Tuesday, July 26, 2011

Overdrawn in the U.S.A

Most of us may be vaguely aware of the fact the the United States is in danger of defaulting on their interest payments on over US 14 trillion of debt (rolls off the tongue like a cheap Chinese* abacus) come a deadline imposed on August 2 and that democrats, having failed to stick to a budget over the last 3 years, have thus far failed to agree with republicans on a desperately needed budget slashing and or the raising of debt levels a further US $2.5 trillion so the country can pay the interest on that debt and function for just another 12 months before this all happens again just before Obama puts his neck on the line again for a further 4 years.

New Zealanders would be mostly unaware of the detail though because it hasn't been covered with much thought or serious commentary in the local news media because there have been more pressing issues of the day like brain-dead stranded penguins and rabid lefty journos going after non-existent Israeli spies.

It should have more than a passing interest for us though because the possibility and uncertainty of a default (which is unlikely to happen he says crossing the keys on his cheap Chinese* keyboard and touching his head for luck) will impact on interest rates for kiwi consumers and affect global markets over the remaining 9 days leading up to the deadline.

I must digress back to my primary subject for this post though because as important as the US debt crises is there is perhaps a more pressing and serious timebomb waiting to go off in the form of The Bank of America and the precarious and uncertain state of its books and the reflection of that in its rapidly dropping share price:

"At US$9.85 a share, down 26 per cent this year, Bank of America finished on Thursday with a market capitalisation of US$99.8 billion. That's an astonishingly low 49 per cent of the company's US$205.6 billion book value on June 30.
As far as the market is concerned, more than half of that book value is bogus because of overstated assets or understated liabilities or a combination of the two.
That perception is a dangerous situation for the world at large, not just the company's shareholders.
The risk is that with the stock price this low, a further decline could feed on itself and spread contagion to other companies, regardless of the bank's statement this week that it is "creating a fortress balance sheet". NZ Herald, 25 July 2011
The author of the NZ Herald article goes on to point out that the bank is the country's largest by asset value, it recently made its biggest quarterly loss ever and management have made public statements on the banks health have been caught out understating liabilities for bad mortgages.

Does all this sound eerily familiar and a little too much like early 2008 when several financial and banking institutions began to show real signs of the financial skullduggery and mismanagement that they had been up to over the previous 10 years or more that led to the current global financial recession?

Don't answer that dear reader, put your head in the sand like any good democrat would and lets go on!

Countrywide Financial Corp was bought by BOA in early 2008 to help it out of its collapse under the weight of the subprime mortgages on its books and that same company with its $1.5 trillion in loans of various states of disrepair look likely to have an impact on BOA sometime soon with dire consequences for the rest of us. This is without going into the quality of the mortgages in its own division of course.

Lets go on!

After buying the impaired assets of Merril Lynch in January 2009 BOA found itself even further down the toilet and shortly after was the recipient of a second capital injection from the American taxpayer that has totaled US$45 billion thus far.

It is looking likely that BOA will need to raise capital somehow to continue to operate in a solvent and fiscally prudent manner due to its breach of new international banking rules and my pick is that the private investor is not going to want to touch that sort of stinker with a cheap 400 foot barge pole made in China*, so Obama may well be tapped on the shoulder again to let the US taxpayer bail it out of its woes, again.

The twin towers of the insolvency of the US Governments books and the possible implosion of the Bank of America will no doubt be fended off by increasing debt levels and more bailouts but just how long can this go on?

It has been 3 years so far and the world lurches from one Greek tragedy, to Irish wakes, Italian spaghetti westerns and Spanish civilian wars to who knows what next and we continue to put off the inevitable of facing up to our debt levels, making a clean break and letting the weak and greedy collapse into the black hole of debt they have dug for themselves.

If it takes everyone else down with them then so be it, I just cant stand this Chinese* water torture.

*With thanks to China and the Chinese for saving so hard after selling us your crap and letting us borrow even more of what was once our money so we can continue buying your crap. No offense.

NB - Please note I had run out of black ink by the end of this.

Recent Share Investor Reading

c Share Investor 2011


  1. Epic read. I am amazed that these institutions continue to be propped up. I am no economist but it seems like throwing good money after bad. Better to let them go down and create a feeding frenzy on the corpse. If there is anything good left.....

  2. Love the repeated references to Chinese products. Isn't it worrying that the world's markets can be so heavily influenced by two men sitting at a coffee table.

    I'm still waiting to hear Obama's response to the two tier plan from Republican saviours...

    What a joke.

  3. Great read!
    Notwithstanding the contagion effect for the pending downgrade, my Libertarian brain is also keen to consider:
    - potential collapse of the US$ as a benchmark currency (yes, I'm a goldbug)
    - what happens when the 'peacekeeper' of the world realizes it can no longer afford to keep the crazies at bay in all the far flung fringes?
    - effect on global currency values?
    - China realizing the money US owes to it is worth-less (worthless?)
    - Ordinary US citizens saying enough is enough - re-arrangement of states and civil unrest (you think Greece was bad...)
    - whether the NZ government and reserve bank is able to implement its emergency planning in time http://www.rbnz.govt.nz/finstab/banking/4335146.pdf

  4. Thanks guys, I thought a bit of humour was needed in this otherwise dire and possible disastrous situation. Can ya spare a dime buddy?

    Do you think NZ will be hunky dory Shane? should the US default?


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