Why is the nation's banking system "crippled"?

[leftofthedial]

We've either already given them (or the Fed has given them) nearly enough money to buy every "toxic" mortgage in teh country.

I know the root cause is unfettered, unregulated capitalism (which is a corrupt system at its core and breeds corruption and devastation).

But has anyone accurately stated what the nature and scope of the current crisis really is? Or is Wall Street just calling wolf and getting away with it?

[leftstreet]

1. uh...uh...uh

You must not question the Wall Street Finance Gods.

Everything will be fine.

Go shopping.

:hi:

[leftofthedial]

2. if I go shopping,

I'll need me some serious credit...

[leftstreet]

5. No problem, baby!

http://latimesblogs.latimes.com/money_co/2008/11/new-credit-mark.html

Thanksgiving surprise: $800 billion more for the credit markets

4:40 PM, November 25, 2008
The $800 billion in new outlays announced today by the federal government to unlock the credit markets might have come as a shock if you remembered Treasury Secretary Henry M. Paulson’s remarks a week ago as suggesting that he had no such new programs in mind for the rest of the Bush administration.

[leftofthedial]

3. mystery dupe

some sort of glitch in the series of tubes apparently cloned a post.

[marketcrazy1]

4. this might help explain things --- it`s long, got to the link to finish

Colossal Financial Collapse

The Truth behind the Citigroup Bank "Nationalization"

By F. William Engdahl

On Friday November 21, the world came within a hair’s breadth of the most colossal financial collapse in history according to bankers on the inside of events with whom we have contact. The trigger was the bank which only two years ago was America’s largest, Citigroup. The size of the US Government de facto nationalization of the $2 trillion banking institution is an indication of shocks yet to come in other major US and perhaps European banks thought to be ‘too big to fail.’

November 25, 2008 "Global Research" -- The clumsy way in which US Treasury Secretary Henry Paulson, himself not a banker but a Wall Street ‘investment banker’, whose experience has been in the quite different world of buying and selling stocks or bonds or underwriting and selling same, has handled the unfolding crisis has been worse than incompetent. It has made a grave situation into a globally alarming one.

‘Spitting into the wind’

A case in point is the secretive manner in which Paulson has used the $700 billion in taxpayer funds voted him by a labile Congress in September. Early on, Paulson put $125 billion in the nine largest banks, including $10 billion for his old firm, Goldman Sachs. However, if we compare the value of the equity share that $125 billion bought with the market price of those banks’ stock, US taxpayers have paid $125 billion for bank stock that a private investor could have bought for $62.5 billion, according to a detailed analysis from Ron W. Bloom, economist with the US United Steelworkers union, whose members as well as pension fund face devastating losses were GM to fail.

That means half of the public's money was a gift to Paulson’s Wall Street cronies. Now, only weeks later, the Treasury is forced to intervene to de facto nationalize Citigroup. It won’t be the last.

Paulson demanded, and got from a labile US Congress, Democrat as well as Republican, sole discretion over how and where he can invest the $700 billion, to date with no effective oversight. It amounts to the Treasury Secretary in effect ‘spitting into the wind’ in terms of resolving the fundamental crisis.

It should be clear to any serious analyst by now that the September decision by Paulson to defer to rigid financial ideology and let the fourth largest US investment bank, Lehman Brothers fail, was the proximate trigger for the present global crisis. Lehman Bros.’ surprise collapse triggered the current global crisis of confidence. It was simply not clear to the rest of the banking world which US financial institution bank might be saved and which not, after the Government had earlier saved the far smaller Bear Stearns, while letting the larger, far more strategic Lehman Bros. fail.

Some Citigroup details

The most alarming aspect of the crisis is the fact that we are in an inter-regnum period when the next President has been elected but cannot act on the situation until after January 20, 2009 when he is sworn in.

Consider the details of the latest Citigroup government de facto nationalization (for ideological reasons Paulson and the Bush Administration hysterically avoid admitting they are in the process of nationalizing key banks). Citigroup has more than $2 trillion of assets, dwarfing companies such as American International Group Inc. that got some $150 billion in US taxpayer funds in the past two months. Ironically, only eight weeks before, the Government had designated Citigroup to take over the failing Wachovia Bank. Normally authorities have an ailing bank absorbed by a stronger one. In this instance the opposite seems to have been the case. Now it is clear that the Citigroup was in deeper trouble than Wachovia. In a matter of hours in the week before the US Government nationalization was announced, the stock value of Citibank plunged to $3.77 in New York, giving the company a market value of about $21 billion. The market value of Citigroup stock in December 2006 had been $247 billion. Two days before the bank nationalization the CEO, Vikram Pandit had announced a huge 52,000 job slashing plan. It did nothing to stop the slide. ----- READ THE REST HERE http://www.informationclearinghouse.info/article21318.htm

[leftofthedial]

6. thanks. that's an inersting article.

