at mall in West Denver. Things seemed really busy but I did notice a number of closed “units” I imagine after the New Year many of these shops will begin closing and more units will be available for rent but the minimum operating cost of the mall will be the same and the lack of vendors will shut the place down. I'm sure a few will survive though. As long as they're near a train/light rail station!

[AlexdeLarge]

A very good analogy seahorse. The middle class are all in steerage and there is not enough life boats to go around.

How long can we tread water when the ship sinks and the water is freezing...............and no rescue vessel on the horizon.

[cipi604]

Oh boy! seahorse, you're speaking truth. Reality is pushing you to be a doomer, this is the best thing to do this days.

[Concerned]

nice writing.

Agree very nice post by seahorse

[hardtootell]

It means the banks are effectively all bankrupt, even though the FDIC hasn't closed them yet. Its a charade. Don't believe it. Get your money out.

Hardcore Doom Porn

[smallpoxgirl]

You're totally right Seahorse. I wonder though, do you feel a bit like a distant observer of the whole thing? I mean, other peoples misfortune means booming business for lawyers. Right?

Honestly, I'm feeling a lot of that right now. My personal situation is running completely counter to the general economy. I'm finding more and more work every week. I'm making more money than I ever have in my life. I don't think it has much to do with the broader economy just my small business is maturing. More people are becoming aware of us, and I'm slowly finding niches in other practices that need help. It's sort of like watching a horror movie. There's all these bad things happening, but it's not really affecting me or anyone I know right now. I know one person that lost his computer programming job due to the economy but he immediately found another. Even my dumbass friend that kept her money in WaMu despite my repeated warnings escaped unscathed. For years I've felt like I was at the bottom of the economic food chain. Now suddenly, I've got extra money around, and all the things I could never afford to buy(e.g. land) are getting cheaper by the day.

[rockdoc123]

Seahorse, my legal friend....chill. The harsh reality is that banks have always been on the edge, that is their raison d'etre. They need to lend that money out, stay on the edge to maximize their returns. We are now just hearing about the risks they take on due to this very bizarre financial crisis and the love the press has with drawing attention to potential disasters. The situation they are in now is no different than they have been in the past...now unfortunately Toto pulled down the curtain which immediately causes panic amoungst the populace of Emerald city. Lending facilities which have always been on the edge are now screwed because the press has driven away the investment capital they require to survive.
I've noticed that over the past year you have become progressively freaked over everything, high price, low price, etc. From someone who has been in the industry through a number of nasty things (perhaps not this bad, but pretty bad) all I can say is I truly believe ...this too will pass. Think of the scene in It's a Wonderful Life (hey it's Xmas time) where the Savings and Loan survives a run. They actually weren't in a problem until eveyone wanted to get their money out.
If we can get the price of oil up to say $70 and get the costs down then I think everything will be good. Whether you want to believe it or not OPEC is going to be our best friend in this. The gov't stimulus will eventually have an impact, Banks will sort their act out. Our worst friend is Wall street and the idiot reporters who continually want to drive the price of oil and the rest of the market down as far as they can regardless of fundamentals. Their view now is to find someone who has something negative to quote. I view this as a bottom
My view on bankruptcies is that there are many that are unfortunate but many are opportunistic. My guess is the unfortunate ones are increasing but I bet their are a lot of folks taking the opportunity to declare bankruptcy in order to take advantage of the system.

[Cid_Yama]

Seahorse,

I think the sinking analogy is a little premature. We are more at the stage where, as the designer of the Titanic, you are well aware of the implications having just recieved the damage report, and looking on in wonder at the other passengers who are perhaps anxious but totally oblivious that there is only a couple hours left.

I laid in bed last night trying to pull it all together, the economy, the climate, the geopolitical situation and tried to come to a realistic estimate of when it all unravels.

Like the designer of the Titanic, what is the best guesstimate of how long she will stay afloat?

How long before the shelves begin looking bare? How long before you have to travel 20 miles to find gasoline? How long before the prolonged blackouts? How long before those around us begin dying?

It took us what, about 2 years since we saw it coming and no one believed.

Now we still face the deniers, no we are not there yet. But we are close. Another 2 years? Are we halfway there? More?

International Shipping has stopped, just like the engines on the Titanic.

It is even possible to make it another 2 years?

I become more convinced the answer is no. It all seems to be accelerating. Next winter then. Next winter before large numbers freeze in their homes. Before the hunger hits.

Perhaps the migrations will begin this summer among those with the foresight.

When will Pakistan act against India to try and take the water India has blocked with their dam? How long before the hunger forces them to action? Will this be where the first nukes will be used?

Already the states are running out of money for unemployment benefits.

We are approaching the loss of a million jobs per month. How will they provide shelter, feed their children?

Assistance for the poor has nearly dried up, they could just not meet demand.

When will the hungry revolt? What good will it do if there is nothing to give them?

I guess it will be 2009 that will be remembered. I find it harder and harder to believe we can stay afloat through 2010.

We can always hope... and pray.

[seldom_seen]

The situation they are in now is no different than they have been in the past...

Bear Stearns, Lehman, Wamu, Merrill, Citibank, Countrywide, Citibank...etc. are all in a very different position from the past. They either no longer exist, or their liabilities were transferred to the taxpayer and their assets to other banks.

Are you being sarcastic or do you honestly believe what you wrote?

[Keith_McClary]

Burn em down and collect the insurance. Nothing a little gasoline and a Bic lighter can't fix!

I've read that some towns are in such bad shape they have shut down their fire depts and even police.

[IslandCrow]

Thanks Seahorse for the report... I hope that by now, as a little time has past, you are a little more relaxed

I enjoy reading your information and have found that you give a very good (=accurate) warning of the things that are happen, and in your work you pick up some very good early signs of trouble. I am particularly grateful to reading information from you months before it starts appearing in the mainline press.

However the devil is in the details and especially the timing where I have found you a little over pessimistic, ie things take a little longer to occur than you often seem to feel they will.

I suppose my take when I read your reports is: this has a a high probability of happening, but it won't happen quite as soon as predicted, so I have a little more time to prepare, but it is all happening faster than I feel comfortable with.

Thanks for all the good warnings you have given us.

[yesplease]

The problem is, with this housing crisis and so many houses in default, the banks cannot possibly take the losses or mark the homes they hold down to their true value. If the banks told the truth and wrote the value of these assets down or sold them for less than owed, the banks would effectively bankrupt themselves. Thus, out of economic necessity, the banks do not mark the value of the houses down. Even though they show these homes as an asset on their books, they are really a liability because the bank has to maintain insurance on them and pay taxes. Ouch!

The bank regulators, the FDIC or the OCC can't possibly do their job and "examine" the books, otherwise, most banks would go into receivorship. So, the regulators turn a blind eye to all but the most egregious.

This little charade leads to a very real practical problem which is this, they can't keep making loans. They are effectively out of capital to lend (compounded even further by deposits going down bc of job losses etc). This is true in my area. The banks all here say, no worries, we're doing fine. They all say they are still making home loans. But, actions speak louder than words. So, what are they doing? They aren't making home loans. A bankruptcy trustee said a realtor had 21 contracts to buy with qualified buyers, but not a single one of them "qualified" for a loan. What does that mean? It means the banks are effectively all bankrupt, even though the FDIC hasn't closed them yet. Its a charade. Don't believe it. Get your money out.

It sounds fine and all but who are you referring to when you say "the banks"? Are you talking about all banks, all banks that are local to you, or some percentage of all banks?