More About That Lending Crisis...

Nick Gillespie | September 29, 2008

Granted, this is from Friday, so all hell mighta broke loose over the weekend and today, when Congress surprisingly bowed to the will of the American people:

"We collect money from local savers, and we lend it in the local community," said William Dunkelberg, chairman of Liberty Bell Bank in Cherry Hill, N.J. "We're doing fine. There are 9,000 financial institutions out there, and most of them are small and most of them are doing fine."

Dunkelberg, a professor of economics at Temple University and chief economist for the National Federation of Independent Business, added that a recent survey of that group's members found that only 2 percent said getting a bank loan was the great challenge facing their businesses.

"If you can't get a loan, my advice is to go see your local community bank," Dunkelberg said.

Even some of the nation's largest banks, which have pushed hard for a federal bailout, deny that the current situation is forcing them to reduce lending. "The strength of our core businesses, capital and liquidity are enabling us to continue to support our customers," Bank of America, the nation's largest bank, said in a statement. It added, however, that the bailout plan would allow more lending.

The most recent Federal Reserve data show that the volume of outstanding bank loans declined 0.5 percent from the last week of August to the second week of September, though it was up more than 6 percent from the corresponding time last year.

More here.

Hat tip: Todd Morman via Open Left.

Comments

James B.|9.29.08 @ 7:40PM|#

I just got a car loan from my credit union last week. They didn't seem too concerned about things.

On a related subject. I have been seeing the claim that no one knows what these MBSs are worth. How many mortgages are rolled up into an MBS? It would seem to me that a little leg work: calls to the home owners, appraisers (Zillow?) and some credit reports were give a better idea of what they are worth. Sure it would take money, time and effort, but certainly less than $700 Billion.

|9.29.08 @ 7:42PM|#

Wow, click on "More Here" and the article goes from apple pie to shit pile.

I guess if I need an auto loan, I could get one from my small community bank. However, I doubt Liberty Bell Bank could finance the accounts receivable for the dealership, much less Ford.

I'm sure loans were made somewhere during the Depression. To lead with those first paragraphs is incredibly misleading.

|9.29.08 @ 7:47PM|#

I have been seeing the claim that no one knows what these MBSs are worth. How many mortgages are rolled up into an MBS? It would seem to me that a little leg work: calls to the home owners, appraisers (Zillow?) and some credit reports were give a better idea of what they are worth. Sure it would take money, time and effort, but certainly less than $700 Billion

I saw it quoted yesterday that the worldwide derivatives markets are $600 trillion (with a T). That is a lot of legwork. These mortgage MBSs are just the fuse tied to the powder keg.

The market is setting prices on all the MBSs, just nobody wants to sell that low and when they value their holdings at those prices they become insolvent.

|9.29.08 @ 8:01PM|#

Here is the thing. Banks have to lend money to make money. The idea that good credit businesses and individuals cannot get money because of this doesn't make sense. First, not every bank is in trouble. Second, even the ones who are still will want to lend money to good risks. How else are they supposed to recover? Third, even if they don't loan, the banks that do have money will be just that more willing to loan to the customers who would have gone to thier now defunct competetitors.

One of the biggest things that made the depression so bad was deflation. Since the value of money was increasing on its own, people were not interested in loaning it out. If there is a deflation rate of say 5%, why loan money and take the risk of not being paid back when you can do nothing and earn 5%? This killed business investment. That is not going to happen here.

I am very skeptical of stock crashes and credit crunches destroying the economy on their own. The 87 crash didn't do that. The S&L crash didn't do that. The Japanese credit crunch didn't do that. Hell, even the asian crisis of the late 90s hasn't exactly destroyed Asia's economy.

Ultimately, I don't see how transfering money from profitable areas of the economy to prop up unprofitable areas can ever be the right thing to do.

James B.|9.29.08 @ 8:04PM|#

I saw it quoted yesterday that the worldwide derivatives markets are $600 trillion (with a T). That is a lot of legwork. These mortgage MBSs are just the fuse tied to the powder keg.