I read most, skimmed some.

I understand the theft and cronyism that's been going on.

What I don't understand is what really caused the banks to fail. It clearly wasn't bad mortgages, since we've already given them more than the mortgages were worth.

The whole thing just smells.

[marketcrazy1]

10. it`s called leverage

banks and investment banks have leveraged their assets to the tune of 30 to 1 and as high as 50 to 1,, apply that to citi, with assets of 2 trillion levered at 30 to 1 and you can see that it would ( and did ) only take a relatively small percentage loss at these ratios to generate tens or hundreds of billions in losses... this is what is happening, the FED is in a mad dash to aid banks in their efforts to de lever their loss exposure but with no market for risk the FED has become the buyer of first,last and only resort, there are tens of trillions of dollars in bad debt which needs to be unwound, the FED and Treasury think they can manage it. wether or not they can has yet to be determined. right now the FED is levered 50 to 1!!!, something has to give.... soon!

[leftofthedial]

11. I don't see how throwing any amount of money at that problem will ever fix anything.

[marketcrazy1]

13. this "problem" can be fixed

but it would be very painful to the economy, banks could be FORCED to take their losses wich would mean bankruptcy for the biggest banks ( wich could be a disaster ) but even that drastic a move could be managed by simply creating NEW banks capitalized by the FED to the tune of say 50 billion each.. this would INSTANTLY create 5 trillion dollars in new lending capacity that amount of CLEAN financing would be plenty to stave off economic collapse... it would be complicated due to the derivative markets but it could be managed... THERE ARE ALTERNATIVES

[pipoman]

25. The problem with this scheme

is that the people who were most fiscally responsible would loose their life savings to bail out those who were least responsible, IMHO.

[pipoman]

26. This article only explains

the ins and outs of the bailout scheme, not the root cause of the problem.

[Double T]

7. It is called the last bush corporate hoorah.

Looting the teasury and handing it over to wall street. Remember whence Paulson came: Henry Merritt "Hank" Paulson Jr. (born March 28, 1946) is the United States Treasury Secretary and member of the International Monetary Fund Board of Governors. He previously served as the Chairman and Chief Executive Officer of Goldman Sachs.

[2Design]

8. they sucker punch america and now have to eat their own gaming n/t

[Jack Sprat]

9. The banks moved into investments of different kinds

and the investments had a severe downturn. Banks should have stayed within banking, I think.

[leftofthedial]

12. but those investments were mortgages, que no?

and we've already committed enough dough to pay off ALL the bad mortgages and then some.

Or were there other bad investments?

[Hannah Bell]

14. i think it's something like this: financiers made bets on mortgages.

some bet they'd fail, some bet they wouldn't.

so if "we" paid off the mortgages, "we'd" be weighting the table for one set of gamblers v. the other set.

instead, paulson is giving the $$ to his friends.

and the guy who cleans the casino will pay the bill.

something like that

[leftofthedial]

16. by jove

I think you've got it!

[marketcrazy1]

17. bad mortgages are

a small part of the problem, they could have been managed IF the problem was addressed sooner, the credit failure contagion has now spread throughout the system, there is still a chance to turn things around but it becoming clearer each day that we will not accept the truth.. the hole we are digging is very deep now, soon it will be to deep to climb out of..... the road we are traveling leads to only one place.....

[leftofthedial]

19. Im on the highway to hell

Living easy, living free
Season ticket on a one-way ride
Asking nothing, leave me be
Taking everything in my stride
Dont need reason, dont need rhyme
Aint nothing I would rather do
Going down, party time
My friends are gonna be there too

Im on the highway to hell

No stop signs, speed limit
Nobodys gonna slow me down
Like a wheel, gonna spin it
Nobodys gonna mess me round
Hey satan, payed my dues
Playing in a rocking band
Hey momma, look at me
Im on my way to the promised land

Im on the highway to hell
(dont stop me)

And Im going down, all the way down
Im on the highway to hell

[KakistocracyHater]

15. It is a mirage

I don't think-or feel-that our banking system is crippled, this is a ruse, a bluff, a lie.

