I reported last week the lifting of "mark-to-market" rules that I have been asking to do since last August. Now I see a rearguard action by the doomsayers based on the difference between "liquidity" and "involvency." The naysayers also warn that, while lifting "mark-to-market" rules have corrected the values for mortgage based assets, we still have problems with securitized non-mortgage debt.
During the "Financial Meltdown of 2008" and the "Great Recession of 2009" I have seen a constant debate between those involved about the exact nature of the financial crisis. Some say it is a lack of "liquidity" and others say it is a matter of "insolvency." Both arguments have merit.
The exact problem is that those valuing the securitized mortgages and the credit default swaps used to insure these investments, variously known as "securitized debt, derivatives, or toxic assets," were obstensibly marking their value to the "market." However, since there was no established market for these assets they marked them to "models" based on the property market.
As the property market went flat and then south, those doing the values devalued the mortgage based assets as much as 90%. This in turn savaged the balance sheets of those holding the assets. With their balance sheets out of kilter the holders, banks and other financial groups, had to borrow to compensate for the lost value of their mortgage based assets. But their balance sheets did not allow this borrowing. So for the "liquidity" crowd the problem was the inability to borrow and for the "solvency" crowd the holders were bankrupt since assets were clearly worth less than debt.
On April 2 the Feds lifted the "mark-to-market" rules that allowed valuations of the mortgage based assets to their maturity or long term value instead of the "market" that did not exist. It has worked immediately. I heard one expert say yesterday that the mortgage based assets had been corrected. However, he warned that there are still problems with non-mortgage securitized debt, essentially student loans, auto loans, credit card debt, and commercial debt that has been bundled and sold as "securitized debt."
I do not see any real problems caused by securitized non-mortgage debt. There is no market to mark against since, as with the securitized mortgages, there is no established market for trading these. But more importantaly, no one is valuing securitized non-mortgage debt to "models" based on the values of the underlying item, i.e. no one is valuing auto loans to the current prices or sales of autos. I suppose one could devalue student loans by saying that graduating students face a more difficult job market and will be less likely to find work. But this has not yet been done. So, unlike the securitized mortgages, there will be no panic devaluing of securitized non-mortgage debt.
No we have passed the first major hurdle. Now to implementing the Obama Stimulus Plan. More on that later.
Leo Cecchini
April 2009
Thursday, April 9, 2009
Thursday, April 2, 2009
BYE BYE "MARK-TO-MARKET"
Well it has taken me since last fall to get the authorities to take action but here it is, the Financial Accounting Standards Board, FASB, has modified the "mark-to-market" rules allowing banks and others to value their "securitized debt" holdings to "models" instead of the "market." I use parentheses since the "markets" they were using were actually "models" based on the property market. The "models" they will now use are the long term or maturity value of the assets, reduced by actual losses.
I expect this to cause an immediate effect on the balance sheets of those holding "securitized debt" instruments. However, given the severe decline in the financial system, it may take some time for these improved balance sheets to translate into increased lending.
The other immediate effect will be to reinforce the Feds move to revive the "securitized debt" industry. Again, the Feds are pouring $400 billion into Fannie Mae and Freddie Mac to generate more mortgages that will be "securitized." The Fed TALF Program will also generate some $ 1 trillion in "securitized debt" based on non-mortgage loans, e.g. student loans, car loans and credit card debt.
While all of this is good, we will still need President Obama's stimulus package to jump start the stalled economy. Taken into account the combination of the various plans to revive the credit market and the direct stimulus to the economy, I would expect the US economy to be back to 2007 levels by the end of this year if not sooner.
Leo Cecchini
April, 2009
I expect this to cause an immediate effect on the balance sheets of those holding "securitized debt" instruments. However, given the severe decline in the financial system, it may take some time for these improved balance sheets to translate into increased lending.
The other immediate effect will be to reinforce the Feds move to revive the "securitized debt" industry. Again, the Feds are pouring $400 billion into Fannie Mae and Freddie Mac to generate more mortgages that will be "securitized." The Fed TALF Program will also generate some $ 1 trillion in "securitized debt" based on non-mortgage loans, e.g. student loans, car loans and credit card debt.
