What If Banks Are in Deeper Trouble Than Anyone Realizes?

The Wall Street Journal has a sobering article that starts with a disturbing question: What if nearly half of U.S. banking assets turn out to be bad?

Defaults are rising on every form of debt, which should come as no surprise to anyone. Those who thought that the issue was subprime mortgages need to wake up and realize that no form of debt exists separate from any other. People strapping themselves with mortgages they cannot afford are clearly going to be financially strained elsewhere. But then, people taking out lines of credit against homes, using multiple credit cards, and leasing fancy autos that they wouldn't be able to afford to purchase are also going to be hard-put to manage any untoward financial situation. That will likely add up to a lot of money:

Indeed, Goldman Sachs Group estimates that troubled assets could exceed $5 trillion, if defined as assets that could show a loss rate close to, or above, 10%. To put that in context, $5 trillion is just over 40% of the $12.3 trillion in total assets of U.S. commercial banks.

Granted, actual losses will be much smaller than $5 trillion, and banks won't have to sell every bad asset. Most still can reserve for a good share of their losses. Moreover, the government already is on the hook for losses at Citigroup and Bank of America, with $3.8 trillion of assets between them.

Why take for granted that the losses will be a lot less? This is exactly the type of willful blindness that has led banks to where they are today.

The talk today is of creating a government-owned so-called bad bank, which would buy the bad assets and then liquidate them. The strategy is at least twenty years old and was in use during the 1980s, when many more banks were failing than are failing now.

The problem is that everyone is making things up as they go along. No institution to my knowledge has done risk management planning for such an extreme situation as that much potential default. Not even the U.S. government can take on this level of debt with impugnity. How many years -- how many decades -- will it take to pay off this volume of money?

I don't think anyone in government or the financial community is being straight, either with the public or with themselves. They are likely concerned about inducing panic, but maybe that is exactly what the public needs. Already we're seeing lowered spending and more attention to debt levels, at least by individuals. They are right to react strongly, because they see they are living with choices made over the years. But how long will it be until those who are in charge do the same?

Bailout: Just the Beginning

Ah, should have known this was going to happen. According to the Financial Times, all sorts of people are pressuing the U.S. Treasury and the Federal Reserve to provide further help to the economy, possibly a mix of a rate cut, letting money markets borrow money to fund their holdings, and maybe even offering unsecured loans to regulated banks. In other words, the U.S. government is going to become like a parent who always bails out the troubled child until things get so bad that it's no longer possible. I'm sure some would liken the current situation to the intervention of a doctor, but unfortunately the illness was the result of the stupidity of the institutions in danger. How is curing the symptoms going to change the underlying behavior? It's not, and chances are that the cash is not going to travel much farther than the banks and their largest customers - the ones they want to keep happy. I'm already hearing stories from small business owners suddenly finding their credit lines pulled. Many will make it through, but when you remember that the majority of employment in the country comes from small businesses, it makes you wonder whether it's the economy that's getting a bailout, or the most elite piece.

Wall Street and the Wages of Estimation

Last week, the New York Times blog Bits had a piece about Wall Street analysts "lying" to their computers. Written by a journalist who has covered both the Internet and trading and finance, it indicates how little many reporters know about the mathematical processes they write about -- otherwise there might have been much earlier warnings of the problems now facing the world's economy.

Yes, the current meltdown is supposed to be a "once in a hundred years" event, as the president of a consulting firm told the reporter. However, these black swan events, when considered together, happen far more frequently than every hundred years. That's because when you have potential events that are independent of each other, but still capable of creating financial cataclysm, the cchance of at least one of them happening is the sum of the separate chances of a given one happening.

So already experience and math suggest that the surprise at an unusual event should have the same tone as Captain Renault being "shocked, shocked" at the gambling at Rick's in Casablanca. The concept of adding probabilities for independent events has literally become math in grade school, or at least high school.

