JPM margin call warning - my favourite financial blog says "The Game is Over". Here's why.

[GliderGuider]

The Automatic Earth is a newcomer to the financial blog scene, but they are hitting all the right notes (disclaimer: the authors are friends of mine). Here's what they have to say about the significance of the JP Morgan "margin call" story:

Late yesterday, I added the following article to the Debt Rattle, and put in bold letters above it: The Game Is Over! It might be a good idea to explain that.

JPM states that Wall Street banks are facing a "systemic margin call", in other words a margin call that will pervade through the system. The banks will have to cough up $325 billion, and fast, when called upon., or its assets will be sold off for whatever the creditor can get for it.

The only way the banks can do this is by calling in their own loans. That means urgent phone calls to smaller banks, hedge funds, and any other funds and businesses, first those that depend heavily on borrowed money to fulfill obligations. These parties then need to do the same: call in what is owed to them. Down the line, that means you may get a phone call to pay up for your loan or lose your home. It doesn’t matter if you are a good client, pay in time, have a great job. The banks and lenders need to call up everything they can, just to stay alive.

You would, and will, do the same: if someone holds a gun to your head, and tells you to pay up, you go to those who owe you money, and demand your cash. Same thing.

We already have seen what this whole picture entails: the selling off of large amounts of assets. Since this happens in a market where buyers are rare, prices drop. Well, imagine that, multiplied a thousand times. And there’s still no buyers. It’s obvious where prices are headed, for all assets, including precious metals. And especially real estate. All assets will be marked to market, in a market without buyers. Pennies on the dollar is poised to become the next household term added to out vocabulary. It will be brutal. That means your home will lose value very fast, and that in turn will make that dreaded phone call come even sooner.

Remember that Wall Street has so far written off about $150 billion. Many banks have had to sell parts of themselves to foreign funds in order to stay liquid. Of course, the first $150 billion was hard, but it was also the easiest part. Now they have to come up with over twice as much on top of that, and probably with far more time pressure. There will be -many- banks who don’t succeed. But before giving up, they will ravage the entire financial system, all the way down to your mortgage, car loan and all other debt. If there’s a way to get their hands on it, they will do so. They must.

Hedge funds will fail en masse. Many institutional investors, like pension plans, will also be killed. Anyone with leveraged investments in non-100% liquid investments will be caught under the wheels of the oncoming steamroller. All businesses have credit lines, all levels of government do too. Get the picture?

This is why the game is over.

That means urgent phone calls to smaller banks, hedge funds, and any other funds and businesses, first those that depend heavily on borrowed money to fulfill obligations. These parties then need to do the same. Companies with leveraged "Merger and Acquisition" loans will be right in line behind the hedge funds. Over the next 6 months many companies that can't meet the calls on their loans will fold . Lots of jobs will be going away, just as the we need those jobs to to service our personal loans that will also be getting called.

Business loan shortfalls will in all cases be recouped (insofar as possible) from customers who bought on credit. Basically, we can view the whole loan structure as a food chain: hungry lenders at the top will feed on the next layer beneath them, and those on the layer beneath them and the whole thing will domino right down the food chain until they come to the plankton, which just happens to be your credit card bill, student loan, car loan or mortgage.

I've joined the flight to safety - cash is king right now.

[Uben]

1. Hmmmm? I better plant a bigger garden this year.

At least I'll eat!

[gristy]

2. cash meaning cash in hand?

I would think <$100K in an FDIC insured account is just as good.

[Wednesdays]

6. An FDIC insured account does you no good...

if your mortgage lender demands the balance on your loan. (To the experts here: can they legally do that?) :shrug:

[salin]

8. elsewhere a DUer posted that there is often language in mortgage docs

that make a provision allowing lenders to do just that.

[sendero]

59. Even so..

.. it would be useless. You cannot squeeze blood from a turnip. What's the bank gonna do, take you house back? They don't need that either.

[salin]

64. My guess is that if the bank were to go into default

and had to go liquid to pay off its debt, that they would be more likely to give their share of the house (lien) to the entity to whom they were indebt. Only if things turned real dicey for banks (where they were fighting for their existence, and could liquify no other assets and thus would be willing to take pennies on the dollar for the house) would banks probably take this kind of extreme action. If it gets to that point, my guess we are already in the midst of an economic disaster.

[backscatter712]

88. That might be the case.

Usually, when you go up the food chain a bit, banks are more likely to sell their interest in the mortgage to someone else, rather than call it in, which in good financial times may net them some decent cash.

Though that method probably isn't working when the housing market's in freefall, the borrower is upside-down on the house and they can't get enough money from buyers to make it worth the trouble.

That leave two choices - just leave the mortgage alone, which may be worthwhile if the borrower is paying on time and fairly reliable, or call in the loan, which will probably not result in the owner being capable of writing a check and paying off the entire mortgage, which leads to the bank repossessing the house and trying to sell it directly, which again is problematic with the housing market tanked.

[gristy]

14. What loan?

Any why does $100K in an FDIC-insured bank account do me no good?

[GliderGuider]

22. FDIC is there to protect the banks, not the depositors, no matter what they tell you.

The FDIC has about $52 billion in cash to insure $4.2 trillion in deposits, or about 1.2 cents on the dollar. That amount will cover only 520,000 maximum-value accounts. How many of America's 300,000,000 people have FDIC-insured accounts?