While all of this is good, we will still need President Obama's stimulus package to jump start the stalled economy. Taken into account the combination of the various plans to revive the credit market and the direct stimulus to the economy, I would expect the US economy to be back to 2007 levels by the end of this year if not sooner.
Leo Cecchini
April, 2009
Monday, March 30, 2009
OBAMA IN THE LION'S DEN
President Obama leaves soon to confront his counterparts among the G 20 countries. I say confront because in the main they have complained about Obama spending too much money to cure the economic crisis. We have the remarkable situation where leaders of such countries as Germany are calling the US too “socialist.”
I have stated several times that I support all of the President’s efforts to revive the economy except for the one to improve the personal balance sheets of property investors. I have also pointed out that all of these programs, except for the actual Budget for 2010, are being funded out of borrowed money, not current tax revenues. I also detailed the Feds’ borrowing potential and set it at up to $28 trillion, while the current national debt stands at about $11 trillion. To complete the basic equation I said the Feds are paying about 1% interest to borrow these funds. I do not view this as having borrowed and spent too much nor do I see this changing.
Yes, we will have to repay the borrowing and will do so most likely with new borrowing. But as I also said, the US has been in debt since 1791 and we will be so for the duration of the Republic. I also noted that the Feds have acquired some valuable assets with these borrowed funds and in all likelihood the future earnings from these will repay the borrowing, or at least a substantial part.
So I say to the Europeans who complain about Obama spending too much, why not do the same? Your economies are even more distressed than is ours. Do you plan to wait until your economy rises in the wake of a revived US economy as in the past, or will you work with us to improve the lot of all?
As for the natterings of the present EU President, the President of Czechoslovakia, thank God he is in a rotating position and will soon rotate out.
Leo Cecchini
March 2009
I have stated several times that I support all of the President’s efforts to revive the economy except for the one to improve the personal balance sheets of property investors. I have also pointed out that all of these programs, except for the actual Budget for 2010, are being funded out of borrowed money, not current tax revenues. I also detailed the Feds’ borrowing potential and set it at up to $28 trillion, while the current national debt stands at about $11 trillion. To complete the basic equation I said the Feds are paying about 1% interest to borrow these funds. I do not view this as having borrowed and spent too much nor do I see this changing.
Yes, we will have to repay the borrowing and will do so most likely with new borrowing. But as I also said, the US has been in debt since 1791 and we will be so for the duration of the Republic. I also noted that the Feds have acquired some valuable assets with these borrowed funds and in all likelihood the future earnings from these will repay the borrowing, or at least a substantial part.
So I say to the Europeans who complain about Obama spending too much, why not do the same? Your economies are even more distressed than is ours. Do you plan to wait until your economy rises in the wake of a revived US economy as in the past, or will you work with us to improve the lot of all?
As for the natterings of the present EU President, the President of Czechoslovakia, thank God he is in a rotating position and will soon rotate out.
Leo Cecchini
March 2009
Sunday, March 29, 2009
HOW TO MAKE "TOXIC" ASSETS "NON-TOXIC"
Treasury Secretary Geithner's discussion of greater Federal control over the financial sector and his suggestion that the Feds should be able to seize any major financial group that is in danger of bringing down the entire economy is generating lots of controversy. As for seizing large financial institutions, the Feds have already done this by acquiring Fannie Mae and Freddie Mac,the insurance giant AIG, major stakes in GM and Chrysler and looking to take on more. Technically the Feds have not "seized" these key enterprises but bought them, or at least a major stake in them. How the Feds manage their new portfolio is open to discussion, but their ability to do this is no longer a question.
As for new rules for the financial sector, I have already outlined how the Feds will restart and manage the "securitized debt" market. We have come to learn that in order for our economy to operate at the level it achieved by 2007, it must have "securitized debt," as well as "traditional" sources of credit.
Until 2007 this market worked well as a private activity with no visible market or specific set of government rules. However, no one had a complete understanding of how large this source of credit had become, how it operated, who owned what and so on. In the absence of a visible market and a clear understanding of the total construct of securitized debt, valuations of the assets, the bundled loans that were sliced up and sold as "securitized debt," were done by "models" that used related or even tangential factors to make their valuations. I am given to calling these models, "electronic Ouija Boards," since they are no more reliable a device.
