Thursday, September 18, 2008

Resolution Trust: Part 2

I'll tell you what, the pigs on Wall St. and in DC have a lot of nerve to try sell the public on another Resolution Trust. I apologize for the rant tonight, but when I see the criminals about to act I get angry.

I am outraged by this. The market zoomed up 400 points as Wall St. cheered the mother(and I mean MOTHER) of all bailouts.

Here is news the that that lit the bulls fuse today a couple hours before the close.

"Schumer advocated a Great Depression-era Reconstruction Finance Corp. model, different from the Resolution Trust Corp.- type plan others have floated. Another RTC, which was a 1990s agency that sold devalued assets in the Savings and Loan Crisis, would ``simply transfer excessive risk to the U.S. government without addressing the plight of homeowners,'' he said."

My Take:

Alrighty folks, lets all jump in a time warp and go back in time to 1990/1991 and see how the taxpayer did with the last Resolution Trust.

Lets use Wikipedia to take a look at this. Here is how the Resolution Trust was setup by the government:

"The Resolution Trust Corporation was a United States Government-owned asset-management company charged with liquidating assets (primarily real estate-related assets, including mortgage loans) that had been assets of savings and loan associations ("S&Ls") declared insolvent by the Office of Thrift Supervision, as a consequence of the Savings and Loan crisis of the 1980s. It also took over the insurance functions of the former Federal Home Loan Bank Board. It was created by the Financial Institutions Reform Recovery and Enforcement Act (FIRREA), adopted in 1989. In 1995, its duties were transferred to the Savings Association Insurance Fund of the Federal Deposit Insurance Corporation.

Between 1989 and mid-1995, the Resolution Trust Corporation closed or otherwise resolved 747 thrifts with total assets of $394 billion. [1]"

So how did this work out for the Taxpayer?

Lets take a look at the savings and loan crisis losses that the Resolution Trust bailed out:

"While not part of the Savings and Loan Crisis, many other banks failed. Between 1980 and 1994 more than 1,600 banks insured by the Federal Deposit Insurance Corporation (FDIC) were closed or received FDIC financial assistance. [13]
From 1986 to 1995, the number of US federally insured savings and loans in the United States declined from 3,234 to 1,645. [8] This was primarily, but not exclusively, due to unsound real estate lending.[14]

The market share of S&Ls for single family mortgage loans went from 53% in 1975 to 30% in 1990.[3] U.S. General Accounting Office estimated cost of the crisis to around USD $160.1 billion, about $124.6 billion of which was directly paid for by the U.S. government from 1986 to 1996. [1] That figure does not include thrift insurance funds used before 1986 or after 1996. It also does not include state run thrift insurance funds or state bailouts.

The concomitant slowdown in the finance industry and the real estate market may have been a contributing cause of the 1990-1991 economic recession. Between 1986 and 1991, the number of new homes constructed dropped from 1.8 to 1 million, the lowest rate since World War II. [3]

A taxpayer funded government bailout related to mortgages during the Savings and Loan crisis may have created a moral hazard and acted as encouragement to lenders to make similar higher risk loans during the 2007 subprime mortgage financial crisis. [15]"

My Take:

If this doesn't sicken your stomach as a taxpayer then you don't have a pulse. We cannot let this happen! This mortgage crisis is 1990 x 20!. This crisis runs into the trillions not billions ladies and gentleman.

The problems with this idea are multiple. First of all, the losses would be over a trillion dollars. Look at the 1990 crisis. The last trust took over roughly $400 billion in assets in 1990. The trust lost roughly $160 billion and that didn't even include state bailouts.

Whats this one gonna cost us? $1-2 trillion? Where in the hell is the money going to come from? Last I knew, Santa didn't give out cash on Christmas.

This has got to stop! Whats the bond market going to say when the government tries to secure a trillion dollars from Congress to buy all of these bad assets? Another issue here is the government will want to buy the assets for .30 on the dollar like they did in 1990. Who says the banks will take a 70% losses on loans? Who says they can afford to take such losses? They are already insolvent. They will be left with pennies int heir pockets.

Remember, the trust took assets from mainly failed banks. This time the banks are technically still "solvent"(HA! What a joke) and open for business

If the government forces the banks to take this deal, will there be any banks left other than BofA and Wells Fargo? Also, who says the bank would agree to such terms? You know the government isn't going buy these assets at bloated prices. Hell, look at what the Treasury did to AIG this week. They took 80% of their capital and gave them a loan at an 11% interest rate. I am sure AIG was just thrilled with those terms(NOT)!

What sickens me even more here is who ends up making money on this trust: Wall St. What will happen if this ever goes through is Wall St. will find capital and buy these houses from the trust and make a fortune turning them around and selling the assets back to us and other private equity.