[high density]

66. Why are you assuming all of the banks are going to fail?

You are putting a lot of faith into the writing of one guy on one blog. The economy is not good, but it's still quite distant from the point where the FDIC is insolvent.

[GliderGuider]

71. "One guy on one blog"? GMAFB

The stink of fear is coming from all over the world right now. You can't read a financial blog these days without catching a case of the oh-shits.

I don't think you've been paying attention - this has been building since early last year.

[high density]

75. Well show the proof that Bank of America et al are on the brink of failure

There's a LOONG way to go for that to happen.

[salin]

77. agreed... but

the JP Morgan margin calls (they state that more are likely) pushing other entities to liquify or "die" (and then be liquified) - are very rattling and are a possible harbinger of other corporate failures might be in the making.

If the financial institutions did not carry so much "leveraged" debt, then things would seem much less precarious.

That said, to predict *what* the rough road ahead will be paved with (as predicting specific failures) is premature. It is also premature to assume that the ripple effect from the meltdown is going to be pretty much isolated to one sector of the economy (you haven't done that, but I have heard and read that sentiment stated with great certainty.

[GliderGuider]

79. It doesn't start with the Bank of America.

It starts with smaller banks like the Hume or Douglass National banks in MO. Right now the crisis is still working its way towards the banks, eating through the hedge funds, bond insurers and Fannie Mae/Freddie Mac as it goes. To watch it start to happen to banks you can bookmark this and check it every month or so: http://www.fdic.gov/bank/individual/failed/banklist.html

[roguevalley]

90. what about pensions like TERS and PERS?

[Snarkoleptic]

19. Your lender can only demand payment in full...

if your loan has a 'call option'(a rarity) or if you're in default (read your mortgage).
A borrower is considered in default if there is a violation of any of the terms of the mortgage (not just payment default).

A new and disturbing practice is that lenders are shutting down future draw provisions in home equity lines of credit and other 'open ended' loans. This is especially common in declining markets.

You can also expect to see credit card issuers summarily reducing or freezing future charges and advances.
Credit card issuers are also big fans of 'unversal default', which means that if there is any derogatory information (on other accounts) in your credit, they can jack up your rate to their 'default rate' which is often 28% or more. If you carry a balance, you need to watch your statement for any changes in credit line, interest rate, and fee.

[salin]

23. you may have just answered a question I raised down thread...

So Morgan calls in its margin (I believe that is the difference between the original loan for the CDOs and the decline in value of the CDO) to several Wall Street banks or risk going into default. The article also said similar margin calls were likely to other banks. My question was what happens to the lendee bank if it goes into default. If the same rules apply that you list above, then it would suggest that the JP Morgan could call in the entire outstanding debt on the loan.

[elehhhhna]

107. Perhaps, but most loans aren't owned by banks, and in many cases, the ones that ARE...

are bundled paper that recently hasn't stood up in foreclosure actions b/c the banks don't actually own (or have docuementation to prove they own) the loans.

[salin]

7. As long as too many banks don't fail

there are limited funds in the FDIC.

[CountAllVotes]

28. yes, that is the best place for your money

and forget the idea of buying a bunch of Euros (you might read my post on this same subject in the LBN; things are not so hot overseas either ... credit crunch there too; perhaps worse than here I suspect on many levels and the Euro is likely to take one hell of a hit soon enough as it is a new currency and hasn't really proven itself yet IMO) or for that matter even gold (too high in price for the average investor IMO; was good a few years ago though -- perhaps look into some silver, but only some).

I have everything in banks and in Series I inflation bonds that I bought in mid-2001. Now you can buy Series I bonds but only a maximum of $5,000 worth rather than the $30,000 limit that was in place up until just very recently (and the core rate is very low now; like ~1.2% I believe it is). For this reason, Series I bonds might not be such a great investment, but then again, if inflation eventually trickles down realistically to the CPI (and I believe it will, everything will become extremely expensive), they will be paying quite a bit despite their low core level of ~1.2%.

I have not liked the stock market since 2000 and got out of it in early 2001. I moved all of my investments (which I will admit doubled during the dot.com bubble from 1995-2000) to certificates of deposit and I have no regrets nor stress.

I also have no debt and never have carried a lot of debt in my life for any great length of time.

[Wednesdays]

3. How bilblical and ironic...

You would, and will, do the same: if someone holds a gun to your head, and tells you to pay up, you go to those who owe you money, and demand your cash. Same thing.

Matthew 18:23-34 ...

"The kingdom of God is like a king who decided to square accounts with his servants. As he got under way, one servant was brought before him who had run up a debt of a hundred thousand dollars. He couldn't pay up, so the king ordered the man, along with his wife, children, and goods, to be auctioned off at the slave market.

"The poor wretch threw himself at the king's feet and begged, 'Give me a chance and I'll pay it all back.' Touched by his plea, the king let him off, erasing the debt.

"The servant was no sooner out of the room when he came upon one of his fellow servants who owed him ten dollars. He seized him by the throat and demanded, 'Pay up. Now!'

