2008 Review in Pictures and 2009 Forecast - Eric Janszen

[rabot10]

Re: 2008 Review in Pictures and 2009 Forecast - Eric Janszen

I am a little bigger than most people so that may be why I want to know when we get to hear about jump ball? Looking forward to it

Hey it says "Senior iTuliper" under my name!! Just for your info I'm only a year or so older than Ej!! It should say Spring Chicken!

[Slimprofits]

Re: 2008 Review in Pictures and 2009 Forecast - Eric Janszen

The TIME writer does not propose a solution. Here's ours. If the market won't clear on its own, the Fed will have to clear if for them. The Fed did this with the banking system as a whole in 1934 and with the S&Ls in the late 1980s. How about this solution broken down into three steps:

Functionally, this is clearly what needs to be done. Why hasn't it? Is the process operationally impossible, like changing tires on a moving car, the banks too big and too integral to daily business and market operations? Will a modern bank holiday that shuts down banks holding collectively $20 trillion in assets be done without crashing the system? Or are the big banks politically off limits?

We have no idea how this conundrum will work out in 2009 but suffice it to say that continuing the same program of adding excess reserves until the cows come home will not work any better this year than it did last year. The largest banks in the US banking system will at some point have to be toaster-reset, as they say in the computer business -- a phrase that refers to the practice of unplugging and plugging back in a computer that is not responding to traditional operator efforts to restart it. When that happens, expect sparks to fly. We do not believe this eventuality is yet priced into the markets.

I posted this in the news section, but should have just put it up here. On Tuesday Bernanke addressed the idea of "Bad Banks" fop the purpose of clearing the bad assets. Is it the first time he has talked about this publicly?

Before the London School of Economics:

However, with the worsening of the economy’s growth prospects, continued credit losses and asset markdowns may maintain for a time the pressure on the capital and balance sheet capacities of financial institutions. Consequently, more capital injections and guarantees may become necessary to ensure stability and the normalization of credit markets. A continuing barrier to private investment in financial institutions is the large quantity of troubled, hard-to-value assets that remain on institutions’ balance sheets. The presence of these assets significantly increases uncertainty about the underlying value of these institutions and may inhibit both new private investment and new lending. Should the Treasury decide to supplement injections of capital by removing troubled assets from institutions’ balance sheets, as was initially proposed for the U.S. financial rescue plan, several approaches might be considered. Public purchases of troubled assets are one possibility. Another is to provide asset guarantees, under which the government would agree to absorb, presumably in exchange for warrants or some other form of compensation, part of the prospective losses on specified portfolios of troubled assets held by banks. Yet another approach would be to set up and capitalize so-called bad banks, which would purchase assets from financial institutions in exchange for cash and equity in the bad bank.

[Slimprofits]

Re: 2008 Review in Pictures and 2009 Forecast - Eric Janszen

EJ, Did you call this one into Bernanake and company?

Fed's Lacker: 'Bad bank' good way to tackle crisis

A top Federal Reserve official on Friday said lifting bad assets from troubled banks would be a "compelling" way to recapitalize the financial system, hours after the Fed backed major aid for Bank of America.

"As long as you have some material risk that remains on the bank's books, any new equity investor is going to be subsidizing existing debt holders," Richmond Federal Reserve Bank President Jeffrey Lacker told reporters after a speech.

"That is going to pose an impediment to raising new equity and recapitalizing the banking system from the private sector, which is what, ultimately, we want to do," he said.

U.S. ‘Bad Bank’ Plan Gets Momentum to Revive Lending

President-elect Barack Obama’s advisers see an increasingly grave banking crisis and are considering proposals far more sweeping than any steps that have been taken so far, according to people who’ve discussed the outlook with them.

“They need to do something dramatic,” said Harvard University Professor Kenneth Rogoff, a former chief economist at the International Monetary Fund, and member of the Group of Thirty counselors on financial matters, a panel that includes Treasury Secretary-designate Timothy Geithner and Lawrence Summers, incoming director of the National Economic Council.

Officials at the Federal Reserve and other agencies are focusing on the option of setting up a so-called bad bank that would acquire hundreds of billions of dollars of troubled securities now held by lenders. That may allow banks to reduce write-offs, free up capital and begin to increase lending. Paul Miller, a bank analyst at Friedman Billings Ramsey & Co. in Arlington, Virginia, estimates that financial institutions need as much as $1.2 trillion in new aid.

