&@$”@&@” flipper.

This found on Calculated Risk, via London Telegraph:

U.K.: Bank of England Warns of “Doom Loop”

On the eve of the G20 meeting of finance ministers in Scotland, Andy Haldane, the Bank’s executive director for financial stability warned that the relationship between the state and banks represents a “doom loop” which will keep inflicting crises on the public unless arrested.

—-This is applicable in the USA too.—-

Mr Haldane, who was a key part of a Bank unit which was among the first to warn, well ahead of the crisis, of a dangerous gap between what banks had in their balance sheets and what they were lending customers ...

I wonder how long the govt is gonna be capable of sustaining the mirage?  After all, Fannie Mae is insolvent and looking for more bailout money, Freddie Mac is also insolvent, and will eventually need more bailout money ... then you add the Trifecta over at the FHA, and you have to ask yourself, WTF are they doing?  The more money the govt either loans or backstops, the more money they (WE) lose.

I contend that the only way to resolve this debacle, is to allow the excesses to unwind, NOT to restart the scheme.

Lee,

It is surprising how long insolvent companies (or individuals) can operate.  It is not always an indication of irresponsibility, or even of an inability to leave insolvency.

Technically, most recent college graduates are insolvent.  They have student loans with only a little principal paid down, and haven’t yet accumulated much in the way of assets.

One of the things most people don’t know about corporate bankruptcy is that larger firms are vastly more likely to file Chapter 11 and try to reorganize.  Smaller firms & sole proprietorships make up a much larger portion of those going straight to Chapter 7 liquidation.

There are three distinct things one should look at regarding an insolvent entity.  The test of whether their assets exceed liabilities is not the only relevant consideration.

1. Is the firm in positive cashflow?  If they are, you probably have a lot of time to try to fix things.  Two caveats.  If the firm is growing rapidly, but each of its deals is expected to lose money in the long run, it needs to be fixed quickly or shut down.  Insurance companies who charge low rates for long term coverage often fit this profile.  The FHA might currently fit this profile.

2. On an accrual basis, is the company making money?  There are a large number of banks who are currently making money on new business, but watching losses pile up on old transactions.  Many of them will survive and prosper, especially those with competent management.  Others have severe losses, are putting a positive spin on their losses, or are very sensitive to factor like their own borrowing capacity or cost.  They are less likely to survive.

3. Does the company have the ability and the willingness to make changes?  This actually applies to governmental entities as well as companies.  Some firms just have idiots for managers.  A few have criminals for management who are just trying to enrich themselves without regard for the law or shareholders.  However, much more common is that the management of an insolvent company doesn’t have the ability or will to make changes.  In all three cases management needs to be replaced. 

In a few cases, you have good management at insolvent firms.  Sometimes they were brought in to fix huge problems which were known before they were hired.  Other times, they were brought in and only later realized the mess they inherited, and started to fix it. 

The one thing you really don’t want to do with insolvent firms is to supply them with additional money or credit without doing anything to cure whatever got them into their financial mess. 

Fannie, Freddie, and the FHA are unusual.  Collectively, they are such a large part of the market for housing finance that some people believe the way to improve their solvency is to artificially move housing prices. 

While I am not 100% opposed to all steps which might increase home prices, some of the methods being used are quite ineffective, others delay problems, and a few make the problems worse. 

What strikes me as by far the largest mistake regarding home prices is that home prices are the result of some fundamental factors which are being ignored.  Migration and immigration are being ignored.  New construction incentives are being passed, even by state governments which big budget deficits.  That is lunacy.  The incentives should be to stop construction, or take down existing buildings with problems. 

The most basic factor being ignored is that a healthy underlying economy helps support housing prices.

Lee and Malibu,

Either of you guys going to make it to the block party? I’m trying to get down there from Westwood and you are two of the people I’d like to meet—along with IR and Kirk(!).

I don’t see these agencies as having problems raising money for the foreseeable future! It’s always been that the Central Bank can print money as needed but now it’s much more apparent and can continue this way for a while. IMHO, the reason for Fannie’s and Freddy’s (and the FHA’s) problems is the housing bubble which inflated property values and put ALL lenders at risk for a steeper fall. Who caused the bubble? I would say many parties but mostly the managers of Wall Street’s shadow banking systems.

If this place was worth 600k a few months ago, that’s all it is worth now, probably less. These flippers are going to get burned again.

Hi MB.  In response to one of your last points, I don’t think it’s higher house prices that support the economy, but wages and employment.  That’s why governments are encouraging building new homes - because construction employs people and gives them the incomes they need to buy houses.

Boosting house prices without boosting wages can’t work.  If we build a lot of new homes, and that creates low prices that the construction workers can actually afford, it’s better for governments - think of the property and income tax considerations.

So you can say that boosting building initiatives is an attempt to boost the underlying economy.

And we will weep hot, bitter tears for them.

“So you can say that boosting building initiatives is an attempt to boost the underlying economy.”

Are you kidding?!

A strong underlying economy is based on supplying goods and services to areas outside of the region.  Our trading partners care not a wit if we build a fancy house for everyone here.  They just want to buy our products/services for the lowest price and we should concern ourselves with delivering this end.

We’ve already gone through a building boom.  There is nothing left that needs building.  Perhaps some infrastructure projects would have merit, but other than that, what should we do?

We are going back to the “dealer” that we know, “buying houses”, even though deep down we know this is not the solution.

Hang on.

Well, I see many roads where they erase the old marker paint, and then repaint! How about that for stimulating jobs and the economy?

It backs to a busy street, so this one will never sell.