"The poor wretch threw himself down and begged, 'Give me a chance and I'll pay it all back.' But he wouldn't do it. He had him arrested and put in jail until the debt was paid..."

[Elspeth]

15. That is the best use of a Bible quote in context that I have seen in awhile

Methinks human nature never changes...

[DemReadingDU]

4. typical term of margin call is 72 hours

JPM states that Wall Street banks are facing a "systemic margin call", in other words a margin call that will pervade through the system (a margin call takes place when a broker tells a borrower to put more collateral for a loan in place, for instance when the existing collateral has lost value; the typical term for this sort of margin call is 72 hours)
http://theautomaticearth.blogspot.com/2008/03/debt-rattle-march-9-2008-game-is-over.html

[DemReadingDU]

10. IF and When

The banks will have to cough up $325 billion, and fast, if and when called upon, or their assets will be sold off for whatever the creditor can get for them.
http://theautomaticearth.blogspot.com/2008/03/debt-rattle-march-9-2008-game-is-over.html


So this does not necessarily indicate that the loans will be called in? This does not say all loans will be called in 72 hours, but maybe some will?

[salin]

20. It reads like there are levels - top bank

is warning Wall Street banks that have mortgage holdings that a margin call is *likely* (from the Reuters aricle), and defaults will follow if the margin calls are not met.

The linked article takes on - so how might banks go about raising the collateral to put up for the margin call?

As I understand it - it is like the Man kicking the wife who kicks the kid who kicks the kid sister who then kicks the dog, in the sense of the margin calls being refered to by JP Morgan are specific to other banks holding debts (to JP Morgan) related to mortgages - then those banks have the 72 hours to come up with the margins, and if it means avoiding going into default, then they have to turn to entities that hold debt with them to try to "Liquify" those debts to raise the collateral to cover the margin call - think of it as a chain reaction, so then the entity called up by the bank that has been called up by Morgan, has to find away to liquify some assets to cover their debt, etc.

Or at least that is how I read it.

[GliderGuider]

24. That's how I read it too.

It all ends up with a guy in a tow truck hooking up your Escalade in the middle of the night as the bailiff knocks on your door.

[DemReadingDU]

31. So this 'margin calling' process could go on for weeks/months

depending on whether the banks can satisfy the debt to JPMorgan. If not, then the smaller banks would need to satisfy the debts to larger bank to satisfy to JPMorgan.

But if the smaller banks can't satisfy their debts to the larger banks, JPMorgan just sits around waiting and waiting for this process to end? Then how long would it take for JPMorgan to fail, or would the smaller banks at the end of the process fail first?

[GliderGuider]

33. Yes. Don't expect this to all unwind within the next six months.

We'll still be seeing the effects well into 2009 when the world is already into a depression. That said, the really ugly stuff will probably happen over the next six to nine months.

[salin]

38. It reads like.. if a bank can't pay the margin

on the debt to the bank above it - in the allotted time (72 hours?), then the bank is in default and owes the entire amount of the loan to the bank above it. I would guess that then the smaller bank would have to either give its assetts (paper loans?) to the bank above it for the value of the default, and so on.

Probably banks could go bankrupt all along the chain, but assetts would be passed up the 'food chain' - and probably JPMorgan would end up with some losses, but much smaller than is current. It would only go into bankruptcy itself if enough other banks along the chain couldn't either pay up or pass assets equalling the debt up the foodchain.

[salin]

5. Thanks for posting this here

I found it to be a very thought provoking post.

[williesgirl]

9. How can they call in home loans being paid on time?

[GliderGuider]

11. If the value of the home has dropped below the balance owed (it's "under water"), or...

... or if there is a clause in the contract permitting the lender to call the entire loan at their discretion. Such clauses are apparently common, but generally not used.

[williesgirl]

13. Thanks - are you then able to make up the diff in the value vs loan?

[GliderGuider]

18. I think it would depnd on how desperate the lender is.

If they are being squeezed by bigger fish and they have an "all or nothing" clause in the mortgage, they'll probably exercise it. Initially I'd expect more willingness to negotiate for just the difference. Later on, maybe not so much.

[salin]

21. as I read the article and the original article from Reuters,

JP Morgan is trying to raise the collateral to make up for the loss in value of the CDOs, so the margin they are calling for is the difference between the debt obligation (to Morgan), and the declined value of the asset. It doesn't appear that they are calling for repayment in full for the debts. However I don't know what happens when the debtor institution goes into default.

[northzax]

58. nah

In this market, calling an underwater mortgage is just stupid, what are you going to do with the house if the cash isn't delivered? Sell it? To whom?

Second off, few of these banks actually hold many mortgages at this point, and those that have been securitized aren't callable, per se, they might be used as collatoral between two institutional lenders, but for the owner that just means a different name on the direct debit every month. Anyone who is current on their mortgage is gold right now, kicking them out devalues your own asset, why bother?

[amandabeech]

47. I disagree with you that "call" clauses in mortgage loans are common in the U.S.

My recollection is that you are Canadian, and the situation might be different there.

Calling a home loan that is not otherwise in default may be an option under some loans, but each person should check his loan documents and call his attorney. I am not sure that it is as common as some here think.

