A compilation of credible sources, insights and commentary on the financial crisis, brought to you by an expert on government affairs.

  • Borderline Insolvency vs. Democracy
    02/22/2009 7:57PM
    If you don't know who Nouriel Roubini is, learn. Nouriel Roubini is not a new whole grain at your local food co-op. He is a professor at NYU who uses comprehensive, global data to back his assertions. He has the credibility to point out that even with current injections, our banking system may be "borderline insolvent."

    Congress approved $750 billion for a Troubled Asset Relief Program (TARP) late last year, after a haunted-looking Secretary Paulson came to Capitol Hill asserting that the economy could collapse without approval of the program. Congress voted Yes only after the House of Representatives voted No. (No turned back to Yes after a stock market drubbing made even Members of Congress who wanted more time to ask serious questions afraid of their own shadows). In the greatest marketing faux-pas of 2008, the TARP bill was dubbed the "bailout" bill. When ordinary citizens and Members of Congress asked why we would bail out banks, the politically correct term became the "economic rescue" bill. Calling it "economic rescue" and then approving it did not prevent some Members of Congress from returning to their districts to the waving fists of angry constituents. Despite the backlash, the nation held its nose and drank the bad medicine we would never have drunk had we known how bad it would taste.

    Nouriel Roubini is now pointing out that the size of the banking crisis is even larger than predicted. He reports that it is much larger than the very haunted looking Treasury Secretary Henry Paulson proclaimed in his unprecedented "11th-hour-just-before-adjournment" pass at Congress asking for $750 billion. Members of Congress know little more than I do about the banking system, which is not a fault of Congress, but rather why we have lengthy, multi-year, deliberative processes for passing complex industry bills. Rather than having multiple years to vet and study the problem, Congress was given just days to vote yes or be blamed for what we were informed was a problem of titanic proportions. This 11th hour cry for help and resulting votes obliterated everything I previously understood about how Congress works.

    If what Mr. Roubini says is correct, the Congress will have to approve another $1 trillion for the banks. The "all at once problem and good thing" is, we still have a democracy, meaning voters who might tell their Members of Congress to vote no. And it is that democracy that could prevent us from doing what maybe should be done. I do not pretend to know what should be done, but point out the considerable bind the nation is in. If we approve $1 trillion dollars without considerable review, we do not do justice to our democracy. If the Members of Congress override a potentially significant backlash from their constituents, they do not do justice to their purpose in office. If constituents do not ask the kinds of tough questions that can lead to a "no" vote, then we are a nation in slumber. And if the level of the stock market, proven to be a false lover, determines our votes, then reason is lost.

    I received without subscription the following information from Mr. Roubini's website, rgemonitor.com, which I reprint below. (If Mr. Roubini should stumble onto my blog, I hear he give great parties at his home. I hope he will invite me because, after reading this, I need a drink, too.)

    RGE MonitorJanuary 22, 2009
    RGE Monitor Estimates $3.6 Trillion Loan and Securities Losses in the U.S.
    Nouriel Roubini and Elisa Parisi-Capone of RGE Monitor release new estimates for expected loan losses and writedowns on U.S. originated securitizations:

    Loan losses on a total of $12.37 trillion unsecuritized loans are expected to reach $1.6 trillion. Of these, U.S. banks and brokers are expected to incur $1.1 trillion. Mark-to-market writedowns based on derivatives prices and cash bond indices on a further $10.84 trillion in securities reached about $2 trillion ($1.92 trillion.)

    About 40% of these securities (and losses) are held abroad according to flow-of-funds data. U.S. banks and broker dealers are assumed to incur a share of 30-35%, or $600-700 billion in securities writedowns.

    Total loan losses and securities writedowns on U.S. originated assets are expected to reach about $3.6 trillion. The U.S. banking sector is exposed to half of this figure, or $1.8 trillion (i.e. $1.1 trillion loan losses + $700bn writedowns.)

    FDIC-insured banks’ capitalization is $1.3 trillion as of Q3 2008; investment banks had $110bn in equity capital as of Q3 2008. Past recapitalization via TARP 1 funds of $230bn and private capital of $200bn still leaves the U.S. banking system borderline insolvent if our loss estimates materialize.

    In order to restore safe lending, additional private and/or public capital in the order of $1 – 1.4 trillion is needed. This magnitude calls for a comprehensive solution along the lines of a ‘bad bank’ as proposed by policy makers or an outright restructuring through a new RTC.

    Back in September, Nouriel Roubini proposed a solution for the banking crisis that also addresses the root causes of the financial turmoil in the housing and the household sectors. The HOME (Home Owners’ Mortgage Enterprise) program combines a RTC to deal with toxic assets, a HOLC to reduce homeowers’ debt, and a RFC to recapitalize viable banks.

  • The Fed's Two Trillion Dollar Loan Begat This Blog
    02/22/2009 7:32PM
    We've learned much from this financial crisis. And we've learned what we still do not know. Not knowing where to begin, I will begin in the middle.

    Bloomberg has sued the Federal Reserve, asking that the recipients of two trillion dollars of loans be revealed. The Fed has so far refused to release this information.

    We've heard experts claim that the banking crisis is now two or three times larger than initially anticipated. But we don't know if Congress will muster the votes to provide such a bailout.

    We've seen our savings accounts begin to pay back less than the rate of inflation. Today my bank sent a polite email suggesting I remove my money from a money market account held there because it may soon lose value (known as "breaking the buck").

    We've experienced a evaporation of about 40% of our monies held in the stock market.

    There is an explosion of headlines from major financial websites, but they are cluttered with quips from financial service industry professionals whose analyses once appealed to day traders and the casual observer, but no longer seem relevant when money markets lose money. The websites also lack a larger public policy context that is sorely needed.

    We have a call to action from the new President to set aside childish things. If we are to behave as adults in the midst of this systemic financial crisis, then mustn't we start asking questions?

    This blog will seek the best insights from credible sources so that the next time Congress votes on America's economic future, we will know what questions to ask. Even credible sources may have bias, but this post-partisan blog will seek to make any bias transparent and let the reader judge validity.

    The question I start with is three-fold: who did the Fed lend two trillion dollars to, why is it a secret, and why aren't very many people asking why? See: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aGvwttDayiiM