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IndyMac Bank seized by federal regulators
July 11, 2008 4:25 PM   Subscribe

The FDIC has taken control of IndyMac Bank This is being described as the second largest bank failure in US history. If you are a current customer with funds on deposit, here's what you need to do.
posted by Asherah (160 comments total) 12 users marked this as a favorite

 
Note that you don't really have to do anything. The FDIC is really good at shutting down banks transparently. Hard to believe they're part of the government.

The FatWallet thread on this from 7/3 is interesting (and prescient): WARNING: IndyMac appears close to collapse
posted by smackfu at 4:32 PM on July 11, 2008 [1 favorite]


Is this bad?
posted by empath at 4:34 PM on July 11, 2008


This is why I keep all my money in a cookie jar.

Nah, I'm kidding. I don't have any money.
posted by mr_crash_davis at 4:35 PM on July 11, 2008 [11 favorites]


Interesting article on how the FDIC takes over banks.
posted by smackfu at 4:37 PM on July 11, 2008 [19 favorites]


Sorry...poor wording, should have been: here's what you may want to know.
posted by Asherah at 4:37 PM on July 11, 2008


Yet another psychological problem of this mental recession no doubt.
posted by rooftop secrets at 4:40 PM on July 11, 2008 [11 favorites]


All the headlines today were about Fannie Mae and Freddie Mac being in trouble. Close but no cigar...
posted by East Manitoba Regional Junior Kabaddi Champion '94 at 4:44 PM on July 11, 2008


We're all just a nation of whiners... it's all in our heads.... psychological

blah blah blah

/sarcasm
posted by edgeways at 4:45 PM on July 11, 2008


The Evil Financial Firm I worked for in the '80s was taken over by the California Department of Insurance. I WISH it had been the FDIC. Still trying to figure out if then-Insurance Commissioner/now-Lieutenant Governor John Garamendi actually LEARNED anything from the debacle, but I am definitely supporting "Anybody But Him" in the Governor's race.
posted by wendell at 4:47 PM on July 11, 2008


It was a diversion East Manitoba, all a part of the plan.

*greases handlebar mustache*
posted by Skorgu at 4:47 PM on July 11, 2008


hum hm mm...it's the end of the world as we know it...and i feel...
posted by sexyrobot at 4:48 PM on July 11, 2008


Well, at least they waited until after the Friday market close...

EVERYBODY should be PANICed out by the end of the weekend.
posted by wendell at 4:49 PM on July 11, 2008


Just in case anyone is freaking out a little too much (which I don't see here so far):

Note that despite the -Mac, IndyMac is not Freddie Mac, Farmer Mac or any sort of GSE.

Also, it's interesting to note, that IndyMac spun out of Countrywide Financial back in the day.
posted by mullacc at 4:50 PM on July 11, 2008


The secrecy described in smackfu's link is interesting, but I don't really understand why bank runs are even technically possible now. Shouldn't any U.S. bank be able to get a much cash as it needs from the Fed? Or is the fear that even though the bank wouldn't actually run out of money, people would still move their assets to other institutions if they were frightened by news of the takeover, making the new institution unviable?
posted by gsteff at 4:50 PM on July 11, 2008


Countdown to libertarians arguing that the FDIC is unconstitutional and that people who put their money in a bank that they should have known was going to fail deserve to lose their savings in 5, 4, 3, 2, 1...
posted by Pope Guilty at 4:54 PM on July 11, 2008 [3 favorites]


I suggest you check Bill's house, and Fred's house. That's where your money is.
posted by drjimmy11 at 4:54 PM on July 11, 2008 [15 favorites]


smackfu's link is amazing. They're like our first, last and only line of defense against the worst scum of the universe
posted by East Manitoba Regional Junior Kabaddi Champion '94 at 4:55 PM on July 11, 2008


I suggest you check Bill's house, and Fred's house. That's where your money is.

Why the hell do you have my money in your house, Fred?!

*starts a riot*
posted by Pope Guilty at 4:56 PM on July 11, 2008 [2 favorites]


smackfu's link is amazing. They're like our first, last and only line of defense against the worst scum of the universe

The FDIC is Gwar?
posted by Pope Guilty at 4:57 PM on July 11, 2008 [9 favorites]


Also, the release from the Office of Thrift Supervision is really interesting. The OTS Director cites Senator Schumer's statements as the "immediate cause" of the bank failure:
The OTS has determined that the current institution, IndyMac Bank, is unlikely to be able to meet continued depositors’ demands...The immediate cause of the closing was a deposit run that began and continued after the public release of a June 26 letter to the OTS and the FDIC from Senator Charles Schumer of New York...

“This institution failed today due to a liquidity crisis,” OTS Director John Reich said. “Although this institution was already in distress, I am troubled by any interference in the regulatory process.”
posted by mullacc at 5:00 PM on July 11, 2008


So this may be simplifying things. Banks have depositors who save money, they lend money to people in their community, to buy homes. They make money, communities prosper, home values are real, and all is well.
At some point, homes became a commodity to buy and sell to make money. Banks saw this, and the system morphed into mortgages becoming a commodity. Banks saw savings decline, and sold of mortgages to speculators.
The real estate industry no longer cared if there was any real value, pumped up values, and gave mortgages on houses to anyone, even though they couldn't pay them. All these people in the real estate business made money on the transaction, so the more transactions that occur, the more they made.
Wasn't the Fannie and the Freddie just government's response to two smaller scale real estate values crisis' in the recent past?
It will be interesting, when the house of cards all falls, and foreigners finally realize all the fancy financial B***S*** they bought is close to worthless. Houses and real estate is ONLY worth the amount of money someone will put in your hand TODAY for that property. If there's no one to do that, it won't be worth the paper the appraisal is written on.
I don't even own a home, and at this point I'm waiting for bargain basement prices...and I would bet they are coming...but then, gambling is illegal(?).
posted by GreyFoxVT at 5:04 PM on July 11, 2008


CHRIST YOU PEONS STOP YER WHININ
posted by Avenger at 5:06 PM on July 11, 2008


I've never seen one, but that's got all the earmarks of being a run.
posted by Kinbote at 5:23 PM on July 11, 2008 [1 favorite]


Interesting article on how the FDIC takes over banks.

Neat! They're like the BPRD or Men in Black, except with boring.
posted by spiderwire at 5:31 PM on July 11, 2008 [15 favorites]


I don't pretend to understand this in a macro sense, but I wonder how it is going to affect the individual depositor.

Wouldn't this be transparent to the guy with a checking account or mortgage at the bank? Loan terms won't change, ATM's will work, direct deposits will be made. The biggest bank buys (bails out?) a smaller bank.
posted by cedar at 5:44 PM on July 11, 2008


If you're an IndyMac customer, I really hope you've got less than 100k in there.
posted by chimaera at 5:44 PM on July 11, 2008


"First International planned to open the lobby Saturday morning to assuage the community."

I read that as "..to sausage the community."

I suppose that's still fairly accurate, though.
posted by mr_crash_davis at 6:09 PM on July 11, 2008 [3 favorites]


The "iNdyMac Bank" is also unrelated to the iMac, iPod, iPhone and iGotcha.
posted by wendell at 6:13 PM on July 11, 2008


From following Calculated Risk, I learned that Indymac had recently been offering CDs with more than 4% interest. Commenters thought it was odd that any bank thought they could offer that much in return in this market.
posted by drezdn at 6:14 PM on July 11, 2008


From following Calculated Risk, I learned that Indymac had recently been offering CDs with more than 4% interest.

As recently as yesterday, apparently.
posted by dw at 6:21 PM on July 11, 2008


Indymac had recently been offering CDs with more than 4% interest.

OOh, ooh. Do they have, like, Madonna CDs or the new Moby CD?
posted by binturong at 6:33 PM on July 11, 2008


Yep, drezdn - when I saw that Indymac was offering CDs at almost twice the rate of most any other bank I knew they were flippin' desperate for capital. Of course, the sign has been on the wall for months now that Indymac was on its way out.

Next to fall: Lehman Brothers. They closed at $14.43 today. For some perspective, they were at around $70 last August.

There's a common thread you can gleam from Indymac, Bear Stearns and the recent runs on Fannie and Freddie: each and every time the collapse has been preceded by executives of the company stating something along the lines of "our capital position is strong" or "we foresee no need to seek new capital" or "Leverage? What leverage? We ain't got no mortgage/commercial real estate leverage!"

Never were there better contrarian indicators than the words of CEOs and CFOs....
posted by tgrundke at 6:39 PM on July 11, 2008


IndyMac owns my mortgage. Maybe it'll get lost in the transition :)
posted by COD at 6:42 PM on July 11, 2008


Hey, my mortgage is indymac. Maybe if I just keep quiet they'll forget about it?

3. Profit!
posted by maxwelton at 6:44 PM on July 11, 2008


COD, clearly we need to coordinate our efforts.
posted by maxwelton at 6:44 PM on July 11, 2008 [1 favorite]


Nice to see a government program that serves a useful purpose and works as planned. Let's hope the FDIC can keep on top of things and keep this from getting worse.
posted by Brian James at 6:46 PM on July 11, 2008


The Pasadena, California-based bank specialized in so-called Alt-A mortgages, which didn't require borrowers to provide documentation on their incomes.

Gee, how could this have gone so wrong?
posted by marble at 6:51 PM on July 11, 2008 [3 favorites]


I usually gripe about how anal and conservative Canadian financial institutions are; they're typically 10+ years behind U.S. banks for innovation and using new technologies to increase convenience for the consumer.

Today, as when sub-prime meltdown started happening, I took back all of the bad things I said about Canadian banks.
posted by illiad at 7:01 PM on July 11, 2008 [1 favorite]


FDIC always closes banks on Fridays. The agents then spend the entire weekend seizing the records and making sure nothing is changed.

Here is what they told the employees.

If you look at the fact sheet, the bank reserves went from an average of positive $10 million to negative $110 million in the span of a few days. That's no way to run a bank.
posted by calwatch at 7:11 PM on July 11, 2008


I took back all of the bad things I said about Canadian banks.

Please re-say all of those things about CIBC.
posted by oaf at 7:20 PM on July 11, 2008


Today, as when sub-prime meltdown started happening, I took back all of the bad things I said about Canadian banks.

Except that our (canadian) regulatory twits had OK'd 40-year no-down mortgages. This week they have pulled back from that, but the plug won't be pulled on them til October. I guess they didn't wanna ruin everyone's summer with a nasty ole housing bust.
posted by Artful Codger at 7:24 PM on July 11, 2008


ok wau at that fact sheet
posted by bonaldi at 7:25 PM on July 11, 2008


Danger, Will Robinson!

Indymac is not going to be the last major bank to fall.

If you have funds in WaMu, Wachovia, or (maybe) Wells, now is the time to get it out. WaMu in particular is going to be the next to fall, for the same reason that IndyMac failed.
posted by mark242 at 7:29 PM on July 11, 2008


Please re-say all of those things about CIBC.

I've had minimal experience with them, but for you I'll include them in my nightly Voodoun mantra along with Bank of Montreal, who I don't include in my "take back."

Except that our (canadian) regulatory twits had OK'd 40-year no-down mortgages.

Yeah, that was stupid, but it's not much more stupid than how they treat the self-employed. Say I hold a job that pays $60K a year, have no savings or investments, but I've worked there for a 18 months and it's in the B.C. Forestry sector. Mortgage on the way at their best lending rate! Now say I'm self-employed, pay myself $100K a year, have three years of audited financials that show great success, have $250K in investments with the bank and have banked with them for 15+ years. "Oh no, sir, you're a greater risk. How about a mortgage at Prime+3%?"

Tell them you're self-employed and they look at you askance. Tell them you're successful as well and they look at you like you're from a Jovian moon.
posted by illiad at 7:34 PM on July 11, 2008


WaMu and Wachovia do seem to have CD rates that, for B&M banks, are rather…big.
posted by oaf at 7:36 PM on July 11, 2008


This was basically entirely expected since Monday when the bank's chief told everyone they're going to stop making loans.

I consider myself a superbear (here's the funniest editorial cartoon I've ever seen) but I'm almost thinking the financials are getting "oversold" as they say.
posted by yort at 7:37 PM on July 11, 2008 [1 favorite]


I've had minimal experience with them

Me too, but they've been real jerks to people I know and love, and I think they thought subprime mortgages were a great investment several years ago.
posted by oaf at 7:39 PM on July 11, 2008


Is this something I should be blaming Peyton Manning for?
posted by william_boot at 7:40 PM on July 11, 2008


laser rocket ARM
posted by oaf at 7:43 PM on July 11, 2008 [3 favorites]


So what U.S. bank is considered safe?
posted by TorontoSandy at 7:46 PM on July 11, 2008


or (maybe) Wells

Wells is pretty solid, from what I've heard.

Mr Market backs up this diagnosis.

I actually went long on BAC today for some reason. Initially, I was liking how the bottom @ ~$20 was in for BAC so I purchased some shares and put stops on @ $18. But then I realized that if BAC reduces their presently 11% dividend or has other bad news they could gap down to $10 and that would ruin my day, so I sold that position and bought some LEAPS Jan-10 calls for what I consider a pretty cheap bet on Obama coming and saving the planet.
posted by yort at 7:47 PM on July 11, 2008


oaf writes "I think they thought subprime mortgages were a great investment several years ago."

They sure were pushing them hard along with all their "Your richer than you think" BS advertising.
posted by Mitheral at 7:50 PM on July 11, 2008


Wow (from the fact sheet):

Deposit inflows in the three days prior to June 27, 2008: $31.2 million
Deposit outflows beginning June 27, 2008: $730.2 million through July 7 and $1.3 billion through July 10


"This is being described as the second largest bank failure in US history."

The reporters seem to be ignoring inflation there... the second biggest was an S&L worth $30 billion in 1988 (20 years ago), while IndyMac is $31 billion in 2008.
posted by smackfu at 7:54 PM on July 11, 2008


ObitFilter

So what U.S. bank is considered safe?
Right now I think even the West Bank is safer than a US bank [drum roll]
posted by qvantamon at 8:00 PM on July 11, 2008 [1 favorite]


There's a common thread you can gleam from Indymac, Bear Stearns and the recent runs on Fannie and Freddie: each and every time the collapse has been preceded by executives of the company stating something along the lines of "our capital position is strong" or "we foresee no need to seek new capital" or "Leverage? What leverage? We ain't got no mortgage/commercial real estate leverage!"

Never were there better contrarian indicators than the words of CEOs and CFOs....