But if you knew the underlying value of the MBSs, you'd be able to calculate what the derivatives were worth, right? I'm not being rhetorical here, just trying to understand the situation. Because if that's the case, I again don't see why someone, Buffet, Entrepreneurs, Oout-of-work investent bankers, doesn't try to work out a value for the MBSs. It seems there is certainly a market for this information.

|9.29.08 @ 8:12PM|#

"I again don't see why someone, Buffet, Entrepreneurs, Oout-of-work investent bankers, doesn't try to work out a value for the MBSs. It seems there is certainly a market for this information."

They are and they will. It will just take a long time. That was the idea behind the bailout. The Fed would buy the things and get them off the books and then resell them at a profit after the value was determined.

Bush could do a lot by just changing the accounting rules and allow the banks to hold on to the things without going into insolvency.

If there is one thing that ought to come out of this it is how in the hell did they get financial insturments so complex that no one knows what they are worth? Considering that, MBA schools should be reduced to the community college night school for 7-11 managers that they should be.

|9.29.08 @ 8:27PM|#

I agree with John on the state of things. As long as you don't disincentivise banks and individuals from lending (through reduction of money), the market will seek a bottom and from there things will unlock. The only thing the bailout does is delay the final value of the assets from being realized yet and divides the cost among the whole of the nation. Yeah yeah, there's a theory that we'll make money on the upswing, but housing does not necessarily HAVE to go up again high enough to eliminate the cost to the consumer. In fact, unless there is another bubble, I wager the inflation adjusted values for homes does not increase to the level the government would pay for, meaning I AM on the hook for the tax money out to our foreign lenders. I think the best thing to do is what we're doing, nothing. After everything shakes out, regulation and additional constraints on the Fed should be looked at and possibly added, but until the market has reset itself, any change will make the market even more manic/depressive and hurt things more. The only risk is that the market undershoots the value before it corrects, causing ore damage than necessary, but there's no guarantee that government intervention would dampen the natural drop, in fact, it could make it worse.

|9.29.08 @ 8:30PM|#

Dopn't you libertarians get it?

The sky is falling!
The sky is falling!

We have to something, anything, RIGHT NOW!

|9.29.08 @ 8:32PM|#

"I have been seeing the claim that no one knows what these MBSs are worth."

There are a few different problems here. The first is that although the lender who originated the loans might have good information on them, the investor who bought the MBS usually has less (presumably because they didn't care enough in the first place to really worry about it). If the MBS is used to back a CDO, then the investor in the CDO has even less information. If the CDO is used to back a CDO-squared...

Second problem is that the cash flows themselves can be determined in a complicated way, e.g. if there is a waterfall structure in which some investors get priority. And these structures can vary from deal to deal, so that's a lot of work to track.

Third problem is that modeling prepayments and defaults is tricky, even if you have ideal information on the loans and the borrowers.

Fourth problem is that the "more derivative" a derivative, the more sensitive its value tends to be to any assumptions you have to make about prepayments and defaults (and interest rate and house price dynamics that drive them). So even if you think you have great information on the loans, good statistical models, and accurate simulation of the contractual features of the MBS, you can still be unsure about the value. (What if you underestimate the probability of house prices dropping further? What if there is a structural shift--such as the government suddenly modifying loan terms willy-nilly--that makes your previously-reasonable statistical models shot to hell?)

This is specialized, complicated shizness.

|9.29.08 @ 8:34PM|#

"I saw it quoted yesterday that the worldwide derivatives markets are $600 trillion (with a T). That is a lot of legwork."

I'm guessing most of those are vanilla interest rate swaps when it comes down to it, not MBS. Those don't require a lot of legwork.

|9.29.08 @ 8:35PM|#

Lost,

I don't see how you get around the reality that houses are overvalued. There simply is not a market for the number of homes we have at their current value without speculation that the price is going to go higher. Given that fact, you have two choices; either reinflate the bubble and the speculators back in, or take your medicine and let asset values fall to their natural value. The first one is not an option. It seems to me that every bailout or other option is just needlessly delaying the second option.

hotsauce|9.29.08 @ 8:39PM|#

Again, why do I keep hearing that the federal government is the only entity capable of holding these instruments for the long term? Corporations have indefinite lives. Directors and officers have fiduciary duties (to the shareholders) to maximize share value, i.e., the long term value of the company.

|9.29.08 @ 8:43PM|#

"Again, why do I keep hearing that the federal government is the only entity capable of holding these instruments for the long term? Corporations have indefinite lives. Directors and officers have fiduciary duties (to the shareholders) to maximize share value, i.e., the long term value of the company."

