An email from my brother, the corporate banker. Believe it if you want... Scares the pants off me

[scheming daemons]

I asked him what his "Gut" feeling is. Here's his response.

The "bold" parts were done by me.

Dean,


Some thoughts...
- I dont know if the paulson plan was going to solve things long term (I'm pretty sure it wouldnt have), but it was a necessary band aid for putting 'confidence' in the markets. I'm not talking about the equity markets, I'm talking about the core liquidity markets that are the blood that keeps the heart beating. Without short term credit markets (like commercial paper), ALL credit and liquidity is left to come from banks, which are limited in how much they can provide to the market by the amount of capital they maintain. Capital is driven by size of deposits and by debt and equity issued. Unfortunately, even the best banks cant issue new debt or equity in this market (example....PNC, which is a strong bank right now, must pay 10 times what they paid 2 years ago for 5 year debt), so the weaker banks are totally screwed. Not only cant they issue new debt, they are losing deposits as customers are fleeing for fear of bank failures.
- My specific product that I manage at PNC is asset backed commercial paper (ABCP). I have been doing this for 13 years. There have been 3 days in the entire 13 years where the ABCP market was not able to operate fully for PNC. The first was 9/12/2001 (the day after 9-11). This one was purely logistical - the dealers of the ABCP were unable to get to work in New York and backup systems for offsite locations were not developed the way they are now. The 2nd and 3rd days have been this month - on 9/18 and then again today. These were not logistical - these were a result of investor strikes (money market funds are the investors in ABCP). On 9/18, we had to issue $1.1 billion of ABCP and we came up $0.2 billion short. Today, we had to issue $2.3 billion and we came up $0.5 billion short. Tomorrow we have to issue $2.4 billion....I am not sure if we will be able to issue any of it. (note: when there is a shortfall, PNC must cover the amount through a backstop loan...which again puts incredible strain on balance sheets of banks as this will be happening to all major banks, not just PNC).
- It's not the money market funds fault. They cant buy all the ABCP that needs to be sold because they are under a massive redemption siege from their investors who are pulling their money out at an alarming rate (over $400 billion the last 2 weeks has come out of money market funds). The redemptions are the immediate ripple effect from Lehman's failure. Lehman was a highly rated commercial paper issuer who went from being highly rated to bankrupt in one weekend. Money market funds who held CP issued by Lehman took losses two weeks ago - that is what spooked investors to withdraw from money market funds in general, which forces money market funds to keep more cash and treasury bills on hand rather than more fully invest in CP and ABCP.
- THIS IS THE MAJOR PROBLEM. The CP market is a $2 trillion market that provides all the grease for the operation of our economy. Without it, the economy stops. Companies WILL NOT invest or grow because they have no idea where they will borrow money from. This is a fact - I talk to companies every day and all of them have basically stopped all new projects and will not make any large strategic decisions until this settles down.
- People think this is a 'bailout' plan for Wall Street. This really has nothing to do with Wall Street at this point. If companies pull back, they cut jobs, they cut dividends, they cut spending, they pay less taxes, etc, etc, etc. Then the consumer gets the next ripple efffect because he has lost his job, cant sell his house, lost tremendous value in his 401k, etc, etc, etc.

So you asked what my gut is telling me. This is frightening to be honest - I have seen a lot of stuff, but this is unprecedented - if another big shoe drops (god forbid a terrorist attack), complete panic could ensue with people stuffing cash under their beds. No cash in the banking system would mean complete economic shutdown. Well, I have also been around enough to know that at the end of the day, the govt will figure out a way to get enough confidence back in the short term credit markets to stablize it - be it complete nationalization of our banking system. a revised paulson plan, or continued 'arranged marriages' of good banks with bad banks. That will stop the flood waters from rising, however it will not help pump the dirty water out of the system. So we wont drown, but we will be stuck in a muddy pit for awhile - at least a year - and many many companies will go under in the meantime until this 'deleveraging' of the world right-sizes itself.. I believe this could be the onset of new paradigm in how the banking system works.

[IndyOp]

1. We won't drown. We will be stuck in a muddy pit for at least a year.

I find it unsettling that the fear of financial crash elicits fear of and talk about terrorist attacks. I am not criticizing him, just noticing an unfortunate marriage of any really scary events and terrorist attacks.

:(

[pnwmom]

3. Or possibly you and many others are in an understandable -- but dangerous --

state of denial.

[IndyOp]

30. I was quoting the OP back to the person who posted the OP. That is all.

At this point, I don't know what I would be denying.

