Your last nightmare was brought to you by....

The words you want to be repeating to yourself are... Washington Mutual. WaMu is the sixth largest bank and the largest savings and loan in the United States. Rumours abound that it is up for sale having lost 85% of its share value in one year. Shares closed today at $2.01 and its rating has been reduced to "junk" by Standards and Poors. In fact, shares dropped even further after the markets closed to somewhere around $1.80.

The problem with Washington Mutual is that it is not only extremely exposed in the high-risk mortgage market, (yes, subprime and adjustable-rate mortgages), it has a huge customer base with (by their own recently released 3rd quarter outook) $143 billion on deposit.

Let's toss in another little number. Washington Mutual borrowed from the Federal Home Loan Bank of San Francisco to the tune of $58 billion to finance all those high profile mortgages. What the hell is the FHLB of SF? Glad you asked.

The Federal Home Loan Bank (anywhere it's based) is a US government corporation established by former US president Herbert Hoover in 1932, in the depths of the Great Depression, to provide low-cost credit to residential home lenders. This was a government owned corporation which was intended to provide regional banks, thrifts (savings and loans), etc. with low-cost money and enough capital to keep the home construction market alive and financing for middle income Americans with enough stable income to buy a modest house.

In the Bush 41 era, in the throes of deregulation, the FHLB ended up with an expanded role and less government control. Under Clinton, a Republican-controlled congress took the leash off FHLB and it behaved more like a private investment bank than a government operation. In short, in order to survive, it had to behave more like a private investment firm and, instead of reporting to the US Federal Housing Administration, reports to the Security and Exchanges Commission.

Means nothing? That's what I figured.

The FHLB was never supposed to be able to lose money. The money loaned to small banks and thrifts was supposed to be low risk. In short, the borrowers (credit unions and the like) had to have a strict lending criteria. That meant the retail borrower, (home buyers), had to provide some assurity that they could repay the mortgage and that they had a proven record of saving a little more than the amount of the monthly mortgage payment. Under the older regulations Washington Mutual would never have been able to borrow wholesale mortgage funds from the FHLB if they were signing subprime mortgages.

Now, the FHLB is losing money. After years of constant growth it is showing losses. And who underwrites those losses? The US government. The taxpayers.

This (20th Century) Depression Era, government established lending institution, with a mandate to lend only for residential housing became a player, however unwittingly, in a Ponzi scheme. Instead of dictating mortgage rules to lenders, they took a "hands off" approach because of several deregulation moves. But none was more important than the Financial Institutions Reform, Recovery and Enforcement Act of 1989 enacted by George Bush the Elder. It removed the FHLB from a supervisory and regulatory role on the lending practices of regional banks and thrifts. The smaller lending banks were closer to the consumer and they would assess risk - locally.

So, Washington Mutual actually has a liability of over $201 billion. If WaMu fails the taxpayer is on the hook for the $58 billion borrowed from FHLB San Fran. Money on deposit with WaMu is averaged at $5,200 per depositor. The Federal Deposit Insurance Corporation (FDIC) guarantees depositors insurance on their funds up to $100,000.

It gets ugly now. The FDIC has been depleted and has funds on hand of about $45 billion. It cannot cover WaMu depositors if WaMu fails. That said, FDIC has stated that the US Treasury, (yeah, the taxpayer again) will inject money into FDIC to cover its insurance liability.

Got that? Good. Sounds great... until you figure out that the US Treasury is in a huge deficit balance. It gets its money from taxes and by issuing bonds which are bought up by foreigners. That's where you need to listen to Paul Craig Roberts, former assistant Secretary of the Treasury under Reagan.

Most Americans, including the presidential candidates and the media, are unaware that the US Government today, now at this minute, is unable to finance its day-to-day operations and must rely on foreigners to purchase its bonds. The Government pays the interest to foreigners by selling more bonds, and when the bonds come due, the Government redeems the bonds by selling new bonds. The day the foreigners do not buy is the day the American people and their government are brought to reality. This is not the financial position of a superpower … Will what happened to Lehman Brothers today be America's fate tomorrow?

In short, the US government is borrowing money to finance the bailouts of of failing banks because they borrowed money to finance a risky scheme which failed.