Now for the other revelation:

The people who ran the financial firms chose to program their risk-management systems with overly optimistic assumptions and to feed them oversimplified data. This kept them from sounding the alarm early enough.

Top bankers couldn’t simply ignore the computer models, because after the last round of big financial losses, regulators now require them to monitor their risk positions. Indeed, if the models say a firm’s risk has increased, the firm must either reduce its bets or set aside more capital as a cushion in case things go wrong.

In other words, the computer is supposed to monitor the temperature of the party and drain the punch bowl as things get hot. And just as drunken revelers may want to put the thermostat in the freezer, Wall Street executives had lots of incentives to make sure their risk systems didn’t see much risk.

I'm sure there's something to this, but let us get at a more fundamental issue: many complex problems in math and engineering and science are too tough to easily solve. What people do, then, is simplify. You put the world into models and approximations that you have a prayer of solving. You drop factors that seem tiny in comparison with the rest of the problem in an attempt to simplify the equations even more. You employ numeric methods to get closer and closer to the "real" answer ... as close as you need.

Unfortunately, your answer is simply an approximation, nothing more. It may be acceptible for your uses if the real world conditions are forgiving enough. But when things get hairy -- you're trying to predict the behavior of materials in the face of quantum mechanics effects or trying to understand how an incredibly complex system, such as the weather or global finance, will behave -- then approximate may not be good enough. If a chip fails, well, you head back to the drafting board. When an economy fails, then you end up with huge banks and investment companies going out of business, oil prices swinging by $25 in a single day as short-sellers have to cover their positions, and governments begging for the right to spend $700 billion of taxpayer money to get their croneys out of the frying pan.

Banks, Bankruptcies, and Economic Reality

Bettors, speculators, and con men have one thing in common: more often than not they forget the saying, "There's no free lunch." The phrase can be traced back to bars offering free lunch. Of course, you had to pay for liquor or beer (which might be marked up). So there really was no free lunch. Somehow, somewhere, someone paid for the meal in another coin.

To the list of believers in economic fairy tales we can apparently add a good number of businesspeople. As the Financial Times notes, Merrill Lynch has lost $14 billion, after taxes, since the beginning of 2007.

This is equivalent to about a quarter of all the profits, adjusted for inflation, made in the course of the bank’s history as a listed company since 1971 – the highest ratio of recent losses to historical profits among its peers.

That mirrors the precipitous growth in profits preceding it. Between 2003 and 2006, the bank racked up $21bn in profits, more than a third of its total between listing and the credit squeeze. Backed by a buoyant global economy, investment banks could buy up, repackage and sell on assets, while deploying little capital and pushing profitability and leverage to historic highs.

Merrill had gone looking for free lunch in the form of securitized debt obligations - turning groups of loans, like subprime mortgates, into bonds that it could sell ... at least for a while. Relatively little captial went into schemes that promised wealth beyond the dreams of avarice.

But the bill has come and someone had to pay. That payment has extended to all manners of people. Bankruptcy filings have hit the million mark this year, up 29 percent from last year. But as a society we've collectively enjoyed a spree, since at least the early 1980s, of living high off borrowed funds. Sated to a point of bursting and staggering drunk from the bar, we forgot that the bill would come.

Toxic Banks: Not Just US Problem

I've heard some people remark that the credit crunch has shown the weakness of US banks as compared to the rest of the world (which generally means Europe, when it comes to the financial industry). I found that hard to believe, because it seemed that some of the names hit hardest were European banks. So I was interested to read in the Financial Times Lex column (sorry, no free link) that sub prime credit write downs by banks have totaled $493 billion worldwide. Of that, $250 billion was in the US, but $221 billion was in Europe, with $22 billion elsewhere.

