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Banking Sector Groundhog Day Hits U.S. Treasury Bonds

Politics / Credit Crisis 2009 Jan 30, 2009 - 02:36 PM GMT

By: Money_and_Markets


Best Financial Markets Analysis ArticleMike Larson writes: Have you ever seen the fantastic Bill Murray movie “Groundhog Day?”
Murray plays Pittsburgh weatherman Phil Connors who's forced to cover the annual February unveiling of Punxsutawney Phil.

He clearly isn't thrilled. And his bad attitude shines through in several hilarious episodes. Fate punishes Murray as a result, by forcing him to re-live Groundhog Day over and over again until he improves his attitude and can win the love of his co-worker, Rita.

I feel like we've got something similar going on these days in the banking sector. Every few months, some bank, broker, or lender “blows up”
— New Century Financial. Countrywide Financial. Bear Stearns. Fannie Mae. Freddie Mac. Lehman Brothers. AIG.

You know the names.

And every few months, some subsector of the credit market gets dysfunctional — first subprime mortgages, then Alt-A loans, prime residential mortgages, commercial real estate loans, leverage buyout loans, credit cards, and auto loans.

Whenever these simmering crises explode into a boil — meaning the problems migrate from the business pages to the front pages and/or bank stocks tank —

Washington Gets Into a Tizzy!

Whenever politicians, regulators, and policymakers get together, you can count on them pushing through some new 'solution.'
Whenever politicians, regulators, and policymakers get together, you can count on them pushing through some new “solution.”

Then the politicians, regulators, and Federal Reserve policymakers run around like chickens with their heads cut off and push through some new “solution.”

  • One of the first federal ideas was FHASecure . The plan was designed to help move troubled, subprime adjustable rate mortgage borrowers into FHA loans.
  • Then there was Hope Now , the government-industry alliance to modify terms on more mortgages.
  • Later it was Hope for Homeowners , a program whereby current lenders were supposed to write down borrowers' mortgage principal balances and then refinance them into FHA loans.

Now, the government is shoveling hundreds of billions of dollars into the banking system via TARP. It's buying bigger and bigger stakes in the country's megabanks, including Citigroup and Bank of America. It's helping arrange shotgun marriages between wounded institutions like Washington Mutual and Wachovia, and other banks.

Now, the government is shoveling hundreds of billions of dollars into the banking system via TARP. It's buying bigger and bigger stakes in the country's megabanks, including Citigroup and Bank of America. It's helping arrange shotgun marriages between wounded institutions like Washington Mutual and Wachovia, and other banks.

Finally, it's guaranteeing hundreds of billions of dollars of crummy assets.

Those moves essentially put the taxpayer on the hook for billions in future losses from bad mortgages, bad commercial loans, bad securities, and more.

Losing Count of All the Failed Rallies?
You’re Not Alone …

EACH AND EVERY TIME one of these bailouts has been announced, leaked, or otherwise picked up on by investors, the financial stocks have rallied. EACH AND EVERY TIME, those rallies have eventually failed with financial stocks falling to new lows.

Just look at this longer-term chart of the KBW Bank Index, a benchmark index made up of the top banks in the U.S. How many failed rallies can you find?

I’ve identified some of the major ones, each spurred by some new whiz-bang program out of the Treasury Department or the Federal Reserve. But there are plenty of minor ones, too.

And none — NOT ONE — have stuck!

Failed Rally

There's a very simple reason all these failures: We just experienced a once in a lifetime credit market bubble .

The housing market was the most visible sector trashed by the reckless interest rate policy of the Fed. Its demise was the result of the complete abdication of responsibility by U.S. regulators, the absolute stupidity of America's top financial institutions, and the overwhelming greed of everyday borrowers and speculators.

But it wasn't just housing. The recklessness pervaded:

  • Commercial real estate …
  • The private equity business …
  • Emerging markets lending …
  • Auto loans …
  • And more.

So naturally, the losses that began in housing and mortgages have spread throughout the credit world.

Financial institutions worldwide have already taken a whopping $1.06 trillion in writedowns and losses, according to Bloomberg. But that could turn out to be less than half — or even just a THIRD — of the total losses we'll eventually face.

Just this week, in fact, the International Monetary Fund hiked its estimate of the costs of the global credit crisis to $2.2 trillion from an October forecast of $1.4 trillion.

No wonder these bailouts keep failing!

What's Behind the Latest Financial Lovefest

We can't stop Washington bureaucrats from doing dumb things. But we can take steps to keep our money safe.
We can't stop Washington bureaucrats from doing dumb things. But we can take steps to keep our money safe.

The latest plan from Washington that got the financial stocks running up is creating a “bad bank.”
This institution would be financed by some combination of taxpayer money, banking sector money, and other sources.

It will reportedly buy toxic assets from banks, more than likely at inflated prices. Government officials will justify doing so by claiming today's asset and security prices are “artificially”
depressed by forced selling and that its “mark to model,”
hold-to-maturity prices are more accurate. This process will make bank balance sheets look better and supposedly resume the flow of credit to the economy.

I'm going to go out on a not-so-thin limb here and make a prediction:

This latest scheme to save the world will fail just like all the others. That is because nothing … NOTHING … can prevent a painful adjustment process.

I wish that weren't the case. But the time to prevent this painful correction and deleveraging process was a few years ago when the bubble was inflating.

If regulators, policymakers, borrowers, and lenders hadn't acted so stupidly then, we wouldn't be in this mess now. But they did, we are, and no amount of Washington happy talk can change that fact.

As individual investors, we can't stop Washington bureaucrats from doing dumb things. All we can do is roll with the punches, try to ride the rallies and the sell offs as best as possible, keep a large chunk of our money in safe haven investments such as Treasury-only money markets funds, and hunker down.

Finally, have you seen the carnage in the Treasury bond market? The long bond futures have tanked roughly 14 points in a straight line since December. Ten-year yields have shot up by more than 60 basis points! In fact, January is shaping up to be the single worst month for Treasury bonds in almost five years.

This should come as absolutely no surprise to you. I warned in my December 5, Money and Markets column that the long-term Treasury market had all the characteristics of a bubble — and now it appears to be getting pricked.

The reason is simple and straightforward: Our country is borrowing and spending money it doesn't have like never before. We rely on the kindness of strangers to fund our profligacy, and those investors appear to be getting cold feet. Bonds are oversold now, so they could easily bounce in the near term.

But my longer-term prescription remains the same: “Stay the heck away!”

Until next time,


P.S. Want even more frequent updates on the housing market, interest rates, mortgages, and the economy? Then be sure to check out my blog in between my weekly Money and Markets columns. To do so, just click here .

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit .

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