economic situation is dire

[leviramsey]

Bailing out the banks (whether by nationalization or whatever) is the wrong way to go about this, IMO.

The core issue is that there aren't many creditworthy entities (as far as entities that generate sufficient cash flow to make lending to them viable). Cisco and a few other companies are having no problems raising billions. Even with all the extra capital from the bailouts, the banks are not going to lend that much out.

Ultimately, the amount of debt and the debt service relative to income prospects has to be reduced, and there are two basic ways of doing it:

* write down (this isn't the same thing as changing the accounting value... this is actually deciding, "you owe us $250k, but we'll take a haircut to $150k") or otherwise restructure the debt

* increase incomes across the economy, which basically means running the printing presses overtime

Everything else (massive tax cuts, huge boosts in government spending, etc.) will not do a thing to resolve the underlying issue.

So what should happen, say, in the USA?

The Fed should back a government bank that would facilitate debt restructurings in residential mortgages, corporate asset-backed loans, and commercial real estate loans. One way to do this is for this bank to pay lenders to reduce the principal balance of outstanding loans to, say, 90% of the discounted cash flow valuation of the asset securing the loan. The borrower would then have a zero-coupon loan (thus no monthly debt-service payments) that would be a recourse loan and, being an obligation to the federal government, would be senior to pretty much everything but IRS debts (and defaults on the loan could result in the IRS taking over the loan...). The effective rate of interest on the loan would be the interest rate on treasuries plus a certain amount. The terms of the loan and relevant modifications to law would allow for a very good recovery rate for this bank. The original loan would have its principal amount reduced by the amount of the loan (via payment from the government bank), but all other terms (interest rate, minimum payments, covenants, etc.) would remain fully in force.

For example, $400k house purchased with a 95% LTV interest-only loan (so $380k borrowed). The house is now (on a comparable rental basis) valued at $250k, so the 90% LTV value is $225k. Thus the government bank pays the mortgage lender $155k immediately to reduce the principal. The bank now has a zero-coupon bond, with an effective interest rate of 6%, with c.$310k payable in a lump sum in 12 years (the $155k being, effectively, the interest on the loan over the course of the 12 years).

The borrower has just had their mortgage debt (and thus their payments) reduced by some 40%, which should dramatically improve the chances of them being able to repay the debt. The large lump sum payment, as well as improved prospects for future payments will prop up the value of the loans; whether this increases the values of the securitizations or simply goes straight into the lender's capital, the result makes the lenders more solvent and more able to lend to more buyers.

It potentially sets up a problem 12 years down the road, but in twelve years there's more basis for hope that asset values will recover to something reasonably able to cover the debt (not farfetched, given gradual inflation), etc. Borrowers could opt to apply a portion of their income to paying off the loan early etc.

[tonyh29]

tony what the **** has that go to with the topic, nothing at all, just political point scoring, because I asked you a simple yes or no question a few pages back you either missed or refused to answer

sorry , i thought the topic was "the economic situation is dire " , and as the claim from you has constantly been that it's a global problem and not our governments fault AND that our government has shown the way forward i would think it's perfectly obvious that I am asking a valid question

As for your question it's been answered many a time , however i would point out my answers were based purely on speculation as we don't know what outcome it would have produced .... what we do know though is that the actions that have been taken have all failed ..

maybe less typing and more reading and you will seek the answers that you find ....

[snowychap]

I've just seen Portillo talk about James Crosby on This Week, where he said that Crosby was appointed as a non-exec board member of the FSA whilst still Chief Exec of HBOS.

In the press release announcing his appointment, there was another appointment and a couple of reappointments.

The appointment was Professor David Miles (still on the FSA board), a respected economist, who also happens to be a Managing Director and Chief Economist at Morgan Stanley.

Among the reappointments was Tom de Swaan who was Chief Financial Officer of ABN AMRO (the worthless one bought by RBS - a huge mistake according to Tom McKillop).

On the board currently, there are another couple of bankers - one of whom (Hugh Stevenson) is Chairman of a Plc (The Merchants Trust) regulated by the FSA.

Poacher turned gamekeeper is one thing but to get someone (or some people) to do both jobs? Crazy Mental.

[leviramsey]

I miss your old avatar, snowy...

[tonyh29]

I've just seen Portillo talk about James Crosby on This Week, where he said that Crosby was appointed as a non-exec board member of the FSA whilst still Chief Exec of HBOS.