Now WaMu has been making a lot of noise that they have the capital to cover their losses and manage their debt. Except for one small thing. Money on deposit to a bank is actually a liability - not an asset. A bank's assets are the shares they issue and the loans they've made (but now, we have to wonder how good they are), and in the case of WaMu, their shares have lost most of their value and a huge chunk of their loans are not recoverable. That means they have little or no collateral to put up to borrow their way out this mess.

WaMu, despite its size, owes a lot, isn't worth much and is losing money - lots of money. If it was a horse you'd shoot it. Yes, there are all kinds of news stories hinting that there is a buyer for WaMu. Except that that doesn't solve much and WaMu would be an extreme risk for any buyer.

So, no bank is going to buy WaMu without a guarantee.... and guess who that's coming from. (File your tax return early and often.)

If no other bank buys WaMu then the US Government will be forced to place it in conservatorship.

By the weekend, the cost of the subprime mortgage scheme will be passed from the grandchildren of Americans to the great-grandchildren.

And if you're some poor shmuck in Iraq or Afghanistan, you're wondering what you're coming home to.

How did it happen?

Watching the meltdown of the financial sector of the global economy (yes, it's global) can be confusing to most of us. I know, (aside from the fact that I saw US sub-prime lending as dangerous and highly dubious from the start and felt that it was a hollow scheme which had no place to go but into a disaster), that what happened to have led to the collapse of long-established investment banks and large insurers was largely a mystery to me. Once the borrower had been given a mortgage they had little chance of repaying I had difficulty sorting out where things went from there.

Luckily, the Business Pundit has put together an easy to understand Subprime Primer in 45 pages of simple cartoons. When you've clicked through the whole thing, what's happening today will probably make a little more sense. And, while the cartoons are done humourously, you are probably going to come away very, very angry.

Have.... fun?

=====

The Business Pundit is clearly getting a lot of traffic these days and pages may be a little slow loading.

The penny drops. Subprime mortgages were bad.

Having just made a transit that was reminiscent of crawling through the inside of a cow (wet, windy and unbelievably dark) I took my quick morning break before diving into another day of instruction by trying to catch up on what's going on in the world outside.

Perhaps I should have stayed in the dark.

This is something that should make heads explode. When the US sub-prime mortgage lending scheme first made its appearance it was panned by anybody with more than two firing synapses as little more than a corrupt ponzi scheme. The results have been economic destruction on an order not unlike the savings & loan crisis of the 1980s and the municipal junk-bond fiasco.

The Federal Reserve, acknowledging that home mortgage lenders aggressively sold deceptive loans to borrowers who had little chance of repaying them, proposed a broad set of restrictions Tuesday on exotic mortgages and high-cost loans for people with weak credit.

Jeez, you mean the marketplace didn't sort itself out? Does someone mean to tell me that all those honest business people were, you know, out to make a quick buck, despite the wreckage in their path?

How come Alan Greenspan couldn't figure that one out?

Oh right. The synapse thing.

The new regulations, expected to be approved in close to their proposed form after a three-month period for public comment, amount to a sharp reversal from the Fed’s longstanding reluctance to rein in dubious lending practices before the subprime market collapsed this summer.

And it still goes back to Greenspan.

“Reading these proposals today is almost painful,” said Dean Baker, co-director of the Center for Economic Policy Research, a liberal research group in Washington. “These are all just simple, common sense regulation. Why couldn’t Greenspan have done this seven years ago?”
If the measures had been in place earlier, they would have applied to as many as 30 percent of all mortgages made in 2006.
Some advocacy groups that had warned for years about reckless practices said the Fed’s move was too little and too late.

Mmmm, hmmm.

In other news, the Bush administration is proposing having all barns in the United States inspected for horses. If the barns, once containing horses, are empty, then all barn doors are to be shut to prevent any further loss of horses.

And it begins

The carnage of the obvious ponzi scheme that was the sub-prime mortgage fiasco is starting to have an effect, not just on those who are losing homes, but on the people who work for the lenders who manipulated the whole thing.

Citigroup, the No. 1 U.S. bank by assets, is planning major job cuts over the coming months, CNBC television reported on Monday.

CNBC said that no exact number had yet been set, though some jobs were already being eliminated. It estimated that the cuts could total anywhere between 17,000 and 45,000.

Mike Hanretta, a spokesman for Citi, declined to comment.

Any layoffs would come as Citi wrestles with asset writedowns and looks for a new chief executive officer. Former CEO Charles Prince resigned on November 4, the same day Citi said it may write off this quarter $11 billion of assets linked to subprime mortgages.