My parents lived through the Great Depression and I learned lots from them including how to eat beans & greens for days on end and how to distinguish between "need" and "want."

After the theft of the 2004 election I sold the house I owned at the time and bought a significantly smaller, less expensive house with a fixed mortgage. I pay less each month for my mortgage than many people I know who rent a 2-bedroom apartment. My home is a 1920 bungalow and I was looking for a home this age because I wanted to be in a house that stood up during the Hoover Great Depression.

I've long since assumed that my retirement stocks will drop in value to 0 and I'll have to rebuild.

I teach at a Big 10 University and although we will lose out of state students as the economy contracts we will gain instate students who will no longer be able to afford to pay to go to college outside the state.

If I lose my job I am willing to take just about any other job I can find.

I live pretty simply and I can simplify further.

I believe that if we stay focused on taking care of each other then we will be as okay as we can be... The community in which I live has an active social safety net to which I contribute now and will continue in future. Our only security is in each other -- not in the stock market or in the economy - in each other.

Peace.

Namaste.

Mitakuye Oyasin.

[Eyes_wide_ open]

40. I can understand your reasoning

even though I'm not quite willing to throw in the towel yet. It's sane and rational and very different than that of those that are celebrating our 'victory' :eyes: Also I'm glad that there are some who had the MEANS, as well as the foresight to prepare for the present scenario. For those of us who did not things are looking pretty bleak.

[Mojambo]

2. Interesting. Thanks for sharing. n/t

[liberalpress]

4. Thus spaketh the masses at DU

Too bad if good people suffer THE CORPORATIONS MUST PAY! Good people will go down, yes, people who don't deserve it, BUT THIS IS WAR AND THE BANKERS MUST PAY. Sure, my parents will have lost all their retirement. IT"S THEIR FAULT FOR TRUSTING THE CORPORATIONS< THEY MUST PAY!

Thus endetth the quote from DU

[grantcart]

11. embarassing isn't it

"I won't be satisfied until my local baker, my local gym and my next door neighbor who ones a contracting company installing solar panels all go down in flames and misery to show Wall Street that I know they are bad guys."


Its amazing this country functions at all lol.

[Fractasticlicious]

33. Damn straight!

I'm glad you understand me.

[regnaD kciN]

53. The pattern I've been seeing for the past few days...

...has been eerily familiar.

I'm thinking of how, any time someone gives a logical explanation of why some sort of bailout plan (not necessarily the one that went down today) is necessary to preserve liquidity and prevent the day-to-day operation of the economy from tanking, he or she will get drowned out by a chorus of outrage, all based on the simplistic notion that the purpose of a bailout plan is merely to enrich the wealthy at the expense of the rest of us, and that it thus must be rejected out-of-hand, irrespective of any actual problems it might help prevent.

What it takes my mind back to is a time five-and-a-half years ago, on political boards other than this one, where you could present a detailed and convincing argument as to why invading Iraq would not be in our best interest, and a fitting "rebuttal" would be "Why do you hate America?" :eyes:

Two different issues, two different sides...but, from here, it looks like the same simplistic, slogan-chanting, resentment-driven refusal to use one's mind instead of one's gut.

[seabeyond]

14. i was lecturing two 20 yrs this weekend. THINK. all i am asking is for you to think

it is odd odd behavior isnt it. i listened to people today cheer, celebrate, as families saving for college and retirees were losing their investments. hugest.... wtf

[renie408]

35. Hey, I just got told that my 77 year old mother DESERVED to lose

a third of the money she lives off of. That would have been by another DUer.

Feel the love.

[seabeyond]

39. it takes them to the same level of hateful and ignorant as any on the right side

we gripe about.

i read your post.

i wont look at mine, lol, but we have only been putting into it a year. i have refused to put our money in market since 03. but hubby wanted future 401k. i wasnt confident so whatever.

just rotten people that they want ot save enough to take care of themselves when they are old instead of having their kids picking up tab

[steve2470]

5. k and r nt

[MadrasT]

6. Thank you for sharing this.

I'm always interested in reports from the "inside".

[TheKentuckian]

7. I'll try to keep warning you guys

we are not in as good a shape as we were for a recovery from The Great Depression.

We really need to lay down some foundation to allow a come back. If we screw up too badly, there is a potential to slip into a Dark Age, not likely but possible and maybe plausible.

Be good stewards of what was passed on to you, right now is our responsibility.

[Cronus Protagonist]

8. "these were a result of investor strikes" shuld be highlighted in RED BOD

There you have it. The current crisis is a result of an investor strike. Not that I think this one account holds that munch water, but I'd like to hear more about this "investor strike" that caused the ABCP market to fail.

