Mish's Global Economic Trend Analysis

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Debt Collector Will Not Pay More Than $500 for a Loan, Regardless of Size Posted: 14 Aug 2010 11:53 AM PDT The bigger the debt, the less likely a debt collector is to get anything says Clark Terry, the chief executive of Utah Loan Servicing. Please consider Debts Rise, and Go Unpaid, as Bust Erodes Home Equity During the great housing boom, homeowners nationwide borrowed a trillion dollars from banks, using the soaring value of their houses as security. Now the money has been spent and struggling borrowers are unable or unwilling to pay it back. The delinquency rate on home equity loans is higher than all other types of consumer loans, including auto loans, boat loans, personal loans and even bank cards like Visa and MasterCard, according to the American Bankers Association. Lenders say they are trying to recover some of that money but their success has been limited, in part because so many borrowers threaten bankruptcy and because the value of the homes, the collateral backing the loans, has often disappeared. The result is one of the paradoxes of the recession: the more money you borrowed, the less likely you will have to pay up. Utah Loan Servicing is a debt collector that buys home equity loans from lenders. Clark Terry, the chief executive, says he does not pay more than $500 for a loan, regardless of how big it is. "Anything over $15,000 to $20,000 is not collectible," Mr. Terry said. "Americans seem to believe that anything they can get away with is O.K." Desert Schools, the largest credit union in Arizona, increased its allowance for loan losses of all types by 926 percent in the last two years. It declined to comment. The amount of bad home equity loan business during the boom is incalculable and in retrospect inexplicable, housing experts say. Most of the debt is still on the books of the lenders, which include Bank of America, Citigroup and JPMorgan Chase. According to former regulator William Black, there are still "trillions of dollars of unrecognized losses" sitting on bank balance sheets. Please see Former Bank Regulator William Black: U.S. Using "Rally Stupid Strategy" to Hide Bank Losses - Will Produce Japanese Style Lost Decade for details. Forward earnings estimates by analysts are nonsense in the face of falling consumer demand and hidden bank losses. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Former Bank Regulator William Black: U.S. Using "Rally Stupid Strategy" to Hide Bank Losses - Will Produce Japanese Style Lost Decade Posted: 14 Aug 2010 10:14 AM PDT Aaron Task has a nice interview with former bank regulator William Black on our "Really Stupid Strategy" to Hide Bank Losses 109 U.S. banks have failed so far this year, 23 in this quarter alone. These failures may not cost depositors, but they do come at a steep cost to the FDIC. As discussed here with ValuEngine's Richard Suttmeier, the FDIC Deposit Insurance has already spent $18.93 billion this year, "well above the $15.33 billion prepaid assessments for all of 2010." The situation is likely even worse than the FDIC portrays, says William Black Associate Professor of Economics and Law at the University of Missouri-Kansas City. "The FDIC is sitting there knowing that it has both the residential disaster and the commercial real estate disaster [and] knowing it doesn't have remotely enough funds to pay for it," he says. William Black with Aaron Task Video Partial Transcript AAron Task: Should we be surprise there are not more bank failures? William Black: Not Surprised,we should be upset there are not more bank failures. The industry has used its political muscle to get Congress to extort the financial accounting standards board to gimmick the accounting rules so that banks do not have to recognize their losses. Aarron Task: In practical terms, what does the gutting of that rule mean for the banks? William Black: Capital is defined as assets minus liabilities. If I get to keep my assets at inflated bubble values that have nothing to do with their real value, then my reported capital will be greatly inflated. When I am insolvent I still report that I have lots of capital. Aaron Task: You are saying the FDIC is intentionally keeping foreclosures down because it knows it does not have enough money to pay off depositors who are insured by the FDIC? William Black: That is correct and that is going to make ultimate losses grow. It also means we are following a Japanese type strategy of hiding the losses and we know what that produces - a lost decade, which is now two lost decades. Your listeners and viewers if they are stock types, look at the Nikkei. It lost 75% in nominal terms and has stayed that way for 20 years. I real terms it lost 85% of its value. This is a really stupid strategy. And it's ours. Aaron Task: You can just keep kicking this down the road and have stagnant economic growth? William Black: Geithner's original estimate was $2 trillion and of course things got much worse that their original estimates. The IMF estimates were in the $3 trillion range. So, there are trillions of dollars of unrecognized losses under these guy's scenarios. There is a huge slug, far more than they can pay for. What they are doing instead is these stupid subsidies for the biggest banks, with essentially no political oversight. It works, for the banks but it's really bad for the economy. It diverts moey from small businesses, large businesses, and entrepreneurs. Aaron Task: What does it say to you that Tim Geithner and Larry Summers are still on the job? William Black: Well I said it from the beginning, Geithner and Summers were selected and promoted, and the same is true with Bernanke, because they are willing to be wrong and have a consistent track record of being wrong. That's useful for senior politicians but disastrous for the country. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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