Post hoc, ergo propter hoc. Just because a CEO says "we're doing OK" doesn't mean the company is doing poorly. It also doesn't mean they're doing well. It just means the CEO said "we're doing OK."
posted by dw at 8:05 PM on July 11, 2008


Isn't it the CEOs job to say "we're doing OK" at all times, regardless of the position of the underlying company?
posted by smackfu at 8:08 PM on July 11, 2008


If you have funds in WaMu, Wachovia, or (maybe) Wells, now is the time to get it out. WaMu in particular is going to be the next to fall, for the same reason that IndyMac failed.

Good thing PNC sold their residential mortgage business to WaMu. An actual smart decision by PNC. (At least in my view, with the caveat that I don't know nothin' about nothin.)

You really think Wachovia will go?
posted by inigo2 at 8:11 PM on July 11, 2008


Privatise profits, socialise losses. Business as usual. Nothing to see here. Plenty more to come. Move along now.
posted by meehawl at 8:14 PM on July 11, 2008 [1 favorite]


Isn't it the CEOs job to say "we're doing OK" at all times, regardless of the position of the underlying company?

Only if they want to go to jail. Doing so is a crime, in fact, that's one of the things Martha Stewart was convicted for (she told her shareholders that she was innocent of insider trading)
posted by delmoi at 8:14 PM on July 11, 2008


All the Indy kids love Mac.
How could it go wrong
with a name like that?
posted by treepour at 8:17 PM on July 11, 2008 [1 favorite]


As a general rule of thumb, the later in the week that the FDIC takes over a failed bank, the less severe the crises is (well, as non-severe as a bank failure can be). The FDIC likes to use the weekend to consolidate control of a bank's operations, so that most customers can be served by the following Monday. When a bank is closed earlier in the week, it is usually impossible for the FDIC to get its hands around enough of the bank's problems to allow withdrawals the next day. This increases consumer panic, and only makes things worse, which is why the situation is avoided at all costs. If we start to see institutions failing early on in a work week, that is a very, very bad sign.

That the FDIC took over on a Friday afternoon is a silver lining in this cloud
posted by thewittyname at 8:18 PM on July 11, 2008 [1 favorite]


There are three very very big problems here that I don't think people commenting in this thread are realizing.

The first problem is that the FDIC only covers up to $100,000 per person per bank. If a married couple has a joint account, it gets covered to $200,000. There are certain other tricks you can use to max out your protection, like if you have your kids named on your account as your dependents. But generally it's $100,000 insured, the rest uninsured. And you can't just skirt the rules by opening up six different accounts at the same bank, either -- it's $100,000 per person per bank.

So if you're a business and you hold your operating capital in a bank account, you could be way over the $100,000 limit depending how close you are to payday or whether you're saving up for a new piece of equipment or whatever.

Despite the last-minute bankruns in the past few days, Indymac held over $1,000,000,000 in UNINSURED deposits when it went under. It's unclear how many individuals or businesses or organizations or other entities that represents, but CNN is currently reporting that this represents approximately 10,000 depositors. I bet we'll start hearing about those poor folks very soon...

So those accounts and CD's that were worth more than $100,000? That money is gone. Now, CNN says that "Customers with uninsured deposits will get at least half that money back", but frankly, I just don't see how that could be possible. I know that this is what the Brits did for the depositors at Northern Rock when they had their own bank run recently, but I don't know how they could pull that off here. Maybe they'll pull it off for IndyMac, but they can't do it for every bank. Because eventually they'll be hard-pressed to fund the insured deposits they said they'd cover. More on that in a sec.

Here's problem number two: in almost every other US bank failure overseen by the FDIC -- like, ever -- Bad Bank is absorbed by Good Bank over a weekend, and most depositors, if they were under that $100,000 limit, barely notice a thing except that their checks have a new name and their website to login to their account now forwards to Good Bank's URL.

But in the IndyMac case today, there is no Good Bank. Apparently, nobody wanted to buy the assets and absorb their potential losses; the bad mortgages and loans that IndyMac made were that heinous. Alternate possibility: the other banks who might otherwise have stepped in have semi-impaired balance sheets too and couldn't take on that much new weight while they're already straining and creaking. In any case, the FDIC actually created a brand new Good Bank from whole cloth. The old bank was called IndyMac Bank; the new bank created today that will absorb what can be absorbed at all is called IndyMac Federal Bank (see what they did there?). In order to capitalize this new Good Bank, the FDIC for the first time ever had to put up some of its money.

The cost to do this, for IndyMac alone, is estimated at (one version I read) between $4 and $8 billion dollars, or (second version I read) between $8 and $12 billion dollars. The FDIC has $51 billion in assets, but only $4.2 billion in cash. For all banks. And there are a lot of banks that are going to go bust later this year and next year and the year after that. Banks that made far worse loans than even IndyMac (hello, Option ARMS? OMG.). Banks that have have more regular insured accounts -- never mind the shortfalls! -- than the entire budget of the FDIC. Banks that have more depositors and assets and liabilities than anything the FDIC has ever had to deal with before.

You want names? Busted banks that are very likely coming soon: Downey Savings and Loan (DSL), National City (NCC), BankUnited (BKUNA), First Federal (FED), Corus (CORS). After that come the big boys: Washington Mutual (WM), Wachovia (WB - used to be WorldBank). And that's when the real fun starts...

Third problem? When the FDIC starts to sell off IndyMac's piece of shit mortgages assets, it thereby be defining what the market price is for those items, because it will be finding out what an actual sale price is on them. That means that every other bank or financial institution that has had similar assets tucked away off their balance sheets in magical "Level 3" land (i.e. "there's no easy way to define what the price for these assets are because there's currently no market for them, so their price is what we say it is") suddenly has to bring those assets back onto their balance sheets, and do so at their new fire sale price.

Finally, remember when I made a post six months ago about how non-borrowed deposits at US banks -- that is, money that is deposited at the banks by actual people/businesses instead of money that is borrowed by the banks (against possibly dodgy collateral) from the Federal Reserve's brand new alphabet soup "temporary" loan programs -- had gone into seriously negative territory? And some people in that thread were like, oh it's no big deal, and I'm sure they aren't actually borrowing against CDO's, and even if they are they're only borrowing against good CDO's, and no way would anyone ever default and leave the Fed holding the bag on a piece of below-par shit, and you're clearly overreaching and trying to stir shit up for mentioning the ironically concurrent run on the banks in Second Life that had happened because of bad loans and counterparty risks, and... Mmm-hmm.

Now please excuse me while I go downstairs to the kitchen and eat some more dark chocolate.
posted by Asparagirl at 8:21 PM on July 11, 2008 [58 favorites]


WaMu and Wachovia do seem to have CD rates that, for B&M banks, are rather…big.

Really? I'm looking at WaMu's rates right now, and they're very close to Wells' rates. In fact, their shorter term rates are lower than Wells. The one exception is that WaMu is offering a 48+ month at 4.89% APR/5.00% APY; Wells doesn't really have a comparable product, though they are offering a 25 month CD at 3.89% APR.

If you have funds in WaMu, Wachovia, or (maybe) Wells, now is the time to get it out. WaMu in particular is going to be the next to fall, for the same reason that IndyMac failed.

I'm in Seattle. We've all heard the rumors about WaMu. But people going on about "GET OUT NOW RUN TO THE BANK RUN RUN RUN!" are running on fear. And fear can turn bad but salvageable into completely gone.

When I was a kid, I watched Sooner Federal, a poorly performing but still stable and functioning S&L, get hit by a bank run started entirely on rumor. The fear of a bank failure became a self-fulfilling prophecy; they never recovered and were closed a few years later.

That's why I don't like this crap. WaMu is in trouble, but right now they are full capitalized, and they're backed by the FDIC. A bank run is more likely to put them under than their idiotic mortgage policies. I wouldn't discount their problems, but if they were close to total failure, the rumors we'd be hearing would be about the FDIC shopping them.

Yes, I have a WaMu account. Yes, I'm changing banks. But I've been meaning to leave WaMu for a couple of years, and a windfall elsewhere motivated me to make the change. WaMu used to be a good bank, but they really lost focus when they went merger-mad in the early 2000s. I walked in one day and couldn't get customer service because their databases, which included Great Western's and Dime's, stopped talking to each other. The branch manager said they were still working on a plan to integrate them all, but they were merging so much the tech guys couldn't tell him when it would ever happen.
posted by dw at 8:27 PM on July 11, 2008


The OTS Director cites Senator Schumer's statements as the "immediate cause" of the bank failure:

I read that when the comment was first made. It was entirely irresponsible of Schumer to say something so blatantly incendiary in a market like this. It's the equivalent of yelling "fire!" in a theatre. No way Schumer had more knowledge about IndyMac's books than any Wall Street analyst, but Schumer's words are more impactful since he seemingly doesn't have an ax to grind (unlike analysts).

It reminds me of what S&P said this morning about Lehman Brothers, "We are concerned that ill-founded and persistent pressures on Lehman's stock unnecessarily prolong what is already a very challenging business environment"

It's not S&P's business to make such statements, and the fact that they did say that tells me one of two things: 1) Lehman leaned on them; 2) S&P's analyst is a fucking moron. S&P has no insider knowledge, per se. More importantly, they cannot make a justifiable comment regarding what speculation MAY exist in the market regarding Lehman's viability in the near-term. If you can't cite it, you can't write it.

Which isn't to say that I'm shorting Lehman or that I want them to fail. But investors are incredibly, incredibly news-sensitive in times like these, and what Schumer did a couple weeks ago and what S&P did today are really unforgivable.

BTW, w/r/t Wachovia, they have over $50 billion in Tier 1 capital, have a great deposit base across the country, and have been among the more transparent (as of late). You can't say that about Wells Fargo, or WaMu. WFC in particular has significant exposure in the West, yet their write-downs have been minimal. How is that possible?

People need to start asking questions about banks across the board. But they also need to get a grip. Not every bank is suddenly going to fail. There are WAY too many fail-safes, including a bailout which is ultimately paid for by all of us. Stocks aren't going to zero. But the bottom isn't here yet.
posted by SeizeTheDay at 8:31 PM on July 11, 2008 [2 favorites]


Strange how the CEOs and other executives, who were so phenomenally well-compensated when things were going good, will not be penalized now that things are bad.

It's so very good to be a CEO: whatever happens to the company, the CEO always wins, and wins big.
posted by five fresh fish at 8:42 PM on July 11, 2008 [3 favorites]


You want names? Busted banks that are very likely coming soon: Downey Savings and Loan (DSL), National City (NCC), BankUnited (BKUNA), First Federal (FED), Corus (CORS). After that come the big boys: Washington Mutual (WM), Wachovia (WB - used to be WorldBank). And that's when the real fun starts...

I like ya and all Asparagirl, but really, this comment comes across as nothing more than a shrill panic. I've spent the last two months reading reports, studying the banks, getting an understanding for what would really cause failure, and write-downs AREN'T it...it's panic, a shortfall in liquidity, and bad business practices. Firms like TPG don't put billions of dollars into WaMu without some expectation that there is a way out. WB can't do a capital raise as late as April (a full month after Bear), raise a crapload of cash, and suddenly fail.

The point is: you're going to have to do a lot better than a hunch to convince anyone that these banks will fail, and more important, you're only adding to the hysteria by posting comments like yours. These are difficult times for banks, no doubt, and we may see a couple more failures before all is said and done, but the reason why Wall Street keeps getting richer, despite the panics, is because the little guys are ALWAYS the ones who blink first. DON'T BLINK.
posted by SeizeTheDay at 8:42 PM on July 11, 2008 [7 favorites]


It's so very good to be a CEO: whatever happens to the company, the CEO always wins, and wins big.

Here's proof that that theory is untrue.
posted by SeizeTheDay at 8:50 PM on July 11, 2008 [1 favorite]


I pondered the experience of going from logging in and seeing this (well, that's half of it, Archive.org seems to be getting crappy these days) to this. Yikes.
posted by tinkertown at 8:55 PM on July 11, 2008


Okay, SeizeTheDay, I hereby bet you $100 that at least three of the banks I just listed in that comment will have gone under by July 11, 2011, which is three years from today. If I'm wrong, at least I know the money will be going to a decent fellow, because I do like you too, even if we disagree on this. And in any case, that $100 will be worth a lot less by then. :-)
posted by Asparagirl at 8:55 PM on July 11, 2008 [3 favorites]


The FDIC has $51 billion in assets, but only $4.2 billion in cash. For all banks.

They try to keep the fund at 1.25% of the total deposits which are around $4 trillion. And it's not like they have any problem going negative on the fund... they've done it in the past.
posted by smackfu at 8:58 PM on July 11, 2008


SeizeTheDay writes "People need to start asking questions about banks across the board. But they also need to get a grip. Not every bank is suddenly going to fail. There are WAY too many fail-safes, including a bailout which is ultimately paid for by all of us. Stocks aren't going to zero. But the bottom isn't here yet."

So do I buy a mule, or don't I?
posted by orthogonality at 9:01 PM on July 11, 2008


Despite the last-minute bankruns in the past few days, Indymac held over $1,000,000,000 in UNINSURED deposits when it went under.

That sure is scary with all those zeroes written out. Of course it's only 5% of the total deposits, and it's only your own fault if you exceed the limit on a bank that everyone knew was shaky. That's banking 101, whether you want to buy a piece of equipment for your business or not.
posted by smackfu at 9:02 PM on July 11, 2008


And some people in that thread were like, oh it's no big deal, and I'm sure they aren't actually borrowing against CDO's, and even if they are they're only borrowing against good CDO's, and no way would anyone ever default and leave the Fed holding the bag on a piece of below-par shit... and... Mmm-hmm.

Has there been data released about the collateral performance in the alphabet soup facilities? I haven't seen any and this IndyMac thing doesn't have anything to do with that, so I'm a bit confused by this statement.
posted by mullacc at 9:18 PM on July 11, 2008


the reason why Wall Street keeps getting richer, despite the panics, is because the little guys are ALWAYS the ones who blink first.

The little guys would have done (and will likely continue to do) well by buying some put options in ye olde crappy banks.
posted by storybored at 9:26 PM on July 11, 2008


SKF is a nice hedge.
posted by einer at 9:29 PM on July 11, 2008


Here's proof that that theory is untrue.

What was the golden parachute each of those bankers got? I know if I fuck up on the job, no one is going to pay me $20 million to fire me.
posted by ryoshu at 9:35 PM on July 11, 2008


it's only your own fault if you exceed the limit on a bank that everyone knew was shaky. That's banking 101, whether you want to buy a piece of equipment for your business or not.