I think it is because there are too many of them. No one has the money to buy all of them except the fed.

|9.29.08 @ 8:43PM|#

John,

I agree completely. Scrape away all the financial trickery and you're left with houses who need people in them (either by renting or owning). Some houses will be demolished because there won't be a market available to even just afford the upkeep of the mortgageless house, but most will be sorted out at much lower prices.

The wildcard to the recovery will be energy costs though.

And John, looks like oil is coming perilously close to losing my bet with you, but its not there yet. We'll see in 5 months.

Anonymoose.|9.29.08 @ 8:49PM|#

John | September 29, 2008, 8:43pm | #
"Again, why do I keep hearing that the federal government is the only entity capable of holding these instruments for the long term? Corporations have indefinite lives. Directors and officers have fiduciary duties (to the shareholders) to maximize share value, i.e., the long term value of the company."

I think it is because there are too many of them. No one has the money to buy all of them except the fed.

We'd be borrowing $700 billion from someone like China. If this was truly a money making idea, China would simply buy the mortgages instead of lending us the money to do so.

|9.29.08 @ 8:51PM|#

Lost,

What is interesting is that the dollar was up today. What is up with that? If it is the end of the world, why isn't the dollar collapsing?

Don the libertarian Democrat|9.29.08 @ 9:03PM|#

Hey Nick, Did you read about this?

Via Greg Mankiw:

http://www.bloomberg.com/apps/news?pid=email_en&refer=worldwide&sid=a9MTZEgukPLY

"The Fed's expansion of liquidity, the biggest since credit markets seized up last year, came hours before the U.S. House of Representatives rejected a $700 billion bailout for the financial industry. The crisis is reverberating through the global economy, causing stocks to plunge and forcing European governments to rescue four banks over the past two days alone.

``Today's blast of term liquidity will settle the funding markets down, and allow trust to slowly be restored between borrowers and lenders,'' said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. On the other hand, ``the Fed's balance sheet is about to explode.''

|9.29.08 @ 9:31PM|#

http://caseymulligan.blogspot.com/2008/09/wall-street-will-drown-alone.html

A University of Chicago economist. Everyone should read that blog post.

|9.29.08 @ 10:28PM|#

Corporations have indefinite lives. Directors and officers have fiduciary duties (to the shareholders) to maximize share value, i.e., the long term value of the company.

I would think the problem would go like this:

1. The Gov't can currently borrow money very cheaply (3-4%). Corporations are looking at much higher rates (6-11%).

2. Even at firesale prices, the best case yield I've seen for this junk is 10-11%. It might make sense to borrow at 6-8% to make 10-11%, but I doubt it. Just not enough payoff for the risk (that defaults will reduce yield below borrowing costs).

3. Corps that have lots of cash (no borrowing cost) tend to be high growth, and investing in their own companies would be much higher returning then buying this junk. Buying their own stock would probably be a better deal.

The stuff that would be attractive to own is already owned. What is the problem is the stuff nobody wants to own.

Paul|9.29.08 @ 11:36PM|#

I think it is because there are too many of them. No one has the money to buy all of them except the fed.

Interesting perspective. That's a bit like saying "no one has the money to by all of them, except people."

The fed doesn't have money. They have my money. Your money etc. Another point that's being missed entirely is that it's concievable that some of them might not need to be purchased. That's the entire problem with this bailout in the first place. The fed is rushing in to by everything instead of allowing the private sector to value these things naturally as everything deflates and returns to some level of parity.

The government has shown itself to be the worst possible entity when it comes to determining value. But they are, however, very good at applying cost. See where this is going?

