Where is the Fat Lady? She needs to start singing!


Recently somebody said, “Hey, you lost weight,” and I said, “Yeah, thirty-five pounds and three and a half billion dollars.” So I’m quite a bit lighter and more flexible than I was.” – John Malone

Greetings from the metropolis of Cedar Crest, NM.

Friday evening, I was watching CNBC when the news broke out about the IndyMac Bank seizure. I was in shock. I just got to a peaceful place….well…not really peaceful…but a place of “acceptance” (for a lack of a better word) in regards to the unavoidable bailout of Freddie Mac and Fanny Mae. Now this?

Doing some quick research, this is the FIFTH FDIC failure of the year. Fifth!!! And guess what….we are not done. Based on what the experts are saying (…just pick one of your favorites), not only has the “fat lady” not started to sing yet….from my understanding….there are a lot of fat ladies and they all have a lot of singing to do.

Although this was expected (not specifically IndyMac but obviously Freddie and Fanny), the reality of it all is still surprising. I guess it is still surreal to me.

I have written a lot in my own blog about how to invest in a tumultuous economy….so I was very aware of the prognostications by many experts regarding the future of the economy. One particular opinion stood out….Nouriel Roubini, chairman of RGE Monitor and professor of economics at New York University’s Stern School of Business.

Back in February, I wrote a post that discussed Glenn Beck’s “DEFCONOMY” scale regarding the “worst-case scenario” forecast of the economy. This DEFCONOMY scale is based on Nouriel Roubini’ s “twelve steps to financial disaster.”

Based on Beck’s DEFCONOMY definitions….I think we have met the requirements of DEFCONOMY 3….and well into DEFCONOMY 2. According to Roubini, in DEFCONOMY 2, we will see “Most forms of credit become virtually nonexistent. That results in a “vicious circle” of additional write-downs, stock market losses, and bank collapses, which leads to even less credit being available.”  Roubini also states that “…credit conditions are becoming worse everyday across a variety of markets and won’t be getting better anytime soon. Without extra credit available, people might have to actually (gasp!) live within their means.”

Now…DEFCONOMY 1….according to Roubini is “A full economic meltdown.”  In other words, “The Great Depression has arrived.”

I doubt DEFCONOMY will ever materialize.  Too much has to happen…..but then again….what do I know?

There is my “feel-good” article for the week…..until next time……rob

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  1. “Most forms of credit become virtually nonexistent”…Things are bad, but lets not get melowdramatic.

    Good deals are still getting funded, just not through traditional lenders. LTVs are lower, DSCR requirments are higher, 100% financing is dead.
    All this is true, but the sky is not falling.

    Indymac went out-of-business because they were reckless and unprepared for this down-turn. There are still strong banks out there…one of them will buy Indymac from the feds within a month.

  2. Real estate lending guidelines were out of control in the years prior. We are back into the “old fashioned” or traditional days of home financing. If you have money in the bank and have a good credit score, you can still get financing from hundreds of lenders.

    The sky isn’t really falling, it is merely adjusting back to where it once was.

    I guess IndyMac got a little too greedy and it bit them in the butt!

  3. thanks for the comment Glenn.

    You are talking about current conditions…and I would agree with you. BUT… The post was directed toward a prediction….about what may or may not happen.

  4. Colin - Buying Florida Property on

    It’s hard to dispute that, in retrospect, lax lending attitudes of the past few years were crazy and were almost certain to result in today’s problems. We’ve probably all got some war stories of loans being dispensed like candies and borrowers who were encouraged to stretch things too far. At the time it was fascinating but now it seems unreal how many lenders and borrowers got caught up in it because of (basically) greed.

    On the question of how far along the DEFCONOMY scale we’ve progressed, I’d put it at 3 rather than 2 – because there is still some level of credit around for some people! I’m also a firm believer that pessimism can bring about the very troubles that it fears – so let’s stay positive and publicize the positive signs (if/when they appear!) just as much as the melodrama of Indy Mac, Freddie Mac, etc. I do agree that one of two more big banks cracking under the pressure could transform the situation quickly. Let’s hope we avoid that!

  5. I definitely think we are going to see a few more big banks fail before we get out of this. I just heard something on NPR about the government has a secret list of over 30 banks they feel are in trouble. I am ready for this to be over.

  6. I agree with Rob and the other posters. Yes, good deals are getting funded the old fashioned way. However, as an economist Rob is right if Fannie and/or Freddie went down markets would more than likely freeze. Given that scenario no deals would be funded overnight.

    It’s hard to understand how close we really are to the edge until a dramatic event occurs to wake us up. Hopefully all the talk from Bernanke and Paulson will continue to instill confidence in markets.

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