Would you like to volunteer to be the poor sap who has to explain that to the 10,000 angry people/businesses who just lost their money? Sure, those people should have known better. But if the shocking statistics from this past year have taught us anything, it's that the American public is woefully financially illiterate and does not understand the risks they often take on, be they over-large bank accounts or bad mortgages or spiraling credit card debt or borrowing from one's 401(k) for bad reasons.

And "everyone knew [IndyMac] was shaky"? Well yeah, we may have -- but how many people out there never read a newspaper's business section or check their bank's stock chart? How many IndyMac branches are (um, were) near mostly-immigrant neighborhoods in the Los Angeles area, where there may have been a language barrier? And as recently as one week ago IndyMac was lying that they were well-capitalized, that all their locked loans would be honored (no!), and dangling incredibly attractive CD rates in front of people's noses -- all despite the fact that senior bank execs must have known that they were about to go tits up!

So let's not start looking down our noses at IndyMac's sucker depositors too much, and ignore all the other elephants in the room.
posted by Asparagirl at 9:47 PM on July 11, 2008



It's so very good to be a CEO: whatever happens to the company, the CEO always wins, and wins big.

Here's proof that that theory is untrue.
posted by SeizeTheDay at 8:50 PM on July 11 [1 favorite +] [!]


Fucking lies. Oh no: the poor CEO lost his job with a golden parachute. I despise economists corporate whore apologists for blathering about the "risks" it takes to lead a company. If companies do well, the CEOs get paid handsomly, with amazing bonus and share packages. If the companies fuck up: oops: well they aren't liable: it was the market.

CEO and other top position packages are not market driven : they are fixed by a cabal of compensation consultants whose job it is to lick the next rich mans boots in a sickening form of perpetuate-the-wealth-at-the-top-at-all-costs game.

From this link:


Compensation consultants have strong incentives to use their discretion to benefit the CEO. Even if the CEO is not formally involved in the selection of the compensation consultant, the consultant is usually hired by the firm’s human resources department, which is subordinate to the CEO. Providing advice that hurts the CEO’s pocketbook is hardly a way to enhance the consultant’s chances of being hired in the future by this firm or, indeed, by any other firms. Moreover, executive pay specialists often work for consulting firms that have other, larger assignments with the hiring company, which further distorts their incentives.

Pay consultants can favor the CEO by providing the compensation data that are most useful for justifying a high level of pay. For example, when firms do well, consultants argue that pay should reflect performance and should be higher than the average in the industry—and certainly higher than that of CEOs who are doing poorly. In contrast, when firms do poorly, the consultants focus not on performance data but rather on peer group pay to argue that CEO compensation should be higher to reflect prevailing industry levels (Gillan, 2001).

After the compensation consultant has collected and presented the “relevant” comparative data, the board generally sets pay equal to or higher than the median CEO pay in the comparison group. Reviewing the reports of compensation committees in 100 large companies, Bizjack, Lemmon and Naveen (2000) report that 96 used peer groups in determining management compensation and that a large majority of firms that use peer groups set compensation at or above the fiftieth percentile of the peer group. The combination of helpful compensation consultants and sympathetic boards is partly responsible for the widely recognized “ratcheting up” of executive salaries (Murphy, 1999, p. 2525)


You want to talk about "risk" and "dynamic leadership"? How about if CEOs lose money below a certain point, they and their children and their childrens children are permanently fucking indentured to pay back every last dime that they screwed out of people, pension funds and the public purse.
posted by lalochezia at 9:49 PM on July 11, 2008 [6 favorites]


If you're an IndyMac customer, I really hope you've got less than 100k in there

Yeah, this is why FDIC insurance is super-awesome and everyone should make sure that all of their funds are protected. I tell people this in AskMe all the time and I get responses like this one from last month:

erm... which bank do you expect to fail in the short term? I somewhat don't see that happening in the consumer market right now, the risk seems to have been assumed by the investment bank sector.

Seriously, if you have over $100k in a bank account, either have enough financial sense to protect yourself or hire someone with enough sense to do it for you.

If you have funds in WaMu, Wachovia, or (maybe) Wells, now is the time to get it out.

You can go with the FDIC will fail catastrophically theory and I'll go with the FDIC will do its job theory. If you end up being right, I'll buy you a drink if they still accept dollars in bars after the financial apocalypse.
posted by burnmp3s at 9:56 PM on July 11, 2008 [2 favorites]


I was simply making the point that a great many financial CEOs have lost their job. My comment really wasn't intended to make a social statement on their retirement packages.

But feel free to call me names. I have a few choice words for folks like yourself who enjoy jumping to ridiculous conclusions without having the wherewithal to ask first if I meant that a golden parachute was appropriate, or reasonable, or necessary.

BTW, if you want some REAL research on the subject of overcompensated CEOs, especially those who receive ridiculous compensation packages following their climb to "superstardom", I would take a look at this study.(PDF). Fascinating stuff.
posted by SeizeTheDay at 9:59 PM on July 11, 2008 [1 favorite]


Huh? are depositors over $100k actually going to lose their money? That's fucking crazy. How long has the limit been $100k by the way? I seem to remember it being that much when I was a kid, it's not even that much money for like a life's savings.
posted by delmoi at 10:05 PM on July 11, 2008


But if the shocking statistics from this past year have taught us anything, it's that the American public is woefully financially illiterate and does not understand the risks they often take on...but how many people out there never read a newspaper's business section or check their bank's stock chart? How many IndyMac branches are (um, were) near mostly-immigrant neighborhoods in the Los Angeles area, where there may have been a language barrier

But how many of those people have more then $100k just sitting around?
posted by delmoi at 10:10 PM on July 11, 2008


it's not even that much money for like a life's savings

There's about $6.5T in savings accounts in this country, $60K per household, so no worries.
posted by yort at 10:14 PM on July 11, 2008


You can go with the FDIC will fail catastrophically theory and I'll go with the FDIC will do its job theory. If you end up being right, I'll buy you a drink if they still accept dollars in bars after the financial apocalypse.

Yeah, if the FDIC goes tits up, we're no longer talking the Great Depression, we're talking about the Absolutely Fucking Awesome Depression, With Gnarly!

I'm not sure I share burnmp3s's optimism, though. But, hey, I could be wrong, and I can't really do anything about it one way or the other.
posted by dirigibleman at 10:17 PM on July 11, 2008


Huh? are depositors over $100k actually going to lose their money? That's fucking crazy.

If a company owes you money and goes out of business, sometimes you can get some or all of your money back but other times you are just SOL. That is why bank runs used to be a big problem and your grandma keeps her money under her mattress.

How long has the limit been $100k by the way?

Here is a neat article with a graph of the inflation adjusted FDIC limits since its inception. You are right about it not changing very much, the last time they increased the limits was 1980.
posted by burnmp3s at 10:21 PM on July 11, 2008


There's about $6.5T in savings accounts in this country, $60K per household, so no worries.

People don't generally have their entire life savings in a savings account, though, do they?
posted by Mr. President Dr. Steve Elvis America at 10:21 PM on July 11, 2008


The failure of the FDIC would entail the complete collapse of the U.S. federal government. If anything they can just print a shitload of money to cover those deposits.

Also, this Google groups discussion is kind of interesting. here is the whole board for the company.
posted by delmoi at 10:22 PM on July 11, 2008


I read it as Indie McBank. Why would you put your money in that?
posted by raysmj at 10:23 PM on July 11, 2008 [1 favorite]


actually that number is from the Fed Flow of Funds Report. Total household assets was ~$40T, including around $10T in equities that have seen a good 10-20% hit since 1Q08.
posted by yort at 10:25 PM on July 11, 2008


I took back all of the bad things I said about Canadian banks.

Can't go wrong with pemmican futures.

Seriously, that stuff lasts forever.
posted by Alvy Ampersand at 10:52 PM on July 11, 2008


siezetheday: Here's proof that that theory is untrue.

Oh they may have lost their CEO position with that one company, but they got a golden parachute and will land another CEO job. Exceedingly few CEOs are every properly punished for their colossal mismanagement, looting, and criminal business practices.
posted by five fresh fish at 10:59 PM on July 11, 2008 [3 favorites]


"Has there been data released about the collateral performance in the [Federal Reserve's] alphabet soup facilities?"

I wish there were -- I haven't seen any either. I did see this Economist article about the ECB's version of the facilities, which was not very reassuring.

(Anyone here know?)

"this IndyMac thing doesn't have anything to do with that, so I'm a bit confused by this statement."

As mentioned, if IndyMac's assets are sold off -- literally marked to market! -- then many other banks' assets must finally be dragged out into the light and marked to market. That will affect not only their capital ratios, but it will affect whether or not they still have decent assets to swap for future loans from the Fed through the new alphabet soup loan programs, since some of those assets would presumably have been revealed as not creditworthy. And it might mean that some things the Fed is holding as collateral could be revealed as not-very-creditworthy while the Fed is holding them. Which would be bad.
posted by Asparagirl at 11:05 PM on July 11, 2008 [1 favorite]


But feel free to call me names. I have a few choice words for folks like yourself who enjoy jumping to ridiculous conclusions without having the wherewithal to ask first if I meant that a golden parachute was appropriate, or reasonable, or necessary.

Oh cry us a river. Here's what you were responding to and your response:
It's so very good to be a CEO: whatever happens to the company, the CEO always wins, and wins big.
Here's proof that that theory is untrue.
You flatly claimed that "wins big" is untrue, and then try to claim that, well hey, you weren't counting the $20M termination clauses. You tried to counter my bitching with a lie and got called out for it. Suck it up, apologist: you lose.
posted by five fresh fish at 11:09 PM on July 11, 2008


delmoi: "Huh? are depositors over $100k actually going to lose their money? That's fucking crazy. How long has the limit been $100k by the way? I seem to remember it being that much when I was a kid, it's not even that much money for like a life's savings."

It's a limit per person, per bank. You can use a spouse to open a joint and double it, and spouse along, for $300K insured per bank. And that's not even counting various ways of naming beneficiaries that also secure FDIC insurance.

Still not going to help this person:
I have 400k, 200k is not insured. They cut me a check on Thurs and I deposited into another bank, but there's a 5 days hold on the check.. Will the fund cleared in 5 days, or i'm in deep sh*t?
Someone who would front $200K into uninsured status to chase a minor bank rate advantage over market competitors has a curious approach to risk.
posted by meehawl at 11:11 PM on July 11, 2008


Whoa, Neo. That was weird.
posted by five fresh fish at 11:11 PM on July 11, 2008


Those with over $100K in IndyMac are guaranteed to get at least 50% of that back:
If you have more than $100,000 in your account, or if the total of your related accounts exceeds $100,000, your accounts may require review by an FDIC Claim Agent and you should call the FDIC to schedule an appointment with an FDIC claim Agent. The FDIC will pay uninsured depositors an advance dividend of 50% of your uninsured deposit.
posted by dw at 11:18 PM on July 11, 2008


Is it a recession yet?

Can't we just throw some more $600 checks from the heli?
posted by qvantamon at 11:31 PM on July 11, 2008


Can't we just throw some more $600 checks from the heli?

that is, actually, the plan. The US is running a type a ship as Canada if you compare us to Japan, where their government debt is 150% of GDP, ~$60,000 per person.

By way of contrast, our $5.5T national debt is under 40% of GDP -- under $20,000 per person; we've got $40T in assets and $20T in liabilities, so the balance sheet certainly has room for as many $200B bailout efforts as we care to make.

Our allegedly $13T economy implies an average household income of $120K/yr. This nation could easily get our finances back in order by just taxing the wealthy people more, like what Bush I and Clinton did, and what boy genius (and his republican partners in crime) undid in 2001-2003.
posted by yort at 12:06 AM on July 12, 2008


Asparagirl said: As mentioned, if IndyMac's assets are sold off -- literally marked to market! -- then many other banks' assets must finally be dragged out into the light and marked to market.

I don't follow your logic here (and it's not because I'm ignorant--hell, I invest in financial companies for a living). Since we don't know what was put up for the TAF, I guess you must be thinking one of two things: (1) the TAF must contain a lot of the assets also found on IndyMac's balance sheet for which we don't already have market values for, or (2) IndyMac's portfolio roughly mirrors the mix of assets put up for collateral at the Fed and we don't already have market values for those types of assets.

Scenario (1) doesn't work because IndyMac was a big Alt-A player and did a bunch of securitizations, so there are remittance reports that detail the credit quality of their product (which hasn't been good, of course). The market isn't lacking for data or prices on Alt-A mortgage securities. They also have a $16BN slug of loans on their balance sheet in the "held for investment" and "held for sale" buckets, and those are mostly Alt-A garbage similar to the 2007 vintage Alt-As. And they have a big servicing portfolio made up of the right to service loans they sold to the GSEs, so those won't be surprises either. So even if we assume the TAF is stuffed full of Alt-A MBS, IndyMac's liquidation isn't going to tell us much we don't already know.

And scenario (2) won't work since IndyMac was a fairly small, specialized CA-centric bank--you won't be able to look at their assets and infer that banks in general hold roughly similar portfolios. And while there may be plenty of Level III mysteries out there, we know at least on a high level what the mix is between Alt-A mortgages and other types of assets. It simply isn't the case that most banks are as skewed to that asset class as IndyMac was.

Let me know if I'm mischaracterizing your thoughts on this, but it really seems to me you're playing fast and loose when you relate the IndyMac failure with the nature of the collateral put up for the alphabet soup facilities. But don't get me wrong--I think this was bad news for the markets, but really just a drop in the bucket compared to what may be on the horizon with FNM/FRE.
posted by mullacc at 12:56 AM on July 12, 2008 [1 favorite]


Fuck it all. I'm yanking all my accounts and investments and stashing it into the cookie jar.
posted by sourwookie at 1:04 AM on July 12, 2008


I've read good argument, I think from the chair of the Dallas Federal Reserve, that an accurate summation of US debt is $99 trillion. Which rather changes your calculations, yort.

Here we go. He figures a debt of ~1.2 million per household.
posted by five fresh fish at 1:47 AM on July 12, 2008


Wow there is some misinformation being pushed about in this thread.

"Finally, remember when I made a post six months ago about how non-borrowed deposits at US banks -- that is, money that is deposited at the banks by actual people/businesses instead of money that is borrowed by the banks (against possibly dodgy collateral) from the Federal Reserve's brand new alphabet soup "temporary" loan programs -- had gone into seriously negative territory? And some people in that thread were like, oh it's no big deal, and I'm sure they aren't actually borrowing against CDO's, and even if they are they're only borrowing against good CDO's, and no way would anyone ever default and leave the Fed holding the bag on a piece of below-par shit, and you're clearly overreaching and trying to stir shit up for mentioning the ironically concurrent run on the banks in Second Life that had happened because of bad loans and counterparty risks, and... Mmm-hmm."

