COP report shows "troubled assests" still looming problem

DailyBuzz

Does everyone remember all the talk about "troubled assets"? That was the home loans (loaning, leveraging, default insurance) that started this whole economic crisis. Treasury came to then president Bush and told him they needed loans to buy up the troubled mortgages in order to get them off the banks' books. Soon after this loan (bailout) was approved, treasury decided not to buy up these toxic mortgages after all, instead selecting to inject that $350 billion of capital directly into the financial institutions themselves, in exchange for choice stock options. We are seeing this choice pay off now as we currently make a small profit from these financial institutions repurchasing those stock warrants.

Here's the catch. Those financial institutions STILL have these troubled assets on their books. These troubled assets are STILL highly overvalued. These troubled assets STILL have the potential to bring the financial system to it's knees, yet again. Prepare for plummeting commercial real estate values and a new wave of defaults.

cop.senate.gov/documents/cop-081109-report.pdf

F. The Future

The nation‘s banks continue to hold on their books billions of dollars in assets about whose proper valuation there is a dispute and that are very difficult to sell without banks experiencing substantial write-downs that can trigger a return to financial instability. Whatever values are assigned to these troubled assets for accounting purposes, their actual value and their potential impact on the solvency of the banks that hold them are uncertain and will likely remain so for some time; the degree of uncertainty is difficult for anyone to estimate confidently. Treasury‘s strategy works to control the impact of the uncertainty, and

it has stabilized the financial situation effectively, but the impact of the strategy may be less strong if present conditions change.

There are a number of reasons that present conditions may worsen:

1. Unemployment continues to rise, and both government and private economists have noted that an improvement in employment may lag several years behind the return of economic growth generally, as is true in most recoveries and has been noted as a potential problem for this recovery.
2. Bank lending has not recovered.
3. Both large BHCs, somewhat smaller regional BHCs, and small banks are increasingly at risk from troubled whole loans, as discussed above.
4. The plunge in values that affected the residential real estate market may be moving to the commercial real estate market as properties come up for refinancing and that financing is unavailable because of the drop in commercial and retail activity arising from the economic downturn. Like residential property, commercial property is held both in the form of complex securities and whole loans, and a similar sell-off in that sector could trigger losses of its own and a more general renewed pressure on bank balance sheets that would again call into question the true value of residential mortgage loans.
5. To the extent banks have not written-down troubled assets, they are in effect continuing to invest in those assets by holding them for a future return. That is not an unreasonable strategy in itself. But it only postpones the day of reckoning if it turns out that, rather than appreciating, the assets depreciate.

DailyBuzz

COP's August report:

www.youtube.com/watch

deviliscious

I tried to explain this before the first set of bailouts. People are dancing thinking we are recovering, but in fact we just repropped up a even more rickety house of cards, and built more on top so when it does crash, it will be much worse than before. People need to understand that artificially propping it back up again only postpones the inevitable. These assest do not just " disappear".  Not only will there be another wave in the housing and banking industry, this will be further impacted by further job loss and continueing mass layoffs. The next time it will even be worse than before simply because now we have all of these unemployed whose benefits will run out at some point while more are being piled on top of that and these people will all be losing their homes as well.

Unless we actually solve the long term problems here, this will only get worse over time. We must get Americans back to work long term in order to fix this, and that means focusing on incentives for American businesses and Industry. We must make it more profitable for companies to have their businesses here with American workers than to import their products here. That is the foundation that has crumbled, and we must fix the foundation before we can rebuild the house properly.