And yet, the European economy has not taken the same hit as that of the US. The housing bubble in the US has been one factor, but there's been a similar bubble in many parts of Europe - Spain, Denmark, the UK, and Ireland. I'm guessing that the relative strength of the euro has been the reason. But it seems that won't be lasting long:

The US and European economies are of similar size, as are their banking industries, which both have market capitalisations of about $1,000bn. Yet European banking stocks have outperformed since the credit crisis began. So far, US banks have suffered most. The worst is yet to come in Europe.

Those in the US looking for economic salvation by investing overseas are likely to find that the safety is only temporary. Ah, well, misery loves company.

Yet Another Investment Scandal: Duping Investors

I know it must be hard to believe, but there's more evidence that when financial services companies have conflicts of interest, they tend to pay more attention to their own than to those of clients. The New York Times reported yesterday that Massachusetts has turned up evidence that USB was deliberately trying to foist risky securities that it and its employees owned onto individuals:

Auction-rate securities are preferred shares or debt instruments with rates that reset regularly, usually every week, in auctions overseen by the brokerage firms that originally sold them. They have long-term maturities or, in the case of the preferred shares, no maturity dates whatsoever. The securities are issued by municipalities, student-loan companies, closed-end funds and tax-exempt institutions like hospitals and museums.

In mid-February, the $300 billion market for these instruments collapsed, trapping investors who had been told that they were safe and easy to cash in — leaving both wealthy investors and those of modest means unable to finance their small businesses, buy homes, pay college tuition and otherwise use their money as they had planned.

Although USB is denying it, Mass. secretary of the commonwealth Bill Galvin's office apparently uncovered some blatant emails. Read the story (at the link) to see some of the panic that knowingly ran through the company as it wanted to dump inventory - and that some emails by brokers themselves suggest that they felt they were being kept in the dark about real risk as well. If it really was cash equivalent, as they allegedly claimed, then why was it so hard for them to get cash? Could they be ... lying? Maybe: were their fingers typing?

Putting Money in the Bank

US banks are apparently in much riskier positions overall than even some of the pessimists may have thought. According to an article in the Financial Times, statistics from the FDIC are not looking good:

• The agency says that net income for the entire industry during last year's fourth quarter was not $5.8 billion as previously thought, but $646 million. The downward revision was the result of bank financial restatements, presumably as they wrote off the billions of dollars of imaginary profits and bad loans.


• "Problem" banks have risen from 76 to 90 in number, although that is still a lot lower than during the S&L crisis in the 80s and 90s, when a full 10 percent of banks fell into that category. Their combined assets are $26.3 billion, or about $292 million on average. That is diddly for a financial institution, even a relatively small one.


• So far this year, three banks have failed. Even in last year's turmoil, three failed total, and none failed in the two years prior. The FDIC expects additional failures.


• The coverage ratio - or amount of cash on-hand compared to the total dollar amount of loans that are 90 days or more overdue - has dropped for the eight straight quarter. It's now 89 cents in reserve for every dollar. That's the lowest level since some time in 1993.

According to a quote in the FT, the FDIC is not happy:

“This is the kind of thing that gives regulators heartburn,” said Ms Bair. “We also want them to beef up their capital cushions beyond regulatory minimums given uncertainty about the housing markets and the economy . . . It’s only prudent to be building up capital at a time like this."

There are three reasons I can see that banks may not be putting away enough money: they underestimated how bad things were, they continue to engage in overly risky behavior, or the rate at which loans are going bad is continuing to escalate and every time they think they know what's going on, reality intrudes. My bet is that it's some combination.

Coming U.S. Bank Failures?

The Financial Times is reporting that the U.S. comptroller of the currency John Dugan, who oversees about 1,700 national banks, said that banks failures will rise back for virtually none to at least historic rates, and could climb above that.

“That is a natural consequence of the economy going from historically exceptionally benign credit conditions to something that is more normal to something you would get in a downturn.”

Mr Dugan’s comments come as US banks report big spikes in reserves for expected losses on consumer and small business loans, reflecting the spread of the credit crisis from Wall Street to the broader economy.