Yeh, I remember the thread. I since it purportedly involved capital ratios, something I know a great deal about professionally, I asked several questions. I specifically asked everyone what non-borrowed deposits at a US bank meant (most of my banking career has been spent in Europe, and the same things are called by different names sometimes).

Nobody, absolutely, NOBODY participating in that thread knew the answers. Didn't stop everyone else from getting all excited. About that number. That BIG number. And since the BIG number was NEGATIVE it had to be a BAD number. Or so it was implied.

Well, non borrowed reserves don't work that way.

But let's refocus.

"...non-borrowed deposits at US banks...had gone into seriously negative territory?"

Uhm, not really. So here is what that statistic means:

The folks regulating the banking system require financial institutions to keep specific amounts of funds - reserves - on deposit at The Fed. This is to insure that banks won't "collapse" if a sudden rush of depositors all withdraw at the same time. These are known as "required reserves".

Another type of reserve, also on deposit with The Fed, is called "excess reserves", and they are, as the name implies; funds that are above the level of "required reserves".

Now banks need these funds, lest they be declared insolvent by The Fed and shutdown (which, by the way, happens all of the time, even in robust economic conditions). Typically institutions obtain them from depositors, but sometimes their ratios get out of whack. When these ratios get unbalanced they must borrow these reserves to bring their ratios back into regulatory approval.

By the way, this function is called Asset & Liability Management, or ALM, and I recently explained how this job works in case anyone wants to learn more about how banks operate. In any case, at most banks it's a very tough job, and just to keep this all in context - some folks make a career out of ALM, so I'm not surprised that bloggers got all concerned about the sharply negative numbers, and panicked.

There are two key ways banks can obtain these needed reserves - either from The Fed's discount window, or via The Fed's daily open market operations (FOMC).

No here's what happened to drive that number so sharply negative: on December 12th The Fed created another mechanism allowing banks to raise capital - the TAF, or Term Auction Facility. This mechanism lets member institutions post a wide range of collateral to raise funds. As I posted before, this is nothing more than The Fed attempting to provide liquidity to the market, and therefore its no surprise that we see the interest rate on the TAF lower than Fed Funds in the open market.

The TAF accepts a very broad range of collateral for these loans, so, an open credit line, what would any rational market participant do? Put any and all collateral up to raise funds.

That's why we've seen Non Borrowed Reserves crater.

If you look up a chart of Borrowed Reserves, you'll see a complimentary increase, as balance sheets must, of course, balance. And we know they do, indeed, balance.

So yeh, sadly, this was indeed posted several months ago. When it was clear that nobody knew the answers to the questions I'd posted, I investigated.

So that BIG number you keep posting? You know, that NEGATIVE number? It is NOT a bad number.

The explanation is actually pretty simple and rational if look to how banks operate as businesses.


-- "You want names? Busted banks that are very likely coming soon: Downey Savings and Loan (DSL), National City (NCC), BankUnited (BKUNA), First Federal (FED), Corus (CORS). After that come the big boys: Washington Mutual (WM), Wachovia (WB - used to be WorldBank). And that's when the real fun starts...

I like ya and all Asparagirl, but really, this comment comes across as nothing more than a shrill panic. I've spent the last two months reading reports, studying the banks, getting an understanding for what would really cause failure, and write-downs AREN'T it...it's panic, a shortfall in liquidity, and bad business practices. Firms like TPG don't put billions of dollars into WaMu without some expectation that there is a way out. WB can't do a capital raise as late as April (a full month after Bear), raise a crapload of cash, and suddenly fail."


Agreed. If there is a methodology involved at picking those banks I'd like to know it.

I'm very active in the markets, always looking for an opp. I've recently looked at these banks - and many others - and I'm looking not at interest rates offered but more at the price of shares (different classes), debt (again, all offerings), balance sheet changes and especially Credit Default Swaps. We're finding CDS' are incredibly effective predictors of failure, by the way.

Offered interest rates is a highly inefficient predictor of bank failure, as the changes come too late in the cycle. If the bank is going to fail then other indicators (a few of which I've mentioned above) will flash long before high interest rates becomes a concern.

The market isn't indicating failure for all of those banks. By no stretch of the imagination.

So what methodology - if any - was involved in singling out these institutions for failure? I know of a few not mentioned that have sharply higher probability of defaults, even before last nights fun has been factored in.



qvantamon -- "Can't we just throw some more $600 checks from the heli?"

Well, while we are seeing some economic impact from the stimulus, we're also seeing indication that its impact will mitigate pretty quickly. These things have been tried, multiple times before, and rarely have a persistent impact on the economy.

I saw some dead tree research earlier this week by Credit Suisse and their view is the stimulus will have run its course by start of Q4. While the United States still isn't technically in a recession, in the first part of this comment I presented a good overview of the current situation, and its looking grim. Still, The US Yield Curve is looking pretty healthy, so line up your positions accordingly.

I inventoried past stimulus efforts in this comment, and the academic paper cited will show how ineffective these things generally (not always) are.

Sidenote sure to invoke a roar from the crowd - while cash is the most popular way to stimulate the economy (who doesn't like receiving cash, and what politician doesn't like handing it out), we know that reducing corporate income tax rates is the most beneficial - "Empirical evidence on the effect of corporate income tax rate changes is scant, but economic models suggest that while these reductions may encourage investment in the short run, they have the greatest effect on long term growth."

Source: OVERVIEW OF PAST TAX LEGISLATION PROVIDING FISCAL STIMULUS AND ISSUES IN DESIGNING AND DELIVERING A CASH REBATE TO INDIVIDUALS [.pdf] Staff of the JOINT COMMITTEE ON TAXATION, February 13th 2008


mullacc -- "But don't get me wrong--I think this was bad news for the markets, but really just a drop in the bucket compared to what may be on the horizon with FNM/FRE."

Yeh, I'm still trying to figure out how to play that one. CDS spreads on both are widening sharply, as expected. But I'm calling this episode revenge of the ratings agencies, as even we're picking up rumours in London that The US AAA rating is in jeopardy if they attempt a Fannie Mae/Freddie Mac bailout. Ha! That'll teach 'em to lean on the ratings agencies.

This will be interesting. I was working for Deutsche Bank when we lost our AAA, and the time it was deemed just an expensive lapel pin; cost too much to maintain the regulatory capital so they intentionally let it go.

Well, if that happened to the United States it wouldn't be the end of the world, and what is downgraded and later be upgraded. In 1998, for example, we saw Japan downgraded from AAA to AA1, and at that time fully two of the G7 had less than AAA credit ratings.

Would be interesting times if this happened to The United States. We'd probably see higher, perhaps sharply higher interest rates on treasuries, then more dollar pressure. Have to think about this one - I'll see if I can find some academic papers, 'cause someone, somewhere surely has thought long and hard out this possibility.
posted by Mutant at 3:41 AM on July 12, 2008 [14 favorites]


Out of that $99 trillion about $68 trillion is comprised of Medicare A and Medicare B which is hospital stays and doctors appointments respectively.

How the fuck do hospital stays and doctors appointments take $68 trillion dollars to fund? Really.

We spend 40 billion australian (about 38 billion US) on health for 20 million people at the federal level. That's US$1900 per capita. At the state level they blow A$500 million for 2 million people. That's another $240 per capita.

So we spend roughly $2140 per capita per year. At that rate of spending we could treat every man, woman and child in the US for 20 years for around 12-15 trillion dollars.

What in the hell are you guys doing over there?
posted by Talez at 4:11 AM on July 12, 2008


Really? I'm looking at WaMu's rates right now, and they're very close to Wells' rates.

I may have been looking at a non-B&M CD. Wachovia's rates, though, are way better (relative to what else is out there) than I recall anything from First Union ever being (and yes, the last time I dealt with them directly was that long ago).
posted by oaf at 4:46 AM on July 12, 2008


According to FDIC I'll continue to get the "OMG, we need capital!" rate for the duration of the CD or I can withdraw without penalty. Yay federally funded arbitrage!

Something that people are leaving out: if you have less than $250k and the money is in an IRA, you're still FDIC covered. So it would be more like $500k per household as long as your enormous pile of money is in an IRA. Most people's assets are a) their house b) equities and treasuries and c) IRA. If you have more than $100k cash and it's not a retirement account, you're dumb for not noticing when a) the share price collapsed b) IndyMac being in bad position was national news via Schumer c) your bank sells subprime mortgages. The FDIC limits are well publicized, and if you were at IndyMac over the past week they advised you to take money out to get under the limit while you could. I guess these customers could be businesses who need that kind of cash? Are there grandmas with $100k in cash?
posted by a robot made out of meat at 6:27 AM on July 12, 2008


Well, although I have nowhere near a hundred grand in cash assets in banks, I do have my money spread across three different banks. I thought the $100k insurance limit was common knowledge. I'm sorry for those who exceeded the limit and are now screwed, but they say pain is a great teacher, and I can pretty much guarantee that anyone who *does* lose money for this reason will never make the same mistake again. Their experience also serves as an educational lesson to the rest of the population: this is what you *don't* do.

It's like homeowners insurance. If you've got a $300k home, and you insure it for $100k, well, you're taking a big risk. Yes, the odds that your home will burn down are low, just as the odds of a particular bank's collapsing are also slim...but if it happens, it's an enormous disaster, and few are willing to take that degree of risk. At least with homeowners insurance though, you do save money on your premiums by having a lower limit on coverage. The only thing you save by not spreading your money around in several banks to keep it all insured is the little time and hassle necessary to open the other accounts and move some money to them.
posted by jamstigator at 7:13 AM on July 12, 2008


Man, this is when I'm stoked to be broke.

Thanks to all for a fascinating thread.
posted by generalist at 7:53 AM on July 12, 2008


Fuck it all. I'm yanking all my accounts and investments and stashing it into the cookie jar.

Once again the cookie-heavy portfolio pays off for the hungry investor!
posted by ROU_Xenophobe at 8:19 AM on July 12, 2008 [7 favorites]


Now banks need these funds, lest they be declared insolvent by The Fed and shutdown (which, by the way, happens all of the time, even in robust economic conditions).

Actually, Mutant, check this out -- a list of all banks the FDIC closed since 2000. Notice something odd about 2005 and 2006? Not one bank was closed. I don't that's ever happened in the history of this country. Was there a shift in public policy? Or should we have taken it as a sign that something off with the bank markets?

Would be interesting times if this happened to The United States. We'd probably see higher, perhaps sharply higher interest rates on treasuries, then more dollar pressure. Have to think about this one - I'll see if I can find some academic papers, 'cause someone, somewhere surely has thought long and hard out this possibility.

I've been thinking through something similar with higher interest rates. If the Fed raised them, then the Treasury yields would rise as well, and that would attract foreign capital. OTOH, mortgage rates would be under pressure to rise as well, and if 1% mortgage interest = 10% change in home affordability, then the pressure on the housing market could be exacerbated. It probably wouldn't make a difference in real estate markets that are in capitulation (e.g. NV and CA), but in ones where the market is lagging behind in the correction (e.g. WA and NC), it could make things bad in a hurry.

And yet... say you did this. Say you raised interest rates, attracted foreign currencies to buy in, then turned around and hit the foreign markets to buy back dollars. Over a couple of years, wouldn't the increasing strength of the dollar offset the economic declines from higher interest rates?

I've been trying to see if there is a way out, where we can be back on track economically by 2010. And also, I'm actually considering buy a house in this market, but I'm waiting for the Seattle market to finally capitulate, and right now everyone is still in the denial stages here. It may just be that Seattle typically lags about a year behind the rest of the country economically -- most of the pain people saw in Q4 2001 hit around here Q3 2002.
posted by dw at 9:00 AM on July 12, 2008


On the non borrowed reserves topic.. First, I know nothing about this stuff! But anyway, I found this as a top google hit about the topic: Non-Borrowed Reserves: False Alarm. The article seems to be saying basically the same things Mutant is saying. In the comments though, there are a couple of observations..
So borrowing from the TAF is counted very much like borrowing from the discount window? What you are telling us then is that banks found it advantageous to borrow $50 Billion from the functional equivalent of the discount window (formerly used only by banks in trouble as there was a perceived stigma) and that this is business as usual?
The clear purpose of the TAF is to allow banks in difficulty to borrow from the Fed ANONYMOUSLY so as to avoid the stigma previously attached to the discount window (which was not anonymous).
and
The key quote: “But like the discount window, the money was lent directly to banks rather than primary dealers, and against a wide range of collateral rather than just Treasurys and agency securities.”

Yes, my good man, a wide range of collateral rather than just stodgy old low-yielding Treasurys and agency securities. The Fed can make great returns by taking these high-yielding, mortgage-backed CDOs as collateral.

So, the Fed is lowering lending standards…precisely the behavior that created the subprime fiasco.
posted by Chuckles at 9:08 AM on July 12, 2008


that an accurate summation of US debt is $99 trillion. Which rather changes your calculations, yort.

infinite-horizon debt calculation is, in a word, bullshit

sure, this is a $3T/yr operation now and growing (too) fast, but we don't even know what next year holds in terms of innovation and productivity gains, let alone the next decades, or the next century.

Also much of that $100T future debt assumes we will still be sending 15% of our GDP to the medical guilds. This, I am sure, will be changing.
posted by yort at 9:17 AM on July 12, 2008


So, the Fed is lowering lending standards…precisely the behavior that created the subprime fiasco.

Yes, that's been one of the biggest arguments against what the Fed has done with opening this window.

OTOH, those CDOs have been stuck in this strange state lately -- they're not worthless, but at the same time no one can precisely pin down how much they're really worth, and no one wants to attempt to place a value on them by buying or selling them because that will establish a value for all of them. So, the Fed said they'd take them, and banks lined up to hand them over.

Yup, it's a bailout. The Fed had no choice, though -- it was either take them, or the entire capital market would have seized. The hardcore anti-Fed libertarian types were really rooting for the latter, which could have triggered, at best, a severe recession, and at worst a cycle of deflation that would have dropped us into a depression.
posted by dw at 9:18 AM on July 12, 2008


Pope Guilty: "Why the hell do you have my money in your house, Fred?!

*starts a riot*
"


Don't forget: There's always money in the Banana Stand...
posted by PontifexPrimus at 9:19 AM on July 12, 2008 [2 favorites]


We'd probably see higher, perhaps sharply higher interest rates on treasuries,

I just looked over the Treasury.gov's spreadsheet on this this morning, and rates range from 2% to 4% on current debt, with about 10% of the total foreign-held debt maturing every year.

