tag:blogger.com,1999:blog-17232051.post2759030198577095459..comments2024-03-18T07:04:18.975-04:00Comments on Noahpinion: 2008: Liquidity crisis, or solvency crisis?Noah Smithhttp://www.blogger.com/profile/09093917601641588575noreply@blogger.comBlogger38125tag:blogger.com,1999:blog-17232051.post-76681713250115153532014-03-03T22:20:36.167-05:002014-03-03T22:20:36.167-05:00It's not so much regulatory reform we need -- ...It's not so much regulatory reform we need -- it's the imprisonment and execution of the crime kingpins who have been violating existing laws on a massive scale and getting away with it. They're called "bankers".<br /><br />Such big-scale criminals often get away with their crimes for a long time. Unfortunately, their existence erodes popular trust in the legitimacy of the government. Expect civil war if they aren't imprisoned.Nathanaelnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-71645282882774740092014-03-03T22:17:50.293-05:002014-03-03T22:17:50.293-05:00Indeed. Ignoring land title law is going to have ...Indeed. Ignoring land title law is going to have very very nasty long term effects. Very *VERY* nasty. Already starting to, by the way.<br /><br />This is the sort of stuff which causes governments to be overthrown as illegitimate.Nathanaelnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-56666644263681018932014-03-03T22:16:18.010-05:002014-03-03T22:16:18.010-05:00Actually, the mortgage assets are still worthless,...Actually, the mortgage assets are still worthless, because most of these banks never actually owned any mortgages -- they had never bothered to file mortgage papers at the county clerks' offices and the mortgages were void and illegal.<br /><br />This puts a much darker spin on the situation. The banks are quite literally attempting to steal land they don't have any claim to, and are also selling fraudulent mortgage paper to investors. They topped this off with robosigning.<br /><br />The crisis has not resolved itself. It is still ongoing. It will not be resolved until the criminals running the banking crime syndicates are stopped, which usually means imprisoning or executing them.Nathanaelnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-87029098842939383642014-03-03T22:13:49.253-05:002014-03-03T22:13:49.253-05:00It was a solvency crisis, driven by fraud. Read N...It was a solvency crisis, driven by fraud. Read Naked Capitalism and learn about robosigning and the menu of frauds committed by servicers (starting with fee fraud and moving on to transfer fraud), fraudulent foreclosures, and the rating agency frauds, and that's before you get to the rest of the frauds on investors.<br /><br />The major banks are crime syndicates. The correct model is Bill Black's criminological model. Try it.Nathanaelnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-90632379439093249582014-03-01T07:27:14.807-05:002014-03-01T07:27:14.807-05:00From memory what I saw around me in Britain went a...From memory what I saw around me in Britain went as follows:<br />- globally, confidence in the value of and risk attached to sub prime related assets suddenly disappeared<br />- the potential losses faced by holders of such assets suddenly became a concern because no one had a clue what they were or much sense of who was holding them (or how much they were holding)<br />- monoline insurers going phut added to the mix (with every other headline by now stating "Is XXXX the next subprime?". Febrile.<br />- banks and institutions responded to this by reeling in their lending to each other<br />- a domino effect kicked in where, with hindsight, you could predict which bank would be next to fail depending on how reliant it was on wholesale funding/deposits e.g. here Northern Rock, which was the most reliant by a mile, went first, then the other former building societies<br />- it just so happened those banks most reliant on wholesale funding were typically regarded - rightly - as the more aggressive lenders (go figure) e.g. Northern Rock and its 125% mortgages, B&B and its buy to let stuff, so they were both the most vulnerable and the ones about which the biggest questions were getting raised from a credit perspective.<br />- as banks ran out of money, credit got reeled in (2007/08 being the onset of a credit crunch after all) and asset values, particularly commercial property, fell off a cliff.<br />- this in turn meant lenders began (and were expected) to take big losses, particularly the more aggressive ones.<br />- things got more than a bit self-fulfilling<br />- thats kind of it really.<br /><br />Not sure how solvency vs liquidity plays in the above. However, the UK regulator's initial focus on capital appeared a bit beside the point. In terms of lessons learned/practical prudent policy steps - loan to deposit ratios and restrictions on really bad lending were/are the biggiesPrimula Monkeyhttps://www.blogger.com/profile/09289100326536298640noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-83020841656610410472014-02-28T04:48:42.633-05:002014-02-28T04:48:42.633-05:00As you say, it's ultimately a distinction with...As you say, it's ultimately a distinction without an difference.