Crosby became the first chief executive of the newly-formed HBOS Group in 2001 ..he left that position in 2006

in 2004 Crosby was indeed appointed as Deputy Chairman of the Financial Services Authority (so yes Portilo is correct)

[ianrobo1]

I've just seen Portillo talk about James Crosby on This Week, where he said that Crosby was appointed as a non-exec board member of the FSA whilst still Chief Exec of HBOS.

In the press release announcing his appointment, there was another appointment and a couple of reappointments.

The appointment was Professor David Miles (still on the FSA board), a respected economist, who also happens to be a Managing Director and Chief Economist at Morgan Stanley.

Among the reappointments was Tom de Swaan who was Chief Financial Officer of ABN AMRO (the worthless one bought by RBS - a huge mistake according to Tom McKillop).

On the board currently, there are another couple of bankers - one of whom (Hugh Stevenson) is Chairman of a Plc (The Merchants Trust) regulated by the FSA.

Poacher turned gamekeeper is one thing but to get someone (or some people) to do both jobs? Crazy Mental.

problem is that few others are qualified ...

the GMC looks over doctors

GTC looks over teachers

MP's over MP's

unfortunatly you need bankers to look at the complex regs and rules for banks

what the FSA need is tougher regs and more teeth and accountability

the banking bill address;s osme of those

[ianrobo1]

tony what the **** has that go to with the topic, nothing at all, just political point scoring, because I asked you a simple yes or no question a few pages back you either missed or refused to answer

sorry , i thought the topic was "the economic situation is dire " , and as the claim from you has constantly been that it's a global problem and not our governments fault AND that our government has shown the way forward i would think it's perfectly obvious that I am asking a valid question

As for your question it's been answered many a time , however i would point out my answers were based purely on speculation as we don't know what outcome it would have produced .... what we do know though is that the actions that have been taken have all failed ..

maybe less typing and more reading and you will seek the answers that you find ....

just asking for a word

Yes or no

[ianrobo1]

Lev, I think I understand what you say basically you are saying the tax payer should underwrite the losses on mortgages ?

that would be huge amount of money

so say for someone like me with a sensible mortgages still in positive equity (just) i should subidise indirectly those who over stretched themselves foolishly ?

I am not saying it is not the answer (isn;t the governments buying toxic debts teh same kind of thing), but poltcally very difficult to get peopel to accept

[leviramsey]

Lev, I think I understand what you say basically you are saying the tax payer should underwrite the losses on mortgages ?

It's not exactly a subsidy though.... in all probability the government will end up making money on the deal.

[ianrobo1]

Lev, I think I understand what you say basically you are saying the tax payer should underwrite the losses on mortgages ?

It's not exactly a subsidy though.... in all probability the government will end up making money on the deal.

only if house prices recover

ok so they might and thats why when the government took ovver RBS it paid a cheap price and nominally has liabilities but when it goes back to provate the government may make a proit

but Lev isn;t the scheme you propose an anthema to the ree market principles I believe you follow

as I say that type of scheme could work, it means the government in efect acts a guarntee on loans but how far does that go and again are we not just carrying o the same old policiy of allowing house prices to drive the economy ?

is it not time for a 'new economy' based on something more susbstainable than house prices

what, I have no fecking idea

[leviramsey]

I've come to the conclusion that that's ultimately the least disruptive solution to free market capitalism. Handing the state control over allocation of capital (which is what nationalizing banks will do) is very dangerous.

[ianrobo1]

see Lev thats my whole point I have said over the past few months

the free market (I knwo you argue less regs may have stopped this) has spectaculary failed

not only that the last few moths have changed people's perception of it because I think peopel have seen how unfeted captialism leads to greed and excess

now I would never advocate wholesale state nationalisation either but I struggle to accept an idea to get out of the mess caused by the housing market is to actually help it get back to exactly where it was

whats the point o pourig in trillions of dollars only for it to happen again in an other generation

think of all the money wasted and what could have been done with it instead

[snowychap]

problem is that few others are qualified ...

If that is true then why is it not the case that each and every member of the board of the FSA is currently employed by one of the institutions which it regulates?

the GMC looks over doctors

GTC looks over teachers

I think neither of those bear any comparison to regulation of an industry sector in this way.

I would be interested to see the details of the board members of Ofgem and Ofcom, for example.

unfortunatly you need bankers to look at the complex regs and rules for banks

Why do they need to be current bankers with a vested interest in having regulations which suit them, their business and their business model?

what the FSA need is tougher regs and more teeth and accountability

The FSA set the regulations. They don't need to have tougher regulations, they need to make tougher regulations.