[leftofthedial]

18. MIHOP

the crooks in the oligarchy are good at that

[marketcrazy1]

20. if only

It is a mirage
Posted by KakistocracyHater


I don't think-or feel-that our banking system is crippled, this is a ruse, a bluff, a lie. --- if only that were true!! most posters here have NO IDEA how bad things are because you are not being told.... probably a good thing some would say.

[kentuck]

21. My major criticism of the whole mess is with our Congress...

They have the responsibility and duty to study any request much more thoroughly than they studied this bailout. They look like naive incompetents. When someone asks you for $700 billion dollars, the least you can do is ask them to open up the books and let us see every dotted "i" and crossed "t" in their records. I have been terribly disappointed in this Congress.

[marketcrazy1]

22. not to worry

it`s only debt!!! there are only two ways to settle a debt, pay it off OR default....

[pipoman]

23. The mortgage crisis drove the bus and the consumer credit crisis were the passengers

To place blame for this mess on either party is wishful thinking. They are both nearly equally responsible. The pugs lobbied and won bank deregulation, the Dems lobbied and won lowering the qualifications to receive credit, most notably mortgages. The result is this colossal mess.

I didn't realize this was going on until a year or so ago while watching HGTV. They have a show which tracks first time home buyers through the process of shopping, contracting, and closing on their first home. I watched several episodes and each time it was the same story. Young couple (or single) were shopping $400k homes and going shopping in their new car. At closing they would sign up for an 80% (of appraised value) first mortgage, 20% second mortgage, interest only for the first 5 years, amortized on 40 years. The buyer would walk away with the keys to the house and enough cash to buy a new house full of furniture and appliances.

Rewind 25 years. In the 1980's there were requirements on banks and mortgages. I was selling real estate at the time. The best mortgages were 80% of purchase price (not inflated appraised value). If a person was absolutely stellar from a credit standpoint they might be able to get a 90% mortgage. The 20% (or 10%) had to be earned income. It could not be borrowed or gifted. If the person could not demonstrate in detail how the money was obtained the money had to be in their account for an entire year before it could be used for the down payment. 30 years was the longest amortization available. The buyer could not exceed 35% of their income in long term debt including auto loans and credit cards. The 35% included the house payment (principle, interest, taxes, and insurance), there was no such thing as an interest only mortgage.

The combination of bank deregulation and lowering the requirements for qualification took us to where we find ourselves.

The result of these things was suddenly these people who had mediocre jobs were buying these big new homes. This is the cause of the housing bubble. These people who wanted to buy a $400k house in the 1980's would have to save up $80k in cash...impossible for most. So in the 1980's first time home buyers would buy a starter home with a down payment they could, with diligence, viably save up. They would buy an $80k house, after saving up $16k. They would live there for 5 or 10 years then sell that house collecting their equity and the appreciation on the house which would give them a larger down payment for a more expensive house. This process was crucial for capping new construction, maintaining a reasonable real estate market, kept a broad enough gap between new and used, and keeping young people who notoriously have eyes bigger than their wallet in check.

These buyers were in over their head immediately and could scarcely afford the interest only payments. Then the principal would kick in and default would kick in too in higher percentages than any other time in history. In the process they were running up huge consumer debt often just for non durable necessities. Then the buyers began to dry up and the inflated cost of homes began to deflate and the banks were on the hook for the losses.

[marketcrazy1]

24. nice post

in a nutshell! I like!! some one gets it!!! house prices HAVE TO COME DOWN, sound lending standards MUST be resumed.. problem is, the only way there is a crash!!! and THATS what we are going to get!! DOW 3000 anyone!!

[KakistocracyHater]

27. but that's only a tiny amount

you forgot about outsourcing most of America's 'doing', the rocket scientists were put out in the 90s, our electronics manufacturing was handed to Japan in the 80s, our clothes-making was handed over to China in the late 90s, our food farming was/is being outsourced to S. America & overseas: with all that gone, with what do we have to purchase? Credit, paper values.

[pipoman]

28. I don't disagree

another 'bi-partisan consensus reached in a spirit of cooperation' those 'free trade agreements' were. And our party is supposed to be the party of labor, yea right.

Not to sound too conspiratorial, I have thought that the bank deregulation and lowering of mortgage standards may have been an attempt to conceal the damage of free trade, allowing people to feel as though they were prospering even though they were borrowing their prosperity...time to give it back.