Citi said in April that it would eliminate 17,000 jobs as part of a broad restructuring designed to cut costs, which at the time was about 5 percent of its work force.

Having already laid off 17,000, CitiGroup is looking at dumping at least 17,000 more.

When Charles Prince resigned he walked away with a $40 million severance package - for incurring massive losses.

Milton Friedman would be so proud.

H/T Brilliant At Breakfast

Pay them Walmart wages - And watch your economy collapse.

Maybe it was so simple nobody could see it. Although, I don't know how that could be. I'm no economist and even I could figure out that if you paid people so little, in a retail operation that sold cheap products at the lowest prices, and the employees couldn't afford to buy them, that eventually the model would fail.

Somewhere in the Hamptons a high-roller is cursing his cleaning lady and shaking his fists at the lawn guys. The American poor, who are usually tactful enough to remain invisible to the multi-millionaire class, suddenly leaped onto the scene and started smashing the global financial system. Incredibly enough, this may be the first case in history in which the downtrodden manage to bring down an unfair economic system without going to the trouble of a revolution.

First they stopped paying their mortgages, a move in which they were joined by many financially stretched middle class folks, though the poor definitely led the way. All right, these were trick mortgages, many of them designed to be unaffordable within two years of signing the contract. There were "NINJA" loans, for example, awarded to people with "no income, no job or assets." Conservative columnist Niall Fergusen laments the low levels of "economic literacy" that allowed people to be exploited by sub-prime loans. Why didn't these low-income folks get lawyers to go over the fine print? And don't they have personal financial advisors anyway?

Then, in a diabolically clever move, the poor - a category which now roughly coincides with the working class -- stopped shopping. Both Wal-Mart and Home Depot announced disappointing second quarter performances, plunging the market into another Arctic-style meltdown. H. Lee Scott, CEO of the low-wage Wal-Mart empire, admitted with admirable sensitivity, that "it's no secret that many customers are running out of money at the end of the month."

I wish I could report that the current attack on capitalism represents a deliberate strategy on the part of the poor, that there have been secret meetings in break rooms and parking lots around the country, where cell leaders issued instructions like, "You, Vinny -- don't make any mortgage payment this month. And Caroline, forget that back-to-school shopping, OK?" But all the evidence suggests that the current crisis is something the high-rollers brought down on themselves.

When, for example, the largest private employer in America, which is Wal-Mart, starts experiencing a shortage of customers, it needs to take a long, hard look in the mirror. About a century ago, Henry Ford realized that his company would only prosper if his own workers earned enough to buy Fords. Wal-Mart, on the other hand, never seemed to figure out that its cruelly low wages would eventually curtail its own growth, even at the company's famously discounted prices.

The sad truth is that people earning Wal-Mart-level wages tend to favor the fashions available at the Salvation Army. Nor do they have much use for Wal-Mart's other departments, such as Electronics, Lawn and Garden, and Pharmacy.

It gets worse though. While with one hand the high-rollers, H. Lee Scott among them, squeezed the American worker's wages, the other hand was reaching out with the tempting offer of credit. In fact, easy credit became the American substitute for decent wages. Once you worked for your money, but now you were supposed to pay for it. Once you could count on earning enough to save for a home. Now you'll never earn that much, but, as the lenders were saying -- heh, heh -- do we have a mortgage for you!

Pay day loans, rent-to-buy furniture and exorbitant credit card interest rates for the poor were just the beginning. In its May 21st cover story on "The Poverty Business," BusinessWeek documented the stampede, in the just the last few years, to lend money to the people who could least afford to pay the interest: Buy your dream home! Refinance your house! Take on a car loan even if your credit rating sucks! Financiamos a Todos! Somehow, no one bothered to figure out where the poor were going to get the money to pay for all the money they were being offered.

Personally, I prefer my revolutions to be a little more pro-active. There should be marches and rallies, banners and sit-ins, possibly a nice color theme like red or orange. Certainly, there should be a vision of what you intend to replace the bad old system with -- European-style social democracy, Latin American-style socialism, or how about just American capitalism with some regulation thrown in?

Global capitalism will survive the current credit crisis; already, the government has rushed in to soothe the feverish markets. But in the long term, a system that depends on extracting every last cent from the poor cannot hope for a healthy prognosis. Who would have thought that foreclosures in Stockton and Cleveland would roil the markets of London and Shanghai? The poor have risen up and spoken; only it sounds less like a shout of protest than a low, strangled, cry of pain.