[..]

A big new initiative “is going to be necessary,” said Peter Wallison, who was U.S. Treasury general counsel under President Ronald Reagan and is now a fellow at the American Enterprise Institute in Washington. “Once they have stable capital, once they feel they are not going to be run on by people who doubt the quality of their capital position, they will start lending.”

Obama’s Treasury could use much of the funds to back a bigger Fed campaign to buy the illiquid assets, Wallison said. The FDIC, which has emergency authority to take “any action” with insured deposit-taking firms deemed necessary to counter “adverse effects on economic conditions or financial stability,” could also play a role.

Bair and Treasury Secretary Henry Paulson gave fresh momentum today to the idea of creating a government-backed “aggregator” bank to help take bad assets off the balance sheets of U.S. financial institutions.

“There’s a lot of work that has been done on an aggregator bank, other ways of leveraging TARP funding to let it go further when it comes to dealing with illiquid assets,” Paulson told reporters in Washington.

[EJ]

Re: 2008 Review in Pictures and 2009 Forecast - Eric Janszen

EJ, Did you call this one into Bernanake and company?

Fed's Lacker: 'Bad bank' good way to tackle crisis



U.S. ‘Bad Bank’ Plan Gets Momentum to Revive Lending

Actually, yes. I have been contacted by members of Congress. There have been several conversations and emails. They are aware of the gravity of the crisis. They are reaching out to a wide group of advisers and I have brought others into the conversations. I'm doing what I can to help. At this point everyone has to think and work constructively. There is no time for politics or reviewing past errors.

[tsetsefly]

Re: 2008 Review in Pictures and 2009 Forecast - Eric Janszen

EJ, Did you call this one into Bernanake and company?

Fed's Lacker: 'Bad bank' good way to tackle crisis



U.S. ‘Bad Bank’ Plan Gets Momentum to Revive Lending

I dont see how this could work though?

its not like the losses can magically dissapear someone will have to "pay" for it...
and why is the focus on trying to bring the FIRE economy back to life???

[we_are_toast]

Re: 2008 Review in Pictures and 2009 Forecast - Eric Janszen

Actually, yes. I have been contacted by members of Congress. There have been several conversations and emails. They are aware of the gravity of the crisis. They are reaching out to a wide group of advisers and I have brought others into the conversations. I'm doing what I can to help. At this point everyone has to think and work constructively. There is no time for politics or reviewing past errors.

I have expressed my extreme pessimism many times on the threads here.
I now see a ray of hope.

[Slimprofits]

Re: 2008 Review in Pictures and 2009 Forecast - Eric Janszen

I dont see how this could work though?

its not like the losses can magically dissapear someone will have to "pay" for it...
and why is the focus on trying to bring the FIRE economy back to life???

Are you familiar with the Resolution Trust Corporation?

The Resolution Trust Corporation pioneered the use of so-called “equity partnerships” to help liquidate real estate and financial assets which it inherited from insolvent thrift institutions. While a number of different structures were used, all of the equity partnerships involved a private sector partner acquiring a partial interest in a pool of assets, controlling the management and sale of the assets in the pool, and making distributions to the RTC reflective of the RTC’s retained interest.

The RTC used equity partnerships to achieve a superior execution through maintaining upside participation in the portfolios. Prior to introducing the equity partnership program, the RTC had engaged in “bulk sales” of asset portfolios. The pricing on certain types of assets often proved to be disappointing because the purchasers discounted heavily for “unknowns” regarding the assets, and to reflect uncertainty at the time regarding the real estate market. By retaining an interest in asset portfolios, the RTC was able to participate in the extremely strong returns being realized by portfolio investors. Additionally, the equity partnerships enabled the RTC to benefit by the management and liquidation efforts of their private sector partners, and the structure helped assure an alignment of incentives superior to that which typically exists in a principal/contractor relationship.

As to your second question, are you looking for an explanation for the behavior of Paulson, Bernanake, Obama? We know EJ isn't trying to save the FIRE economy though.