Also, calling a home loan and getting any money out of it anytime soon are two very different things. Foreclosing a home and then selling it in a market like this one could take months. Margin calls must be met in 72 hours. A foreclosure just isn't going to help a lot immediately.

It is more likely that the Fed will lend to the banks on the CDOs and other exotic instruments at a high proportion of face value. The proceeds of the loan will be cash and may help shore up the banks.

I expect seriously tough times, but not financial armageddon.

[GliderGuider]

51. How about, "For sufficiently small values of 'common'"?

I found this article about "demand clauses":

http://www.mortgageloanplace.com/lending-guide/home-mortgages/due-on-sale-demand-and-acceleration-clauses

It is imperative to closely examine your mortgage or loan contract before agreeing to it or signing it. The language may seem difficult, and at times impenetrable, but when your money is what’s at stake, it is extremely important to understand what you are agreeing to by signing your mortgage contract. The Truth in Lending Act was signed into law for the explicit purpose of making lending arrangements and terms extremely clear to the borrower. One of these terms is the existence of a “demand feature.” Pay special attention to this detail on your mortgage or loan contract before signing it.

There are three types of clauses that could potentially fall under the category of a “demand feature.” If your loan or mortgage contract states that it does have a “demand feature,” then you need to find out exactly what kind. The simplest is the acceleration clause. This clause stipulates that in the event you violate a contractual obligation, the lender has the right to “call” the loan – demand its payment in full immediately.

The next type of “demand feature” is the due on sale clause.

The final type is known simply as the demand clause, and this means that the lender can demand repayment of the loan in full at any time for any reason. This clause gives the lender the same powers as the acceleration and due on sale clauses, but also allows the lender to raise interest rates even if you aren’t selling your property. The lender may even force the borrower to agree to a rate hike by threatening to call the loan. These practices may not be ethically sound or even legal, but all borrowers need to be aware of them in case the lender attempts them. Be sure to check your mortgage contract for any demand features before signing and discuss them in full with your lender.

So I have no idea if such clauses are "common", but in a financial environment like this, they would seem to present an extraordinary risk.

[BadgerLaw2010]

82. Breach of covenant. That said, no one wants to do that. This line of thought is dumb.

There's no money there; there's a piece of property. Property takes months to sell even when the market is moving. If a bank needs liquid cash, calling in a mortgage will do nothing because the house cannot be liquidated and a person with a mortgage doesn't have enough liquid cash to pay the loan.

This "theory" breaks down when you look at the real factors involved in selling property.

[CountAllVotes]

12. I advised someone around here to do just this

get the hell out of the stock market if you are on a fixed income (retired, etc.) and put your money in the bank or somewhere else where it is insured.

You wouldn't believe the reaming I got for this sage advice.

A huge crash is coming. These two-bit stocks have been overpriced for a very long time (like since the DOW was at 5,000).

No one listens to me. I happen to be a retired bookkeeper and I know a thing or two here and there given my age, education and experience.

Again, I'd advise anyone/everyone that is on a fixed income to get the HELL OUT OF THE STOCK MARKET. It is not going to go anywhere but down is what I believe and have believed ever since 2001.

I have relations that are in their 80s. They've lost 60% of what they once had in the 2001/2002 crash and have yet to recover. Why don't people wake up and smell the coffee? Is it greed greed greed?

:kick: & recommend!

[williesgirl]

16. I've been toying w/doing this but am scared. Have lost $25K since Oct and wanted to see if it'd

come back before deciding! It's not greed - it's fear and need. I'm disabled with a disabled daughter and extremely high medical bills.

[CountAllVotes]

30. my relatives I mention are still *waiting* too ...

and one of them is on the way out I suspect. I tried to convince them a long time ago that being they are on a FIXED income and they cannot go out and earn money that they should look for other investments. They did not take my advice. They still have what is left in the stock market, all of it.

:kick:

[Subdivisions]

103. Can you risk losing it all? Take what you have left out NOW!

If things turn out OK after all, you can put it back in.

[DemReadingDU]

17. I'm not really in the stock market, have money market fund

and bank CDs, and a bond index fund. From what I am reading, there really isn't anything 100% safe. Except cash under the mattress, but inflation will eat that away.

[Warpy]

27. Perhaps they're still getting income

from stocks that lost paper profit they never recovered.

That's what's keeping me in the market right now, the income. It doesn't matter what the paper says the per share price is right now. I could manage to survive on a 90% income cut although I'd no longer be enjoying my satellite TV and maybe not my DSL.

The main thing to do is get as far out of debt as you can, advice I've been giving for years before I was in a position to do so, myself.

Not having to service debt is like giving yourself a big pay raise.

[CountAllVotes]

32. if they lost 60% of what they have

they better have some great investments of this sort. I tend to not think so as they are pinching ever corner to save a buck is the feeling I get from them. This is really quite disturbing to me as neither of them is in the best of health and neither one of them needs the stress that goes with losing large sums of money. *sigh*

[annabanana]

61. "survive on a 90% income cut "

This is not usual. There are very very very few people who could take that hit and not end up in a cardboard box with a candle to boil their rainwater....

[Warpy]

89. I'll be in a house

but I might be reduced to a campfire in the back yard for cooking.

I didn't say I'd live well. I'd just live through it.