<br /><a href="http://www.emergencydentistmanhattanny.com/" rel="nofollow">Emergency Dentist Manhattan NY</a><br /> Banks were "insolvent" because the the huge piles of mortgage assets they held were worthless - at the time. Anonymoushttps://www.blogger.com/profile/18203970405755475515noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-35825570024134727822014-02-28T04:46:46.411-05:002014-02-28T04:46:46.411-05:00Forcing banks to take equity capital [and stop red...Forcing banks to take equity capital [and stop reducing leverage in the system], it seems to me, was an extremely smart way limit the contagion and stop the downward spiral of asset prices. <a href="http://www.gibesafrica.com/" rel="nofollow">Ratings and reviews SA</a><br />Limiting leverage going forward seems the right end game - and letting banks earn their way to lower leverage seems a relatively painless way to get there.Anonymoushttps://www.blogger.com/profile/18203970405755475515noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-43206094765574332912014-02-27T13:04:25.209-05:002014-02-27T13:04:25.209-05:00As you say, it's ultimately a distinction with...As you say, it's ultimately a distinction without an difference. Banks were "insolvent" because the the huge piles of mortgage assets they held were worthless - at the time. <br /><br />But many of those mortgage-related assets would prove not to be worthless as the panic waned, so during the acute phase, there was a solvency crisis that would ultimately resolve itself if treated with the prescription for a liquidity crisis. Which is what happened.Adamhttps://www.blogger.com/profile/00848821084269314215noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-40838642207184551682014-02-27T07:56:38.366-05:002014-02-27T07:56:38.366-05:00Reagan took office in 1981; 75 years before would ...Reagan took office in 1981; 75 years before would have been 1906. I <i>feel</i> like there had been one or two significant financial crises in that time....Pathttp://berlinmusings.blogspot.comnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-60584890015774465402014-02-26T22:13:32.373-05:002014-02-26T22:13:32.373-05:00When insolvency leads to a crisis it is inevitably...When insolvency leads to a crisis it is inevitably accompanied by a liquidity crisis. If a financial institution is leveraged 40 to 1 it only takes a 2.5% fall in the value of its assets to make it insolvent. When it becomes known (or feared) that an institution is insolvent it will face a liquidity crisis as its creditors scramble to recover their cash. <br /><br />It seems to be fairly clear that in 2008-2009 the value of the assets of the major banks and shadow banks were taking a substantial hit and that a fairly large number of them were insolvent. At that point they all faced a liquidity crisis, and if they had been forced to dump their assets on the market to meet this crisis they would have all also faced a solvency crisis as the prices of all their assets were driven down. <br /><br />I have explained my understanding of how this played itself out here: <br /><br /> http://www.rweconomics.com/WD/Ch10.htm <br /><br />and some of the mechanisms that led to this situation here:<br /><br /> http://www.rweconomics.com/WD/Ch_9.htm<br />George H. Blackfordhttp://www.rweconomics.comnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-42170825893758095372014-02-26T21:42:51.186-05:002014-02-26T21:42:51.186-05:00TBTF makes more sense as a liquidity put. That'...TBTF makes more sense as a liquidity put. That's what you might actually get from the Fed, it doesn't mean the trade is negative expected value, and the bank might come out on the other side with equity left.Kyle Mnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-24015598849491318702014-02-26T21:30:23.841-05:002014-02-26T21:30:23.841-05:00Both? Clearly there was a run on the shadow banks...Both? Clearly there was a run on the shadow banks by themselves. Clearly many were also insolvent.ibillnhttps://twitter.com/ibillnnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-1251338602251708412014-02-26T15:40:23.604-05:002014-02-26T15:40:23.604-05:00Prior to Reagan, I believe we went 75 years withou...Prior to Reagan, I believe we went 75 years without a significant financial crisis. But since then we've had the Continental Bank failure in 1984, then the S&L speculative bust, followed by Orange County going bust in 1994, then the Enron bankruptcy due to speculation and fraud, not to mention the dot com speculative bubble, and finally the first real world run on North Atlantic banks of 2007-08. Yet after six serious collapses centered around banking and speculative fraud, all within 33 years, there are still those who believe we need to regulate less, not more. I think we're definitely in the “It is difficult to get a man to understand something when his salary depends on him not understanding." <br /> Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-15171111391347525442014-02-26T15:27:02.265-05:002014-02-26T15:27:02.265-05:00It seems like a false dichotomy to me.