As companies shove more money onto the shelf for reserves against expected losses, they have less money to invest, less money to pay off obligations, and less money to calm down panicked investors who suddenly want their cash back and who create a run on the bank. Can you say Bear Stearns?

JP Morgan to Sweeten Bear Honeypot

It sounds as though JP Morgan may have to up its offer for Bear to $10 a share, and the entire situation is creating an interesting dilemma. ON one hand, the Fed is looking to ensure that commerce continues. It's not that Bear Stearns itself is so important to the economy so much as its position as a middleman in so many transactions. The problem is that if Bear had gone into bankruptcy, then the court would have had no choice under the law but to freeze all transactions in which it took part, no matter what it was actually doing. That could be a big enough hiccough to derail enough commerce that suddenly everything would come tumbling down.

So the Fed wanted to keep this from happening, and I can understand that. But Bear Stearns is a publicly-traded company, and the public that trades the company was pretty upset about the price being only $2 a share when it had gone for as much as $30 on Friday - and that was a loss of two-thirds of its value. According to a New York Times story, shareholders were ready to head to court.

On one hand, I don't have a lot of sympathy for the shareholders. They wanted the high return and were happy to overlook the questionable nature of the business that the bank was doing. Hey, it's capitalism, and there's risk. Why is it that so often so many people who have money to invest suddenly want welfare for the rich? But the intriguing issue is which governmental (quasi or not) agency has precedence when it comes to the conflict of interests? Can the Fed encourage a fire sale, or does the SEC have to come in on the side of investors, who want as much money per share as they can get?

The new offer must be approved by the Fed, which had initially balked at the new price.

If the Fed balks, does the deal come apart? This seems like a deal that is so important to the economy that the Fed is effectively powerless to say no, which means it has little leverage in a negotiation.

A new deal could raise even more questions about the Fed’s involvement in the negotiations. As part of the original deal, the Fed guaranteed to take on $30 billion of Bear’s most toxic assets. The central bank had also directed JPMorgan to pay no more than $2 a share for Bear to assure that it would not appear that the Bear shareholders were being rescued, people involved in the negotiations said Sunday night.

Might not the SEC say, "Sorry, folks, but the directors can't legally agree to such a deal?" I don't know that different branches of business regulation have ever clashed in such a way.

Wikileaks Reports JP Morgan Document on 10B5-1 Trading Plans: Claims Inider Trading

Wikileaks is reporting sudden discovery of the 10B5-1 trading plan:

A confidential memo obtained by Wikileaks shows that not only has the U.S. Securities and Exchange Commission created an insider trading loophole big enough to drive a truck through, but that Wall Street is taking full advantage of it, establishing 'how-to' programs and even client service divisions to help well-heeled clients circumvent insider trading regulations.

However, life just isn't that simple. There are several ways of structuring these plans, and there has been some evidence that these plans may be getting better results than you might mathematically think.

But the story isn't new, and the SEC is hardly ignoring potential abuse. Also, if someone uses the particular approach mentioned in this leaked document, they will probably lose the legal protection that 10B5-1 plans offer. Also, an executive wishing to game the system has much more effective and invisible methods of doing so. I covered the topic last December in Corporate Secretary.

Cracks in the Financial Fissure

So JP Morgan Chase & Co. is going to buy Bear Stearns. That may seem like a rescue, but it's not. This is yet another crack in the world's money foundation. First the UK government felt it had to take over North Rock, then the Fed was trying to support Bear Stearns through JP Morgan, but it has instead turned into an outright acquisition at $2 a share. Let's get some perspective on this. If you look at a chart, like this one from the Wall Street Journal, notice that the 52-week stock high was $170.23 and the low was $26.85. This isn't a "fire sale" as some in the media portray. This is bankruptcy and selling off the assets without the intervention of a court. And what is the Fed doing? Here's how the WSJ phrases it:

The Federal Reserve announced one of the broadest expansions of its lending authority since the 1930s in an effort to stem a credit crisis that is engulfing the financial system and threatening a deep recession.