[Phx_Dem]

9. I've been hearing the same thing from other

financial people. The financial industry is the oil for our economic engine. An engine can't run without oil.

[girl gone mad]

10. When in danger or in doubt..

run in circles, scream and shout!!!1!

[DCBob]

12. I think is close to reality from what other experts have been saying..

Warren Buffet said today if we don't have a bailout deal soon it will be an economic "meltdown". Laura Tyson on Rachel said credit will dry up and cause a major slowdown in business -- cutbacks, layoffs, closings. This is not a just a Wall Street situation. We need a deal and we need it very soon.

[Fractasticlicious]

34. Warren Buffets suffering greatly concerns me.

Are you kidding? What, he is going to have to sell one of his islands? Whatever, I can't believe DU is anguishing over the possibility of Warren Buffet losing a few billion. Ridiculous.

[stevenleser]

62. That isnt what that person said.

Buffet isnt concerned for himself at all.

[1corona4u]

13. Thanks for sharing.

There are a lot of factors to consider. If people are looking at this without prejudice. (as some have been)

[TexasObserver]

15. Ask him if this is worse than the day in 1987 the DOW lost 22% of its value.

You see, this isn't the first rodeo for some of us.

This is far from the collapse of 1987. It may get there, but it's 1500 points from being there.

[scheming daemons]

17. This problem is more fundamental than the stock market.... notice that

my brother never even mentioned the 800 point drop in the Dow.


PNC bank was unable to cover the ABCPs on 9/18 and again today. FOR THE FIRST TIME SINCE 9/12/2001.




This crisis has no relationship to the 1987 market crash. The fundamentals of the economy at THAT time absolutely WERE strong.


Not now. We're standing on top of a house of cards that will collapse within 96 hours if there's no bailout.


That's not hyperbole..

[TexasObserver]

21. the liquidity crisis was created by the Bush administration, and cured by them

That's what 600 billion plus of liquidity infused into the system will do.

Don't let me stop you from chasing your tail in that circle, however. You're clearly committed to catching it.

[scheming daemons]

22. No... that 600 billion is inflationary - it didn't get rid of the "dirty water".

The 700 billion would remove the "dirty water" (as my brother called it) from the system.

[TexasObserver]

25. Your brother is wrong.

And, he's clearly in over his head.

Like I said, if either of you had been cognizant 21 years ago, you'd understand this a lot better. As it is, you believe every shrill story you're told, you go for every head fake.

[Jennicut]

27. That is pretty rude. Some of us were just kids 21 years ago.

[TexasObserver]

44. If you were a kid, you can't possibly understand how 1987 was worse.

We lost 22% of the value of the DOW in one day in 1987. Today's loss was 7%.

This is nowhere near the 1987 collapse, and we survived that just fine. Can you see how silly it sounds to one who saw a 22% decline in one day when people run around like a 7% loss is cataclysmic?

[scheming daemons]

45. 1987's collapse was ONLY on Wall Street... credit never dried up....

The problem today is NOT the Dow.

The Dow's collapse today is a SYMPTOM, not the problem.


In 1987, the Dow's one-day drop was the problem... and it was largely contained to the investor class.

The "little guy" wasn't hurt by the 1987 "correction".



The little guy will most DEFINITELY be hurt by the credit market drying up.

[TexasObserver]

46. More nonsense.

If you would spend more time learning and less time saying the same thing over and over, you might eventually understand a tiny portion of what is happening.

As you said earlier, you were in school, drunk and clueless, in 1987. You don't know what happened then, and you don't understand what is happening now.

[scheming daemons]

48. Read this

http://en.wikipedia.org/wiki/Black_Monday_(1987)

Very basic description of Black Monday, 1987. No resemblance whatsoever to the current economic problems.


The credit market is drying up. The stock market is just a symptom.


3 of our largest and most prominent banks have gone under in less than two weeks:

Lehman
Merrill Lynch
Wachovia


Nothing like that came from the 1987 crash. Unemployment didn't rise. Few small businesses were hurt.


This one's different. And with each post, you show how little you understand about 1987 *AND* today.

[Eurobabe]

57. Another tasty-trollie for my ignore list

Yummy! Why are people so condescending on this board, especially the new ones who think they know it ALL?

Besserwisser!

Hang in there Scheming Daemons.

[Jennicut]

60. You said it. Rude and condescending. Sort of like McTroll.

1987 obviously is different then 2008. My parents went through the 1987 crash and survived it but the crash yesterday is going to effect businesses across the board. "This is no market correction." And just because I was 12 in 1987 doesn't mean I don't and others don't get it. Sheesh!