Meanwhile, the people who bought at the peak get totally screwed because they are stuck in a house that's worth half of what it was. Do you see those empty houses on your block or in your condo building? If this goes through, you will have new neighbors that will buy at half the price you did.

If you bought at the peak I would walk away if this goes through. Why pay for an asset that's worth half of what you paid?

The saddest part about this is guess who pays for the losses incurred from this trust. Take a look in the mirror folks: Its us.

Bottom Line:

The Treasury is in a total panic right now trying to stop this debt bubble from bursting. I don't think they can pull this trust off. The losses are too large and I think the bond market will go bananas with interest rates if they attempt it.

We cannot continue to add more debt onto our balance sheet. This would add trillions more to the trillions we already took on from the Fannie/Freddie disaster.

This bailout would kill the dollar and make our treasuries much less attractive. Mark my words folks: There will be a point where China says "enough" and says no mas to buying more T-bills. Other countries will surely follow. The game is over if this happens because we will have no one to fund our debt. We continue to make this crisis worse with these foolish greedy ideas.

It amazes me how Wall St. will step on anyone in order to make or save $$$. I really don't believe they have a conscious.

Let me finish by repeating Wikipedia's conclusions on the bailout of the savings and loan crisis:

"A taxpayer funded government bailout related to mortgages during the Savings and Loan crisis may have created a moral hazard and acted as encouragement to lenders to make similar higher risk loans during the 2007 subprime mortgage financial crisis. [15]"

If this trust goes through: Will Wall St. have learned a lesson?

I predict a potential crash in equities if this ever gets approved. It looks like they are going to give it a try. Lets hope the taxpayers and bond market rise up and say:


I have already sent a message to my Congressman. I advise you all to do the same if you want to save your country.


John Maynes said...

Hi Jeff,

obviously you lost a lot of money today being short. My guess: SKF? Anyway, this is very good news and will help the U.S. in the long run. The government and the FED are still acting and won't let this beautiful country down. Kudos to Ben & Hank. :-)

Jeff said...


I don't care about my trading account. This is about watching our country go down the drain.

My ETF's are even two days so I have lost nothing anyway. I am out of most of my SKF although I still have a small chunk as a FU to the pigmen:)

I have always said my trading account is for fun as its a small piece of my total portfolio.

I am extremely upset about this intended bailout and its consequences.

In terms of beauty, this country will go from looking like Jessica Simpson to Barbara Bush if this bailout goes down.

Like I said before I don't think it will happen.

Jeff said...

WAMU...Anyone wanna buy a bank? Zombie for sale.

Gee no bids what a shocker...I am sure there are plenty of buyers who would love to take a $37 billion writedown:

"Hopes of finding a buyer for Washington Mutual dimmed on Thursday as an auction for the beleaguered US bank had yet to attract any bids.

Shares in WaMu got a 14 per cent boost after news it had put itself up for sale, but interest from prospective buyers remained thin on the ground because of reluctance to take on WaMu’s portfolio of risky mortgage debt.

Goldman Sachs is conducting the auction for Seattle-based WaMu, which is the sixth largest US bank, with $310bn (€215bn, £170bn) in assets and more than $140bn in deposits.

Goldman has approached a number of banks, including Citigroup, JPMorgan Chase and Wells Fargo, according to people close to the situation.

The banks declined to comment, but people close to the talks said JPMorgan was not planning to bid for WaMu, while San Francisco-based Wells Fargo generally focuses on small acquisitions. Citi is also believed to be wary of expanding its US retail operations.

Fred Cannon, analyst at Keefe, Bruyette & Woods, said that while WaMu’s franchise and retail branch network on the west coast of the US made it an attractive prospect for banks such as JPMorgan, a buyer would have to take up to a $37bn accounting hit from the deteriorating mortgage portfolio."

johndaniels said...

All I see is the entitlements, bailouts, the Government being forced to back up Bank of America, and our astronomical debt. I also see this going into a type of "new world order scenario", where we end up with one huge bank, one huge information source, and one huge nationalizing government that owns everythign. DOesnt it concern you how close the government is getting to BAC and GOOG? they are already conducting surveilance and anti rhetoric operations on youtube. This is scary stuff. If the government had undo influence over BAC, then we are looking at a type of defacto dictatorship. the all seeing eye. I am getting out. I'm almost there. All patriotism aside: The USA is screwed because we have greedy bankers running our monetary system! The federal Reserve is an unconstitutional entity. So im going to be out of the system, and rage against the machine. I plan to not produce anything next year...why bother? I will file my returns as usual; but there wont be income because I did not produce it. All they have is magic, deception, and rabbits now...nothing solid, no real solutions. Can you buy stocks and actually hold them? Good luck out there guys..I'm very discouraged...I would like to see the market capitulation and investment banks collapse so we can move on. all this is is bankers clinging to power at the expense of the taxpayer...whoo hoo rant!

