New Article States: 'To Congress: Please Do Not Spread the Panic'

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Martin D. Weiss, Ph. D. discusses how the President, the Treasury Secretary and the Federal Reserve Chairman recently announced their view that Congress must get to the root of the debt crisis in America by providing a broad solution that truly puts the crisis to an end. In this issue of Money and Markets, Dr. Weiss explains the magnitude of the crisis afflicting mortgages, other debts and derivatives clearly overwhelms the $700 billion bailout proposal currently under discussion.

Martin D. Weiss, Ph. D. discusses how the President, the Treasury Secretary and the Federal Reserve Chairman recently announced their view that Congress must get to the root of the debt crisis in America by providing a broad solution that truly puts the crisis to an end. In this issue of Money and Markets, Dr. Weiss explains the magnitude of the crisis afflicting mortgages, other debts and derivatives clearly overwhelms the $700 billion bailout proposal currently under discussion.

Congress should seriously consider the facts in the Federal Reserve's Second Quarter Flow of Funds Report. In this report, released on September 18, just one day before the President announced the Administration's $700 billion bailout proposal, the Fed estimates that the nation's interest bearing debts has now grown to $51 trillion. Plus, it provides critical additional insights regarding the breadth of the debt problems facing the nation.

The ownership of residential mortgages is dispersed among many different sectors. There are $12.1 trillion in mortgages on single and multi-family homes in the United States. But these are not held only by banks and S&Ls. They are spread among a wide variety of institutions and individuals, all of which could have similar claims to federal assistance.

Fannie Mae, Freddie Mac and GSAs are still at risk. As a first priority, the plan would have to expand the recently announced bailouts of Fannie Mae and Freddie Mac in order to properly secure the residential mortgages held by government-sponsored enterprises (GSEs) and agencies (GSAs). These now total $5.4 trillion, according to the Fed.

Private sectors and local governments also own residential mortgages in substantial quantities. The current debate seems to focus exclusively on residential mortgages, but at many regional and super-regional banks, much of the risk is currently in the commercial mortgage sector, where recent data denotes many of the same difficulties as the residential sector. There are $2.6 trillion in commercial mortgages outstanding in the United States. As with residential mortgages, these are also dispersed widely beyond the banking sector; $644 billion held by issuers of asset-backed securities, $263 billion held by life insurers, $65 billion at nonbank finance companies and $37 billion at Real Estate Investment Trusts (REITs).

State and local governments also have debt problems. Indeed, given the essential nature of their services, it could be argued that their credit challenges take priority over those faced by banks, S&Ls and Wall Street firms. Currently, the Fed estimates $2.7 trillion in municipal securities outstanding, most of which have been reliant on a bond insurance system that remains on the brink of collapse. In short, to truly get to the root of the problem as the President is requesting, Congress' new bailout plan would have to cover a lot of ground beyond just the banking industry.

The Money and Markets experts urge Congress to get a better handle on the enormous build-up of derivatives in America, beginning with a thorough review of the OCC's Quarterly Report on Bank Trading and Derivatives Activities, First Quarter 2008. Although derivatives were originally designed to help reduce risk, it is widely acknowledged that their volume and usage have reached such an extreme level that they have become, instead, speculative bets which greatly increase the systemic risk to financial global markets. And although regulators have few details about these derivatives, most officials now realize they may be at the root of the panic that began to spread throughout the global banking system in the wake of the Lehman Brothers bankruptcy on September 15. Therefore, it should be well understood by all members of Congress that, to ward off possible renewed waves of global panic, the bailout plan would also have to address the following facts:

  •     The notional amount of derivatives held by U.S. commercial banks is $180.3 trillion.
  •     The credit exposure to derivatives (risk of default by trading partners) is $465 billion, up 159% from one year earlier.
  •     U.S. banks with the greatest credit exposure to derivatives are HSBC (with $7.21 in risk per dollar of capital), JPMorgan Chase (with $4.11 in risk on the dollar), Citibank ($2.79), Bank of America ($2.15) and Wachovia ($.77).
  •     Further, after Bank of America's merger with Merrill Lynch, which reports $4 trillion in derivatives, and after a possible Wachovia merger with Morgan Stanley, which holds $7.1 trillion, these exposures will likely be intensified.

For all of these debts and derivatives, a bailout plan would, in normal circumstances, require realistic estimates of the amount that is already delinquent or in default, and a reasonable forecast of how many more are likely to go bad in a continuing recession. However, the only estimates currently available are those reflecting actual write downs recognized by large, global financial institutions, over $500 billion. That figure does not include the thousands of other institutions which are among the sectors we cite above. Nor does it include losses incurred but not yet properly booked let alone losses not yet incurred. To date, no government agency is providing such estimates. But without them, any budgetary planning for this bailout is next to impossible.

"In sum, there should be no illusion that the $700 billion estimate proposed by the Administration can actually provide anything approaching a total solution to America's current debt crisis. It could very well be just a drop in the bucket. There should also be no illusion that the market for U.S. government securities can absorb the additional burden of a $700 billion bailout without traumatic consequences," Dr. Weiss states.

To read this issue online, please visit:

http://www.moneyandmarkets.com/Issues.aspx?To-Congress-Please-Do-Not-Spread-the-Panic-2298

About MARTIN D. WEISS & MONEY AND MARKETS     

Martin D. Weiss, Ph.D., founder and president of Weiss Research, Inc. and a leading advocate for investor safety, is a nationally recognized expert on domestic and international financial markets. With more than 35 years of experience, including many years in Latin America and Asia, Dr. Weiss has helped empower millions of investors to make better financial decisions through his monthly Safe Money Report and daily Money and Markets.

Dr. Weiss' keen understanding of foreign markets and the global economy has earned him a reputation for thoughtful, in-depth analysis that investors can rely upon to make informed financial decisions. Regularly called upon by the media for his independent investing guidance, he has been featured in publications nationwide, including The Wall Street Journal, The New York Times, Chicago Tribune, Investor's Business Daily, and Forbes and has also appeared on CNN and CNBC.

Throughout his career, Dr. Weiss has been an advocate for consumers and investors in the insurance, banking and brokerage industries, dedicating his time and resources providing analysis and data for Congressional testimony, constructive proposals for reforms in the securities industry and legislation for full financial disclosure as well sound accounting and fiscal policy. In November 2004, he launched the Sound Dollar Committee, a nonprofit organization dedicated to building a network of investors seeking to protect the nation's future by demanding honesty in government accounting, a balanced budget and sound economic policy.

Dr. Weiss is author of The New York Times best-seller, The Ultimate Safe Money Guide, which gave baby boomers a road map to grow their wealth safely. It was listed on the New York Times Business, Wall Street Journal, and BusinessWeek best-seller lists, as well as the Barron's Roundup for 2002.

Dr. Weiss holds a bachelor's degree from New York University, a Ph.D. from Columbia University and is fluent in eight European and Asian languages.

Money and Markets (http://www.moneyandmarkets.com) is a free daily investment newsletter from Dr. Martin 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. Weiss Research, Inc. is located in Jupiter, Florida. For more information about our editors, or to set up an interview, please contact Jennifer Moran at 561-627-3300 or visit http://www.moneyandmarkets.com.

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