Here’s some simple math to help wrap your mind around what’s going on in the halls of our nation’s capitol every day. Call it a glimpse into the actual bank losses staring down the barrel of the proverbial bailout shotgun. And remember, most senators and congressmen suck at math, otherwise they’d be engineers or bookies.
The total nominal value of all outstanding mortgages, both portfolio and securitized, at the peak of the US real estate market in 2006 was approximately $10.2 trillion, according to The Bond Market Association. Some estimates puts the nominal value of the US mortgage market as high as $12 trillion by 2007. For the purpose of this article we’ll split the difference and call it an $11 trillion dollar market peak for the aggregate US mortgage market. Of the two mortgage classes, portfolio and securitized mortgages, the US mortgage-backed-securities (MBS) market at $6.1 trillion dollar nominal peak value is much larger than the market value of outstanding asset-backed securities (ABS) - credit cards, car loans, etc. Also, MBS actually overtook the market for US Treasury notes and bonds in 2000.
I’m going to refer to the US mortgage market as the ‘trigger’ component of my equation. And in financial weaponry terminology every trigger needs a ‘firing-cap.’ For our purposes that firing-cap will be Credit Default Swaps (CDS). The total nominal value of CDS during the same period of 2006 was approximately $28 trillion dollars, growing to $42 trillion in 2007, and $57 trillion in 2008 at which time CDS volume leveled off. My guess is that a lot of bets were being placed by the Wall Street brain trust because they couldn’t figure out what that single bright light was bearing down on them from up ahead on the tracks. Turns out it was a freight train named reality.
Now here is what all those Wall Street analysts and CNBC morons are trying to figure out but can’t seem to correlate the data well enough to put a calculator and some logic to the problem. The question is this - how much of that $11 trillion dollar mortgage trigger is going to vanish and then how much of it will come in contact with the $57 trillion dollar CDS firing-cap? As I have said since before I sold my own real estate holdings in 2006 - real estate values across the US will adjust to pre-bubble prices, as in pre-1999 levels, which is when sub-prime lending and loose monetary policy greased up the skids for this whole barn-dance to get underway. So, if US real estate prices nearly doubled during the barn-dance bubble, guess what? Their values will now be cut in half. Note - the increase on the Case-Shiller index was approximately 83% from about 1997 to market peak. While I’ve used this Case-Shiller history of home values graph before - here it is again. It is after all the best depiction of how we got to where we are today.
So, if US real estate loses half its value and the Bureau of Economic Analysis is now saying by 2010 50% of all mortgages versus home values will be upside down, how many possible foreclosures do you think we’re staring at? How about 50%. Sounds good to me. Because here’s what these bozos don’t understand about foreclosure events. You ready, here it is - when your neighbor’s foreclosed house sells to a carpet-bagger for half what you owe on your mortgage - everybody becomes sub-prime. You get it? Even people with stellar credit will walk from their homes. And those who don’t will ultimately have their loan balances modified. So the Wall Street brain trust can muddle through sub-prime-this and Option-ARM-that but when it no longer makes financial sense to keep paying a banker their blood money it’s your God-given American duty to bolt.
The math - an $11 trillion dollar mortgage market, the trigger, loses half its value, or $5.5 trillion dollars. An assumption can be made that the ‘trigger’ will then strike the firing cap and wipe out half the CDS market - that’s about $23.5 trillion dollars. Add the two together and you’re at about $29 trillion dollars in potential loses. Hell let’s call it $30 trillion because you know they’ll round-up. So how much of that has already been accounted for? We’ll be generous and say 20%. That leaves about $24 trillion dollars in losses yet unaccounted for in the US banking sector - granted the majority rests in the shadow derivative economy. I shudder to think what the global number is.
The question then becomes how and to what extent the Fed and Treasury covers those losses - the measure of which will only be tallied when total losses from actual foreclosures, loan modifications, and the impact on credit default swaps are all in. I say three to five years. The banks will be able to recoup some of those losses by manipulating PPIP revenue opportunities which may in turn add even more burden on the US taxpayer.
When the recession officially began in December 2007, the total public debt outstanding stood at $9.149 trillion. As of April 1, 2009, the figure had risen to $11.110 trillion. The difference comes to $1.961 trillion. That’s about as simple a calculation as you can get relative to the total cost of this economic fiasco to date. They’re in for about $2.0 trillion so far. They’re staring at about $24 trillion in bank losses - including CDS. How much money are they going to commit, or allocate, from us to them to cover that nut? There’s your new war right there. Us versus them. If the banks don’t get what they want they will further unleash their fury. Which simply means they’ll hang onto the money our government hands over to them. Remember, that’s our money. The US Treasury, in cooperation with the Fed, will issue it on your behalf. But the banks will treat it as their own. Get it? They’ll choose when and how much to lend to you. But most importantly it will only occur when it is to their advantage.
Theirs is a system of elastic currency designed not for tenets such as stable prices or sound financial markets, but rather to provide bankers the ability to control the supply of currency to your detriment and their gain. The Federal Reserve System, by design, creates a continued shortage of actual money and imposes a massive extension of credits on the general population – for when there is a shortage of real money, and even more egregiously a suppression of wages, people then have to borrow at interest from the very bankers who restricted the supply of real money and wages in the first place.
So there it is. What Congress, Wall Street, the Fed, Treasury, and the Obama administration are afraid to admit is that potential mortgage losses to US banks hovers around $24 trillion dollars including CDS. And I haven’t even made a run at other gargantuan monsters looming in the woods - like ABS, and municipal bailouts, etc. Our government has no one to finance this for them. They can only create new central bank money - which we pay for, for the rest of our lives, and children’s lives, and our children’s children’s lives.
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