(Originally written and posted on 11/25/08)
The media have been informing us that the troubled bank Citigroup (whose credit card I use) has $306 billion worth of bad loans. For instance, I heard Kai Ryssdal say this on NPR’s Marketplace on Nov. 24, I read it in the Sacramento Bee on Nov. 25, etc.
So far, the federal government is in hock for $45 billion to bail out Citigroup, which is just one of many, many financial institutions and corporations which the government is being asked to bail out - not just under the $700 billion Paulsen plan, but also under other programs, such as those for the rescue of Fannie May and Freddie Mac, AGI, the Big Three auto companies, American Express and other credit card companies, etc, etc.In other words, Paulsen’s $700 billion aren’t going to be nearly enough, we are told. The $45 billion allocated to Citigroup aren’t even going to scratch the surface, since that bank has $306 billion in toxic assets, i.e. non-performing loans, - presumably mostly subprime loans that were made during the housing bubble of 2004-2007. We are also told that this is about 1/6 of Citigroup’s total assets of nearly $2 trillion.
Now I don’t know what part of the total financial sector Citigroup represents, but if they alone are saddled with $306 billion worth of toxic assets, then the total amount of such assets must be at least 10 to 15 times more, no? I.e. anywhere between $3 trillion and $4 trillion. Other banks, lenders, financial institutions, and those who insure them, ( E.g. AIG), are all in the same fix, aren’t they?
* * * * *
But it is difficult to comprehend these figures. I am not sure Kai Ryssdal, or NPR, or any of the media understand what they are talking about when they throw such figures at us. I believe that they are sometimes at least as ignorant as me.
I am not talking here about the various instances when I caught anchormen and newscasters on CNN or on CNBC’s business channel confusing a million and a billion. That also happens. No, I am now only talking about my hunch that the media (1) don’t understand the nature of the current economic crisis any better than I do, and that they (2) are in some ways even more innumerate than me, unable to grasp the magnitude of some of the figures they spout in their news reports. As a result, they spread confusion and misinformation.
* * * * *
Case in point: let me interpret the number $306 billion, the alleged amount in toxic assets owned by Citigroup. How does this number compute? In order to do this, I use some simple facts and some reasonable assumptions:
Fact/Assumption Number One: There are in America about 120 million households (See Census Data and Statistical Abstract of the United States).
Assumption #2: 65% of households own their private house/home/apartment. That’s 78 million mortgages. But many people own more than one piece of property, there is of course business property, etc. So let’s say there are 110 million deeds to real property in America.
Assumption #3: 80% of these mortgages are still being paid off. That’s 88 million mortgages on which banks should collect monthly payments, or some other sort of regular periodic payments.
Assumption #4. 85% of these are okay performing loans. After all, the vast majority of mortgages were taken out before the subprime frenzy, and even after 2004, millions of people still took out mortgages the responsible, old-fashioned way.
So let’ say that 15% of all real estate loans in America are “bad,” i.e. toxic, sub-prime, junk, non-performing, call it what you will. These are the loans that were made during the housing bubble, that should not have been made, that are now leading to foreclosures, and triggered the current world financial crisis. That’s about 13 million bad mortgages/loans.
Assumption #5. The average American home is now worth $200K, down from $380K at the peak 4 years ago. Remember, real estate is very expensive in places like San Francisco and much of California, but not so in Mississippi and in rural Kansas.
Assumption #6: The average sub-prime junk loan was for the full amount, with no down payment.
Assumption #7. If ALL sub-prime, junk, non-performing mortgages were a total loss to the banks, the magnitude of the entire problem of the exploded housing bubble would be:
13 million x 200 K = 2,600 billion, or 2.6 trillion.
If you want to be a bit more pessimistic, say that the problem is 3.5 trillion.
This sum is between one fifth and one fourth of US GDP.
If Citigroup owns 306 billion of the roughly $3 trillion in bad loans, that’s 10% of the total. Can that be correct?
Also, can Citigroup’s total assets (2 trillion) be one 7th of US GDP? Or about the same as the total economy of China or Germany?
And can the total combined assets of all US banks dwarf US GNP?