[1corona4u]

52. Yeah, I see that...so unless it all gets worse, than you experienced..

it's irrelevant. Gotcha.

[scheming daemons]

29. In over his head? He's makes about $250k/year for PNC.... and has been doing this

for more than a decade.


As for me... I was in college in 1987, and I remember it well. But I didn't have to worry about being able to even get my next college loan because of the 1987 crash.


This has nothing to do with the Dow.


There hasn't been a time in this country's history when the credit market completely dried up..... since the 1930s.

[seabeyond]

16. tell your brother thank you, and thanks to you too for sharing. n/t

[AZBlue]

18. A new paradigm is an excellent idea!!!

We just have to get through the stuff in between.

[scheming daemons]

20. 1/4 of us will be out of work by then. 1/10 of us will be homeless, or living with relatives.

Maybe that is ok with you.

It's not ok with me.

[AZBlue]

23. You obviously missed the point of my post.

First of all, a new paradigm will hopefully mean we won't revisit this again in 5, 10, 20 years.

Secondly, I did say we have to get through the other stuff first. Meaning, we're in for a very bumpy ride for a while, even if we may come out ahead in the end.

There are actually ways to solve this without the market completely collapsing - the question is whether or not we can get Congress to implement them.

[Fractasticlicious]

37. Good grief, why stop there?

158/320th of us will become cannibals by Christmas. Sheesh, mind if I check back with you about your ridiculous prognostications at a later date? Could you pick a date for your immensely cerebral prediction conclusion?







Pray for the 100millionaire bankers.

[symbolman]

58. When do we get to the roving packs of mutants?

because they make great target practice and you don't have to feel bad, as they are practically animals :)

[Lifelong Protester]

19. Been saying this all along...

Is the 'stick it to the man' argument working for ya? I still refer to it as the 'cut off your nose to spite your face' idea.

Save the patient, lectures later.

Remember, in 1929, only 2% of Americans were invested in the market, and look how long that depression lasted.

Nowadays, it is more like 50% DIRECTLY in the market; everyone else is touched by it whether you like it or not.

[vaberella]

24. I'd increase that percentage because so many people are connected through they're 401Ks. n/t

[Fractasticlicious]

38. Stick it to the corporate pig-men works for me.

Sticking up for the billionaires works for you, apparently.

[progressiveforever]

26. Thank you- this made more sense to me than most things I've read

But it sure is not good news. I fObama decided to quit the race with this mess, I wouldn't blame him.

[DeschutesRiver]

28. Thanks so much for posting that -confirms things for me

DH and I had put together a lot of pieces and that is about what we'd come up with as well. I read it out loud to dh, and it just had a chilling effect to hear someone within the industry confirm some of our fears.

[Fractasticlicious]

31. Glad to hear it.

Tell him to set fire to the bank and run.

[scheming daemons]

32. That helps us, how?

[renie408]

36. I think I hear your mom calling you. It's your bed time. Remember to brush first. n/t

[IndianaJones]

41. sobering.nt

[dailykoff]

42. Is your brother the Unibomber

or just paragraph challenged?

[scheming daemons]

43. I think he typed it from his blackberry.... not sure...

[dailykoff]

49. Cue the black helicopters.

You both need to take a nice chill pill.

[scheming daemons]

50. You don't know how much I sincerely hope you are right

[dailykoff]

51. In a week we'll all be in a lather over Iran

or poison tomatoes, and what do you know, your bank will still be cashing your checks.

[hay rick]

47. Thanks for a meaty post. nt

[Bobbie Jo]

54. Many of us have already lost our 'homes, jobs, 401K's'....and discovered the world didn't end.

Long story I would be more willing to share if it weren't almost 1am. To make a long story short...many of us have taken this hit some time ago.

[soothsayer]

55. Oh, THAT's why you're in a panic. Got a brother in the biz. Makes sense now.

[Dems to Win]

56. I'm looking foward to the new paradigm that doesn't include hedge funds, those greedy parasites.

[TheKentuckian]

59. Well, I'm tired of getting whacked and losing everything

I'm tired of ramen noodles. I'm tired of sleeping in my car. I'm tired of starting over.

I'm tired of people thinking the fatcats are going to be punished. They'll be fucking groovy and I'll be looking for a safe spot to camp that I can travel to the soup line or some bullshit job.

These people can lose billions of dollars and still have more net worth than many countries. Its only the little people that get hurt. The people that everyone wants to see take their licks will be eating...well.

[Extend a Hand]

61. interesting, thx for posting. nt