Soros says U.S. banks "basically insolvent" (lasting slowdown)

[Eugene]

Source: Reuters

Soros says U.S. banks "basically insolvent"
Mon Apr 6, 2009 10:37am EDT

NEW YORK (Reuters) - The U.S. economy is in for "a
lasting slowdown" and won't recover this year, while
"the banking system as a whole is basically insolvent,"
billionaire investor George Soros told Reuters Financial
Television on Monday.

While nationalization of banks is "out of the question,"
he said stress tests being conducted by the U.S. Treasury
could be a precursor to a more successful recapitalization.

-snip-

Soros also said the U.S. dollar is under pressure and
may eventually be replaced as a world reserve currency,
possibly by the IMF's Special Drawing Rights, a synthetic
currency basket comprising dollars, euros, yen and sterling.

-snip-

While a global recovery is possible in 2010, Soros said
the timing will ultimately depend on the depth of the
recession. China, he said, will be the first country to
emerge from recession, probably this year, and will
spearhead global growth in 2010.

-snip-

Read more: http://www.reuters.com/article/ousiv/idUSTRE53537D20090406

[marketcrazy1]

1. I think he is wrong about china

at least in his time line, China may be the first to recover but it will not be in 2010.....

[theoldman]

2. As long as the US is down, China will be down.

We are and will remain China's number one customer. Once we start to recover China has a better chance of recovering because they did not fall as far economically.

[zipplewrath]

3. Accounting problem

Unlike the crash of '29 and the Great Depression, this is as much an accounting problem as anything. The banks are only "insolvent" to an accountant. Their assets market value are low, but there are real assets behind all that paper. In '29 much of what was lost was literally paper stock. It wasn't backed by anything except a companies future production. Much of this stuff is backed by actual property. And 85%+ of those mortages are still paying. The underlying property isn't worth the loan value, but none the less the owners will continue to pay, and ultimately pay off. The problems the banks have right now is they can't make new loans (and therefor new money) and they can't sell what they have for what they would need to raise the money. But these banks are still making money. And even those who can make loans, aren't going to find large numbers of people able to take on new debt.

He is right though that this will long and slow. The current debt held by the banks will not be paid off quickly and until some large portion of it is paid down, there won't be money for new investment.

[marketcrazy1]

4. it`s not just

mortgage backed paper that is Toxic, there is paper backed by 2nd mortgages and by home equity loans, there is paper backed by other paper ( cdo squared and CDO cubed ). securities backed by credit card debt, auto loans, equipment loans. and on and on and on......... there are derivatives worth over 1.4 QUADRILLION dollars worldwide out there. financial engineering created trillions of dollars of debt backed securities of various kinds many of wich are in fact worthless. the worldwide collapse of these debt instruments is creating a very complicated problem that will not be solved by the current machinations of the FED or WCB`s

[zipplewrath]

5. They are still paying

Those "worthless" securities are in fact still paying. You can't sell them, but the income they generate is still coming in. Yes, some of those instruments are kicking in such that people have obligations that need to be fullfilled, and many will not be able to. And those obligations are in excess of the income value. However, the vast majority of them are still "working". But they can't be sold. I've got instruments still generating 95% of their initial returns, but I can't sell them for more than about half of what I paid for them. Don't get me wrong, it's bad, and we don't really know the full extent yet. And there could be another serious crash coming if the default rate climbs much above 15%. The really scary part is no one knows. The folks hollering for the suspension of "mark to market" I think are hoping that the old rule of "what you don't know can't hurt you" works. I dunno.

[Hawkowl]

6. Derivatives don't pay anything

I don't think you understand the problem. Yes, the vast majority of mortgages are still paying. That's not the problem. The problem is the giant financial institutions created these ridiculous derivatives that were supposedly backed by these mortgages. Unfortunately, the "value" of these derivatives were bid up to 1000's of times the value of the actual collateral. This is the so called "leverage". Compounding the problem is the fact that each derivative(at best) is a mish mash of pieces of mortgages. In other words, a single derivative does not match up to a single mortgage. How can you repossess 2% of a house? A second compounding factor is that the investment banks kept the riskiest tranches of derivatives in their own portfolios. Some derivatives aren't based on anything but a side bet on which a mortgage will move or default. A mere bet on the roulette wheel of red or black. Unfortunately, since the repeal of Glass Steagall, the investment banks are the same entities as the commercial banks, which are essentially made such institutions as GS, simply the world's biggest predatory hedge fund.

Now the derivative market has collapsed and the banks are not only out "paper" losses, they are out real cash. Geithner's plan is an attempt to re-inflate this derivative market with taxpayer dollars. Of course once the banks cash out, the market for derivatives will collapse again. But this time, the taxpayers will be holding the bag, while the wealthy bankers get off scott free, multiplying the national debt by astronomical levels, ruining the dollar as a currency, destroying the US government's ability to raise money and plunging our economy into perhaps a 10 - 20 year depression.

It is impossible to make whole the banks that have become insolvent because the derivative mortgage market has collapsed. This market is "valued" higher than the entire world's GDP! The dilemma is a false one. Simply force the insolvent banks into receivership. Happens every week on a smaller scale. 22 banks this year so far. The only difference is that some really, really, formerly rich, but still powerful families will be forced into bankruptcy.

[zipplewrath]

7. Some do

I can't claim to know of all of the derivatives out there, but many of them are basically insurance. If the underlying risk does not default, they have to pay nothing. Some of them are still collecting payments for this "protection". Of course the problem is that those risks have to be held for fairly long times. And no one will buy them now. But as property is sold, and mortgages are ended, these risks shrink. Don't get me wrong, this is a huge problem with potentially huge downsides if the economies worsen significantly. It just isn't clear that's how it will pan out. But if these derivatives are forced to begin paying out immediately, the money isn't there to honor them all. And they are leveraged as you say so heavily that small losses get magnified.

[riderinthestorm]

9. Uh, Duh! You are some kind of preacher of optimism? You said it yourself.

The "economies" WILL worsen significantly. You can project "best case" scenarios all you like but most economists of any merit predict a major worsening of the global economy for the near future.

Please don't minimize the risks for people here. We're all in this together and frankly, predictions of minimal risks by investing in real estate for any foreseeable future is calamatous in my humble opinion.

[zipplewrath]

10. Different basis of comparison

In here somewhere the basis of comparison was made to the Great Depression of '29. There are a few significant differences this time around and one of them is that much of the paper that is in danger (the "toxic" assets) are connected to real property, not just future production of companies that ultimately went belly up. We're at about 10% unemployment now, with some fearing it's headed towards 15%. As catastrophic as that is, 15% was the "good" times in the '30s and quite honestly women weren't particularly in the workforce then. 30% was some of the highs they faced then.

The predictions have us "bottoming out" somewhere in the late '09 to mid '10 time frame. Even if they stretches into '11, it will be a bit short of the 4 years to the bottom after '29. Properly managed, we can come out of this. Much of the "most toxic" has already kicked in (which is where alot of those bailout funds have gone already). They are starting to unwind the rest of those CDO's, but it will take upwards of 2.5 years to do so. There will be more losses, but we are beginning to get our hands around things. The problem is that other major countries (China, Japan, Germany, etc.) could do dumb things that make it much harder. Too many more Madoffs could complicate things too.

[wuvuj]

8. A comparison...

This time it's different?