For the first time securities dealers, effective today and for at least the next six months, may borrow from the Fed on much the same terms as banks. The Fed also lowered the rate charged on such borrowings from what's known as its discount window by a quarter of a percentage point, to 3.25%, and extended the maximum term to 90 days from 30.

This is a panicked attempt to keep everyone from taking that final plummet that Bears enjoyed. There isn't money because many people are no longer trusting the systems. But to keep things afloat, the Fed has potentially opened the flood gates. After all, it was large investment houses and banks - and the greedy credulity of investors - that landed everyone here in the first place. So now the country is supposed to trust their judgment with even more money? Maybe it's necessary to keep the whole system from freezing up, like an engine without oil, but only at the risk of having so much money out there that they dollar loses a lot more value.

I know there's the theory that some institutions are too large to fail, because you can't afford to have them out of business. But I'm wondering if what we're facing is more like a case of fiscal gangrene, in which you amputate a limb or the patient itself dies. Those who worship at the altar of capitalism must realize that can't adopt a deity and then insist on only the friendly parts. That's like saying you want to be a fundamentalist Christian but believe in only heaven and not hell. and I'm afraid that we're only just beginning to see the literal hell that we'll all be forced to pay.

Light Dawns on This Marblehead - Lenders, Fear, and Liquidity

The title of this post refers to an old Massachusetts put down of someone who suddenly grasps an idea - light dawns over Marblehead, which is a city on the north short of the state. And that's how I felt this morning, when looking at the latest problems with credit prices going higher.

I find that many financial stories, particularly those about the credit crunch, either assume that one understands the dynamics in advance, or assumes that the dynamics don't exist - that is, "And while I wave my hands, the credit markets seize up like an internal combustion engine running without oil." My flash of understanding was on the simple dynamic of what is happening at banks. The underlying driver is fear, as we keep hearing in the stories. But that fear does two things. One, is that the lenders are now afraid that because they've been making bad decisions for so long, any more reasonably drawn decision will be just as risky. So they price risk higher. For example, I received the following in an email from the Financial Times this morning:

Rising credit spreads meant AAA-rated General Electric paid a higher rate on a recent five year bond issue that it did for a comparable bond last May, according to Bloomberg calculations.

Alright, so it's the FT quoting Bloomberg. But consider the substance: GE is having to pay more for credit. It's not that the conglomerate is a worse credit risk. It's that the lenders have frayed nerves, and figure that since stupid decisions went wrong, then all decisions will go wrong.

Compounding that outlet of fear is another. Lenders have been caught having to restate financials to take into account unexpected losses. So they are taking cash and not only paying off the debts that came about from their ill-considered investments in the credit derivative markets, where essentially they create bonds and pay interest based on what they expect to get from payments on underlying assets like mortgages, but they are putting cash in reserves for future screw-ups. That means they lend a lot less of the money they have than they used to, and supply and demand then drives up the cost of interest.

Banks Doing Worse Than Saying

Whatever the banks say publicly about the credit crunch, it appears to be a lot worse. An article in the Financial Times of two days ago mentions how banks have been quietly borrowing a huge amount over the last few weeks - $50 billion - from the Fed under a new mechanism that the U.S. central bank introduced two months ago:

The use of the Fed’s Term Auction Facility, which allows banks to borrow at relatively attractive rates against a wider range of their assets than previously permitted, saw borrowing of nearly $50bn of one-month funds from the Fed by mid-February.

US officials say the trend shows that financial authorities have become far more adept at channelling liquidity into the banking system to alleviate financial stress, after failing to calm money markets last year.

However, the move has sparked unease among some analysts about the stress developing in opaque corners of the US banking system and the banks’ growing reliance on indirect forms of government support.

