Bankruptcy Filings Surge

U.S. Bankruptcy Filings Surged 37% in February Over Prior Year

"The spike in filings comes as 3.6 million Americans have lost their jobs since the recession began in December 2007 and foreclosures last year rose to an annual record."

Everyone should expect that trend to continue. At least for a few years. The largest amount of resets for ARM loans and Option ARM loans are in front of us, and will not diminish significantly until after Spring of 2011.

Many of these people will find it extremely difficult to pay the higher adjusted rate. The availability of refinancing to another ARM is dramatically reduced due to guideline changes. If the banks do not get the higher monthly payments, it means their losses will be greater, for they already factored in the higher payments as future revenue. So even if the government sets a lower interest rate, the banks will need more government money to stay afloat.

Since 2001, the entire US economy was based on real estate transactions, and all the subsequent business activity which emanated from the rise in property values. From 2001 - 2006, the US conducted the largest capital investment ever into an industry, $11 Trillion, and that industry was nothing more than all of us trading houses with one another.

We can't sell that to overseas markets. Hell, we can't even sell it to ourselves. Who in their right mind would pay 2006 housing prices today? Even if we were to rip out all the granite countertops, SubZero refrigerators and marble floors, how much would Europe, Japan, China India or any one else give us for them? Just realizing this should shine the light brightly on what a huge folly it was.

All that investment with nothing, and in this case, a lot less than nothing, to show for it.

Every other business sector during the housing boom benefited, due to one simple fact - as real estate values rose, that profit was taken by selling or refinancing to a higher amount, and that excess was put into the market place for upgrades, bigger vehicles, vacations, etc.

The rapid escalation was compounded by a few historical changes in lending;

1) People with very poor credit histories were being given loans that exceeded the value of the property by as much as 25%. Debt to income ratios, forever at the 35% or less level, were raised sometimes to as high 60%. Some people were even allowed to have three, four or more properties at one time with these new guidelines.

2) Credit card companies were giving new homeowners cards with $10,000, $50,000 and $100,000 limits. This practice escalated in 2004 when the banks figured out that a lot of people were buying houses, putting in granite counter tops and new appliances and selling the house for profit as the market rose. Why not give them a separate line of credit through a card which would be used at Home Depot, then paid off at the closing when they sold the house?

Over the last 12 months or so, that credit card debt is being securitized, and exchanged with the Fed under the TARP, for good US Treasuries so the banks can borrow against them. You see, no one is willing to let them borrow against very risky credit card debt, except the Fed.

In the short term, unemployment will continue to rise. The reductions in employees at large financial, insurance and real estate based companies can only continue as property values fall.
As those people pile into unemployment lines, all the businesses they formerly spent money with will feel the pinch. Property values will continue to fall as the number of buyers declines due to less income, no income, tougher loan guidelines and general fear of more debt.

The only way to combat this is massive employment initiatives that create jobs with wages equal to all those being lost. That is a tough order. As it is right now, for every ten jobs with an average wage of $50K being lost, the government might be able to replace them with two or three $25K jobs.

For the economy at large, that still represents a 85% reduction in capital flow through the system from wage earners.

If we are to save our financial system and economy, no more precious monies should be given banks that made bad decisions. That money is desperately needed to invest in creating jobs of the future. Every penny given in bailouts is actually robbing innovation and employment of tomorrow. The banks will not hire new employees with government money, they can only use it to pay off the bad bets they've made. Trillions of dollars has already been given the banks, and they are still falling fast towards bankruptcy.

The sooner we all recognize this, the sooner we can start recovery.

Stop the nonsense

Now AIG will be broken into smaller, more "manageable" units.

Uh, huh.

For $85 Billion last October, the US government took in AIG. By the end of November, that $85 Billion had become $150 Billion. AIG also received $40 Billion in TARP money in 2008, and just received $30 Billion in TARP money. That's a total, so far, of $220 Billion the US taxpayer has given AIG, with no end in sight.

Now AIG has reported the largest ever quarterly loss for any corporation, a whopping $60 Billion.

That's $5 Billion lost every week for the 4th quarter of 2008.

AIG lost 99% of its market value in the last year.

From Forbes.com;
"In the last three months of 2008, the New York-based firm lost $22.95 per share. It lost $5.3 billion, or $2.08 per share, in the previous year's corresponding period. Sales fell to negative $23.8 billion, as the company had to reverse gains it recorded from investments in past quarters."