Nick|9.29.08 @ 11:43PM|#

Bob Barr "wins the day" at Politico!!!

http://www.politico.com/gameday/

mike|9.29.08 @ 11:50PM|#

Banks are not the only lenders. Much day to day business operation is funded via 30 - 90 day commercial paper (among other things) which is generally bought by money market funds who have $2 *Trillion* in balances to invest.

However, money market funds are in a state of deep fear of a redemption run and are not lending out past one or two days as well as being very selective.

|9.30.08 @ 12:01AM|#

If the politicians really wanted to calm the market they would announce that the problem isn't as bad as they thought, and they will continue to look at the issue to see if it warrants government action in the future.

But then they wouldn't get to act like our savior.

Amakudari|9.30.08 @ 12:29AM|#

Bob Barr "wins the day" at Politico!!!

http://www.politico.com/gameday/

But Broun's (R-GA) quote is so bizarre-folksy it made my day: "This is a huge cow patty with a marshmallow stuck in the middle of it, and I am not going to eat that cow patty."

I hope no one's planning on s'mores for dinner.

|9.30.08 @ 1:18AM|#

James B. writes: "How many mortgages are rolled up into an MBS?"

Give a listen to the This American Life episode, "The Giant Pool Of Money", which is about the housing bubble and is very good.

In one part, they're talking to some people in the business, and ask them to trace a particular mortgage to find out who owns it.

Excellent show, from last year. An update is going to be on this weekend.

Just Google 'Giant Pool of Money'.

|9.30.08 @ 2:21AM|#

this "crisis" is looking more and more like and ad for big government and their big bank friends.

To be honest our financial sytem is long over due for decentralization.

Unlike mass producing cars or microchips or whatever the loan business really has no advantages aside from easy government control with economies of scale.

In fact as this "crisis" has demonstrated the inability to have face to face conversations between the the borrower and lender is a huge disadvantage.

jtuf|9.30.08 @ 6:34AM|#

TrickyVic | September 30, 2008, 12:01am | #

If the politicians really wanted to calm the market they would announce that the problem isn't as bad as they thought, and they will continue to look at the issue to see if it warrants government action in the future.

But then they wouldn't get to act like our savior.

Agreed

|9.30.08 @ 6:37AM|#

Got a letter from Wells Fargo (my mortgage note holder) begging me to take out a home equity loan. Went to the zoo last week and I was accosted by solicitors on the street trying to get me to sign up for credit cards.

Let's see - banks pretend to be solvent and lend to people who pretend they can repay...let's continue that...NOT

|9.30.08 @ 7:00AM|#

Jon H | September 30, 2008, 1:18am | #

James B. writes: "How many mortgages are rolled up into an MBS?"

Give a listen to the This American Life episode, "The Giant Pool Of Money", which is about the housing bubble and is very good.

In one part, they're talking to some people in the business, and ask them to trace a particular mortgage to find out who owns it.

For those not inclined to listen, the answer was 16 million. This one CDO firm had pieces of 16 million individual mortgages, all sliced up into tranches (think like shares of stock) and scattered all over the globe.

The Extispicator|9.30.08 @ 9:16AM|#

I work at a law firm that handles a lot of commercial lending work for 5 or 6 banks. Every time a conflict check comes through the email, I send back a reply that says "Wait?!!? Someone is lending? But the credit markets are all seized up?!?"

|9.30.08 @ 10:02AM|#

"""In one part, they're talking to some people in the business, and ask them to trace a particular mortgage to find out who owns it."""

I saw a news article of someone who beat a foreclosure by challenging the standing of the entity that was foreclosing. The entity couldn't prove it held the mortgage, the case was dismissed.

|9.30.08 @ 12:16PM|#

"The strength of our core businesses, capital and liquidity are enabling us to continue to support our customers," Bank of America, the nation's largest bank, said in a statement.

Sounds like when the GM say "Coach X is doing a fine job. We're in a rebuilding stage." just before firing Coach X.

My instinct after reading that statement: time to short Bank of America.