The FSA enforce the regulations. They don't need more teeth, they need to use the teeth they have.

Accountability? To whom? How?

the banking bill address;s osme of those

Will it? Would you like to explain to us how and why?

[ianrobo1]

I think the GTC and CMC is a perfect analogy snowy

the whole business is far too complicated for laymen to understand only bankers could.

see who would you have on it instead, retired bankers, same issue

economics proessors with no experience of actually working in it ?

o difficult, almost impossible to come up with an answer

the one thing I am happy that this situation has meant is the cry of less red tape has disappeared as it has become apparent lassiez faire/hands off polcies have failed

[snowychap]

I struggle to accept an idea to get out of the mess caused by the housing market is to actually help it get back to exactly where it was

You might want to question the policy of the current government and look, specifically, at the conditions imposed on the banks in which the taxpayer has taken substantial interests.

[ianrobo1]

I question everything snowy but I unfortunatly see little alternatives than to get back to where we were

contradictary I know

An idea I have been thinking about for a while is that the government buys up every repossed house at market value

they then rent it back to those repossed (thus ensuring no homeless problem my Mrs is starting to see )

the rent is based on ability to pay and the rent obviously gos back to the gevernment to pay off the borrowed money

these houses are never then sold back onto the private market, thus boosting the rented sector and decreasing private stock which should help stablise prices over the long term. It also avoids the need to build new council housing at teh levels some have predicted

ok pick holes in that

[snowychap]

I think the GTC and CMC is a perfect analogy snowy

Would you care to explain why?

I'd have thought that the GMC and the GTC, as professional bodies, have responsibility for the conduct of individuals. They are not the regulators of the Health industry and the Education sector, respectively.

On the whole those sectors are not private sector and most (if not all) of the regulation in these sectors comes from government directly.

The telecommunications industry and utilities industry are, however, private sector. The regulation of these industries has been passed to Ofcom and Ofgem both of whose remit is set by government which means that government's relationship with these industries is at arms length (as with the banking industry).

Both of these industry regulators have followed the theme that was seen in the FSA of 'light touch regulation' and have been firmly part of the deregulation drive.

It is, in my view, thoroughly bizarre that you think comparing the FSA to the GMC is appropriate, let alone perfect.

the whole business is far too complicated for laymen to understand only bankers could.

So why is every one of the members of the board of the FSA not a current chief executive from the banking and financial institutions which they seek to regulate?

And we're not talking about pulling someone off the street but, come to think of it, I think that there ought to be some public representation on a regulator like that.

see who would you have on it instead, retired bankers, same issue

No, it isn't. You might get the same expertise but you wouldn't have the same conflict of interests.

economics proessors with no experience of actually working in it ?

Perhaps.

o difficult, almost impossible to come up with an answer

No it isn't impossible to come up with an answer.

Those regulating an industry should not have a conflict of interest such as Crosby obviously would have and as others ma well have.

the one thing I am happy that this situation has meant is the cry of less red tape has disappeared as it has become apparent lassiez faire/hands off polcies have failed

Really?

There was little or no red tape involved in the merger of Lloyds and HBOS.

p.s. You forgot to explain how the Banking Bill is going to solve everything. :winkold:

[snowychap]

contradictary I know

Indeed, Ian.

It doesn't seem that the struggling that you are doing to accept getting back to where we were is going to go down in folklore.

An idea I have been thinking about for a while is that the government buys up every repossed house at market value

they then rent it back to those repossed (thus ensuring no homeless problem my Mrs is starting to see )

the rent is based on ability to pay and the rent obviously gos back to the gevernment to pay off the borrowed money

these houses are never then sold back onto the private market, thus boosting the rented sector and decreasing private stock which should help stablise prices over the long term. It also avoids the need to build new council housing at teh levels some have predicted

ok pick holes in that

Is that not basically Cable's idea?

Except he wanted local councils to be getting involved rather than central government?

[ianrobo1]

the money would have to come from central government, local councils simply don;t have the cash and I think any scheme like this (you could include new builds that have not been solid and empty houses) would have to be run through national guidelines to ensure all take part because some councils would not want to take part and this is a national problem.

If Cable has said that then I agree with him and the money can come from other sources where we cut back and for me the armed forces is one area.

[nrogers]

I think it's a ridiculas idea, people should have done the maths before overstretching themselves.. if the government buy it back it should be on the basis of making a profit, to ensure that the people that were prudent don't suffer.

heartless yes, but lessons learn't for the tossers that didn't do the maths, hell yes, go and live in a bedsit..