[sendero]

62. Yes but typically...

.... when a stock's market value drops substantially, the dividend will too. And then it's too late to sell.

[Greyhound]

36. Forget the insurance, it is only as good as the resources it has to cover the losses

and they don't have nearly enough. There was an article last week about how the Fed is expecting bank failures in numbers not seen since the Great Depression and that they don't have the resources to cover them. Tangible assets are your friends.

[CountAllVotes]

42. try a credit union

that is where the money is controlled by the members, they own it. It is likely the best place to have money and has been a very good place for a long time.

I hate big banks myself. They really sicken me. :puke:

[Wednesdays]

50. From what I understand, the credit union I do business with

has all their assets deposited in a bank. :scared:

[CountAllVotes]

55. wow that is really scary

I've never heard of such a thing. The way credit unions work is that they use the money of other members to lend to other members.

The place I have my money is tight with loans. They would lend me no more than $40,000 to buy a house whereas the V.A. would lend me 2X+ that amount.

They have not been affected by this subprime mess for obvious reasons. They did not lend money to those that were likely not able to pay. Period.

[northzax]

60. then you have an odd credit union

most invest money in other banks. Remember, there is a limit on what percentage of money can be loaned out to members, where do you think the rest is? Sitting in stacks of hundreds in the vault? My credit union has a couple of hundred million in assets on deposit, I hope they don't have it sitting under the CEO's mattress...

[DemReadingDU]

48. FDIC to Add Staff as Bank Failures Loom

2/26/08

WASHINGTON -- The Federal Deposit Insurance Corp. is taking steps to brace for an increase in failed financial institutions as the nation's housing and credit markets continue to worsen.

The FDIC is looking to bring back 25 retirees from its division of resolutions and receiverships. Many of these agency veterans likely worked for the FDIC during the late 1980s and early 1990s, when more than 1,000 financial institutions failed amid the savings-and-loan crisis.

FDIC spokesman Andrew Gray said the agency was looking to bulk up "for preparedness purposes." The division now has 223 employees, mostly based in Dallas.

need subscription to read rest of article
http://online.wsj.com/article/SB120398607404892133.html?mod=hpp_us_whats_news


2nd article...
2/26/08 FDIC Girds For Bank Failures

Shaky loan portfolios continue to darken the landscape for the nation's banks, as federal regulators prepare for the possibility of an uptick in failures of financial institutions, according to recent government reports.

A record-high $31.3 billion set aside by banks for loan losses, record trading losses and goodwill expenses dragged down fourth-quarter net incomes of insured banks to a 16-year low, according to the Federal Deposit Insurance Corp.'s quarterly banking profile released Tuesday. The cumulative increase to loan-loss provisions was the largest increase in 20 years.

The FDIC report comes on the heels of study from the Government Accountability Office made public last week, which found the FDIC recorded an estimated liability of $124 million at the end of 2007 for the anticipated failure of some insured institutions and also identified potential losses of $1.7 billion should vulnerable insured institutions also fail.

All of this is happening as the FDIC, established during the Great Depression to provide a backstop to depositors during a rash of bank failures, solicits banks' input on ways to accomplish as orderly a wind-down as possible in the event of a major bank's demise. The FDIC sent a notice out to banks requesting their ideas last month.

"The notion that a bank is too big to fail shouldn't be out there," says Jim Marino, of the FDIC's Division of Resolutions and Receiverships.

more...
http://www.thestreet.com/s/fdic-girds-for-bank-failures/newsanalysis/banking/10405078.html?puc=googlefi

[Elspeth]

25. So this is why the preparations for martial law

When people lose their homes, they will then take to the streets.

[williesgirl]

26. If martial law is declared, do banks shut down?

[GliderGuider]

29. I suspect they've seen this coming for the last couple of years.

I confess I missed it until a month ago. To waterboard a cheesy boxing metaphor, I was watching so hard for the left hook of Peak Oil, Climate Change and and Ecological Collapse that I totally missed the incoming uppercut of Debt and Derivatives. That's what will put us on the canvas. That other stuff is what may keep us from being able to get back up before the count.

[datasuspect]

40. this is why they have been ramping up the infrastructure of the police state since reagan

hungry, homeless people (who are organized) have been the single most frightening threat to power since time immemorial.

european royalty called them "the great unwashed vulgar"

the founding fathers loathed and feared the power and passion of "the mob."

nothing is new under the sun and when the few fear the many, they will crack heads to ensure order.

[Delphinus]

34. As someone who knows

little or next to nothing about the stock market and margin calls, all I can say after reading this is - if the bank calls to have me pay up, they'll get my house. And I would bet a *ton* of people are in the same position.

Therefore, all of us who walk away are *not* going to be giving money to these banks - our houses will be up for sale - and some foreign investor is going to come in and take over.

Is my scenario close to being correct? Should I take the $600 the government is going to be sending me and hold onto it - or pay off debt?

[CountAllVotes]

35. I'd pay off debt if it was me

saving it won't do much good as the savings rates are so low now that you might get a whopping $20.00 interest a year on $600.00 in a CD or money market account sort of thing. How much interest do you pay on $600 debt in a year? Depending upon the rate of interest on the debt, it could be as high as 20% or even more which would be likely over $100.00+ a year.