$1.8T held now, with ~$180B being rolled over at ~3% rates. Should this rate double that will be a $5B/yr annual interest rate shock, eg. 16M free ipods (or another $300 capital good of your choice) that we could have given to schoolkids going up in smoke.
posted by yort at 9:31 AM on July 12, 2008


heh, we owe Brazil $150B. How the fuck did that happen?
posted by yort at 9:35 AM on July 12, 2008


dw -- "Actually, Mutant, check this out -- a list of all banks the FDIC closed since 2000. Notice something odd about 2005 and 2006? Not one bank was closed. I don't that's ever happened in the history of this country. Was there a shift in public policy? Or should we have taken it as a sign that something off with the bank markets?"

Ah yes I have seen that - many thanks for posting the link by the way - and the way I read the data was not as a change in banking supervision, rather just a very, very benign period of the nations economic health. Seems like all banks were making money back then - it was hard not to, given the housing bubble.

Now the bubble has burst, and we're gonna see some failures. In fact, while there is no reason to believe we won't see a return to the long run average, its important to note that for this long run relationship (the mean) to hold then we'll have to see a period, perhaps a prolonged period of failures and more than we've become (in recent years at least) accustomed to.

So get ready for more failures. The criteria applied by the regulators to close a bank are interesting.

Earlier I raised the question about capital ratios. In the United States banks are grouped according to their risk-based, capital ratio (btw, these aren't always the capital same ratios as the international banking community uses, which we discussed in this FPP).

Banks are required to regularly report these ratios, and immediately report any material changes to their business or operating environment that might cause a negative change to these ratios (the latter would have been Katrina; all banks operating in New Orleans knew their business would have been seriously impacted).

The groupings currently used are These first two ratings are fine, and represent solvent enterprises. It's when a bank drifts into the undercapitalized ranking that the FDIC issues a warning. Typically this warning (I've never seen one myself, so if anyone reading can shed some light please do) not only formally notes the undercapitalization, but also notes the time period the FDIC expects the situation to be resolved by.

When the ratio drops below 6%, regardless of whether or not a warning had previously been issued, the FDIC will force a management shakeup, in addition to other corrective actions such as forced liquidation of performing assets, etc. The goal is to increase the capital ratio to an acceptable level.

Finally, when a bank becomes critically undercapitalized the FDIC declares the bank insolvent and moves in.

This is what happened yesterday with IndyMac.
posted by Mutant at 9:51 AM on July 12, 2008 [1 favorite]


I wanted to address the comments upthread (sourced to many individuals) about the TAF and the so-called "alphabet soup" securities. There has been some activity that folks might find of interest in that area of finance.

We've seen CDO issuance fall from some $500 billion in 2007 to roughly $11 billion (so far) in 2008. [.pdf].

While there are multiple reasons for the collapse looking forward it's the changes in the market that I find most interesting. And not it's contraction - no, it the rebirth of the CDO market that's very, very interesting.


CDOs, particularly, Mortgage Backed Securities provided necessary liquidity and effectively implemented a very critical mechanism for risk transference. Without such structured products we're all seeing the market grind to a halt. Just how bad is it?

Well, in The United States, mortgage issuance has plummeted to 1995 levels, in Britain mortgage issuance is down by two thirds, while in Japan new mortgage issuance is at the lowest level in six years. While I don't have time to research the state of other G7 mortgage markets (sunny Saturday here in London, and Mrs Mutant insists that I shouldn't think about finance 24x7), it's clear lending - and hence borrowing - is grinding to a halt.

So, thinking of getting a mortgage or refinancing an existing mortgage in the near term? Might be tough and even if it's possible - since the risk transference process has been effectively stopped, your mortgage will no doubt be pricey. Pricier than it should be really.

Well, a lack of affordable mortgages presents a classic market opportunity, and bankers are nothing if not innovative.

Now the primary purchasers of CDOs are Institutional Investors - for example, pension funds and insurances companies. And while they were happy with many aspects of the product, such as the very high rates or return coupled with the low risk, once the market went south they started expressing concern across many dimensions.

So nobody wants to hold CDOs because of the complexity? Formerly good customers are also concerned about the fact that some tranches (i.e., parts of the structure) will contain very, very low quality debt (i.e., we call it "the equity tranch" when it's being sold, but it is also known as "toxic waste") ?

I don't blame them. I've previously posted that even though I work in this field I find many CDO structures - for example, CDO squared - very difficult to understand and I'm not alone. At times the structures are overly complex, and valuation presents several non intuitive gotchas. In finance, gotchas mean loss of money, and it's the fear of losing money that is causing institutional class investors to shy away from complex CDOs, with the attendant impact on many aspects of modern financial life - for example, getting a mortgage.

So folks working in structured products listened to their customers, and are now attempting to restart these markets by issuing instruments known as "re-remics".

You'll probably be hearing a lot about them. But how do they differ from CDOs?

Ah good question.

As many of you folks already know, CDOs suffered from a lack of transparency. Although the archetypical CDO consisted of just three tranches (rated from lowest to highest as equity, mezzanine and senior) with a relatively small number of names included in each tranche, well in finance folks like to make money. And one sure fire way to make MORE MONEY is to scale up, get big, fast.

That led to the issuance of CDOs with over twenty tranches, containing thousands of names.

Needless to say, valuation of such structures became non trivial.

Another concern was lack of transparency.

When I worked for Deutsche Bank on a Mortgage Backed Securities (MBS) desk we always had someone head out to inspect the assets underlying the bond we issued. This simply wasn't done for many structures, some now in dispute, as they were too damn big.

If you've got 1,000 assets rolled up in a MBS it's pretty easy to get out and inspect the property; not so easy when there might by 10K (or perhaps more) assets.

Addressing these concerns, re-remic are smaller. Much, much smaller, containing only a few dozen underlying assets.

Second concern, transparency. Well, re-remics only contain higher rated assets - no subprime, just prime and Alt-A mortgages. Also, re-remics never contain credit default swaps or other, somewhat opaque derivatives.

We can still credit enhance the structures in various ways, which offer higher returns with less risk to Institutional Class Investors. So lots of people are hoping there will be a lot of itnerest in these structured products which will provide much needed liquidity to the market by getting assets off banks balance sheets.

This is perhaps the most important point, as we know, that according to FDIC data, banks are holding about $400 million of non agency mortgage bonds (i.e., not Fannie Mae or Freddie Mac)

Banks simply have to begin to move this debt off their balance sheets so they can being to lend again.
posted by Mutant at 9:59 AM on July 12, 2008 [4 favorites]


Mutant, part of the problem, in less words, was that low-graded debt got repackaged and re-tranched into AAA on the assumption if 10-30% of the low-grade was made senior to the rest it wouldn't default. People going by blindly looking at ratings got sold a bill of goods.

As dramatised here, that was a "mistake".
posted by yort at 10:04 AM on July 12, 2008


yort -- "People going by blindly looking at ratings got sold a bill of goods."

You know back when I was working in that business both buyer and seller performed due diligence. We didn't package anything up without first getting on a airplane to insure the assets were indeed what we were buying, and nobody bought from us (or any other counterparty for that matter) without doing the same.

The whole process of due diligence broke down in folks zeal to do bigger and bigger deals.

Now it's back to basics, and people are hoping that re-remics - CDOs by another name - can jump start the securitisation market.
posted by Mutant at 10:17 AM on July 12, 2008


You can do all the DD you want but when the black swan appears, u get squicked.
posted by yort at 10:36 AM on July 12, 2008


But wait. If you only have a few dozen mortgages in a re-remic, doesn't that also increase the chance of failure?

If you bundle 50 mortgages together, you can assume that one will drop into foreclosure, while two or three others may become late in a shorter-term period. This seems to be what happens in a normal market. But if you just have one more failed mortgage, then you're going to double the default rate.

In a larger bundle, say 1000 mortgages, you'll see 10-20 foreclosed on, unless you're in our current situation where you have 100 or more. But adding one more foreclosure only ticks the default rate up a bit.

I understand why people want to do this -- fewer mortgages mean more transparency. But it also means that we're going to have "boutique" lending. It also means that a homeowner could now face some random bank telling them their flamingo is lowering the value of their re-remic so please remove it or else. (OK, that's a little extreme, but wouldn't banks want to take a greater interest in maximizing their returns through pressure like that?)
posted by dw at 10:36 AM on July 12, 2008


You can do all the DD you want but when the black swan appears, u get squicked.

But that's not a black swan. A black swan is when something unique and unpredicted appears in a system. We all knew this bubble was going to pop. By 2006 it was becoming clear that there was no way the market could sustain itself and was due for a correction. It was only a matter of time.

The problem was that investors and homeowners deluded themselves into the idea that RE was, well, safe as houses. Even when home prices were rising at the rates they were rising at, even when CDOs were in such high demand it meant banks were writing NINA mortgages, even when in many West Coast cities buying a house was impossible to a veto-proof majority, even when people were repeating the "new economy" mantra they repreated back during the dot com bubble.

This was not a black swan. A black swan is when something happens that few, if any, people predicted. And anyone with two brain cells to rub together could have seen this was an RE bubble.
posted by dw at 10:52 AM on July 12, 2008 [1 favorite]


It also means that a homeowner could now face some random bank telling them their flamingo is lowering the value of their re-remic so please remove it or else.

Right, so what's the downside?
posted by spiderwire at 10:57 AM on July 12, 2008


In the interest of transparency, I think that people in this thread directly referring to publicly traded companies by name, either positively or negatively (in some cases, predicting their collapse), should declare if they are long or short or optioned on any of the equities under discussion.
posted by meehawl at 11:26 AM on July 12, 2008


I usually gripe about how anal and conservative Canadian financial institutions are; they're typically 10+ years behind U.S. banks for innovation and using new technologies to increase convenience for the consumer.

Heh. The Canadians put low 20's ROEs up through the cycle, while almost always keeping Tier I capital positions in excess of 9%. Strip out the typically stupid acquisitions (Harris/BMO, RBC/Centura, TD/Banknorth) and you get an even higher number.

Strangely, they're rarely accused of anticompetitive behavior; I suppose that getting screwed on deposit rates is the price that Canadians must pay for a (largely) bulletproof commercial bank system.

Oh, and don't forget about the Nortel/TMT meltdown, the CRE bust, and the LatAm meltdown, each of which the Canadians managed to step in.
posted by Kwantsar at 11:37 AM on July 12, 2008


yort writes "we owe Brazil $150B. How the fuck did that happen?"

I'm reminded of Chrysler during the "bailout". They had tens of thousands of individual loans with thousands of different creditors including amounts as small as a few hundred dollars with little single branch banks across the states. All of whom had to agree to the conditions of the restucturing a payment plan.
posted by Mitheral at 12:10 PM on July 12, 2008


Oh Jesus Christ!

If you have no idea about what is going on don't comment like you do. Don't give stock advice or prognosticate in threads either.

There are so many things written here that are absurd I don't know where to start.

Lets just take this gem: "we owe Brazil $150B. How the fuck did that happen?"

Very simply. The Brazillian central bank wants to own USD denominated assets for a multitude of reasons. Easiest way to do that? Buy treasuries at an auction. The US did not go to Brazil hat in hand begging for money.

Seriously a lot of disinformation going on in this thread. A lot of opinion presented as fact. Realize there is nothing such as "fact" when it comes to predicting things.

If you are going to say company x is doomed I want to see a detailed explanation with numbers and quantitative data and clearly laid out assumptions. Don't just say "these guys are screwed cause they did Sub-Prime" tell us why. You know what? Those # told you the odds were very high that a whole bunch of these names that have failed or appear to be on the brink had a high likelihood of failing, and that same analysis will show you a whole host of names we've seen in this discussion have a very high likelihood of surviving even the harshest economic conditions. I'm talking Mad Max bad, worse than the great depression bad, worse than '82 in Texas bad.
posted by JPD at 12:40 PM on July 12, 2008 [1 favorite]


"I guess you must be thinking one of two things: (1) the TAF must contain a lot of the assets also found on IndyMac's balance sheet for which we don't already have market values for..."

Yes, that one.

"Scenario (1) doesn't work because IndyMac was a big Alt-A player...The market isn't lacking for data or prices on Alt-A mortgage securities."

Okay, I thought that the recent rule changes meant that Level 3 assets can be valued by a bank based on non-market criteria (!) if the bank makes a case that the market price is not correct (i.e. too low) based on distressed sales of those assets -- in other words, they're continuing to mark-to-model. And Level 3 assets do get loaned to the Fed -- which has even looser standards now than they did when I wrote that FPP (pre-Bear Stearns blowup).

So if some of those marked-to-model assets being held by "AcmeBank" have to be marked-to-market in the near future -- because similar IndyMac assets are being sold by the FDIC, thus defining a market price -- doesn't this change the asset's price, and therefore change what price AcmeBank can get for that asset from a Fed loan? And therefore AcmeBank maybe can't get quite as large a loan as it did before? And therefore is going to need more money? Am honestly confused here, if this is not the case.

"But don't get me wrong--I think this was bad news for the markets, but really just a drop in the bucket compared to what may be on the horizon with FNM/FRE."

Yes. Anyone want to do a post on that mess? Should probably wait for Monday, though, to see what new statements come out.
posted by Asparagirl at 12:43 PM on July 12, 2008


What mess? Seriously where's the mess? The value of the assets they'll hold til maturity went down, but their still cash flowing. If there has ever been anything more hypocritical they the NYT's coverage of FNM and FRE I don't know what it is.

My favorite is talking about how FNM and FRE battled accusations of not doing enough for low income homeowners for years, without any mention of the fact that this whole debacle is a function of low income homeownership increasing.

FNM and FRE are two of the greatest governmental entities every created, and libertarians are using the current panic (And it is a panic without a doubt) to do what they've been dreaming of for years. Kill the implicit government subsidy of middle class home loans.
posted by JPD at 12:50 PM on July 12, 2008


"In the interest of transparency, I think that people in this thread directly referring to publicly traded companies by name, either positively or negatively (in some cases, predicting their collapse), should declare if they are long or short or optioned on any of the equities under discussion."

