Proposed Bailout "Too Little, Too Late," and Counterproductive
Leading financial expert and investor safety advocate Martin Weiss is very critical of the Paulson plan and gave Congress his views. He called it "too little, too late (and) too much, too soon for the US bond market." It's apparent in rising bond prices and 30-year mortgage rates. Around 6.50% compared to about 5.75% in mid-September.
He recommended reconsidering "a broad bailout for US debts given the wide diversity of mortgage holders" and total outstanding debt in the country. Besides mortgages, over $20 trillion in private-sector consumer and corporate debt and other $2.7 trillion in municipal securities.
Among banks and thrifts with over $5 billion in assets, he estimates 61 banks and 25 thrifts heavily exposed to non-performing mortgages. He urges a greater understanding of the derivatives build-up and the consequences if enough of them sour. He calls established safety nets inadequate. FDIC for depositors. Securities Investor Protection Corporation (SIPC) for brokerage customers, and state guarantee associations for insurance policy holders. If the entire $700 billion was used responsibly (and it won't be), it's "just a drop in the bucket" to address the debt crisis.
He says it's foolhardy to expect the bond market to handle the bailout burden without upward pressure on interest rates. The opposite of what's needed. He sees skyrocketing federal deficits exacerbating things further and "aggravating the very debt crisis that the bailout plan seeks to alleviate."
Instead of protecting "imprudent institutions and speculators," he recommends strengthening "existing safety nets" for individuals and savers. Informing the public about significant systemic risks, and explaining how limited government is to contain them. He says savers and investors should avoid risk for safety.
He estimates 1479 FDIC member banks with $2.4 trillion in total assets at risk of failure. Another 158 S&Ls with $756 billion. A total of $3.2 trillion or 41 times the assets of banks on the FDIC's watch list. He notes $51 trillion in interest-bearing debts. Over $12 trillion in residential mortgages on single and multi-family homes. "Fannie, Freddie and GSAs still at risk" after being taken over. They hold $5.4 trillion in residential mortgages, but a government guarantee doesn't prevent them from deteriorating and requiring much larger funding than contemplated.
Private sectors and local governments also own residential mortgages:
- asset-backed securities issuers - $2.1 trillion;
- non-bank finance companies - $426 billion;
- credit unions - $332 billion;
- state and local governments - $159 billion;
- life insurance companies - $62 billion; and more in
- private pension funds, government retirement funds and households.
Commercial mortgages are also at issue and are souring. A total of $2.6 trillion "dispersed widely beyond the banking sector." And mortgages are less than half the problem. Add to them credit cards, auto and student loans, and various other kinds of private-sector debt. Consumer and corporate. Around $20 trillion in total plus nearly $15 trillion in residential and commercial mortgages.
State and local governments are at risk with $2.7 trillion in outstanding municipal securities and huge growing budget shortfalls given the current crisis.
The derivatives problem is especially ominous. At extreme levels and very dangerous. An estimated $180 trillion held by commercial banks alone meaning those with most of it are technically insolvent. JP Morgan Chase holds half of it. An "unprecedented concentration of risk in modern US history." The large counterparty default risk in this market isn't understood. Currently the Office of the Comptroller of the Currency (OCC) reports credit derivatives exposure (or risk of trading partner default) at $465 billion. Up 159% from 2007. Failure to address the derivatives time bomb "leaves a gaping hole through which financial panic can spread."
In addition, beyond the above lowball figure, no estimates are available of derivatives default amounts or forecasts of more likely in a continuing downturn.
In sum, a monumental problem. Too big to ignore, but precisely what Congress is doing. At enormous risk to the economy, businesses, households, the American way of life, and the nation as the world's economic superpower. Plus the effect on world economies and people everywhere.