When a credit card you can't afford replaces a paycheck something's got to give. You'd think the financial wizards and a tube sock full of MBAs could figure that out for themselves.

H/T While the Earth Burns

A James Burke style 'Connection'

Like John, I never would have made this connection.

There are 9672 homes for sale in California's mosquito-plagued Sacramento and Yolo counties. Around 1400 have swimming pools. Many of them are not being properly maintained while they sit on the market, and mosquitos are beginning to breed in their algae-infested waters like, well, flies. This is raising fears of a particularly virulent West Nile season.

Yikes! Mosquito and vector control staff in Sacramento and Yolo have sent a notification out to real estate agents requesting that when they show an unoccupied property that any unmaintained swimming pools, ponds, fountains and sprinkler systems be reported so that some action can be taken.

As the region's housing slump creates more vacant houses and a growing excess of homes in transition between buyers and sellers, Culex mosquitoes that can spread the West Nile virus to birds, other animals and humans are thriving in uncared-for swimming pools, garden ponds and yards flooded by broken sprinklers, said David Brown, manager of the Sacramento-Yolo Mosquito and Vector Control District.

"A 5-gallon bucket can literally produce a thousand mosquitoes a week," Brown said. "Multiply that by the surface of a pool and you see how many mosquitoes can affect an entire neighborhood. These mosquitoes can fly one to five miles."

So, the subprime mortgage lenders create a condition that prompts increased numbers of foreclosures, thus empty, unmaintained houses and an increased risk of a West Nile Virus outbreak is the result.

And the next casualty of financial de-regulation is...

Maybe it's just me, but there is a familiar ring to this.

As many as 1.5 million more Americans may lose their homes, another 100,000 people in housing-related industries could be fired, and an estimated 100 additional subprime mortgage companies that lend money to people with bad or limited credit may go under, according to realtors, economists, analysts and a Federal Reserve governor. Financial stocks also could extend their declines over mortgage default worries. [...] Subprime mortgages are given to people who wouldn't qualify for standard home loans and typically have rates at least 2 or 3 percentage points above safer prime loans. The portion of subprime loans that financed new mortgages rose to 20 percent last year from 5 percent in 2001, according to the Mortgage Bankers Association.

Subprime loans contributed to a home-ownership rate that reached a record 69.3 percent of U.S. households in the second quarter of 2004, up 5.4 percentage points from the same period in 1991, according to the U.S. Census Bureau.

"Probably the gain in home ownership over the last four, five years, is almost entirely due to looser lending standards,'' said James Fielding, a homebuilding credit analyst at Standard & Poor's in New York.

So, what seems to be happening is, lenders and borrowers are taking a risk. The lender is betting that the borrower won't default within the first 90 days and the lender is betting that one or both of two things will happen:

1. The value of the property will rise sufficiently over time to make the home worth more than the original mortgage;

2. The borrower's income will rise sufficiently to decrease the proportion of income required to service the mortgage.

But, if both those conditions reverse, the borrower is in a world of hurt and the lender is faced with getting the money back by foreclosing - on a property that is worth less than the amount of the mortgage.

And generally, those conditions reversed. Wages have not risen significantly enough to make a difference and the housing market is slumping, causing values to decline.

A good description of sub-prime mortgage lending is here. What it doesn't describe in much detail is the practices sub-prime lenders use to attract customers.

Some of the offers made by sub-prime lenders in the US suggest that the meltdown that is now occurring is, to a great degree, a crisis of their own making.

Subprime lenders make higher interest-rate loans to borrowers who are considered higher risk either because of low credit scores, high debt burdens or other factors. The subprime industry barreled into action during the housing boom, offering a slew of mortgage products including 100 percent financing, adjustable rate mortgages with low teaser rates, and loans with little or no income documentation. Subprime loans are 13.56 percent of the $10.03 trillion U.S. mortgage market, or $1.36 trillion, according to the Mortgage Bankers Association. That's about 5.77 million mortgages.

It doesn't take a genius to figure out what would come out of that kind of activity. And given the amount of money being tossed around the likelihood that a certain amount of fraud and malfeasance exists is fairly high.

All in all, it just has an air of familiarity about it. It is starting to sound an awful lot like something that happened in the 1980s.