That's fair. Of the companies mentioned, I currently own puts on two of them:
- 3 October 5 puts on WM (up 43% since purchase)
- 5 October 12.5 puts on WB (up 63% since purchase)

And in the past, I have owned:
- 1 July $10 put on WM, 1 January $5 LEAP on WM
- 1 May $25 put on DSL, 2 August $15 puts on DSL
- 5 March $25 puts on FED, 5 July $7.5 puts on FED

I'm happy to say that I made money on all of them except for the March FED puts, which were too early (lost $75 there) -- but of course, since I won't ever wager that much, my actual dollar return will always be small even if percentage-wise the return is terrific. I also currently have 5 January 17 puts on the XLF, which tracks the financial sector as a whole (up an unknown percentage at the moment - at least 30%), and have held XLF puts in the past, but never more than a measly 3 puts at a time.

So as you can see, with those kind of embarrassingly tiny numbers, I'm hardly a big fish trying to talk up my book.
posted by Asparagirl at 1:11 PM on July 12, 2008


Wait, forgot to list my past puts on WB: 1 April $30, 5 July $17.5, 5 October $15. Total profit was a bit over $800 -- before taxes, alas. Definitely minnow status.
posted by Asparagirl at 1:26 PM on July 12, 2008


A black swan is when something unique and unpredicted appears in a system. We all knew this bubble was going to pop

? I've been a housing bear since 2000, it was what kept me out of the market in 2001-2003, when it was a "good" time to buy prior to the 2004-2006 run-up.

"We all" didn't know jack. FWIW I thought we'd see a repeat version of the California collapse of the early 90s (which is what kept me out of the market) but to fully understand the dynamics of the past 2 years one needed to know, back then, the degree of outright fraud in the market: pay-option NOO NINJA etc etc and the near complete abandonment of traditional lending underwriting.

I've been pretty well-read on the bubble blogs since 2006, but it was only when the Casey Serin internet drama happened that I began to get a full clue on the rocky road ahead.

Disclosure: As of yesterday I own 10 BAC Jan-10 @ 27.50 call contracts
posted by yort at 2:14 PM on July 12, 2008


The hardcore anti-Fed libertarian types were really rooting for the latter, which could have triggered, at best, a severe recession, and at worst a cycle of deflation that would have dropped us into a depression.
Oh, well you go ahead then. Just bail out one group of the irresponsible and the criminal. Oh, you just spread the problem around? Well, a little larger concentric bailout. No one will notice. Oops, now there is nowhere safe in the economy because you have adulterated the money. Okay, just one more bailout. This is the last one. We're going to hit it big, I can feel it. Let's just hope that not publishing the numbers is enough; people are sure incurious lately. I hope you're happy. You've sure saved us all.
posted by vsync at 2:16 PM on July 12, 2008


"... if the bank makes a case that the market price is not correct (i.e. too low) based on distressed sales of those assets -- in other words, they're continuing to mark-to-model."


Mark to model. While I don't believe it to be intentional, you're making mark to model sound like the banks are given free reign to select a price, any price for their assets. Hardly the case.

Just to make sure that everyone is singing from the same hymn sheet going forward, let's put on the table precisely what "mark to model" means.

That succinct phrase, so casually tossed about in this as well as other threads, implies the following non-trivial and somewhat pricey process has occurred. Note that we are assuming all of the following takes place in a regulated financial institution (that distinction will be very important later):
  1. A mathematical model is created for a given purpose; for simplicity let's assume to value the tranche of a CDO
  2. The models input & outputs are documented, as well as operational parameters and assumptions
  3. The relevant academic references supporting this model are located & cited , 'cause at a regulated instituion, one can't stray too far from industry accepted practice (a valid criticism of Risk Management at banks)
  4. Loads of data to test this model is assembled
  5. The functional results of this model i.e., outputs for range of inputs are noted
  6. ALL of this material is presented to the institutions New Products Committee, ALCO and other, interested parties (that phrase alone means a hell of a lot more than it used to, in this post SOX world) who must review, approve and sign-off the model
  7. IF any of the institutions own internal groups disagree you get to start over, otherwise
  8. Start your business. Trade trade trade and try to make some money until
  9. The regulators start asking questions. You don't want that, you want to exploit market opps, so remember all that information you assembled? Get together a subset and
  10. Present your models backing material to the appropriate regulators
  11. The regulators vett the model, insuring that it performs as represented - note that to accomplish this, the regulators typically will have their OWN models, and largely look for agreement - not precise values, just general agreement of results - this distinction will be very important later
  12. IF the regulators don't approve of your model many things can happen, and you're gonna be damn glad you withheld information early on because you: 1) provide more data, 2) provide more theoretical background to increase their comfort level, 3) escalate - I've dealt with both The Fed and BOE and they are LARGE institutions; someone else might agree, 4) start over, rebuild your model
  13. IF the regulators didn't like / approve of your model, various internal groups (e.g., Risk Management) are gonna start to ask questions, and they're gonna get increasingly agitated as time goes by. So you
  14. Trade trade trade! While trying to convince internal groups you know the market better than them or the regulators and
  15. Hope you don't get shut down while that market opp still exists
A few caveats.

1) Creating a model to value assets is a TEAM effort, typically involving tens if not dozens of people. Not all full time, but very many people will have a say in this activity.

2) Each step may and frequently is carried out by more than one person. Banks do this for many reasons and I'll present just a few here: first it's impossible to be an expert in everything, second, nobody is infallible, you're gonna miss something and make a mistake, and, in banking, mistakes mean loss of money. Not good. Third, possibility of fraud. Forth, key man syndrome - banks hate it, and try to avoid it ay any cost.

3) I'm very familiar with this process, as I've been involved in pretty much all stages the past at several institutions. I've also represented Tier 1 banks to both The Fed and BOE, and have pushed back while they've been pushing, all the while getting pushed on by internal groups that wanted to shut down our business lines. Its a very interesting position to be in, and if you don't have firm grasp of all the issues and specifics, you'll get pushed aside very, very quickly as someone escalates right past you.

4) The output of the model is rigourous - as we used to say on the desk, "it is what it is". If you don't like the price, don't do the trade.

And that important distinction I kept alluding to?

Ok, just looking at what I've illustrated here, it's pretty easy to see why I keep telling folks here that banking is one of the most highly regulated businesses. So lots of folks get tired of all the process and procedure, kow towing to regulators and internal groups and start their own fund.

This is also very, very important as they can exploit an opp that most of the market has missed. Hence the prices will be off. Most banks wouldn't allow them to move in, at least not in a big way and very fast. Too much consideration and approval needed, by too many people. Or, if they can get the capital they can't get enough. Or don't have the leverage as the banks ALCO is focused elsewhere.

So they head off and do their own fund.


meehawl -- "In the interest of transparency, I think that people in this thread directly referring to publicly traded companies by name, either positively or negatively (in some cases, predicting their collapse), should declare if they are long or short or optioned on any of the equities under discussion."

Wow I have to say I missed this until I saw Asparagirl's response and this is NOT a good thing, for many reasons.

First of all, nobody on this board is gonna move the market by anything they post here, pro or con. Thinking otherwise is fantasy.

Second of all, such disclosures are squarely in the realm of what's called public actions and the mention of any security, even in the interest of transparency (and I understand where you're coming from meehawl) could itself be construed as an attempt at manipulation or endorsement.

Back in 2005 I was running client money (yeh, I owned a Hedge Fund) and legal people got very, very concerned about putting specifics on our web site, especially so the publicly accessible parts. I doubt the EULA we all agreed to earlier would indemnify should complaints later be raised.

Any public action can - and in this economic environment may - come back at the poster, and perhaps even the people who own the vehicle used to communicate what was construed as an endorsement.

Also, just because someone claims to be long or short a security, we don't really know if this is the case. No way to prove / disprove assertions. So the mere act of "transparency" is of questionable utility.

I realise that I've posted specifics in the past, but I never have and never will mention ANYTHING I own here on Metafilter ('sides, do your own research chumps, I'm long, making money in this market, and I'm gonna make even more as you all panic). Any specifics I've mentioned have been representative only, intended to illustrate possibilities (e.g., ETFs to take on negative market exposure or ETFs to acquire exposure to commodities).

I'm a little shakey as "full disclosure" becoming the norm here, and I certainly won't be posting my positions here.
posted by Mutant at 2:17 PM on July 12, 2008 [1 favorite]


because similar IndyMac assets are being sold by the FDIC, thus defining a market price

This is where you're going wrong. I get the sense that you haven't actually looked at IndyMac's financial statements to see what assets it holds and then thought about how that compares to other banks and the likely TAF collateral.

I mentioned in my previous comment that IndyMac holds a bunch of Alt-A loans, which were its specialty. Alt-A loans/MBS have been viciously written down at many, many banks. IndyMac's garbage coming to market isn't going to tell us much more. And even if it did, California Alt-A was IndyMac's specialty and it held much greater proportion of its book in this asset than almost any other bank.

IndyMac also has ~$10bn of Level 3 assets as of 3/31. $2.5bn of those are servicing rights, which don't appear to be TAF-eligible collateral (and since they're rights to service loans sold to GSEs, they probably aren't too problematic to value anyway). The rest--~$7.5 billion--is mostly AAA-rated mortgage-backed securities. This is a small portfolio in the realm of AAA-rated MBS and any bank that holds AAA-rated MBS as a Level 3 asset will have no reason to deviate from their mark-to-model valuation in light of this distressed forced-liquidation. If AcmeBank isn't already marking their MBS to market, it isn't for lack of information. It could use the ABX index or it could get prime dealer marks (within minutes) from any number of firms. Another $7.5 billion distressed liquidation isn't going to change this, because liquidations like this have been occurring in this asset class on a monthly basis.

The bad news about this IndyMac failure is what it says about the market for distressed bank capital raises. IndyMac need about $500 million in equity capital to stay alive, and it was rumored that Temasek was going to provide it (at a price fatally dilutive to current shareholders, of course). But it couldn't find the new capital and thus failed as expected. IndyMac is a fairly small niche bank without a broad retail deposit base--there are a lot of banks like that competing for new equity capital in this market, and not all of them will find it.
posted by mullacc at 2:18 PM on July 12, 2008


another "black swan" element is borrowers walking away. The 80s boom still had buyers required to pony up 10-20% down. This time around lenders let people in with 0-3% down.
posted by yort at 2:22 PM on July 12, 2008


Actually the value of the servicing rights might be greater then book if refi's are dropping. Its a weird asset to value given its all about prepayment risk.

Supposedly the FDIC had been shopping for a buyer, but the Schumer led bank run meant they didn't have enough time to get that done.
posted by JPD at 2:47 PM on July 12, 2008


Or rather the OTS was shopping.
posted by JPD at 2:48 PM on July 12, 2008


Mutant: "I missed this until I saw Asparagirl's response and this is NOT a good thing, for many reasons."

I applaud Asparagirl's willingness to reveal her financial interests in the discussion. I can understand your position, but I have to say that it makes me somewhat uncomfortable reading some specific, pointed references to public companies by some people without also knowing if there are financial or analytic interests above and beyond a desire for simple debate. I am sure that there have been, at times in the past, people who have steered such discussions in certain directions because of such interests. The ethical distinction between this and self-linking to me seems a matter of degree, not of quality. For this reason, I usually deliberately recuse myself from any discussions relating to Intel (or AMD) or restrict myself to repeating publicly disclosed information that has been widely disseminated. I maintained a similar policy when I worked for Morgan Stanley Bank. I no longer work for that bank, and have no financial interests in any of the banks listed by name in this discussion. In any case, I feel that even if all the actors here are honest and unconflicted, at some point someone or some agency is going to attempt to use Metafilter for a stock manipulation in the same way that they use other message boards such as the ones at Yahoo. It would be nice to minimize the risk or outcome of such an attempt at manipulation.
posted by meehawl at 3:00 PM on July 12, 2008 [1 favorite]


Sounds like a golden time to troll financial message boards. :P
posted by jeffburdges at 3:24 PM on July 12, 2008


mullacc, I appreciate your answer. Thanks for setting me (and us) straight.

But in my quest to find a tarnished lining, can I just say that "[IndyMac's $7.5 billion] is a small portfolio in the realm of AAA-rated MBS" is kind of a scary sentence on its own merits, even if it reflects relatively well on IndyMac?

And that "any bank that holds AAA-rated MBS as a Level 3 asset will have no reason to deviate from their mark-to-model valuation in light of this distressed forced-liquidation. If AcmeBank isn't already marking their MBS to market, it isn't for lack of information." doesn't mean that the AcmeBank's of the country are actually marking to market on a continual basis, just that if they wanted to, they could do so. I mean, if I hear one more bank (or imvestment bank) claim that this quarter is the "everything but the kitchen sink" write-down quarter, the last one, we really mean it this time...well, you get the picture.
posted by Asparagirl at 4:11 PM on July 12, 2008


Well, an interesting thread.
This bank isn't the first to fail, it won't be the last.
To keep you updated: http://www.fdic.gov/bank/individual/failed/banklist.html

If you want to find out about the financial health of your banking institution I would suggest that you keep an eye on the level-3-assets in the quarterly balance sheet. IMHO the higher the level-3-assets are, the worse is the situation. An increase in level-3-assets from the previous balance sheet might indicate financial distress and a lot of banks are shuffling this assets into the level-3 category like other people shuffle their Credit Card debt.

Please fasten your seat bells, the worst is still to come.
posted by yoyo_nyc at 6:21 PM on July 12, 2008


FDIC-Insured?

How much losses can this fund cover? In Europe accounts are also insured (AT 20k Euro, DE 100k Euro) but if you look at the insurance funds it is obvious that the insurance will collapse when several major banks will collapse.

Would Helicopter Ben come to a rescue?
posted by yoyo_nyc at 6:32 PM on July 12, 2008


But in my quest to find a tarnished lining, can I just say that "[IndyMac's $7.5 billion] is a small portfolio in the realm of AAA-rated MBS" is kind of a scary sentence on its own merits, even if it reflects relatively well on IndyMac?

The lining is tarnished as hell. What I said shouldn't reflect well on IndyMac at all--in fact, I think they're exactly the kind of bizarro business model that has us in this mess to begin with. I just don't think the TAF should be smeared with that IndyMac-brush.
posted by mullacc at 6:43 PM on July 12, 2008


Umm...

Apocalypse time yet? That's all I really read all these fancy financial threads for, is the humorous end-times predictions.

If you can't do that for me, then I'll have to print out this thread and save it as fuel for the purgatory to come. One day your words will be kindling while I blast psychobilly rock over the Appalachians on a stereo powered by a pig-manure fed generator and heat a rusted can of dog food over the fire. It'll be symbolic and I'll fire off a dynamite-strapped crossbow bolt in salute for all your crazy number-crunching dreams. Yeeeeeeeehaw!
posted by saysthis at 4:24 AM on July 13, 2008


the worst is still to come.