The securitized mortgages, which accounted for the largest part of all securitized debt, were valued against the property market. As soon as the property market started to falter, the securitized mortgage debt was devalued to whatever level the model used determined. Those using the models did not wait to see defaults and foreclosures due to non-payment of mortgages as the reason to employ the models, in fact the models in general do not even take these factors into consideration. They worked solely on the value of the property market.
I see those who point to greedy Wall Street mavens as the cause of the financial crisis, or aggressive mortgage brokers, or lax Federal regulators and other "bad guys." However, the decline in balance sheets of major lenders was caused by those using their imperfect models to drive down the value of mortgage based assets and thus leave the holders with "over leveraged" assets.
As contradictory as it may sound, the Feds are starting to revive the securitized debt market in order to restore our economic health. Many say this means using the same "toxic assets" again and this will lead to even more economic upheaval. However, they overlook the main issue. As a totally private sector activity we had no idea how large the securitized debt market was and how it operated. Under Fed leadership and control, the market will be visible and readily understood by all.
Leo Cecchini
March, 2009
As for new rules for the financial sector, I have already outlined how the Feds will restart and manage the "securitized debt" market. We have come to learn that in order for our economy to operate at the level it achieved by 2007, it must have "securitized debt," as well as "traditional" sources of credit.
Until 2007 this market worked well as a private activity with no visible market or specific set of government rules. However, no one had a complete understanding of how large this source of credit had become, how it operated, who owned what and so on. In the absence of a visible market and a clear understanding of the total construct of securitized debt, valuations of the assets, the bundled loans that were sliced up and sold as "securitized debt," were done by "models" that used related or even tangential factors to make their valuations. I am given to calling these models, "electronic Ouija Boards," since they are no more reliable a device.
The securitized mortgages, which accounted for the largest part of all securitized debt, were valued against the property market. As soon as the property market started to falter, the securitized mortgage debt was devalued to whatever level the model used determined. Those using the models did not wait to see defaults and foreclosures due to non-payment of mortgages as the reason to employ the models, in fact the models in general do not even take these factors into consideration. They worked solely on the value of the property market.
I see those who point to greedy Wall Street mavens as the cause of the financial crisis, or aggressive mortgage brokers, or lax Federal regulators and other "bad guys." However, the decline in balance sheets of major lenders was caused by those using their imperfect models to drive down the value of mortgage based assets and thus leave the holders with "over leveraged" assets.
As contradictory as it may sound, the Feds are starting to revive the securitized debt market in order to restore our economic health. Many say this means using the same "toxic assets" again and this will lead to even more economic upheaval. However, they overlook the main issue. As a totally private sector activity we had no idea how large the securitized debt market was and how it operated. Under Fed leadership and control, the market will be visible and readily understood by all.
Leo Cecchini
March, 2009
Monday, March 23, 2009
HESTITATIONS ABOUT OBAMA'S RECOVERY PLAN
I was at a dinner for my old Foreign Serice class Sunday where I heard two kinds of comments that gave me some pause. Some said the US economy had gotten too large and we were living beyond our means. For these the best remedy for the current economic plight would be for the economy to contract to something more in line with what we can afford. On the same path, but somewhat different, were those who were skeptical of the President's efforts to get us out of the mess with increased government spending. They do not want to pump up demand at this point since excess demand is what got us into this position.
As I have said before I do not get into arguments about what constitutes the appropriate level of consumption. I define economics as the science of satisfying the perceived needs of the people with perceived being the operative word. One man's necessity is another's excess.
I do support President Obama's multiple efforts to revive the economy with one exception, I do not support using public funds to improve home owner's equity. This is the idea behind the plan to force write downs of mortgages to lower present values of property. Yes, help stop foreclosures, but no, do not use public funds to improve an individual's property sheet.
I leave it to others to determine the "correct amount of consumption." However, I fully support the President's efforts to bring the economy back to its previous level and go beyond that.
Leo Cecchini
March 2009
As I have said before I do not get into arguments about what constitutes the appropriate level of consumption. I define economics as the science of satisfying the perceived needs of the people with perceived being the operative word. One man's necessity is another's excess.