Can the combined assets of US banks equal three quarters of the world’s GNP? (54 trillion)
Can the total assets of all of the world’s banks be three times the size of world GNP?
The answer to all these questions is YES. Banks’ “magnitude” is measured in assets, whereas GNPs and GDPs are measures of wealth produced in a given year. The world’s GNP is 54 trillion but the total value of the world’s assets is seven times larger. Before the current financial collapse, I estimate the world’s total financial assets at 170 trillion.
And according to The Economist, financial assets only make up 46% of all assets, the rest consisting of real estate. Therefore, total world assets would be 370 trillion. This is $370,000,000,000,000, or 37 x 10 to the 13th power.
* * * * *
Well, these are just numbers. They are what they are. No meaning, really. Except perhaps this:
A) Banks are way too big and too powerful. Accumulating assets whereby a single institution is worth more than the GDP of Germany or California is bad. The power of corporations begins to dwarf that of entire societies. But corporations don’t represent the public, as societies do. Corporations represent shareholders only.
B) 13 million bad mortgages are a bummer, especially to institutions such as Citigroup, which are holding the bag. However, it’s only a small fraction of (1) Citigroup’s total assets, (2) a small portion of all mortgages, (3) an even smaller fraction of the total financial sector’s assets, and (4) an even smaller part of the world’s total wealth. It is unconscionable that the bursting of the housing bubble is permitted to create havoc with the entire world economy. 13 million bad mortgages in the United States do not represent the totality of the world economy. The crisis is far more psychological than economic.
So far, the federal government is in hock for $45 billion to bail out Citigroup, which is just one of many, many financial institutions and corporations which the government is being asked to bail out - not just under the $700 billion Paulsen plan, but also under other programs, such as those for the rescue of Fannie May and Freddie Mac, AGI, the Big Three auto companies, American Express and other credit card companies, etc, etc.In other words, Paulsen’s $700 billion aren’t going to be nearly enough, we are told. The $45 billion allocated to Citigroup aren’t even going to scratch the surface, since that bank has $306 billion in toxic assets, i.e. non-performing loans, - presumably mostly subprime loans that were made during the housing bubble of 2004-2007. We are also told that this is about 1/6 of Citigroup’s total assets of nearly $2 trillion.
Now I don’t know what part of the total financial sector Citigroup represents, but if they alone are saddled with $306 billion worth of toxic assets, then the total amount of such assets must be at least 10 to 15 times more, no? I.e. anywhere between $3 trillion and $4 trillion. Other banks, lenders, financial institutions, and those who insure them, ( E.g. AIG), are all in the same fix, aren’t they?
* * * * *
But it is difficult to comprehend these figures. I am not sure Kai Ryssdal, or NPR, or any of the media understand what they are talking about when they throw such figures at us. I believe that they are sometimes at least as ignorant as me.
I am not talking here about the various instances when I caught anchormen and newscasters on CNN or on CNBC’s business channel confusing a million and a billion. That also happens. No, I am now only talking about my hunch that the media (1) don’t understand the nature of the current economic crisis any better than I do, and that they (2) are in some ways even more innumerate than me, unable to grasp the magnitude of some of the figures they spout in their news reports. As a result, they spread confusion and misinformation.
* * * * *
Case in point: let me interpret the number $306 billion, the alleged amount in toxic assets owned by Citigroup. How does this number compute? In order to do this, I use some simple facts and some reasonable assumptions:
Fact/Assumption Number One: There are in America about 120 million households (See Census Data and Statistical Abstract of the United States).
Assumption #2: 65% of households own their private house/home/apartment. That’s 78 million mortgages. But many people own more than one piece of property, there is of course business property, etc. So let’s say there are 110 million deeds to real property in America.
Assumption #3: 80% of these mortgages are still being paid off. That’s 88 million mortgages on which banks should collect monthly payments, or some other sort of regular periodic payments.
Assumption #4. 85% of these are okay performing loans. After all, the vast majority of mortgages were taken out before the subprime frenzy, and even after 2004, millions of people still took out mortgages the responsible, old-fashioned way.
So let’ say that 15% of all real estate loans in America are “bad,” i.e. toxic, sub-prime, junk, non-performing, call it what you will. These are the loans that were made during the housing bubble, that should not have been made, that are now leading to foreclosures, and triggered the current world financial crisis. That’s about 13 million bad mortgages/loans.