[tsetsefly]

Re: 2008 Review in Pictures and 2009 Forecast - Eric Janszen

Are you familiar with the Resolution Trust Corporation?


As to your second question, are you looking for an explanation for the behavior of Paulson, Bernanake, Obama? We know EJ isn't trying to save the FIRE economy though.

1. yes, but i still dont understand how it could work.

2. I know, that is why I was surprised to see EJ in support of this, however after reading up on this and other post it seems to me EJ suggest some banks will have to be "terminated" but it seems the article posted in the reply I was responding to does not say that will be done.

3. If 1 and 2 dont make sense then I clearly dont get it, : / ... in which case a layman explanation would be welcomed

[Chris Coles]

Re: 2008 Review in Pictures and 2009 Forecast - Eric Janszen

We have to assume that a Resolution Trust is another form of bankruptcy. When a business declares itself, or is declared, bankrupt; the business is placed into the hands of The Official Receiver. They in turn have a simple remit, to produce as much value as possible from the sale of the remaining assets. To permit that process, the rules make the accountants, normally acting for the Official Receiver, first in line for any monies as normal accountancy fees as they act for everyone, including the tax revenue authorities such as here in the UK, The Inland Revenue.

So in essence, the assets are liquidated in as efficient a manner as possible, within a very short timescale.

It is usually a very efficient process. Anything that can be sold quickly in an auction, for example, is sold on to the highest bidder. If you know a business is bankrupt and have a use for the assets, then you, or anyone, can approach the Official Receiver and make an immediate cash offer for anything you want to buy. In many cases, the process can be concluded within days. So liquid assets can be back into use sometimes very quickly indeed.

Bankruptcy is a very efficient process. It brings useful assets back into productive use very quickly and efficiently.

I should imagine that people in the know with plenty of cash will be watching the process to make a considered bid for those assets that they feel are, at the point of opportunity, worth more than the price they are being asked to pay.

Some are going to make a great killing out of such a process.

[metalman]

Re: 2008 Review in Pictures and 2009 Forecast - Eric Janszen

1. yes, but i still dont understand how it could work.

2. I know, that is why I was surprised to see EJ in support of this, however after reading up on this and other post it seems to me EJ suggest some banks will have to be "terminated" but it seems the article posted in the reply I was responding to does not say that will be done.

3. If 1 and 2 dont make sense then I clearly dont get it, : / ... in which case a layman explanation would be welcomed

the way i read it... problem: banks don't know who is and who is not solvent so do not want to lend to each other. ej's solution: gov't reviews the balance sheets of all the banks, SHUTS DOWN the insolvent banks and transfers the marketable assets to a gov't entity he calls resolution trust corp. ii, from that corp. sell the assets to the solvent banks at market prices to the solvent banks. problem solved.

[tsetsefly]

Re: 2008 Review in Pictures and 2009 Forecast - Eric Janszen

the way i read it... problem: banks don't know who is and who is not solvent so do not want to lend to each other. ej's solution: gov't reviews the balance sheets of all the banks, SHUTS DOWN the insolvent banks and transfers the marketable assets to a gov't entity he calls resolution trust corp. ii, from that corp. sell the assets to the solvent banks at market prices to the solvent banks. problem solved.

We have to assume that a Resolution Trust is another form of bankruptcy. When a business declares itself, or is declared, bankrupt; the business is placed into the hands of The Official Receiver. They in turn have a simple remit, to produce as much value as possible from the sale of the remaining assets. To permit that process, the rules make the accountants, normally acting for the Official Receiver, first in line for any monies as normal accountancy fees as they act for everyone, including the tax revenue authorities such as here in the UK, The Inland Revenue.

Okay, so i wasnt as lost as I thought it was, but if this is the case why not let the bank go bankrupt in the first place?
Then the marketable assets can be sold.

[c1ue]

Re: 2008 Review in Pictures and 2009 Forecast - Eric Janszen

I agree a Resolution Trust will help complete the bad debt nullification process, but again how will the overall economy continue?

The FIRE engine is broken. Even a removal of the dead weight of bad debt will not restart it.

Sure, the talk about spending on infrastructure might provide a new engine. But the cost of this spending is ... more debt?

How is this different than a 3 card Monty scheme?

On this hand, bad debt disappears. On this other hand, good debt appears.