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alstry (36.27)

Financials are the ONLY thing that matter

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August 27, 2008 – Comments (3)

It is amazing to see how the current crisis is characterized by the mainstream media.  Statements like the problems are only contained in the financials but most other things are doing fine??????

This kind of logic defies sophmoric analysis and borders on insanity.

Banks are losing money because loans are defaulting and assets are crashing in value.  Yes....crashing!!!!!  In the past, banks were able to sell the collateral backing defaulting loans and recover most of their capital....not any more.

In Q2 FDIC bank profits down 87% at 1991 levels....a time when the DOW was trading at about 3000.  Factoring money center and investment banks and profits are down even more and the DOW's PE is nil.

The wealth of America is being wiped out at a faster than any point in history. 

 Let's look at a $1 million dollar home that someone purchased a couple years ago with 20% down.  This past year homes in CA have declined about 40% in value(some areas even more).  Not only that person lost 100% of his investment, he lost an additional $200K due to the decline in value for a total $400K loss.  If he defaults, the bank will likely loose over about half its loan amount after paying foreclosure and sale costs.

Wealth and assets in America are evaporating into thin air.  Primary decrease in wealth is coming from our largest asset classes that are coincidently the most leveraged....residential and commercial real estate.  A 30% reduction in the value of a commercial piece of property that was purchased with 10% down results in a 300% loss of investment.  Now multiply that by trillions of dollars.

If our banks can't make money, they can't lend.  If they can't lend the economy grinds to a halt as asset prices fall even further and even more savings evaporate.  Hhec, even FNM is making it harder to borrow to buy a home and raising fees.

We are now at the early stages of that process and the stresses are being felt everywhere.  Restaurants, Airlines, Hotels, Casinos, Retailers, Builders, Government Tax Revenues and now technology companies and health care providers.

The FDIC is already warning that it needs to borrow money to keep deposits insured.  Don't you think its easy to see what is coming.....but are they are too afraid to tell you?

Until we unwind the leverage....this downward spiral continues as far as the eye can see.  Deferring defaults only forestalls the inevitable(loaning Ford and GM $50 Billion when they are losing $25 Billion per quarter doesn't accomplish much until they are deleveraged)

For those of you that think that the Fed has printed enough money to compensate for the $10 Trillion dollars of lost wealth in the past year or so....you may want to recheck your addition.  We are likely to lose over $10 trillion this year...especially with a decline in the stock market and continued deterioration in the credit markets.

When we are broke......how do you think the non financials are going to fare???  For those of you that think it only applies to the other guy....if enough other guys can't pay taxes.....the government will need everything you got just to try to sustain itself.

Don't you think Russia and other foreign powers understand our prediciment?  Our government officials are advertising it all over the world while the American public is seemingly in the dark....at least for now.

It was a Ponzi Scheme that lasted a long long time that is now revealing itself.  Payback can be painful......time will tell.

 

 

3 Comments – Post Your Own

#1) On August 27, 2008 at 9:55 AM, alstry (36.27) wrote:

Are banks valuing their assets fairly??????

The Federal Deposit Insurance Corp said on Tuesday it now expects IndyMac's failure in July to cost its insurance fund $8.9 billion, compared with the previous expected range of $4 billion to $8 billion.
...


Diane Ellis, the FDIC's associate director of financial-risk management, said IndyMac's expected hit to the fund blossomed because analysts have had more time to value IndyMac's assets and have assigned some higher loss rates.

http://calculatedrisk.blogspot.com/2008/08/fdic-increases-loss-estimate-for.html

Now the question is what really is the value of assets on banks' balance sheet and how solvent is the banking system????

I know...the FDIC is going to borrow more money to make sure our deposits are insured.

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#2) On August 27, 2008 at 10:37 AM, abitare (43.81) wrote:

SKF

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#3) On August 27, 2008 at 2:59 PM, zygnoda (26.94) wrote:

Wow!  Thanks for the update on Indy. 

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