Pay off the debt is my advice to you. :)

[Delphinus]

37. Thanks.

When Glider said "Cash is King", I didn't know if he was talking bank runs or something of that order.

You're correct - interest on $600 would probably be less than $20 per year!

[CountAllVotes]

39. you are very welcome

glad to help. Sometimes it is difficult to decide what to do when a few unexpected $$$ come your way. I plan to save the money to pay for upcoming medical expenses myself. I'll be needing a lot more than $600.00 though!

[Delphinus]

53. Good luck, CAV -

I hope that whatever your medical need is, the outcome is good.

[GliderGuider]

41. I was really just saying, "Stay out of the F'ing Stock Market!!!1!11!"

[Delphinus]

52. Haha!

No worries, for me, there Glider! :hi:

[lonestarnot]

43. I will fight their call in with bullets.

[Rex]

44. How can you fuck up a nation in only 8 years?

Ask Dick n' Bush. :eyes:

[SpiralHawk]

54. "We mucopurulent republicon homelanders have our ways. Shock and awe, baby." - Commander AWOL

[Rex]

56. It dawned on me yesterday what they mean by 'fight them over there

so we don't have to fight them over here.' They knew how much horrible crap we were going to unleash onto Iraq and if we ever quit and went away, after they had time to take a breath would come after us for killing their families and friends.

Shock and Awe. :dunce:

[CGowen]

45. The Fed will probably pay it

Fed boosts auction size in surprise action

WASHINGTON (Reuters) - The Federal Reserve on Friday announced emergency measures to add $200 billion into the banking system in a bid to ease persistent liquidity strains that are leading to a global credit freeze.

The Fed said it would increase the size of its two term auctions of short-term funding to banks this month to $100 billion from the $60 billion previously announced. It also would start a series of term repurchase transactions with the primary dealers that trade securities directly with the Fed, expected to be worth a total of $100 billion.

...

The central bank also said it would increase the amounts of the March auctions if conditions warrant. It said that in a bid to provide "increased certainty" to market participants, it would conduct term auctions for at least the next six months unless market conditions stabilize to the point such auctions are unnecessary.

...

http://news.yahoo.com/s/nm/20080307/bs_nm/usa_fed_dc

[EvolveOrConvolve]

46. Saying that banks will call in your mortgage loan is a straight up untruth

With the real estate market in the crapper, banks will call in other, more liquid, debts before they ever seize your house that is providing them with one of their only reliable sources of revenue. Seizing an unsellable property and calling in a debt that the consumer can't pay is something that banks will not be doing anytime soon, especially when they already have a huge inventory of foreclosure homes that they can't unload because they're worth far less than what's owed on the note.

[GliderGuider]

49. We'll see. I'd expect a series of widening ripples as the level of desperation increases.

Credit card loans will go first, along with underwater mortgages and those in default. Then how hard they go after mortgages will depend on the situation the lender finds themselves in, the actual terms of the mortgage and how much cash they can squeeze out of the borrower. I can imagine a situation in which a lender needs to recoup anything they can and time is of the essence. So if they sold a foreclosure for even a year's worth of payments they'd come out ahead if the alternative was their own bankruptcy in a couple of months. I don't know if stuff like this would happen for sure, but think back to the behaviour of banks in the early '30s. Desperate people and desperate institutions do desperate things.

[sendero]

65. You clearly don't understand what is happening.

... the last thing a bank needs right now is more real estate. There will be NO calling of home mortgages, I'll bet you any amount on that.

[GliderGuider]

69. I agree with you about banks.

"the last thing a bank needs right now is more real estate." Later on, who knows? I think we're going to see new rules of engagement in this war as time goes on. One of them is going to be "Gimme back my money. Now. Don't have money? Well, whaddya got? OK, I'll take that."

I don't think it's safe to assume that the past will predict the future very well this time. This isn't you grandfather's depression.

[BadgerLaw2010]

83. You do not understand real estate. Real estate is not liquid. There's no "cash" there.

Real estate is taking close to a year to sell at the moment. You cannot liquidate it. It consequently has no value to "call in" in a liquidity emergency at the bank, and no one with a mortgage has an amount of liquid assest similar to that loan. Not to mention that legally, it is rather difficult to do - even if there is a covenant breach, people will contest being tossed out of their home, and that adds at least several months even if the contesting lacks merit and is not done competently.

What you are postulating makes no sense.

[GliderGuider]

87. Well that's a relief, then. We'll all get to keep our homes.

One thing that will happen in this clusterfuck is a surge in corporate bankruptcies and closures. That leads to layoffs, which in turn leads to mortgage defaults and falling house prices (which we're already seeing), and that leaves rising numbers of people vulnerable.

I agree that if you've got an unblemished payment history and your mortgage isn't underwater and there are no poison pills hidden in your mortgage contract you're probably safe. I also think that a lot of people are going to start falling out of that safety zone. The banks didn't want to become landlords in the 30s either.

[fasttense]

93. The home mortgages that banks called in during the Great Depression

were more like balloon payment loans. Loans on homes and land were different then, as compared to today. Back then you would get a loan and so much was due by the end of the first year or two, and the remainder was due at the end of the period of the loan. You could pay off as much, or as little, in-between but you better have paid the agreed amount by the terms or the bank would call in your loan. Smart people would put some money away each month to cover the up coming balloon payment.