Assumption #5. The average American home is now worth $200K, down from $380K at the peak 4 years ago. Remember, real estate is very expensive in places like San Francisco and much of California, but not so in Mississippi and in rural Kansas.
Assumption #6: The average sub-prime junk loan was for the full amount, with no down payment.
Assumption #7. If ALL sub-prime, junk, non-performing mortgages were a total loss to the banks, the magnitude of the entire problem of the exploded housing bubble would be:
13 million x 200 K = 2,600 billion, or 2.6 trillion.
If you want to be a bit more pessimistic, say that the problem is 3.5 trillion.
This sum is between one fifth and one fourth of US GDP.
If Citigroup owns 306 billion of the roughly $3 trillion in bad loans, that’s 10% of the total. Can that be correct?
Also, can Citigroup’s total assets (2 trillion) be one 7th of US GDP? Or about the same as the total economy of China or Germany?
And can the total combined assets of all US banks dwarf US GNP?
Can the combined assets of US banks equal three quarters of the world’s GNP? (54 trillion)
Can the total assets of all of the world’s banks be three times the size of world GNP?
The answer to all these questions is YES. Banks’ “magnitude” is measured in assets, whereas GNPs and GDPs are measures of wealth produced in a given year. The world’s GNP is 54 trillion but the total value of the world’s assets is seven times larger. Before the current financial collapse, I estimate the world’s total financial assets at 170 trillion.
And according to The Economist, financial assets only make up 46% of all assets, the rest consisting of real estate. Therefore, total world assets would be 370 trillion. This is $370,000,000,000,000, or 37 x 10 to the 13th power.
* * * * *
Well, these are just numbers. They are what they are. No meaning, really. Except perhaps this:
A) Banks are way too big and too powerful. Accumulating assets whereby a single institution is worth more than the GDP of Germany or California is bad. The power of corporations begins to dwarf that of entire societies. But corporations don’t represent the public, as societies do. Corporations represent shareholders only.
B) 13 million bad mortgages are a bummer, especially to institutions such as Citigroup, which are holding the bag. However, it’s only a small fraction of (1) Citigroup’s total assets, (2) a small portion of all mortgages, (3) an even smaller fraction of the total financial sector’s assets, and (4) an even smaller part of the world’s total wealth. It is unconscionable that the bursting of the housing bubble is permitted to create havoc with the entire world economy. 13 million bad mortgages in the United States do not represent the totality of the world economy. The crisis is far more psychological than economic.
© Tom Kando 2014
leave comment here
I have always had a hunch that bailing out banks because of bad mortgages was like giving money to a loan shark who miscalculated the value of the diamond necklace you brought in. Now they want their money back but also keep the necklace?
ReplyDeleteBanks.. loansharks, what's the difference? Our society has created a financial monster that is swallowing up it's own tail.
Your article is so to the point: fear has replaced rational thinking. And one sector that is doing very well right now is the news sector. The current situation is news paradise: fear, panic, ignorance. They don't have to be accurate or know what they are talking about.
Like Lilly Tomlin said in her parody on the phone company before it was privatised. When asked why the operators were so rude she said: 'We dont' have to be nice. We don’t care. We're the Phone Company.' The news media don’t have to know what they are talking about. They don’t care. They are the NEWS!
November 26, 2008
Of course, the term 'toxic asset' refers not to the bad loans themselves, but to complex derivatives which are backed by packages of mortgages, some of which are non-performing and some not. It is due to the complexity of these instruments and the care with which bad mortgages were buried in them, that it is difficult to evaluate the extent of the problem. This also explains why an institution such as Citicorp can be holding an amount of these assets which seems out of proportion to the total value of outstanding bad mortgages. Put another way, they can hold 300 bill. of toxic assets, which contain in them 3 bil, or 30 bil, or 100 bil of bad mortgages; who knows?
ReplyDeleteNovember 26, 2008
DDFreund,
ReplyDeleteyou are totally right. "Bundling," I believe, they call it. That makes things a real mess indeed.
Thanks for your comments. Keep them coming!
Tom
December 7, 2008