Minton Mckarkquey said...

I'm absolutely furious, mystified and generally completely pissed off, Jeff! I've had it with these guys! Does anyone in the government give a rat's ass about us anymore?!! ARGHHH!!!!

Jeff said...

JD, Minton

I share your frustrations.

Did you see the news conference tonight? They plan on having this legislation written possibly by tomorrow and send it to Congress by next Friday.

Can you say desperation? My god, are things that bad that they have to put this together in a couple days?

I don't know when this is going to end but when it does its going to be uggglyyy....

We may see a big rally the next couple weeks until we see the details of the RT. What a jopke that will be.

Wait until the banks say " Uhhh Hank, Ben? you want us to take 70% losses on our loans..ummm no thanks"

This is the dumbest idea I have seen from the government in a long time. Where are they going to get the trillion dollars to buy all of this crap?

Iceburgh straight ahead guys!

balancedinvestor said...

if banks do not participate, then the govt does not need funds. you cannot make a case saying that they wil not participate and govt will have to find trillions of new funding

Jeff said...


What I mean is its s lose/lose either way. I am just discussing different scenarios on how this trust fails.

A: The banks don't participate and the trust fails.


B: The banks participate and the government has to find the money.

Either way its a failure and a very dumb idea.

Jeff said...

Leaks on the proposal are already out there folks.

The funding request is at at $1.2 trillion and counting according to Bloomberg.

God, our currency will become toilet paper if they pass this. I am sick to my stomach:

"Options under consideration include establishing an $800 billion fund to purchase so-called failed assets and a separate $400 billion pool at the Federal Deposit Insurance Corp. to insure investors in money-market funds, said two people briefed by congressional staff who spoke on condition of anonymity because the plans may change.

Another possibility is using Fannie Mae and Freddie Mac, the federally chartered mortgage-finance companies seized by the government last week, to buy assets, one of the people said."

John Maynes said...

The Dollar gained against the Euro overnight. What are you guys talking about? Everything is honkey dory again.

Jeff said...



Thats because all is OK now..Ben and Hank have saved the world!!

Stop by a week from now and tell me how the dollar is doing if this $1.2 trillion package gets through Congress.

OK bedtime. Gave myself a headache reading about this tonight.

John Maynes said...

Hi Jeff,

good you are getting it now. Indeed Ben & Hank are the couple of the decade. Kudos to both of them. Saviours of the world!

It's interesting that your trading account is just for fun and not profit. I doubt it. Someone who buys SKF - a DOUBLE shorting paper - does it for profit and not for fun.

In a week the Dollar will be much higher against the Euro. I will you remind of it.

Believe me, everything is honkey dory again. It feels so great.

ZMonet said...

John, I think Jeff is saying that his short position is such a small part of his portfolio that it is largely inconsequential to his overall asset value. I don't think anyone should be cheering or acting like they know what to do in a market this volatility, especially when the government is taking such drastic moves. When a car is coming right at you, it is logical to step out of the way even if that delays your overall journey. Put another way, what if the government didn't make this move yesterday? Obviously John's position seems a little extreme but based on what we have been seeing is it really? Time will tell...For now, the fundamentals of measuring personal situations and risk aversion versus market volatility is the only thing we can do IMO.

Jeff said...



I am well balance with my portfolio The panicky actions of the government only make me feel stronger about how this all ends.


If you think manipulating the markets is going to end well you will be sorely mistaken.

I wish you luck with your long positions, but when this rocket shot rally exhausts itself you are still left with the same fundementals.

Rising unemployment, soaring inflation, tapped out consumer, millions living in houses they can't afford.

This bailout changes none of this. It doen't address the problems of the little guy, it helps only the wealthy on Wall St.

This trust if ever approved will backfire for many reasons.

If you have been around this blog for a long time you would realize this site is not about trading.

The mission here is to try and navigate through the insanity that now has taken over our housing and financial markets.

I have consistantly said that you should be diversified and to keep your trading positions small.

Good with your trades.

p roberts said...

it's hard to object to the government's mass bailouts as similar debt-producing methods were put into action to bring the U.S. out of the Depression... our economy has been supported and driven by debt ever since

Jeff said...

p roberts

I agree, but you need to be able to service the interest payments on the debt.

When you reach the point where the debt cannot be serviced, it all comes tumbling down to a level where it becomes serviceable.

The government has let the economy reset to where the consumer can make the debt payments.

There is a lot of pain thas asscoiated with doing this but it must be done. The government is trying to sustain a level of debt at which it can no longer be serviced because wages are flat.

Intervention is needed, but they should have waited until the debt was able to be serviced.

More pain is needed for us to get there via defaults.