A Killer Chart

The Automatic Earth

Over the weekend, I wrote about Fannie Mae and Freddie Mac, and how they form the core of the biggest fraud and crime ever perpetrated upon the American people. And even though that was already the umptieth time I have addressed this particular topic, I want to return to it again.

After all, we’re not talking about Jesse James or Billy the Kid or Charles Ponzi or Kenny-Boy Enron or any of that petty kiddy wannabe criminal stuff, this is the number one way Americans have ever been fleeced right across the entire nation. Maybe that status is best recognized by the fact that people to this day keep on begging for more of the same. Either that or another little fact: the government is at the center of the scheme.

In the July 11 post at TAE, there was an article by Michael David White, a Chicago area real estate broker who a few years ago started calling on his clients to NOT buy a home. I’ve featured many of White’s articles since; I like that kind of attitude. In last week’s piece by White Pending Homes Sales Crash in a Record Fall to a Record Low as Tax Break Expires, though, something was missing. There was a line that said “see the graph below”, but there was no graph. Since I had a hunch which graph he meant. I sent him a mail. And yes, he came back to me with the graph (some 6 weeks old) that can hardly be surpassed in its definition and clarity of the depth of the US housing and credit crisis.

Take a look at the chart. That is, what Americans’ homes are worth, their equity, decreased by $7 trillion -from $20 trillion to $13 trillion-, from spring 2006 to spring 2010. In the same period, mortgage debt, what Americans owe on their homes, went down by only $270 billion. Yes, that’s right: US homeowners lost more, by a factor of 26, than they “gained” through clearing mortgage debt. Thus, if we estimate that there are 75 million homeowners in America, they all, each and every one of them, lost $93,333.

Good morning America!!

And your own government is still trying to encourage homeownership? Now why would they want to do that in the face of numbers such as these? How much thought have you given that question? Over the past 4 years, the “right to own a home” has become synonymous with the “right” to lose some $25,000 a year. Why does Washington, through Fannie and Freddie, Ginnie Mae and the FHLB, continue to guarantee guaranteed losses for American citizens?

While these may seem separate issues, to me it all feels eerily in the same vein as Eric Sprott and David Franklin pointing out that every single US banking company but the 6 Too Big To Fail ones lost money in 2009, all 980 of them:

“Wither Green Shoots”

Of the 986 bank holding companies in the US last year, a total of 980 of them LOST MONEY.

And that’s even after all the government bailouts the sector received. Hmmmm. Robust banking recovery? Not a chance. However, the remaining six banks, all of which are “too big to fail”, did manage to earn a combined $51 billion in 2009, sending their stocks soaring as a result. So despite 980 out of 986 bank holding companies returning nothing but red, the sector actually fared pretty well from a market perspective.

Does this make any sense to you? Here we have an entire sector that is essentially broken; where a mere handful have maintained profitability not from their own strength but thanks to the taxpayers’ bailouts; and where the government is now aiming the most powerful of their regulatory reforms – and the market decides to pile into their respective equities?

And banking is not the only sector Sprott and Franklin say is completely out of whack. It all leads back, how could it not, to housing, Fannie and Freddie, and more losses for homeowners going forward, to add on to the $7 trillion already incurred.

The banking sector isn’t the only equity space that confounds us – the housing stocks are as equally absurd. Despite what you may have heard from your local real estate agent, the fundamentals for US housing are looking dismal. Ever since the tax credits have rolled off, new home sales are now running at 300,000 on a seasonally-adjusted annual rate (“SAAR”), representing a new all time low this past May. For comparison, this is down from an all time high of 1,389,000 new home sales made in July of 2004.3 Reading this, you may expect the home builder stocks to have performed poorly. But no, not in this market!

[..] from the day that Bernanke first saw his ‘green shoots’, the home builders index appreciated by 47% to June 30, 2010, peaking at 104% on April 23rd – all while new home sales were down 14% over the same time period on a SAAR basis.4 ‘The Market is Always Right’, as they say, but it simply can’t be with regard to these stocks. The housing ‘green shoots’ were the product of government initiative, rather than true fundamental improvement, and were thus short term in nature. Now that the government program has ended, the whole sector looks poised to fall apart.

And finally, for both the cherry and the icing on the cake, Bradley Keoun and David Henry at Bloomberg explain one of many ways in which banks keep the facade upright. They can book a profit when their own bonds lose value. How, you ask, why? Because it -in theory- allows them to buy back their own bonds at a lower price.

Bank Profits Depend on Debt-Writedown ‘Abomination’ in Forecast

The second-quarter results may include gains taken under a U.S. accounting rule known as Statement 159, adopted by the Financial Accounting Standards Board in 2007, which allows banks to book profits when the value of their bonds falls from par. The rule expanded the daily marking of banks’ trading assets to their liabilities, under the theory that a profit would be realized if the debt were bought back at a discount.

In practice, it’s an accounting “abomination” because fluctuations in the value of the debt don’t change the amount the banks owe, said Chris Kotowski, an analyst at Oppenheimer & Co. in New York. “Just because Morgan’s credit spreads widened out this quarter doesn’t mean that their ultimate interest and principal payments changed one iota,” Kotowski said. “The market will back it out, both on the upside and the downside.”

To summarize, all US banks would have lost money last year if it hadn’t been for your taxpayer dollars, and, indeed, all but the 6 biggest did. They received many trillions in public funds, all of which are a loss to you, who have also lost those $7 trillion on your home values. The balance sheets of the big banks, however, still wouldn’t look good even with all your funds; they need stupid accounting pet tricks for that. Just like the government.

The overall picture is one of a ridiculous patchwork of lies and tricks and fraud and ultimately for you, losses bigger than you can bear.

Is it time to storm the Bastille again?