I do support President Obama's multiple efforts to revive the economy with one exception, I do not support using public funds to improve home owner's equity. This is the idea behind the plan to force write downs of mortgages to lower present values of property. Yes, help stop foreclosures, but no, do not use public funds to improve an individual's property sheet.
I leave it to others to determine the "correct amount of consumption." However, I fully support the President's efforts to bring the economy back to its previous level and go beyond that.
Leo Cecchini
March 2009
Sunday, March 22, 2009
"IT JUST GROWED"
Three things have occurred in this last week that give substance to what I have been trying to describe this last year. First is the hoorah over the now government owned largest insurance company in the world, AIG, granting bonuses of some $160 million to the very people who overbought securitized debt and oversold credit default swaps. The public is outraged that the firm used part of its $170 billion in funds injected into it by the Feds to pay the bonuses.
This rather simplistic populist rebellion speaks to an early demonstration of what I call the "New Economy," which means one in which Uncle Sam is now the largest shareholder in the private sector. These funds were not "given" to the firm, they were used to essentially acquire it by the Feds. In the words of Congressman Barney Frank, "we own the company, we can now say who gets paid and how much," or something to that effect. I have been pointing to this development as the major effect of the "Financial Meltdown of 2008" and the "Great Recession of 2009."
One commentator has cast aspersions on this development calling it an unholy alliance of the elites of government and capital akin to the corporate state of Mussolini. Well call it what you will, the movement is well established and we are headed toward greater control of the economy from Washington instead of New York.
The second development is that it has become clear that the devaluation of "securitized debt" or what I call mortgage based assets, began well before the uptick in foreclosures due to non-paying mortgages. The "wunderkind" put their "models," which I am given to calling, "electronic Ouija boards," to work as soon as the property markets went flat, not even south, to devalue these assets to the point they left their holders with destroyed balance sheets. This in turn left them unable to issue credit.
Thirdly, we have all come to learn that we need more credit than is available from traditional sources. In other words making our banks and other financial institutions healthy will not cure the credit problem, we need to revive the "securitized debt" market. And the Feds are already doing this, witness the massive infusion of funds into Fannie Mae and Freddie Mac to issue mortgages and "securitize" these. Next is the "TAFL" program in which the Feds will "securitize" non-mortgage loans.
If I were a believer in conspiracies I would probably see all of this as some plot put together by socialists to take the economy out of the hands of the private sector and put it into the hands of government. But I know that socialists are not that good, witness their failure in Russia. No, it is like Topsy, "it just growed."
Leo Cecchini
March 2009
This rather simplistic populist rebellion speaks to an early demonstration of what I call the "New Economy," which means one in which Uncle Sam is now the largest shareholder in the private sector. These funds were not "given" to the firm, they were used to essentially acquire it by the Feds. In the words of Congressman Barney Frank, "we own the company, we can now say who gets paid and how much," or something to that effect. I have been pointing to this development as the major effect of the "Financial Meltdown of 2008" and the "Great Recession of 2009."
One commentator has cast aspersions on this development calling it an unholy alliance of the elites of government and capital akin to the corporate state of Mussolini. Well call it what you will, the movement is well established and we are headed toward greater control of the economy from Washington instead of New York.
The second development is that it has become clear that the devaluation of "securitized debt" or what I call mortgage based assets, began well before the uptick in foreclosures due to non-paying mortgages. The "wunderkind" put their "models," which I am given to calling, "electronic Ouija boards," to work as soon as the property markets went flat, not even south, to devalue these assets to the point they left their holders with destroyed balance sheets. This in turn left them unable to issue credit.
Thirdly, we have all come to learn that we need more credit than is available from traditional sources. In other words making our banks and other financial institutions healthy will not cure the credit problem, we need to revive the "securitized debt" market. And the Feds are already doing this, witness the massive infusion of funds into Fannie Mae and Freddie Mac to issue mortgages and "securitize" these. Next is the "TAFL" program in which the Feds will "securitize" non-mortgage loans.
If I were a believer in conspiracies I would probably see all of this as some plot put together by socialists to take the economy out of the hands of the private sector and put it into the hands of government. But I know that socialists are not that good, witness their failure in Russia. No, it is like Topsy, "it just growed."