It's not just in the US that there are signs of problems. The government of the U.K. decided to preemptively nationalize mortgage lender and bank Northern Rock. And now Credit Suisse has "revealed $2.85bn of losses on structured credit positions caused in part by “pricing errors” by some of the Swiss investment bank’s traders." That will mean re-examining 2007's stated financial results. And so central banks print more money - it has to coem from somewhere - while banks face just how badly they have been managed, as that's all you can describe the need to run for funds and the inability to see a multi-billion dollar loss in advance.

Wachovia Penny Wise and Billions Foolish

Although I don't bank with Wachovia, I walked into a branch the other day to cash a check that came in late from a client, wanting to deposit cash rather than wait for the instrument to clear. "There will be a five dollar charge to do that," said a teller who was remarkably unpleasant for 8:40 in the morning.

"But that's ridiculous," I said. "The bank is obligated to pay me."

"Sorry, but that's the bank's policy because you're not a customer. Do you want to cash the check or not?"

This is the type of pettiness that makes people hate banks. It's called charging people for the dubious privilege of doing business. Bad enough as a non-customer, I've heard of banks considering charging customers to use teller services. Are the branch staffs really so entirely busy without a let-up that additional people walking up will require additional staff? That certainly wasn't the case where I was, and I doubt it's really that much of a problem over all.

But then, many banks have long since decided that customers were an annoyance. We're just the little people who keep insignificant sums of money in the bank, so it can lend. No, the real important lines of business are the speculative ones - you know, the ones like those derivative investment vehicles that cause banks to write down billions upon billions of dollars of institutional value.

Wachovia wrote down $1.7 billion in its last quarter, and saw only 3 cents per share earnings. Thanks, collateralized debt obligations. Oh, and a $24 billion acquisition of Golden West Financial Corp. and its steady supply of mortgage losses.

Instead of sitting on the roller coaster of questionable profit and trying to squeeze every penny out of the public, here's a radical notion: treat customers well, get their business, see them refer others to you, and be more intelligent about taking risk. Give up the $5 here and there while stemming the grossly unnecessary losses, and it can add up to real money.

Less Profitable Time for Large Banks?

The Wall Street Journal is running an article suggesting that "the next few years will be a return to a simpler and possibly less-profitable time" for the big banks. But I wonder whether that is true when you take everything into account.

The basic thrust is that the banks will be holding on to more of the loans they make, rather than turning them into collateralized securities, and that they will do less of the off-balance-sheet lending that they were doing to corporations to put a check on capital costs. And then the article suggests:

The upshot: Bank investors expecting a big rebound in earnings growth after the debacle of 2007 will likely be disappointed. The slowdown is likely to be especially pronounced at some of the biggest banks, such as Citigroup Inc. Bank of America Corp. and J.P. Morgan Chase & Co.

Supposedly this is going to be a "negative" effect on investors. Frankly, I thought that the fallout from all the supposedly insanely profitable activity was negative enough, and that you'd have to be insane to want more of it. Banks writing down tens of billions of dollars in value and needing to find large cash influxes from countries to stem the capital loss in paying off the bad bets? Now that's negative. When everything is tallied, how much of the profit growth still exists? Even that which wasn't written off may have turned, instead, to loss of investor and customer faith, which means a dramatic reduction of good will, reflected in hits on stock price. As the article quoted Gerard Cassidy, an RBC Capital Markets analyst:

The originate-and-sell business model "encouraged reckless lending" that triggered the current mortgage morass, Mr. Cassidy said. Keeping loans on banks' books will help avoid future meltdowns that could torpedo years of profits.

It was also interesting to read about yet another respectable business scam: off-balance-sheet conduits of banks issuing "short-term commercial paper to purchase debt such as corporate receivables, mortgages and auto loans, capturing the difference in rates between the two." Many of the people running these institutions really do seem far too clever for their own good - and for the good of the investors, otherwise known as the people who own the businesses.

