2008 December 12 Friday
Jim Rogers Sees Most American Banks As Insolvent

Legendary investor Jim Rogers, who co-founded the Quantum Fund with George Soros, says most American banks are bankrupt.

"Without giving specific names, most of the significant American banks, the larger banks, are bankrupt, totally bankrupt," he said.

"What is outrageous economically and is outrageous morally is that normally in times like this, people who are competent and who saw it coming and who kept their powder dry go and take over the assets from the incompetent.

"What's happening this time is that the government is taking the assets from the competent people and giving them to the incompetent people and saying, now you can compete with the competent people. It is horrible economics."

Given that the mortgage default rate is going to surge along with rising unemployment it seems to me most of the losses of the banks still lie in the future. So Rogers sounds plausible. Rogers is a dollar bear.

"I plan to get out of all of my U.S. dollars at some time throughout this rally," he said. "The dollar is a terribly flawed currency, and perhaps a doomed currency."

We are doomed! Well, not all of us. Some people will prosper even during decay.

The promise of mortgage modifications seems exaggerated.

"With half of modified loans defaulting, many modifications are only kicking the can further down the road and not solving the root problem," said Greg McBride, senior analyst with Bankrate.com, an online consumer finance Web site. "The fact is that with a lot of properties, you won't be able to move to an affordable modification because the borrower took out a lot of equity at the top of the market or the initial loan was taken at an extremely low teaser rate," he said.

Rising credit card defaults promise to hammer the big banks that hold most outstanding credit card loans.

The three largest U.S. card issuers are J.P. Morgan Chase & Co., Bank of America Corp. and Citigroup Inc. Those three banks had nearly 60 percent of the $724.44 billion in outstanding loans at the 10 biggest card issuers in the U.S. as of June 30, according to the Nilson Report, a Carpinteria, Calif., newsletter that follows the industry.

These banks are going to get hammered by rising mortgage defaults and rising credit card defaults. We are in the mother of all deleveragings.

Not only are at least half of modified loans failing even after modification. But Stanford University prof Robert Hall says 70% of subprime foreclosures aren't eligible for mortgage modification programs.

“Something like 70 percent of subprime foreclosures are beyond the reach of modification programs because the owners are investors, because the owner is in default for the second time on the property, or because the owner has disappeared,” Hall said.

People who never should have gotten credit in the first place do not magically become good borrowers. These redefault rates will get even worse as unemployment rises.

Consider the first quarter of 2008. After three months, 36 percent of borrowers with mortgages modified in this quarter had re-defaulted (with payments more than 30 days past due). At six months, this re-default rate had risen to 53 percent. And after eight months, it had reached 58 percent. The data is almost identical for mortgages modified in the second quarter of 2008. For those arguing that 60 days past due is a better predictor of ultimate default and foreclosure, the numbers are hardly better, with re-defaults in excess of 35 percent after six months.

Then there's the auto industry. Some see another acute credit crisis if the car companies go bankrupt.

The threat is so serious that "Credit Crisis Part II" looms if the government doesn't come to the aid of GM and Ford, said J.P. Morgan analyst Eric Selle, author of a research report that pro-bailout Democrats like Levin are citing.

While the threat of a GM bankruptcy gets lots of attention the equally real threat of a GMAC bankruptcy promises to slash the size of GM's dealer network.

“There’s so many dealers on the edge, if GMAC goes out of business 30 to 40 percent of dealers won’t be able to get financing from anywhere else,” Martin NeSmith, a liaison to the lender as a member of GM’s National Dealer Council, said in an interview yesterday. “They’ll go out of business.”

Some people (Jim Rogers included) warn that we may be headed into a lost decade ala Japan in the 1990s where the economy stagnated for a decade. I think this risk is real and made worse by attempts to prop up housing prices with low mortgage interest rates. At the end of a bubble trying to patch the holes in the bubble in order to reinflate it is equivalent to what the Japanese government did when it tried to keep unhealthy companies solvent. Prevent a needed correction and the causes of the downturn will persist and therefore economic growth will be stunted.

Share |      By Randall Parker at 2008 December 12 11:49 PM  Economics Lending

Wolf-Dog said at December 13, 2008 2:12 AM:

Another kind of "bubble" that most people may not have noticed, is that in addition to the housing bubble that created a spending spree since the end of 2002, there was also a military spending spree since 2001. Maybe the military spending spree was originally legitimate or necessary, but in the end, the jobs of at least 10 % of the United States ended up depending on this military spending, even though the military spending was certainly less than 10 % of the GDP. Now if Obama downsizes the military, this will increase unemployment.

Audacious Epigone said at December 16, 2008 11:16 AM:

A timely piece from the WSJ op/ed board on that stagnant Japanese decade, and what the LDP and for a short time the Socialists tried to do to stimulate the country's way out of it.

Kent Anthony said at February 12, 2015 2:06 AM:

Correct my bank account is insolvent too! How he know about it? Lol...... Just Kidding...

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