Thursday, September 25, 2008

The Weiss Research Report to Congress on the Bailout

I just found it this afternoon, at Catherine Austin Fitts's website. It's the report from Weiss Research, an apparently reputable financial research firm, to Congress, about the "Bailout."

This pdf contains more facts in its 24 pages than I've heard in the media in 10 years. I've removed the footnotes and tried to clean it up a bit. This is just the Summary. The actual report has charts showing which banks are in danger and exactly how much money we're talking about. I've highlighted some interesting facts—probably too many, but, well, what the heck...

Too Little, Too Late to End the Debt Crisis;
Too Much, Too Soon for the U.S. Bond Market
Submitted by
Martin D. Weiss, Ph.D. and Michael D. Larson
Weiss Research, Inc.
United States Congress
Senate Banking Committee
and House Financial Services Committee
September 24, 2008

Weiss Research, Inc.
Executive Summary
New data and analysis demonstrate that the proposal before Congress for a $700 billion financial industry bailout is too little, too late to end the massive U.S. debt crisis; and, at the same time, too much, too soon for the U.S. Government bond market where most of the funds would have to be raised.

I. Too Little, Too Late to End the Debt Crisis.

Congress should

1. Disregard data based on the list of troubled banks maintained by the Federal Deposit Insurance Corporation (FDIC). The FDIC’s list currently has 117 institutions with $78 billion in assets. However, based on a broader analysis of recent FDIC call report data, we find that institutions at risk of failure include 1,479 FDIC member banks and 158 thrifts with total assets of $3.6 trillion, or 36 times the assets of banks on the FDIC’s list.

2. Think twice before providing a broad bailout for U.S. debts given the wide diversity of mortgage holders and the great magnitude of the total debts outstanding in the United States. Just-released Federal Reserve Flow of Funds data show that, beyond mortgages, there are another $20.4 trillion in privatesector consumer and corporate debts, plus $2.7 trillion in municipal securities outstanding.

3. Recognize that, among banks and thrifts with $5 billion or more in assets, there are 61 banks and 25 thrifts that are heavily exposed to nonperforming mortgages.

4. Get a better handle on the enormous build-up of derivatives held by U.S. commercial banks.

5. Base any legislation on (a) realistic estimates of the loan amounts already delinquent or in default, and (b) reasonable forecasts of how many more are likely to go bad in a continuing recession.

6. Recognize the inadequacies in already-established safety nets, such as the FDIC for bank depositors, Securities Investor Protection Corporation (SIPC) for brokerage customers, and state guarantee associations for insurance policyholders.

There should be no illusion that the $700 billion estimate proposed by the Administration will be enough to end the debt crisis. It could very well be just a drop in the bucket.

II. Too Much, Too Soon for the U.S. Bond Market.

There should also be no illusion that the market for U.S. government securities can absorb the additional burden of a $700 billion bailout without putting dramatic upward pressure on U.S. interest rates.

The Office of Management and Budget (OMB) projects the 2009 federal deficit will rise to $482 billion. But adding the cost of announced and proposed bailouts, now approximately $1 trillion, it is undeniable that the federal deficit could double or triple in a short period of time, driving interest rates sharply higher and aggravating the very debt crisis that the bailout plan seeks to alleviate.

III. Policy Recommendations to Congress

1. Congress should limit and reduce the funds allocated to any bailout as much as possible, focusing primarily on our recommendation #4 below.
2. If Congress is determined to provide substantial sums to a new government agency to buy up bad private-sector debts, we recommend that the new agency pay strictly fair market value for those debts, including a substantial discount that reflects their poor liquidity.
3. Congress should clearly disclose to the public that there are significant risks in the financial system that the government is not able to address.
4. Rather than protecting imprudent institutions and speculators, Congress should protect prudent individuals and savers by strengthening existing safety nets, including the FDIC for bank deposits, SIPC for brokerage accounts and state guarantee associations that cover insurance policies.

IV. Recommendations to Savers and Investors

Regardless of what Congress decides, savers and investors should continue to invest and save prudently, seeking the safest havens for their money, such as banks with a financial strength rating of B+ or better, U.S. Treasury bills, and money market funds that invest almost exclusively in short-term U.S. Treasury securities or equivalent.

1. The ownership of residential mortgages is dispersed among many different sectors. There are $12.1 trillion in mortgages on single- and multi-family homes in the United States.
2. Fannie, Freddie and GSAs are still at risk. Despite the recent bailouts of Fannie Mae and Freddie Mac, Congress must not lose sight of the fact that these two institutions, along with U.S. government agencies (GSAs), currently hold $5.4 trillion in residential mortgages, according to the Federal Reserve. The fact that these assets already enjoy a government guarantee does not prevent them from continuing to deteriorate and requiring substantially larger funding than currently contemplated.
3. Private sectors and local governments also own residential mortgages in substantial quantities. The bailout plan would also have to cover:
  • The issuers of asset-backed securities, now holding $2.1 trillion in mortgages,
  • Nonbank finance companies ($426 billion),
  • Credit unions ($332.4 billion),
  • State and local governments ($159 billion),
  • Life insurance companies ($61.6 billion), plus
  • Private pension funds, government retirement funds and households themselves.
4. Commercial mortgages are now going bad as well. The current debate tends to focus exclusively on residential mortgages. But at many regional and superregional banks, much of the risk is currently in the commercial mortgage sector, where recent data denotes many of the same difficulties as the residential sector. To truly get to the root of the problem, the Administration and Congress cannot exclude these either.

There are $2.6 trillion in commercial mortgages outstanding in the United States. As with residential mortgages, these are also dispersed widely beyond the banking sector — $644 billion held by issuers of asset-backed securities, $263 billion held by life insurers, $65 billion at nonbank finance companies and $37 billion at Real Estate Investment Trusts (REITs).

5. Mortgages are less than half the problem. Although it is true that the current debt crisis in America originated in the mortgage market, it is not accurate to say that the root of the crisis is strictly in this one sector. Rather, the debt crisis has multiple and varied roots, with excessive risk-taking in credit cards, auto loans and virtually every other form of private-sector debt.

There are currently $14.8 trillion in residential and commercial mortgages in America. But beyond mortgages, there is another $20.4 trillion in consumer and corporate debt. This means that mortgages represent only 42% of the privatesector debt problem in America.

6. Local governments could be a higher priority. Overlooking the debt problems of state and local governments could also be a mistake. Indeed, given the essential nature of their services, including the pivotal role they play in homeland security, it could be argued that their credit challenges take priority over those faced by banks, S&Ls and Wall Street firms. Currently, the Fed estimates $2.7 trillion in municipal securities outstanding, most of which have been reliant on a bond insurance system that remains on the brink of collapse.

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