Leo Cecchini
March 2009
Sunday, March 15, 2009
THE NEW ECONOMY FACT AND FICTION
Well time to review what we have learned:
FACT: The US economy needs "securitized debt." Traditional sources of credit are not sufficient to make the engine run.
FACT: "Securitized debt" and the insurance on them, "credit default swaps," constitute what is called "toxic securities."
FICTION: These assets are being "marked-to-market." There is no market for them and they are being marked to notional values derived from "models" based on property markets.
FACT: Marking the "securitized debt" and "credit default swaps" erroneously, i.e. to notional values, has destroyed the balance sheets of those holding them, e.g. AIG Insurance.
FACT: The Federal Government is trying several methods to restore healthy balance sheets to the lenders.
FACT: The "TARP" program served to avert a total collapse in the financial system by restoring some of these balance sheets.
FICTION: The "TARP" has thrown tax money down the drain.
FACT: Through the "TARP" Uncle Sam has acquired a massive stake in our private financial institutions.
FICTION: President Obama's stimulus plan is a massive tax money giveaway.
FACT: President Obama's stimulus plan will save jobs by spending money.
FICTION: The Feds are wasting money trying to revive Fannies Mae and Freddie Mac (now owned by the Feds).
FACT: The Feds are providing funds to Fannie and Freddie to revive their "securitized debt" activities and thereby provide the credit needed to revive the economy.
FICTION: The Feds "TALF" plan will buy up worthless loans.
FACT: The "TALF" plan will buy up non-mortgage loans and issue these as "securitized debt."
FICTION: Uncle Sam is wasting tax payer money to the tune of $2-3 trillion.
FACT: Uncle Sam is borrowing money at cheap rates, maybe an average 1%, to buy up assets that will probably pay back more than their cost over the next 10 years.
FACT: The unintended result of the "financial meltdown of 2008" and "recession of 2009" will be to give Uncle Sam even more control over the economy. Already the largest consumer, 20% of the output to rise to 30% by 2010, the central banker, Federal Reserve, and rules maker, Uncle Sam is now the largest single owner of the private sector. Enter the "NEW ECONOMY."
FACT: The US economy needs "securitized debt." Traditional sources of credit are not sufficient to make the engine run.
FACT: "Securitized debt" and the insurance on them, "credit default swaps," constitute what is called "toxic securities."
FICTION: These assets are being "marked-to-market." There is no market for them and they are being marked to notional values derived from "models" based on property markets.
FACT: Marking the "securitized debt" and "credit default swaps" erroneously, i.e. to notional values, has destroyed the balance sheets of those holding them, e.g. AIG Insurance.
FACT: The Federal Government is trying several methods to restore healthy balance sheets to the lenders.
FACT: The "TARP" program served to avert a total collapse in the financial system by restoring some of these balance sheets.
FICTION: The "TARP" has thrown tax money down the drain.
FACT: Through the "TARP" Uncle Sam has acquired a massive stake in our private financial institutions.
FICTION: President Obama's stimulus plan is a massive tax money giveaway.
FACT: President Obama's stimulus plan will save jobs by spending money.
FICTION: The Feds are wasting money trying to revive Fannies Mae and Freddie Mac (now owned by the Feds).
FACT: The Feds are providing funds to Fannie and Freddie to revive their "securitized debt" activities and thereby provide the credit needed to revive the economy.
FICTION: The Feds "TALF" plan will buy up worthless loans.
FACT: The "TALF" plan will buy up non-mortgage loans and issue these as "securitized debt."
FICTION: Uncle Sam is wasting tax payer money to the tune of $2-3 trillion.
FACT: Uncle Sam is borrowing money at cheap rates, maybe an average 1%, to buy up assets that will probably pay back more than their cost over the next 10 years.
FACT: The unintended result of the "financial meltdown of 2008" and "recession of 2009" will be to give Uncle Sam even more control over the economy. Already the largest consumer, 20% of the output to rise to 30% by 2010, the central banker, Federal Reserve, and rules maker, Uncle Sam is now the largest single owner of the private sector. Enter the "NEW ECONOMY."
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