Sales fell to negative $23.8 Billion, as the company had to reverse gains it recorded from investments in past quarters.

In other words, they lied.

There is no other explanation. How many US financial corporations are getting away with lying? More importantly, why would any prudent company that has conducted itself properly need any government help?

How do we get out of this mess? The solution lies in what no one is willing to do.

Let those that committed mal-investment suffer the consequences.

Intense investigation should take place, and when a law was broken, there should be consequences.

The "investment" that is sitting on the sidelines will continue to grow until those two things are done. Why would they waste any more money on a system in which their interests are cast aside so those at the top can do whatever they like?

The fallout from what was done is coming, no matter any initiative. All manipulation from the government has only deepened the losses, and transferred many of those losses from the companies which bore them to the taxpayers.

At this point in time, the only question should be "How deep do we want the losses to be?" This circumstance is unprecedented. Some variables of past interventions might be positive, but only if the market itself is allowed to self-correct.

The value in companies over the last 30 years has been based on phantom profits, for we were borrowing against ourselves, in every way, from the future.

Actual value, un-manipulated, is the only thing that allows a market to be free.

As it is right now, with accounting schedules hiding opaque investments, bailout terms changing on an almost daily basis, promises from the government which increase our debt load, there is no confidence in how to value virtually any company or our government. Future profits, which investment looks for, are far too hard to determine.

Congress can force two of those things to change, right now.

1) We can eliminate level 2 and level 3 accounting rules through the FASB. FASB had set last August as deadline for full declaration of level 3 onto active accounting ledgers, but rescinded that rule last June, under heavy pressure from the White House, Treasury and major financial companies. The rule would have stopped, immediately, a companies' ability to have "off-balance" sheet entries. It is these very entries that are now considered "toxic."

Doing so would cause most of the largest banks to be immediately insolvent. Yet, that would have been better 12 months ago, when the losses were maybe half of what they are today. One way, or another, this problem will be rooted out. The longer it takes us to deal with it, the deeper the losses. More is being securitized, and shoved into level 3, where they can claim any value they need, and more CDS is being written, allowing the problem to grow.

2) Limits on bailout efforts, where the end is a known quantity, will also allow investors to know the rules on who and what gets help. Investment money will not play when an undeserving company suddenly gets a lifeline their interests ( which may not need a bailout) may not get. Bailouts create an unfair, and unknowable, playing field. Stop the bailouts, and investment money will give the market a bottom.

All of this nonsense will stop. Do we stop it while we have 50% of our economy left, or do we stop it at 25%? Do we want to control the losses, or let mob rule decide?

The government has another alternative. No more bailout money. $300 billion can be given to 10 new regional banks. At $30 Billion apiece, they can immediately lever to 12:1, and collectively have $3.6 Trillion in unencumbered debt to loan. IPO's would dramatically increase that amount. An onerous coupon that demands repayment to the government from dollar one would leave the taxpayers with no exposure. Most calculations I have seen show repayment in less than 18 months. From then on, the new banks keep all profit. But, and I caution on this, a pass on previous crimes committed in the financial world will only allow those bad, old ideas, and those that profited from them, to infiltrate, and in a few years confidence will again be lost.

The Fed is against this idea because it would make the banks that own the Fed impotent. For the last eight months, these very banks that own the Federal Reserve have been threatening economic Armageddon if they did not get taxpayer money. And they have gotten what they asked for, only to use it to pay bonuses for losing money. None of the taxpayer money given them has stopped the down slide. All those Billions in taxpayer money, and their stock prices are a fraction of what they were when the bailout programs began.

Is there any reason to think hundreds of Billions more will help these banks?

It is our decision what is to be done. No matter which way you see it, pain from loss is coming, the damage is already done. It is now a question of how much pain do you want?

Roundabout Reader

Some great articles from the interwebs, in no special order;

New York Times

NBC News LA

Calculated Risk

PhsyOrg

Of Two Minds

Mish

Market Ticker

Bloomberg

Of Two Minds

New York Times

ABC News

Financial Times

Goldseek

Bail them out!?!

"Back in 1990, the Government seized the Mustang Ranch brothel in Nevada for tax evasion and, as required by law, tried to run it.'

"They failed and it closed.'

"Now we are trusting the economy of our country and our banking system to the same nit-wits who couldn't make money running a whore house and selling whiskey."