Bad bank brings unlimited loss potential
The FDICs call for a bad bank to wipe away all bad assets from bank balance sheets may sound great at first but creating a bad bank doesn’t end the problem. Instead it transfers the loss from private companies to the balance sheet of the government.
Don’t be fooled when it comes to recent talk about the creation of a bad bank to absorb the multi-trillion dollar losses incurred in just the past few years. The American taxpayer and dollar will suffer tremendously as the markets will have to cope with either extreme taxation or hyperinflation when the government takes on the losses.
The lending system has never been truly stress tested and there is no model or historical record to see what kind of losses could be experienced. Big name investors and institutions are so highly leveraged on the outcome of the US real estate market. During the boom these assets were repackaged and sold, and then repackaged and sold through the derivatives market. Whether or not you pay your mortgage could ultimately affect thousands of investors who purchased derivatives to hedge risk.
What we do know is that the extent of the losses are far higher than what anyone is predicting. Banks set aside billions to cope with the crisis but fell short and had much higher losses than ever expected. Do not expect anything different from this bad bank, banks want to sell their assets at the highest possible price and will not advertise their own failure.
If the losses are transferred to the FDIC (backed by the Federal Government) both the taxpayer and dollar denominated savers will be inadvertently affected. Multi-trillion dollar losses will have to be monetized either through inflation or through taxation. From history we can declare its going to come from inflation, and its going to come big.
SLV and GLD are going to be hot this year.
My Broker just advised me to sell all my stocks. I was always told to dollar cost average and buy low sell high. “This time its different” he said You’re my best customer and would hate to see you get screwed.So I put it mostly in Bonds and some in my Vault just in case the Banks go Bad.
Used to be we had a choice either Guns or Butter. Now we have nothing, Theres no money left in the system. It has virtually been evaporated by a huge sinkhole called the housing bubble and worsened by the consumer debt/credit Bubble.Now its taking everything with it, including the equity markets and commodities and millions of jobs.It had to happen.It was created to self destruct. Even Gold is having a hard time finding its way.I started to think about this economy spiraling out of control and remember when at the first sign of Blood, Bush came out and said our economy was very strong, It’s resilient he said.
Soon after the Panic set in. My Broker now advises to wait for the eventual collapse, when theres not an ounce of confidence in the markets.True Armageddon, Blood in the Streets. When all the jobs are gone and the US Currency is nearly worthless.Only then you may want to think about putting some money into hard assets only.Its gonna be a cold day in Hell when this bounces back, he says.
Under the “Bad Bank” scenario, the taxpayers will own these Troubled Assets which are comprised of “Toxic” mortgages.
In effect, the US government (taxpayers) will be bearing the loss on these “toxic” mortgages. The growing concern is that these losses will continue to materialize as defaults increase with the projected 8 million foreclosures expected over the next four years. It seems that the key to this crisis IS THE BORROWER!
The underlying “troubled assets” are the “toxic” mortgages such as Alt-A, Option ARMs, Interest-Only, etc. that are interwoven into the Mortgage Backed Securities, Collateral Debt Obligations, and other derivative investments that are leveraged into investments valued in the trillions of dollars worldwide.
Since the valuation of these “toxic” assets depends on the Borrower’s ability to make the monthly mortgage payments, the key to a solution of this Economic Crisis is the Borrower!
Everyone is betting that the Borrower will default and foreclosures will follow. The high rate of foreclosure should have been expected because the Borrower has no concept of managing money and is like a “Boat without a Paddle”.
The Borrower is in desperate need of “Financial Guidance” in this complex economic environment that requires “informed” financial decision-making. The Subprime Mortgage Crisis, out-of-control consumer spending and credit card usage, and the spike in foreclosures and bankruptcies provide evidence of that fact. Loan modification or “Bailout” will not work. Even after loan modification, the re-default rate was 60% within 6 months!
The solution is a program of Immediate and Specific Financial Guidance that will help the Borrower “naturally” be able to make the monthly mortgage payment, without “bailout” or extensive loan modifications which have proven to be a failure. This program is NOT the so-called Financial Literacy initiative that simply disseminates “information”, but rather it is a program that will help the Borrower “understand” how to manage money and avoid the pitfalls that have previously caused financial distress.
Borrowers, both small business and individual, require Immediate and Specific Financial Guidance in order to avoid default and foreclosure. As the Borrower is successfully guided to avoid default, the financial and housing markets will respond favorably. The result will be a reversal of the downward trend in the valuation of the “troubled assets”.
If we are successful, we can turn this crisis “all around” and stimulate the economy “naturally” rather than by “bailout” which does not guarantee success.
Instead of the expected losses, the US government (taxpayers) will benefit from the unexpected gains that will result as these investments grow in value.
Samuel D. Bornstein
Professor of Accounting & Taxation
Kean University, School of Business, Union, NJ
Tel: (732) 493 - 4799
Email: bornsteinsong@aol.com
let the banks fail and the situation will eventually level itself out. we do not need to take on more ‘PORK’. I FOR ONE CANNOT AFFORD TO BAIL OUT ANYONE ANYMORE, INCLUDING MYSELF.
Prof. Samuel D. Bornstein
I wish it were as simple as people failing to make their payments on debts. Trillions of inflated money has been wiped out of the system, never to return. Banks are leveraged 60-70:1. 1.4% of losses wipes out the market.
The problem with the most latest crash is how it worked. The growth we’ve seen over the past 20 years wasn’t growth. The standard of living remained the same. The only thing that happened was capital appreciation. We aren’t saving, we’re spending and borrowing.
It would be bailouts or stimulus that bring us out of the mess. The mess will end when the government stops buying troubled assets at premium prices and lets the market produce the most efficient price.
@Prof. Samuel D. Bornstein
I really hope you’re right though.