I'm not sure what you mean to show by posting deliberately misleading graph.
posted by oaf at 8:58 AM on July 13, 2008


a deliberately misleading graph
posted by oaf at 8:59 AM on July 13, 2008


@OAF

I don't understand your point? This is a representative graph of what happened recently to the ABX. Feel free to post a more adequate representation. Most of them have reached all time low in the last days. -> more write offs for the banks
posted by yoyo_nyc at 9:42 AM on July 13, 2008


yoyo_nyc -- "Feel free to post a more adequate representation. "

Why thank you, don't mind if I do. I've got a few comments about ABX, and not that I believe you were misleading yoyo_nyc, my thoughts are more directed at the index itself.

You've posted a link to the ABX, but this index has come under a lot of criticism lately. To understand fully why some folks think ABX is actually overstating the problem somewhat (I'm one of them), let's look at it in further detail.

The ABX mistakenly thought of as a proxy for the subprime sector, but that isn't true at all. Any index - The Dow, the S&P 500, FTSE, etc introduces bias into what its intended to measure, and if one trades on such data it is critically important that the index be clearly understood. I'm not totally sure this is the case when it comes to the ABX, especially so on Metafilter (not necessarily yourself, yoyo_nyc, but I'm addressing some of spreaders of misinformation, in this thread and others).

The ABX is a rolling indicator, not static like stock indices. Each index series is constructed of Credit Default Swaps referencing "hot run" deals, and lives for a period of time until replaced by the next index.

Therefore its easy to see the first problem we've identified with the ABX; the introduction of Credit Default Swaps as a proxy for the PD referring back to the underlying deals. ABX doesn't directly measure the PDs - it can't - instead, the designers used a derivative as a proxy. Not saying this is bad, mind you, but this can - and quite possibly does - introduce bias into the calculation of ABX.

Now comes the second criticism of ABX - deal level coverage.

ABX prices may not be representative of the market as a whole as each index series covers only 20 deals, and only selected tranches of each deal (via, of course, the aforementioned Credit Default Swaps). The folks constructing ABX do their best but it is, at the end of the day, a very carefully selected subset of the entire market.

The third criticism refers back to something I introduced to Metafilter finance threads last January - specifically, accounting treatment of assets held by banks. I don't believe most people fully appreciate just how much FASB 157 and other accounting initiatives have changed the valuation of assets.

Specifically, banks run two sets of books, each reflecting distinct sides of the business - the banking book and the trading book. The accounting treatment for each, specifically as it pertains to regulatory capital, is different (risk weighted assets). Banks can - and frequently will - shift assets from one set of books to another, in an attempt to gain favourable regulatory capital i.e., less capital to support a position. When positions are moved from the trading book to the banking book, they are treated differently for accounting (and regulatory) purposes. Its very important to keep this in mind when evaluating ABX as a proxy for the entire subprime mortgage market.

Many feel these shifts in assets may deflate writedowns and trigger impairment charges much smaller than the mark to market losses ABX indicates.

What makes the situation worse, once the asset is no longer actively traded (for various reasons) models can and will differ across institutions (see my comment above where I outlined what goes into creating a model); bottom line - the value of assets held by institutions may be different than those implied by a crude indicator such as the ABX series.

And the fourth (but by no means final) criticism of ABX that I'm aware is the market itself.

ABX, because it tracks deal level, is inherently limited. We think ABX is only tracking about 5% of the entire subprime market (again, proxied via CDS'). The original four ABX series covered about $30 billion while subprime issuance at that time was roughly $40 billion per month.

So clearly the subprime market that ABX is intended to track is much, much larger than the coverage of this index.

Some folks have taken a very critical look at ABX (I've been doing some work in that area, and that's why I'm so conversant), and we believe that it is overstating losses market wide by as much as 60%.

While the graph posted is indeed breathtaking, I certainly hope folks won't be getting all panicky and start making rash financial decisions - especially trading on the some of positions that were revealed in this thread.


And this comment alone should give you folks some deep insight into two factors
Finally, just looking at this partial (I've written about two thousand, very quantitative words with lots of supporting data for another audience) analysis of ABX I've presented here should show you folks that nothing in finance can - or should be - taken at face value.

ABX is just an index. A proxy for the market, and like any substitute, it is biased.
posted by Mutant at 9:51 AM on July 13, 2008 [3 favorites]


What mess? Seriously where's the mess? The value of the assets they'll hold til maturity went down, but their still cash flowing. If there has ever been anything more hypocritical they the NYT's coverage of FNM and FRE I don't know what it is.

Where's the mess? Really? Fannie and Freddie are heavily levered spread businesses, as I'm sure you understand, and when Kd goes up materially (as it has on something like eight of the last nine days) enough relative to the rate at which they lend, they most certainly have big problems. Do you think the NYT is responsible for the free fall in FNM and FRE shares? Or does the market see a mess where JPD says none exists, and therefore it must be a conspiracy of some sort?

FNM and FRE are two of the greatest governmental entities every created, and libertarians are using the current panic (And it is a panic without a doubt) to do what they've been dreaming of for years. Kill the implicit government subsidy of middle class home loans.

I think I remember you once being a sensible poster. What happened to you? The literature is pretty rich, and most of it finds that the "subsidy" to the extent that exists does not meaningfully subsidize the things you'd want to subsidize.

And besides, I thought the Lefties around here hated fraudulent companies and were the ones opposed to "socialize the risk, privatize the profits," no? Fannie and Freddie do exactly that.
posted by Kwantsar at 10:03 AM on July 13, 2008


The feds have stated they'll step in to save Fannie Mae and Freddie Mac.
posted by five fresh fish at 5:52 PM on July 13, 2008


@ MUTANT
first, you have to research these things very, very carefully, otherwise you're buying & selling stocks on a whim, a crapshoot. While one may win a few times, you won't consistently make money with that approach. If you can't demonstrate a thought process going into your stock selections, you're gambling, not investing.

I realize that you work in this field since you speak about "thought" processes. Well, most people DO think about their investments. And most do underperform reference indices (S&P500 etc.) in the long run. The very few that DO outperfom them in the LONG RUN are either very very smart or could be just lucky, since a few are statistically expected to outperform the market.

It pays to be critical, and not take things at face value. ABX crashing? Could be, but I still want to know precisely what that index is comprised of before I trade on that data and, further, I need to be able to replicate it, myself, otherwise it's a black box, and my previous observation / comment applies - you'll lose your shirt.
Well, might be and I hope you put your money where your mouth it. I am currently neither long or short but I am aware that people who shorted the banking sector fared quite well in recent months. If people like Soros are right and the US is heading for a serious recession (I actually think the US might have been in a slight recession or stagnation since 2001) then it is seems unlikely that fewer then more people are going do default on their mortgages.
posted by yoyo_nyc at 6:28 PM on July 13, 2008


The feds have stated they'll step in to save Fannie Mae and Freddie Mac.

Nowwww can we panic?
posted by spiderwire at 11:49 PM on July 13, 2008


yoyo_nyc -- "I realize that you work in this field since you speak about "thought" processes. Well, most people DO think about their investments."

Gee sorry to disagree guy, but most people DO NOT think about their investments - at least in the proper way. No, in another thread I inventoried the classic mistakes of retail investors, as corroborated by academic researchers.

But for evidence of this lack of analysis and planning, you don't have to look any further than this thread; three of us asked why specific shares were identified as "names" and no response.

Further, some commenters here have disclosed they are holding options. I seriously doubt ANY of them calculated fair value of the option before purchasing. In other words, they didn't have a clue about the true worth of their position. What does that mean? Trading options is a professionals game, and when retail gets involved they 1) are overpaying for the options, 2) over the long run will lose money.

So options trading in this thread? Middle class equivalent of lottery tickets.


"Well, might be and I hope you put your money where your mouth it. I am currently neither long or short but I am aware that people who shorted the banking sector fared quite well in recent months. If people like Soros are right and the US is heading for a serious recession (I actually think the US might have been in a slight recession or stagnation since 2001) then it is seems unlikely that fewer then more people are going do default on their mortgages."


Yes, I'm long this market. Haven't pulled any out at all, and during the panic last summer put some more in, and have done rather well (up about 16% since purchase, and the shares I bought pay a 17% dividend).

As I've previously revealed here mostly, about one third of my equity (since 2004) has been in Gold & Silver (both physical and ETF) and a miner. The other parts of my portfolio are structured along the lines of cash flow generating assets (currently yielding about 13.02% in monthly income) and relative value plays (I identify two assets with a long term pricing relationship/correlation, and make money on pricing discrepancies between the two, not the market prices of each - simpler that way).

I never get too worked up about the market because I've got a long term perspective - that's why I frequently advise people to study the history of finance if they'd like to understand what's happening now.

Also, my trading style renders me share price indifferent. In other words, I make money no matter what happens to the share price (well, within parameters, of course).

So, yeh, my money is where my mouth is. In the market. But I'm not setting myself up for a lawsuit, SEC or SFA inquiry by revealing positions on a public forum.


But you posted ABX and then later, after someone else replied, invited comments.

While I've outlined just a few, there are lots of shortcomings associated with ABX, as we're just starting to understand. As many are aruging. In any case, this (a divergence of opinion regarding ABX) does indeed seem to present a classic market opp that many folks are gearing up exploit. And that's part of the reason I'd done that analysis of ABX - trying to identify a market opp.

But I just gotta ask yoyo_nyc - before you read the analysis of ABX did you know what the index meant? I'm sure we'd all like to avoid misinformation in the finance threads, like the comments on non borrowed reserves, where we saw there the poster didn't have a clue what the metric was, but that didn't stop the linking of a BIG number. A NEGATIVE number. Therefore the number MUST BE A BAD NUMBER.

And in fact it wasn't really bad. Just what happens to a balance sheet when assets shift.

Unfortunately, that kind of misinformation that we see all too often on Metafilter doesn't really help people who are trying to learn about the markets. And there are lots of people here who want to learn.

And that's why I replied to your solicitation for further comments on ABX. Posting a negative number by itself, without any comments, doesn't really help people understand what's going on, and may just cause panic.



spiderwire -- "Nowwww can we panic?"

Why panic? The Lender of Last Resort is stepping up to the plate. Just as it's done before and will do again in the future. It would be time to panic if there there wasn't such a lender.

But there is. So no worries.

Looking at the overnights, the markets seem rather tranquil this AM and have been all night.

Asian stocks trending down, but nothing significant (-0.25%). The VIX (indicator of US equity market volatility) is flat, and european bourses are up across the continent, again, nothing significant, half a percentage point plus or minus, here and there.

US yield curves holding stable - nothing indicating flight to quality. Gold is actually off down about 0.5%, and $LIBOR flat.

So overnights indicate the markets seem to have just absorbed the news without a hiccup.

Of course it's 10AM in London and we're all watching the US data carefully.

Don't start panicking over there people!!
posted by Mutant at 2:47 AM on July 14, 2008 [2 favorites]


three of us asked why specific shares were identified as "names" and no response.

Here's a response! But it's long and I warn you that it might be boring. I did want to lay out where I was coming from, though. You can choose to read this as a "here are some of the common fallacies that naive investors engage in" lesson, I won't mind. :-)

I live in California -- Los Angeles -- home to several of those banks/lenders/companies. I live within walking distance of multiple branches of five of them (and an IndyMac branch, too) and a short drive from Countrywide HQ in Calabasas. I spent late 2004 and early/mid 2005 house-looking -- and gawking at the insane prices! -- before finally buying in August 2005. Yep, I was a bubble buyer. Thank God we got a nice normal 30-year fixed rate mortgage, despite our broker pushing towards an ARM. So I have a smidge of firsthand knowledge from one of the "ground zero"'s of the bubble mania.

But that wasn't enough to get me interested in mortgages or finance. No, that happened, quite belatedly, because of Bethany McLean's book about Enron, followed by other books. (story previously recounted in Metatalk) That set me off to read, read, read whatever I could get my hands on, both traditional print media and a number of finance-related blogs. In the latter, particularly, there seemed to be a lot of talk about something called a housing bubble -- in fact, there seemed to be a whole blog subculture talking about it. And boy, were they pissed off. And the more I read, the more I realized that my first-hand observations about the LA housing market and mortgage availability were actually part of a much bigger, much more insidious pattern, only it took lots of observations from all across the country, aggregated in those blogs (both the postings and the comments) to start to put it all together.

But that wasn't enough to get me interested in the stock market. No, that happened, also quite belatedly, because of two things: the two Bear Stearns hedge funds blowing up and an article about mortgage securitization that is sadly no longer online. I can't overstate how much it shocked me, to realize that all this silly mania on the ground involving houses could actually affect the larger market, even whole companies and industries unrelated to housing and mortgages. The ramifications started piling up in my head -- to companies, to the consumer, to banks...

So I did two things. I wrote this MetaFilter FPP and a bunch of comments in it -- one year ago today, almost! Happy birthday, FPP! And I yanked my 401(k) out of the various index and large-cap funds it had been split amongst, and put >80% of it into the "safe" money market option.

Now, the latter is exactly the kind of move that would get me laughed at as a dumb investor trying to time the market. I totally accept that. But the timing was actually perfect, and I saved my 401(k) from the drop and bleed that followed. My main criteria going forward was saying this to myself: what would I, personally, find harder to deal with: losing the chance to make gains this year in the stock market by following a gut instinct that could be wrong, or losing a percentage of my hard-earned money by ignoring a gut instinct that could be right? Which one for me would be harder to deal with? I decided to jump ship, and I'm so glad I did. Had I not sold, I would have lost at least 20% of my 401(k) money by now -- but more importantly to me, honestly, actually putting up my money (or in this case, rescuing my money) to follow a thesis was a terrific personal lesson and self-confidence boost. If you just make economic prognostications and don't actually jump in the water yourself, you may as well be a tarot-card reader in a strip mall.

In that same vein of "put up or shut up", I then opened a small personal brokerage account at Fidelity at the end of last year -- funded with very little money, only what I could afford to lose if I was wrong. The positions and sectors I mentioned in a MeFi comment back in January have not changed much. I think you can guess how they've turned out. They're not sophisticated plays at all, I know, but frankly I think I prefer them that way. I'm happy with my "[m]iddle class equivalent of lottery tickets"; they're making me money, and I'm satisfied with that. Not everyone has to bet on spreads and straddles and splits, do they? And I'm not an ex-pat ex-IB hedge fund manager. I have neither a lot of capital nor a lot of risk tolerance, so the only kind of options plays I do are straight-up put buying. That way, if I'm wrong, I can possibly lose all of what I put into my bet, but cannot lose more than that. (And as noted upthread, I buy puts in pathetically small increments anyway.)