When a ban...It seems like a false dichotomy to me.<br /><br />When a bank is more than 20:1 levered (and at it's maximum) it is forced to sell assets or issue equity on even the smallest change in price of it's assets (say a 1% drop in the asset side makes it 24.75:1 levered exceeding some maximum leverage criteria). When many banks are this levered, you have all sellers and no buyers [they are already maxed out for the most part even if they don't sustain similar losses], and what used to be safe [though heavily levered] assets [with an equity cushion sufficient for their price volatility] now need to trade down significantly enough to attract new buyers - typically buyers who see reasonable *unlevered* returns, as the leverage itself is now scarce. It's a vicious cycle, but not one that necessarily began with a solvency question. The lack of ability to provide leverage to the system creates the solvency issue.<br /><br />Forcing banks to take equity capital [and stop reducing leverage in the system], it seems to me, was an extremely smart way limit the contagion and stop the downward spiral of asset prices. Limiting leverage going forward seems the right end game - and letting banks earn their way to lower leverage seems a relatively painless way to get there.<br /><br />Davehttps://www.blogger.com/profile/00121252420141472940noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-70145990318775284342014-02-26T15:25:46.981-05:002014-02-26T15:25:46.981-05:00Seems to me that we can conceive of a situation wh...Seems to me that we can conceive of a situation where there is a negative shock to a bank's assets, leading it to suffer a liquidity crisis, but not a solvency crisis. My thoughts <a href="http://www.economicthought.net/blog/?p=5776" rel="nofollow">here</a>.Jonathan Finegold Catalánhttps://www.blogger.com/profile/16710256011291680376noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-69880015846603651382014-02-26T08:47:15.085-05:002014-02-26T08:47:15.085-05:00It would be as accurate to say that all banks are ...It would be as accurate to say that all banks are solvent until they are not. The liquidity/solvency distinction is just a gambit to maintain confidence in the quality of "assets". Even a mid-size bank failure brings these into doubt. Ignim Briteshttps://www.blogger.com/profile/15916685198734710343noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-66544391638290113162014-02-26T06:29:30.385-05:002014-02-26T06:29:30.385-05:00"Moral hazard" is a bit simple. Any comp..."Moral hazard" is a bit simple. Any competition where money is the key measure is likely to drive towards destroying the underlying assets (fish stocks, sustainably managed land, loans) simply because money is a secondary measure - there's no way to tell from the money return whether the asset is being conserved. And the entity that makes the highest money return will be rewarded with greater investment and better access to capital - it will succeed until the asset fails, and then fail catastrophically. The finance sector, which deals only in money, has of course the fastest cycle of all - it crashes every 25 years unless regulation reduces competition. But the players are caught in the system - it's not that they are careless, but that they have no non-money metric.Peter Thttps://www.blogger.com/profile/13289172253358199028noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-40691927697673865702014-02-26T05:35:57.688-05:002014-02-26T05:35:57.688-05:00Don't forget that many of the mortgages were -...Don't forget that many of the mortgages were -- prior to the various legal settlements -- of extremely dubious legal status, with dodgy paperwork and outright fraud that would have made collecting on them difficult under then-current law. <br /><br />If you've lent out money and you can't <i>practically</i> get it back in any reasonable timeframe, you have a liquidity problem. If you've lent out money and you can't <i>legally</i> get it back, now or in future... you don't have a liquidity problem. <br /><br />... which means that the US now has a history of overriding or ignoring fairly clear land-title law where needed to ensure that private-sector banks remain liquid and solvent. A minor administrative decision, not something that's likely to cause any problems with investor confidence going forward. Collin Streetnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-77329034339673046822014-02-26T02:49:50.962-05:002014-02-26T02:49:50.962-05:00And basically, if you look at the households who d...And basically, if you look at the households who defaulted on their debt (there was a study from the fed abnout mississipi), most of them decided to default after the prices went down, i.e it was not worth anymore to' get the house