Downey Savings and Loan: The Anatomy of an Option ARM led California Banking Disaster. Other People’s Money Delusion.
On June 15, 2009 the Office of the Inspector General issued their audit report regarding the failure of California’s Downey Savings and Loan Association (Downey). Now the story of DSL is important because it highlights the entire process of how we came to this financial crisis that now threatens the economic stability of the world. The market volatility that we are seeing is merely a reflection of what institutions like Downey dabbled in with their love affair with toxic mortgage assets. And California now has an 11.5 percent unemployment rate which is the highest in record keeping history. If we look at alternative measures, the state is probably closer to a 20 percent unemployment rate. Yet the 71 page report issued by the OIG is probably only being read by a few people. This report tells us much and gives us solutions as how to approach this problem.
20% U-6 Rate by End of 2009: Employment Situation: Economic Indicator of Hours Worked Dropping at Fastest Pace Since 1970s. A Key Financial Leading Indicator. 7 Million Unemployed since Start of Recession.
The headline number of 9.4 percent unemployment doesn’t do any justice to the 26,000,000 unemployed or underemployed Americans. Last month, we saw the unemployment situation improve when only 345,000 job losses came online. This sure beats the 500,000+ months we had for six consecutive months. Yet the actual unemployment rate jumped from 8.9 percent to 9.4 percent. This was the highest percentage jump in the recession tying another 0.5 percent monthly jump. So what gives? In a nutshell, companies are not hiring. So yes, job losses may have dropped but there are no new jobs to pick up the currently unemployed so the actual rate increases. This is one of those nuances of the two surveys used by the BLS.
The Economic Recovery Decoy: Bank Refuge and Auto and Home Sales Plummet. Two Largest Purchases for Americans still Treading Water. Number of Renters Increases by 748,000 in one Quarter.
When I hear about the banks and Wall Street returning TARP money to the government I can’t help to think of a successful Trojan Horse hitting our economy from within. The initial rush to back an unprecedented bailout for the sake of the economy actually turned out to be a strategic looting of the American taxpayer. The exercise of AIG being used as a conduit to funnel billions of dollars to firms such as Goldman Sachs was merely a diversion on the breaking backs of the American people. And to what end? Do we measure success by having 26,000,000 unemployed and underemployed Americans who are now destined to take jobs making half of what they once did?
Tracking the Great Recession: Global Industrial Output and World Stock Markets Following the Great Depression.
How the investing world quickly forgets. If we go back into the distant future of March 2009, you would remember that on a panic filled day, the S&P 500 flirted with the 666 low. Since that day, the S&P 500 has rallied an astonishing 41 percent in only a 3-month period. Yet as astonishing as this is, the stock market is still down 40 percent from the peak reached in October of 2007. We are now 2 years into this economic downturn yet the sentiment for many investors has shifted from apocalyptic to outright giddy. Somehow 26,000,000 unemployed and underemployed Americans does not conjure up visions of a healthy economy.