Blooming Housing Crisis

All the powers that be in economic circles keep saying that the housing crisis hasn't spilled over yet into the rest of the economy. But this is sounding like so much whistling in the dark - or, perhaps, trying to keep those ever irrational markets from wigging out - and it's not clear that they can keep it up with a straight face. First, the Wall Street Journal Online reports:

In a model of central-banker understatement, Mr. Bernanke noted to the Economic Club of New York that "the past several months have been an eventful period for the U.S. economy." And he recounted the mortgage meltdown, market panic and increase in Fed anxiety about the economy that prompted a reversal of the Fed's risk balance toward growth worries and the resulting half-percentage-point reduction in the cost of borrowed money last month. While members of the Federal Open Market Committee agreed Sept. 18 that "significant spillovers [from housing-market trouble] to household and business spending were not yet evident," the downside risks to both had clearly increased, exacerbated by "somewhat downbeat consumer sentiment, and slower growth in private-sector employment."

The WSJO continues, calling feedback that the Fed is getting from local bankers and executives "a darker description" than that collected and published before the Fed came out with its Beige Book report, a collection of "anecdotal information on current economic conditions" each branch of the Fed gathers from "key business contacts, economists, market experts, and other sources." The Treasury department is trying to build a coalition that will help stabilize the mortgage markets, August housing starts in Japan were down 43 percent from the same period in 2006, and, according to NPR, the US foreclosure rate is the highest it's been since the Great Depression. At this rate, how can conditions not spill into the rest of the economy. It sounds as thought it already has, only no one has wanted to be the first to say it.

Good Credit? Bad Credit? How About Smoke and Mirrors

The news of Countrywide Financial seeing more borrowers with good credit falling behind on mortgage payments sent the markets into a scurry. But, really, what have they been expecting?
The New York Times in the first graph of their story noted "that the housing market might not begin recovering until 2009 because of a decline in house prices that goes beyond anything experienced in decades." Well, folks, we had the most insane run-up of housing prices for, what, a decade? When will people start looking at history and nature? Nothing lasts forever: not reputations, not nations, and certainly not economies.

Housing prices went up giving people all sorts of wealth - on paper. So what did the mortgage lenders and banks rush to do? Get them to take out equity. As I was reading in the Financial Times (sorry, no link), what really caused the problems for Countrywide were home equity loans where deliquency rates had more than doubled over the period of a year. What compounded that problem was a practice that many lenders have entered: a form of credit washing. Lenders took combinations of loans, mixing different credit risks, and got large lump sums by selling the loans off to legally insulated subsidiaries and then selling high-yielding securities. They essentially washed off any credit taint by saying that even if some loans defaulted, the rising housing prices would ensure the ability to maintain cash flow. In other words, they were juggling numbers and betting that a rising tide would float their rears out of trouble. But it all depended on those prices going up. That's over:

a conference call with analysts that lasted three hours, Countrywide’s chairman and chief executive, Angelo R. Mozilo, said home prices were falling "almost like never before, with the exception of the Great Depression."

This shouldn't have been hard to see. Hell, I saw this coming and so did various people I know, because none of us think that the good times last forever. Prices were at a point that people could no longer afford to get more and more - there's only so much of your income you can devote to something like housing. So people stay put, buying drops, and of course the prices drop. Then people can't move, because they're in hock up to their eyelashes and can't get the price to clear them of debt, meaning that selling the family manse would leave them cowering in the financial basement, so to speak.

Now the experts are saying that it will take until 2009 for home sales to recover. I don't believe them. This is a precarious log jam. More payments will be late, panicky lenders will recall loans (because that's what they do), more houses will be on the market, driving prices lower, with even more people stuck. Every time prices drop, more people find themselves in this trap as the barrier to being dangerously financially leveraged gets lower and lower.

So, we heard in 2006 that it would get better in 2007. Then we heard 2008 earlier this year. Now it's 2009. By the time the finance types admit that there's a significant problem, it will be the next great depression. How depressing.