And when I left my job after becoming a full-time mom, I rolled over the 401(k) into an IRA and did this with it. That one has turned out nicely too, although I may be revisiting how I split that one up in the near future.

So, about those banks. I think they -- and certainly not only they, but they're good names to start with -- are in trouble for a lot of reasons. For the kinds of loans they made (NINJA loans, Option ARMS), for the kinds of people they marketed and made those loans to (sometimes openly to illegal aliens!), for the "bubbly" areas of the country they concentrated their loans in (California, Nevada, Florida, etc.), for the types of developments they kept funding even after it was clear that (for example) Miami really didn't need another mixed-use condo development starting in the high 400k's, for their snowballing non-performing loans and their Texas ratios (although there are banks out there with much worse Texas ratios that I didn't mention), and more...

I also can see that some of these banks have cratering stock prices. Now, that's certainly not enough on its own to mean a darn thing, but when you see a giant bank like WaMu wind up below $4 a share (current price as I type this: $3.49/share!), on top of everything else you know about the kinds of loans they made and hold, it does give one pause. Or it should, anyway, especially if it's your bank holding your money. And as mentioned, banks that offer ridiculously high savings rates or CD rates, out of whack with other banks, usually indicates a problem. I know both of those are very crude ways to measure things. But I don't have a Bloomberg terminal, and I don't have contacts on the Street, and neither do most other investors. We have to go by what we know firsthand, or read secondhand, or hear about thirdhand, or whatever.

I also don't doubt that credit default spread information would be a terrific tool to have in the box, too. But again, I'm a small fish without access to that, so I work with what I've got.

So, there's my utterly unsophisticated take on things. It may not be pretty, but it's been educational -- and I can't complain about the profits, either. :-)
posted by Asparagirl at 10:49 AM on July 14, 2008 [1 favorite]


-- "Here's a response! But it's long and I warn you that it might be boring. I did want to lay out where I was coming from, though. You can choose to read this as a "here are some of the common fallacies that naive investors engage in" lesson, I won't mind. :-)"

Gee if you've read anything I've posted in the past asparagirl, you know 1) I love to talk about finance, 2) I'm at least equally verbose and damn sure twice as boring (this according to Mrs Mutant) and 3) I don't think I've ever denigrated someone else's ideas or system. But at least you've got a system - well done. So let's chat al little and see where we end up.


"I also can see that some of these banks have cratering stock prices. Now, that's certainly not enough on its own to mean a darn thing, but when you see a giant bank like WaMu wind up below $4 a share (current price as I type this: $3.49/share!), on top of everything else you know about the kinds of loans they made and hold, it does give one pause. And as mentioned, banks that offer ridiculously high savings rates or CD rates, out of whack with other banks, usually indicates a problem. I know both of those are very crude ways to measure things. But I don't have a Bloomberg terminal, and I don't have contacts on the Street, and neither do most other investors. We have to go by what we know firsthand, or read secondhand, or hear about thirdhand, or whatever."


Ok, I ignored your investment recap, as it doesn't seem relevant to our question of why you selected those shares you named.

But what I'm taking away from this is (and please don't let me put words in your mouth) you seem to be following the Peter Lynch school of investment, heavy reliance on anecdotal indicators, which isn't bad at all. In fact I used to practice it as well but my investment style has changed. So good that you've got a system in place, although Peter Lynch may have a little more rigour in his.

So you've been successful to date (great, it's all about making money!), but are you looking at Prospectus' at all before you purchase? After? I've got my kitchen table loaded up with these things as, you've gotta now what buy and once you own it, you've gotta know it better than ever.

Also, do you plan these things out in terms of entry / exit points? Classic retail mistake is not to plan both sides of a trade. If you don't know when you're gonna sell you've got no business buying is my view (I hate to lose money).

In any case, you've cited low share prices as an indicator. Be careful there, as lots of factors can cause share prices to crater, and it's not always the future prospects of the firm. For example, of the names you cited, at least one (probably more) has engaged in a secondary share offering. This factor alone - it's called dilution - will markedly drive down share prices, even though the underling business is sound. So that has to be factored into any trading model that's generating signals based on share prices.

Another factor that's gonna cause you trouble will be sector wide, negative/downward bias. Financials are getting hammered, and the share prices of lots of good names are getting pushed down into the mud, along with those companies that are truly deserving of delisting (I ain't naming names but I know of several you didn't mention). There is a lot of emotion associated with financials right now, this is a beautiful time to SELECTIVELY purchase financials as retail money is scared. So you've gotta account for that negative, sector wide bias in your model. Again, false signals will cost - money.

And I've said this before - here as well as in other threads - high interest rates aren't highly correlated with a troubled firm, they just aren't. The ALM function at a bank can and sometimes does offer sharply higher than market rates. And for a wide variety of reasons, perfectly valid reasons that aren't related to the financial health of the firm. So this is a possible false signal that any model will have to filter and / or correct.

The reason I ask these questions is no doubt WaMu is getting hammered, but a brief look at the balance sheet shows they've got over $14 per share in cash. Sure, eps is pretty grim but, on the other hand, it's beta is far greater than unity (1.68 actually!) indicating this is one rough ride - somethings pushing it about and lordy mercy - look at that short interest! That would concern me no matter what side (long/short) I was on, and is a factor I doubt your model is integrating at present. So it seems like some exogenous factors are seriously depressing this stock. Looking at eps I'd ask what factors are causing this collapse in share price, and is management likely to sell of parts of the enterprise that are depressing the share price so much? Your model as explained here won't capture this - a sale of a division - and if they can find a buyer for the unhealthiest parts of the enterprise that share price might rocket up the other way. Especially so as shorts would get squeezed, and in these situations you could easily see that share price double or more in one week if not sooner (not a prediction for WaMu, btw, just an observation from watching short squeezes in the past). Looking at the income statement, their business has been very stable, but a line item called "others" is triggering a loss in Operating Income. What rolls up into that I don't know, but your model should be able to accommodate the factor. If it can't be found in the annual or quarterly report (it WILL be there), then I'd call the company and ask.

But lets look deeper, 'cause I noticed something untoward.

Edgar filings show management changes, in fact lots of management changes and it looks like some funds - TPG Capital at least, near as I can tell, but these funds are like roaches, for every one you can spot there are several other sniffing about, up to something - are putting their own people into the firm. Also, TPG is acquiring lots of shares and already has a large position, keeping in mind whatever we can see from public records is only the tip of the iceberg, they are messing about with the bylaws, so it seems significant changes are already underway at WaMu. Changes that will be accelerating as institutional ownership is about 40% of float. I don't see this company going anyplace with such large institutional ownership, that is static (i.e. they aren't selling).

So your model at present will likely overlook these factors, at least in a direct manner - they will, of course, be reflected in the share price. Yeh, subjective factors, such as (perceived) low share prices and (perceived) high interest rates aren't a bad start, but you can probably do better with publicly available data. There is a lot going on behind the scenes that we can observe if we look in the right place, things that your model at present will not be able to factor in, at least a priori.

I have to admit that I've never looked at WaMu before today (not interested for reasons that will be clear later) but this seems to be a classic big money play - talk the stock down down down, probably shorting heavily as well (they'd do it via proxies or off shore, and nobody will ever be able to trace these actions back) which will be cash flow positive, all while acquiring shares, shares gets you seats on the board, seats on the board allow you to you put your own people in the management line all the while making changes to the bylaws. Later screw around with the debt (i.e., bonds) side of the capital structure (haven't looked, but I'm sure we can find evidence that this is going on) while you either dilute retail money out of existence or engage in a debt for equity swap and screw retail big time. Then walk away with a humungous profit for your work. This is how it's done.

So, in the short term: WaMu probably a good short at present, but I'm not sure for the reasons your system (share price, interest rates, some subjectives) selected it. I'll leave similar analysis of your other names to yourself or interested readers. I don't invest in companies like that.

Why not? Well, as I said before, I don't like to pick stocks. I don't like the uncertainty that goes along with it. I just can't do it, and always lose money picking stocks. I like sure things or as close to sure things as I can get in the stock market. So on one side of my portfolio I trade for cash flow, with precious metals & relative value being the other two approaches I use, and I do have quantitative models covering each (let's ignore the other two for the time being).

So this means I've given up the possibility of an unlimited upside in share price appreciation in return for the certainty of at least 10% monthly cash flow. I say at least because that's my hurdle rate and if I can't get 10%, annualised, I'm not interested. And its very easy to get far, far more than 10% in this fear dominated market.

There are two types of shares you can purchase: those that pay dividends and those that don't. Why should I hold a share that won't pay me when there are shares I can purchase that will pay me for holding them?

That's why I said I'm share price indifferent. As long as I'm getting paid and I'm comfortable the firm has the money to keep paying me, I don't really care what the share price does. I've been down 40% at times, and I just hold on. Even purchase more to average down and goose overall portfolio yield. I'm at about 13% monthly current income these days, have been as high as 22% (dot com bubble, nobody, absolutely nobody wanted dividend paying, bricks and mortar companies) and increasing monthly yield/cash flow in this market in a no brainer as retail money runs scared. Lots of deals out there.

Really none of my business, but why are you messing about with puts? There are ETFs out there that will let you take a negative view on the market or a sector, and you don't have to worry about time value (theta) and other factors. More favourable tax treatment as well, you can even push into long term cap gains if you'd like, so it's a win / win.

Options are too damn pricey anyway. To buy at least, that's why I try to sell them if I can. About the only thing you gain is leverage but an ETF will leverage up, and far more than you can - you won't be able to get 10 or perhaps 30 to one leverage, but a fund can. In any case, I'm so risk averse I just avoid the entire asset class (although I have engaged in covered calls in the past and some other obscure options driven trades). If you're looking to short, ETFs can't be beat - you can even purchase at a discount to NAV.

Anyhow, lots of links and resources in my profile. Can't help with a link to free Credit Default Swaps prices, but I'll add a link if I ever find one. If you've got any useful pricing links please send along so I can add - that way everyone reading these threads can benefit.

I've got some finance books there also, as well as a plan to become a student of the markets. I sense you're interested in finance (and that' commendable, seriously!) but I don't think you'll be able to take things to the next level reading 'blogs. That's the problem I see with lots of posters in the finance threads - they're are interested but read only 'blogs.

But books, however, will help you master the markets.
posted by Mutant at 2:33 PM on July 14, 2008 [3 favorites]


@MUTANT

Gee sorry to disagree guy, but most people DO NOT think about their investments - at least in the proper way.
What is the proper way?

No, in another thread I inventoried the classic mistakes of retail investors, as corroborated by academic researchers.


"academic researchers" AKA "intellectual masturbation"

But for evidence of this lack of analysis and planning, you don't have to look any further than this thread; three of us asked why specific shares were identified as "names" and no response.

Well, each has his own picks. I suspected for a long time that another bank might run into problems but have not heard something about it recently. DB also might be into more trouble than they admit.

I seriously doubt ANY of them calculated fair value of the option before purchasing.
Well, should they? I don't work with options but they are based on the Black-Scholes model and standard deviations. We both know that this is not a real reflection of how the market moves. And, AFAIK, options that are far out the money are actually underpriced if you assume a Levi flight or something else with a fat tail distribution.

structured along the lines of cash flow generating assets (currently yielding about 13.02% in monthly income)
13% monthly? I doubt that anything like this can be sustainable in the long run. fI you manage 13% yearly over decades then you are outstanding already.l

So, yeh, my money is where my mouth is. In the market. But I'm not setting myself up for a lawsuit, SEC or SFA inquiry by revealing positions on a public forum.

Snore.....

And in fact it wasn't really bad. Just what happens to a balance sheet when assets shift.

Well, I would be suspicious if assets get shifted, especially into level 3 assets.

Unfortunately, that kind of misinformation that we see all too often on Metafilter doesn't really help people who are trying to learn about the markets. And there are lots of people here who want to learn.

I am not sure about this. I also doubt that somebody will buy stocks based on a posting here in the blue.

And that's why I replied to your solicitation for further comments on ABX. Posting a negative number by itself, without any comments, doesn't really help people understand what's going on, and may just cause panic.

Don't panic in the stock market. But if you panic, panic first!

I have not much saving this I wasted my life in academia. I will invest the little money that I have saved in ETF when I think the market is near bottom, what is of cause difficult to predict. And I will go far behind S&P500 in diversification. How did Mandelbrot say? Be careful, investing in the stock market might be more dangerous than you think.
posted by yoyo_nyc at 3:06 PM on July 14, 2008


Wow I have to say this - very disappointing response yoyo_nyc!

Overall, but especially this gem -- "academic researchers" AKA "intellectual masturbation"

If you know anything about finance (and I have to admit, I thought you did know something before that comment), then you know there is a near constant of back and forth, between academic and industry. In fact the ties are probably tighter than any other field I can think of. Unlike other fields, academic input into problems financial are highly valued (yes, in money terms) by industry. But your comment illustrates ignorance of this basic truth. Curious, and I'll use it to view your other comments more critically going forward.

But I can't help but have noticed that you've avoided my question, and instead raise a bunch of questions - and borderline, personal insults towards me - so I'll ask it once again before responding to your questions.

What did you know about ABX before you posted that rather alarming chart?

Not much. And what further can you tell us about ABX? Probably not much more than I posted, or what you've read on whatever 'blog it is that you get your information from.

But please. Go ahead. I'm curious about your knowledge of ABX before my analysis was posted. And especially interested in what you add to this (previously civil) discussion.

To close, I don't know what you did in academia - or why you're so bitter about the experience (your comment - "I have not much saving this I wasted my life in academia." ) but please don't take it out on me or the others who are trying to read these threads and learn. I've gotten lots of emails about this thread, very gratifying to be able to help others as I've been helped reading other threads.

That's the value add of MeFi.

But unlike many other comments in this thread, your entire response to my question, totally off topic and evasive, has added precisely ZERO value to our discussion.

Please start over, and start with my altogether reasonable query about ABX.
posted by Mutant at 4:01 PM on July 14, 2008


Why panic? The Lender of Last Resort is stepping up to the plate. Just as it's done before and will do again in the future. It would be time to panic if there there wasn't such a lender.

*bounces up and down in car seat*

how about nowwww?
posted by spiderwire at 5:46 PM on July 14, 2008


Freddie Mac Chairman and Chief Executive Richard Syron pocketed nearly $19.8 million in compensation last year, according to a Securities and Exchange Commission filing Friday, even though the mortgage company's stock lost half its value in 2007.
It's time for some goddamn reform.
posted by five fresh fish at 6:49 PM on July 18, 2008 [1 favorite]


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