During good times, if you had not paid say 50% of the loan (including interest) by the end of 2 1/2 years on a 5 year loan, the bank would let it ride, expecting you to pay in full by the end of the 5 year loan period. But when the stock market crashed and banks were calling in loans, the loans they were calling in were the people who didn't pay their 2 1/2 year balloon payments. Some of those loans also had riders where the bank could call it in anytime they felt like it. Some people thinking they could flip the property got loans that were due in as little as thirty days.

Something else to note during the Great Depression is that when banks finally opened again, people were lucky to get 2 to 10 cents on their dollar back from the banks. That is if you had $300 in the bank before the run, then after the run, after the bank closed and opened again, you would be lucky to have $30. That's why we have FDIC now.

[alfredo]

57. I'm going to get drunk.

[jpak]

63. DOOOO OO O oo oo oooo o mmmmmmm!!!1111

did I say DDDDddddOOOOOOOOOOoooooooommmmmm!!!!!!1111111??????

DDDDDddddddOOOOOOOOOOOOOOoooooooommmmmmmmmm!!!!!111111

edit:

<chains rattling>

[roamer65]

67. Cash is NOT king when there is no gold standard...

reigning in M3 money supply growth. Bernanke is going to create this $325B right out of thin air and feed it to the banks as very low cost loans. In fact, the Fed is already doing just this.

Please, people. Do not think that cash is king when a central bank can create it with absolutely no restraints.

[GliderGuider]

68. It sure beats Nortel shares...

I agree that governments can inflate your money down to nothing, as has happened in Zimbabwe. The point is, the level of agreement about the value of a dollar bill is much higher than the level of agreement about the value of most financial instruments. And most people accept dollar bills as direct value substitutes for goods.

[roamer65]

70. Yes it does and I am glad to hear you sounding warning bells.

But the US dollar should only be a "halfway stop" onto more wealth preserving investments. The US dollar is well on its way to being only a medium of exchange, much like the Brazilian cruzeiro was during the 1990's.

You raise an interesting point on Zimbabwe. I heard on the BBC this morning that the Zimbabwe inflation rate has now passed 100,000 percent. I hope we do not follow that route. Good god.

[GliderGuider]

74. Regarding Zimbabwe

I got an article by email this morning written by a Zimbabean.. It says, in part:

In Zimbabwe, we are also witnessing the collapse of a cash economy. Most people live a life where they do not earn enough even to cover monthly transport to and from their place of employment. We are bombarded by the official line that the economy is booming, that agriculture is about to turn around, that people are happy and healthy, that the official exchange rate is Z$30,000 to 1US$. Yet we live coping with the day-to-day reality that people are starving, that manufacturing and industry have virtually collapsed, that the average life expectancy is now 34 for women and 36 for men, that infant mortality has increased tenfold in the last 5 years, that an estimated 3 million economically-active Zimbabweans (out of an adult population of little over 6 million) live and work outside the country. Our reality is that that even the official exchange rate is 30 million times what it was in 1980 and the unofficial rate, which is the rate at which most trading and business occurs, is currently Z$3 million to 1 US$. This is three billion times what it was in 1980.

I wrote the above paragraph a month ago. The exchange rate now is Z$5.5 million to US$1. A week later, as I finally finish this article, it is 6.5 million. By the time you read this, the rate will have probably reached Z$10 or 12 million to 1US$.

The pressure on the people of Zimbabwe has been relentless over the last few months. Inflation is now estimated at over 150,000%. Almost no figures make sense. We have just printed a $10 million bill that was worth US$2.50 when it was printed a couple of weeks ago and now worth just over $1.50 People have been queuing outside banks since early December to try to withdraw their money. There is simply not enough cash in circulation to go around.

That pretty much has to define the bottom of the financial barrel.

[roamer65]

76. Let's see if they get to the level of post-WW1 Germany...

where price eventually doubled every 49 hours. If I remember right, they finally issued trillion mark notes.

Yikes.

[NJCher]

72. foreclosing on homes

It would seem to me that foreclosing on homes, even if it were legally an option, would not be likely in this market. The homes from the subprime meltdown are already causing massive amounts of problems because they are empty.

On the other hand, look at how fast these financial types put new "products and services" together to meet the demands of the market. There is an excess of dollars held by the Saudis and the Chinese, so why couldn't some financial entrepreneur put together a fund that specialized in the buying up of single-family homes for pennies on the dollar? They could really buy out the United States and fast.

The only thing stopping this scenario would be the political unrest it would cause. Before something like that reached such a point, even the pink tutu Dems would stop it (if they could).



Cher

[earth mom]

73. K & R. I feel sick to my stomach.

:scared:

[laylah]

78. Ditto! K&R nt

[backscatter712]

80. I thought it was illegal to call in a loan like that if the borrower's making his payments on time.

It's routine if people default on their loans for the lender to call it in - demand immediate payment in full before going to steps like lawsuits, garnishments, etc.

But I thought that in the wake of the Great Depression, it was illegal for banks to call in a mortgage for immediate payment if the borrower was making his payments on time and complying with the terms of the loan.