but reimbourse the debt. Thigs got really bad because of the uncertainity and contagion created by the cdo, cds and all the types of mbs. The insolvency of the households is the tree which hiddes the forest.Math. Bo.https://www.blogger.com/profile/10481664971830236516noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-24073794979479828182014-02-26T02:43:58.686-05:002014-02-26T02:43:58.686-05:00I think you forgot the credit crunch of 2008. That...I think you forgot the credit crunch of 2008. That's when the crisis got really bad, and this was driven by the banks. In 2007 eveybody thought the crisis will be a minor event, because the exposure of the banks on the real estate market was largely underestimated.Math. Bo.https://www.blogger.com/profile/10481664971830236516noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-40080865250396294062014-02-26T02:11:04.222-05:002014-02-26T02:11:04.222-05:00According to the FCIC, when the S hit the F in 200...According to the FCIC, when the S hit the F in 2008 there were $10 trillion worth of mortgages outstanding that stood at the heart of the $46 trillion worth of non-federal debt—mortgages that were created during a real-estate bubble that had began to collapse the year before. To make matters worse, the worst of the worst of these mortgages were combined in MBSs, half of which were held on the books of American financial institutions. At the same time the five largest investment banks had leveraged their capital 40 to 1 and the leverage at Fannie Mae and Freddie Mac was 75 to1. In addition, there were $58 trillion of CDSs outstanding that had been created with no government oversight to assure that adequate capital had been set aside to honor these contracts. It is just inconceivable to me that anyone could seriously argue our financial system faced a liquidity crisis rather than a solvency crisis in 2008 in light of these statistics. George H. Blackfordhttp://www.rweconomics.com/noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-835925956630040932014-02-26T01:15:10.999-05:002014-02-26T01:15:10.999-05:00I think that during the financial crisis the quest...I think that during the financial crisis the question of bank solvency was much trickier than is realized. The larger banks and financial institutions were very widely counterparties to one another. So, when you are adding up the assets of a bank, what value do you place on a loan to another bank? Well, if the other bank is sound, then the loan is worth (roughly) the discounted value of the interest and principal due. BUT, if the other bank is insolvent, then the loan might be worth much less than that or even zero!<br /><br />So, bank A's solvency depends on the solvency of bank B. But, by the same kind of argument, bank B's solvency depends on the solvency of bank A. It is very easy to construct a tiny model of bank solvency in which there are two stable answers: either both banks are solvent or both are insolvent.<br /><br />The concept of insolvency, it seems to me, only makes sense in the context of a stable economic background in which assets have their "usual" values.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-85373059367093321202014-02-25T19:24:15.313-05:002014-02-25T19:24:15.313-05:00The crisis was driven by consumers. Households wer...The crisis was driven by consumers. Households were insolvent, not illiquid. They didn't go insolvent because of banks being insolvent but the other way round. Households were insolvent because of overleverage and deflating bubble driving them in the red. This caused the insolvency of banks. But access to credit was never a problem, interest rates didn't spike. So bank were pretty much irrelevant, although very visible. They enabled the households to overleverage but after the crisis started they mattered little. PeterPhttps://www.blogger.com/profile/02032621777697914182noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-79605277863835703012014-02-25T18:25:10.123-05:002014-02-25T18:25:10.123-05:00niceniceAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-22357827975782960272014-02-25T18:23:12.278-05:002014-02-25T18:23:12.278-05:00illiquid/insolvent question does not even arise
T...<i>illiquid/insolvent question does not even arise</i><br /><br />The question arises because: (1) it effects what solutions are available and (2) it effects what consequences should flow.<br /><br />If the problem is liquidity the solution is that the Fed buys unlimited amounts of good commercial paper at 3 percent over the Federal funds rate and the consequence is that companies who had to resort to the Fed cannot afford to pay bonuses or dividends for a few years.<br /><br />If the problem is "solvency" then shareholders and large creditors should lose their investment and, if the financial statements were misleading, people should go to jail. A "solvency" crisis is much more likely to justify calls for regulatory reform.Absalonhttps://www.blogger.com/profile/09131268683451462949noreply@blogger.com