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Troubled Assets Revisited

Troubled Assets Revisited

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Published by romeman

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Published by: romeman on Sep 20, 2009
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Congressional Oversight Panel (August 2009)on the current stability of the United States financial system
“In the run-up to the financial crisis, banks and other lenders made millions of loans tohomeowners across America, expecting that their money would eventually be paid back. ...“They are no longer expected to be paid off in full, and they are very difficult to sell. There isno doubt that the banks holding these assets expect substantial losses, but the scale of thoselosses is far from clear. …“If the economy worsens, especially if unemployment remains elevated or if the commercialreal estate market collapses, then defaults will rise and the troubled assets will continue todeteriorate in value. Banks will incur further losses on their troubled assets.
The financialsystem will remain vulnerable to the crisis conditions that TARP [the Troubled Asset Relief Program] was meant to fix.
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SINCE THE FINANCIAL SYSTEM REMAINS“VULNERABLE” IF ANYTHING GOES WRONG WITHTHE ECONOMY (SUCH AS A DOUBLE-DIPRECESSION), IT IS VITAL TO UNDERSTAND WHATWERE “THE CRISIS CONDITIONS THAT TARP WASMEANT TO FIX.”THAT VULNERABILITY, ACCORDING TO THEAUTHORITIES QUOTED BELOW, IS “LITERALLY AMELTDOWN OF THE FINANCIAL SYSTEM”.
Sen. Chris Dodd (D) of Connecticutinterviewed by Mike Barnicle (September 2008)
"I can‘t even begin to describe to you adequately the mood last evening with the leadership of the House, the Senate, Democrats and Republicans, in a meeting with Ben Bernanke, thechairman of the Federal Reserve, and Hank Paulson, the secretary of the Treasury, [SECChairman] Chris Cox, when they described what situation we‘re in not only here but globally. And if we fail to act in the coming days, the consequences for us here at home, as well asaround the world — pension funds, 401(k)s, mutual funds, jobs, literally a meltdown of thefinancial system. …"I think — they said, Look, I mean, this is — we‘re at a moment here, not a matter of weeksaway or months away or years away, we‘re a matter of hours or days away from the largestcollapse of the financial markets in the history of this country, and the effect would be a globaleffect. And this was a very sobering moment. I‘ve listened to a lot of very important moments
 
in a quarter of a century here, but I can‘t recall another moment as sobering as that one. "And I will tell you, Michael, what happened immediately thereafter was this five or tenseconds where the oxygen went out of the room. That‘s how dramatic it was. And obviously,these men don‘t use hyperbole. There was no press in the room. There was no one trying toscore points politically. It took the breath away of everyone in that room."
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Rep. Paul Kanjorski (D) of Pennsylvania, chairman of the House Capital Markets Subcommittee, speaking on C-Span
 
"Look. I was there when the Secretary [of the Treasury] and the Chairman of Federal Reservecame those days and talked with members of Congress about what was going on. It was aboutSept. 15th. [note: The closed door meeting described in the message below was in fact onThurs. Sept. 18, 2008.] Here's the facts: and we don't even talk about these things. OnThursday, at about 11 o'clock in the morning, the Federal Reserve noticed a tremendousdrawdown of money-market accounts in the United States to the tune of $550 billion was being drawn out in a matter of an hour or two. The Treasury opened up its window to help.They pumped $105 billion in the system and quickly realized that they could not stem the tide. We were having an electronic run on the banks. They decided to close the operation, closedown the money accounts, and announce a guarantee of $250,000 per account so there wouldn't be further panic out there. And that's what actually happened. If they had not donethat, their estimation was that by 2 o'clock that afternoon $5 1/2 trillion would have beendrawn out of the money market system of the United States; [it] would have collapsed theentire economy of the United States and within 24 hours, the world economy would havecollapsed. Now we talked at that time about what would happen if that happened. It wouldhave been the end of our economic system and our political system as we know it. And that's why, when they made the point we've got to act and do things quickly, we did."
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Investor Warren Buffett, interviewed by Becky Quick (March 2009)
 
"BECKY: ... you told us this was an economic Pearl Harbor about six months ago, but did thishappen more quickly or more severely than even you expected? "BUFFETT: It certainly happened clofse to the worst case. I mean, you never know what'sgoing to happen, but I would not have--I would not have thought there could've been a much worse case than what has happened. Although, I will say this, the Fed did some things inSeptember when it happened... "BECKY: Mm-hmm. "BUFFETT: ...that were vital in keeping the place going. I mean, when the--if they hadn't haveinsured money market accounts and, in effect, commercial paper, you know, you and I would be meeting at McDonald's this morning. "BECKY: Instead. "BUFFETT: Yeah. Right."
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THE QUESTION, THEN, IS IF THERE IS ANYTHINGON THE HORIZON THAT COULD DERAIL RECOVERYAND PRECIPITATE SUCH A THREAT. TO CLOSETHIS BRIEF REPORT, HERE ARE SOME ISSUESTHAT HAVE BEEN MENTIONED OF LATE ASDANGERS TO THE ECONOMY:
INCREASE OF US BUDGET DEFICIT
"... the U.S. budget deficit poses a greater risk to the financial system than the collapse incommercial real estate prices."
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WINDING DOWN OF STIMULUS PACKAGES
"It's not clear that these economies can continue to move forward without stimulus."
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CREDIT IS SHRIVELLING UP
"US bank lending is contracting at an unprecedented annualized pace."
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 "Both bank credit and the M3 money supply in the United States have been contracting atrates comparable to the onset of the Great Depression since early summer, raising fears of adouble-dip recession in 2010 and a slide into debt-deflation."
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TROUBLES IN BANKING: THE FDIC IS RUNNING LOWON INSURANCE FUNDS AND MORE BANK FAILURES LOOM
"U.S. bank regulators are considering tapping a line of credit with the U.S. Treasury Department and may explore other lesser-known options to replenish the dwindling fund thatsafeguards bank deposits."
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 " ... the number of financially sound banks is declining and ... the ranks of troubledinstitutions are growing. ... figures show more stress in the banking industry in the secondquarter of 2009 than in the immediately previous periods."
 "... banks are neither at the beginning or the end of the problems presented by a difficulteconomy ... They are in the middle and significant challenges still remain.'"
 
TOO BIG TO FAIL BANKS ARE EVEN BIGGER NOW,INCREASING RISK TO THE ECONOMY
"Unfortunately, measures taken during the past year – while necessary - have only reinforcedthe idea that some financial firms are simply too big to fail. Today, we now have fewer playersin critical areas of our markets. The market is even more concentrated and interconnected

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