Am I wrong on this?

[GliderGuider]

84. It depends on the mortgage. There are "demand clauses" in some that could have that result

I posted about this up above:

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=389&topic_id=2979357&mesg_id=2979844

The comment from the page I found was that these practices may not be legal, but that's a long way from saying they're not legal. And you'd need to fight it in court if they pulled that on you. I wonder if they'd let you draw on your home equity to pay for a lawyer?

[RainDog]

81. what do they think they'll get from students?

why would they bother to call student loans when the students aren't making enough money and don't have the savings to pay off their school loans? I'm sure some have nice jobs and all, but those people who had to get student loans to be elementary school teachers aren't gonna exactly have anything they can take. So, in that case, will the students have to declare bankruptcy too? ...along with the major financials?

[salin]

85. garnish future wages?

this is potentially one hell of a financial mess. I don't know if they will go after student loans (or at least the non govt backed ones) or not, but there has been quite a bit written recently about a severe tightening up on the originating of new student loans. That too is going to have long-reaching effects.

btw : :hi: hope all is well with you!

[GliderGuider]

86. I think we're going to see a huge wave of personal bankruptcies as this juggernaut gets rolling

And yes, some of them will be students with calls on their loans.

[fasttense]

94. Bankruptcy rate in 2008 is expected to equal the rate during the Republican Great Depression.

Looks like we are about on par with the bankruptcy rate of the Republican Great Depression:

Year/Farm/Wage Earner/Merchant/Manufacturer
1929/.091/.058/.690/.508
1930/.084/.068/.700/.494
1931/.069/.064/.673/.453
1932/.081/.065/.783/.562
Average: Farm .081/Wage Earner .064/Merchant .712/Manufacturer .505

The average of the average is 0.3405

The link is a pdf file - http://academic2.american.edu/~mhansen/Invited/hansen%2...

http://www.latimes.com/business/la-fi-bankrupt4mar04,1,4096651.story?ctrack=2&cset=true

The LA Times article at the above link says 1 million consumers are expected to file for bankruptcy in 2008. Assuming every American is a consumer then that gives you a bankruptcy rate of 0.333. Obviously not every American is a consumer so your population really isn't 300 million but if you reduce the population of consumers you increase the rate. So .333 is the lowest it could be.

[El Pinko]

91. Cash is crap right now. Gold is king.

nt

[DemReadingDU]

92. morning kick

[Indenturedebtor]

95. Fuck em

Let them take my house, my car, my tv, my computer, and my job. This life of servicing my debt 24 hours a day sucks anyways. Maybe we'll all start living again when the shit hits the fan eh?

I'll take my wife and my dog and go live in the mountains.

[Mountainman]

99. Life in the mountains is a real struggle. First there are critters you don't have to contend with i...

the city. It snows and gets very cold. You can't go out and get things you need. There is no electricity since you are off the grid. No heat, no water at times, no food, no comforts of life unless you bring them along.

Oh well lets move to the mountains, oops been there done that.

[WinkyDink]

96. And still Dubai builds and builds and builds......

[antigop]

97. that's the problem -- cash is king -- where do you put your cash?

Reminds me of the movie "Marathon Man":

Is it safe?

[masmdu]

98. WRONG!

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=389x2982309

[Wednesdays]

100. Wow, such sage advice

With charts and figures to back up the argument, no less.
:eyes:

[GliderGuider]

101. Yeah, those stupid hedge funds and the Fed - what do they know about anything?

[natrat]

102. i'm sitting on a stack of cash-is it safer buying a tbill through a brokerage or treasury direct ?

i'd hate to make a stupid mistake after making it this far

[NanBo]

104. they all need the money back

Citibank CC's, mortagage holders, car loan holders, they all need cash ASAP. Who has that money (on paper)? The consumers who borrowed it and we've already spent it! It's like a rush on the banks only the rush may be on the consumers with all of those credit card companies etc trying to get what little is still out there from us before the other guy grabs it.

The housing issue is that we may be paying our loans on time, but if the value on those properties goes down 30% and we only have 20% equity, then we don't have enough collateral to cover the loan and that's the amount some mortgage holders may be able to attempt to get homeowners to cough up. Not the full loan, just the difference between value and equity (but who has 10% to just come up with?). Now to do that, I think they would need an official reappraisal (I'm guessing here) and lots of cities may not rush to do those reappraisals as that would lower the tax base.

Just some thoughts on the subject...

[DemReadingDU]

105. afternoon kick

[bain_sidhe]

106. Breathing a sigh of relief

No debt to be called in. As of February 28, 2008. No mortgage. No credit card balance. No car loan.

Of course, savings are very, very small. But they can't take my house, my car, or my big-screen t.v. (Just kidding about that, we're still on the tube around here.)

Yes, I'm being kinda smug and obnoxious. It's to make up for all the people who were obnoxious to us about how "out of fashion" we were with ouR "buy good, buY once" and "use it up, wear it out" spending habits.

So to them (not you guys, you all know better) a big ol'

SO THERE!


**editeded for tyyypo**

[robertpaulsen]

108. Sorry I'm too late to recommend. Nice find, GliderGuider!

:kick: