We are a commune of inquiring, skeptical, politically centrist, capitalist, anglophile, traditionalist New England Yankee humans, humanoids, and animals with many interests beyond and above politics. Each of us has had a high-school education (or GED), but all had ADD so didn't pay attention very well, especially the dogs. Each one of us does "try my best to be just like I am," and none of us enjoys working for others, including for Maggie, from whom we receive neither a nickel nor a dime. Freedom from nags, cranks, government, do-gooders, control-freaks and idiots is all that we ask for.
Our Recent Essays Behind the Front Page
Tuesday, November 6. 2007
More on the Dems' problems with illegal immigration. Barone.
Dick Morris on Bill Clinton on Hillary
The history of the victim card in Dem politics. Taranto
Palestinian Jerusalemites want nothing to do with the Palestinian Authority. So much for "oppression".
Dems are the party of the mega-rich. Ace
Election Day: Do not vote today - unless you understand the issues, and have thought it all through. When uninformed and foolish people vote, everyone loses. As we have noted, it's all about
Looking behind those health care stats. Mankiw in the NYT. (h/t, Viking). He pokes a hole in all of the scare tactics. What people want is portablility, I think. Of course, everybody wants cheaper too - but not if it means less freedom of choice. Medical treatment is not a commodity, and a physician is not a factory worker.
A good point on the supposed "problem" of income disparity. Cafe Hayek. The numbers are deceptive because women are working more these days, and the stats are based on household income, not individual income.
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Markets fear banks have $1 trillion in toxic debt
A trillion is a big number...something tells me if this is true there's no guvmet bailout that can save the devistation this will cause. H.
By Sean O’Grady, Economics Editor
Published: 06 November 2007
A new phase in the credit crunch, one of “$1 trillion losses” seems to be dawning. The crisis at Citigroup and renewed doubts about some of the world’s leading banks disquieted stock markets on both sides of the Atlantic yesterday, with the fractious mood set to continue.
The FTSE 100 fell 69.2 to 6,461.4, with Alliance & Leicester (down 4 per cent) and Barclays (off 3 per cent, to a two-year low) singled out for punishment. In New York, Citigroup, down |4.9 per cent to multi-year lows, weighed on the Dow Jones index, which fell 51.7, or 0.4 per cent, to 13,543.4. Merrill Lynch, Goldman Sachs and Lehman Brothers also dropped on speculation they face more writedowns on top of the $40bn (£19bn) announced in the past four months.
Bill Gross, the chief investment officer of Pacific Investment Management, said US mortgage delinquencies and defaults would rise in 2008. “There are $1 trillion worth of sub-primes, Alt-As [self-certified] and basically garbage loans,” he said, adding that he expects some $250bn in defaults. “We’ve only begun to see the pain from rising mortgage payments,” he added. Brian Gendreau, an investment strategist at ING, commented: “Financials are 20 per cent of the S&P 500 and if that sector doesn’t do well all bets are off. People just don’t know what’s on the balance sheets.”
The banks remain unwilling to lend to each other, preferring to rebuild their balance sheets and “hoard liquidity” to buttress themselves against any shocks from repatriating off-balance-sheet losses from their special investment vehicles (SIVs). However, this tightening up has led to a vicious circle. Making credit tougher has exacerbated the problems of struggling mortgage holders in America; default rates then rise and make the banks even more exposed to losses as credit agencies downgrade their assets. This seems to be what happened at Citigroup. The admission that it was unable to assure investors that a potential $11bn write-down for sub-prime mortgages would not grow has led to this fresh fit of extreme nervousness. Huge write-downs by Merrill Lynch ($7.9bn) and UBS ($3.4bn) have not helped.
Samir Shah at Landsbanki Securities said: “People thought most of the bad news had been priced in. It seems we’re entering a second phase of the credit squeeze. We’re going back to a place where liquidity is drying up and volatility is increasing.”
Barclays has seen its shares savaged. “There is a concern about the extent of the debts among the banks generally and who will be left holding the debt,” Richard Hunter, of Hargreaves Lansdown, said. “There’s a read-across to Barclays Capital. People are concerned about the exposure it has.” Profit growth at its subsidiary was “strong”, the bank declared last month, though it offered no comment yesterday.
Alliance & Leicester also suffered from vague rumours that it had turned to the Bank of England for emergency funding. An A&L spokesman offered this reassurance: “Each week in recent months, including last week, Alliance & Leicester has successfully raised the funds it requires. We have also continued our share buy-back programme.”
The Chancellor, Alistair Darling, also pleaded for calm. “We are experiencing an unparalleled period of financial uncertainty caused by the problems in the US housing market,” he said. “I believe that we can get through that. Many banks in this country have very strong balance sheets after years of making very good profits.”
Meanwhile, on the continent, newspaper reports named two German banks – WestLB and a small specialised bank for professional people – as possible next victims of the crisis
Lack of transparency in derivatives is going to kick out ass
The post above to my knowledge does not address any derivatives. Simple underwriting of sub prime loans is only the first light bedroom slipper falling gently to earth. Lets wait for the derivative hobnail boots to begin marring the polished wooden floors of the nations boardrooms.
As an indication of the dangers they pose, it is worthwhile recalling a shortened list of recent disasters. Long-Term Capital Management collapsed with $1.4 trillion in derivatives on their books. Sumitomo Bank in Japan used derivatives their manipulation of the global copper market for years prior to 1996. Barings bank, one of the oldest in Europe, was quickly brought to bankruptcy by over a billion dollars in losses from derivatives trading. Both the Mexican financial crisis in 1994 and the East Asian financial crisis of 1997 were exacerbated by the use of derivatives to take large positions on the exchange rate. Most recently, the collapse of a major commodity derivatives dealer Enron Corporation has lead to the largest bankruptcy in U.S. history.
Taking on these greater risks raises the likelihood that an investor, even a major financial institution, suffers large losses. If they suffer large losses, then they are threatened with bankruptcy. If they go bankrupt, then the people, banks and other institutions that invested in them or lent money to them will face losses and in turn might face bankruptcy themselves. This spreading of the losses and failures gives rise to systemic risk, and it is an economy wide problem that is made worse by leverage and leveraging instruments such as derivatives. When people suffer damages, even though they were not counterparties or did any business with a failed investor or financial institution, then individual incentives and rules of caveat emptor are not sufficient to protect the public good. In this case, prudential regulation is needed – not to protect fools from themselves, but to protect others from the fools.
Another public interest concern involves transparency Some derivatives are traded on formal futures and options exchanges which are closely regulated. Other derivatives are traded over-the-counter in markets that are almost entirely unregulated. In these non-transparent markets there is very little information provided by either the private market participants or collected by government regulators. Prices and other trading information in these markets is not readily available as is the case with futures and options exchanges. Instead that information is hoarded by each of the market participants. While standard theories of financial markets agree that more transparent markets are more efficient, it requires a public entity to require information be reported and disseminated to the market AND this is where the BIG MONEY is invested.
Habu, William Seidman, the guy who ran the "S&L Crisis" Resolution Trust Corp, was interviewed on the Kudlow show yest afternoon. He reminded that the previous crisis involved some 1400 problem lenders and 14% of the total national housing assets. This current crisis involves 61 problem lenders containing less than 1% of the nations's total housing assets.
he added--these are just my notes, incomplete, but i did get a few nuggets--"the cleanup is about halfway done" and the big kahuna CitiBank's problems affect at most 10% of its capital and a quarter of its recent annual profits.
Tellingly, Citi has no plans to even cut its dividend--a sure sign of containment.
The most dire case involves 15% of subprime going belly up and still that's less than 1% of the total mkt cap--enough to take a full point off GDP--but no more than that.
Seidman and several other heavyweight commenters have remarked on how the RTC had the dickens of a time getting lenders to cooperate, getting bad managers out, getting info distributed, etc, but that this time, with the new regs, the net and the freer flow of info & more shareholder activism, that the market is rapidly cleaning house, and that incoming new management teams are the best tool for cleaning up the portfolios so that they can start fresh.
This has the effect of a seeming cascade of failure but it also a function of speed & thorough cleanup going on.
Anyhoo--expect to sift for a year more--but no collapse--unless long rates start up. Then, woe be to us, buy gold.
But remember, the Fed can go down to a 3 handle, and plus 2 official inflation = a 5 handle for new mortgage rates & ARM re-sets. IOW a full point below current. So, there is that tool in reserve.
However, using it--which we will, probably--will drive USD down & soar the part of the gold/oil/commod sectors that function as asset-class dollar-proxy.
Question--we already seeing that, but how much of it is already a done deal?
Isn't 800 gold and 100 oil a credit-crunch price-in?
Or is it a simple demand-pull?
Well, obviously, both.
My best advice: buckle up--but, don't run just yet--stay frosty, but stand by. Tight trailing stops under anything in beta play.
And, crucially, never forget that there is also a buyer in every one of these cleanup transactions.
Now, just who are these buyers sopping up the SIV tranches that've already traded at a whisper price of 80% of par?
Are these buyers unsophisticated dumbasses--or are they the smartest operators in the system?
Tellingly, the 20% discount on the damaged assets is roughly equal to the amount of speculative bubble in the last run up of house price before the sh*t started to hit the fan late last year.
The clear and present danger is that this bad margin will create a psychological set that will deflate house nationwide up to maybe 10%. This is the recession scenario, the 'hard-landing'.
"We view them as time bombs both for the parties that deal in them and the economic system ... In our view ... derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal."
I often here that refrian. But tell me who bought:
Long Term Credit Management
October 2005 Refco suspends trading
One of the world's largest derivatives brokers is forced to freeze trades.
1995 Barings Bank goes bust.
Nick Leeson loses $1.4 billion by gambling that the Nikkei 225 index of leading Japanese company shares would not move materially from its normal trading range. That assumption was shattered by the Kobe earthquake on the 17th January 1995 after which Leeson attempted to conceal his losses.
Can somebody please fix the "responsible borrowers are all pissed off" link which, as far as I can tell, points to yet another Dems on immigration thing.
Also, someone tap Rick on the shoulder and let him know youzeguys are talkin' econ over here. He loves this stuff.
yeh, Rick'll appreciate this irony:
IOW, you've heard of "a mile wide and an inch deep" --this crisis seems to be "a mile deep and an inch wide".
Bill Seidman's words are encouraging, however it's one mans opinion. Even if you lined up five Bill's I would still hear the echoes of those who encouraged us during the S&L crisis with similar soothing sounds. Whats Seidman suppose to say? "Hey things are totally out of hand and we don't know what we're doing? What was the intercom system at the World Trade Center saying after the first jet hit..."It's OK folks, stay where you are, it's all right"....yeah
The same sounds were heard while Enron crashed, and then WorldCom etc. etc.....With the exception of a very tiny band of economists the ones you read and hear are normally cheerleaders for the school of "Calm down it'll all be OK"...that happens just before you lose power in engines # 3 & 4, and the co-pilot wants to declare an emergency but the pilot believes he can just fly her right onto the runway. Instead he flys it right INTO the runway , if he gets that far. Buddy . of all the guru's on Wall Street, one, only one called it right on Oct. 19, 1987 when the market dropped 22%, Elaine Garzarelli..
I'm convinced, as you are aware, that Wall Streeters are congenitally unable to tell the truth. Even if they were disposed to do so, the truth is often buried so deep or grossly distorted that it takes five of six "restatements of earnings" to get to the "truth"
Do you recall him mentioning that in 1989 there were less than (memory recall here) fewer than 500 derivative funds and that today there are approximately 14,000 derivative funds with another 6,000+ Funds of Funds FOF's? with no one knowing how much money is hedged in them and to what ratios?
Did he mention that since 2005 there has been a two thirds increase in the number of these funds? That the eight largest banks hold over 55% of all assets in the country...that the FED is beholding to business, not the American people, that it is a private entity?
I applaud your confidence.
LOL --"confidence" is code for "dumbass" --hey i wuzn't born yestiddy.
No, seriously--you're right there's a sh*tload of fast money out there--Gov't doesn't even try to calculate M3 anymore--but seriously, go back to the fundies, unemployment is very low, wages are gaining, the world economy is growing @ 5% and is pulling our exports way up and our trade deficit down. Inflation is low, rates are low, and the last GDP #s had us @ 3.9% G for Q3.
And Elaine Garzarelli was bullish--saying IIRC the SP is undervalued by some 5%--in the last interview i caught, some couple weeks ago.
I was in a class in the 87 crash--some conference on pasteurization (i wuz a dairyyman then) and on the noon break called my guy and told him to buy the indexes at the close. By the end of the year I was in the black on those purchases and within a year or two had doubled on 'em. I say this not to brag--the amt of $ involved was paltry tho significant to me as a %--but to make the point that the white-knuckle purchases are the ones that really pay.
Take a look @ (XLF) --the spyder financial ETF--today and then again in six months. I'll bet you a hundred bucks it's up 15% or better.
As far as all those derivatives--yes--if they went to zero an awful lot of folks would suffer. But--they won't--why should they? The CDOs at the core are 99% money-good as of today--and this is the free-fall part of the correction. Capitalism is founded on risk for crying out loud--it's how resources get optimized. These corrections are natural--part of the system.
Of course, i've been buying all the oil and gold stocks i could, for several years now, so I can be philosophical. I could lose a major chunk and still be playing the houses's money. And, I'm still yet 30% cash, waiting for better lows--and meanwhile, zero shorts, zero on margin, and zero in puts & calls.
IOW, the personal risk can be structured for times like these--and if one is out on a limb with derivatives--well--that's a different matter--time could run out and one might have to book a loss.
But--that's how the system allocates and grows. It's shumpeterian creative destruction, and is the only 'best-practice' to create new wealth in a mature diverse economy.
It ain't like the Fed doesn't track
and Debt Service Ratios
pretty thoroughly. The "mile deep" will come to pass if the Chicken Littles can convince enough people to buy gold and bury it in the back yard. I can't even tell yet if this hiccup is going to be as bad as '91. Default and charge off rates will have to go up another 50% or so to hit the '91-'93 rates. I'm pretty sure that people will still be paying for shelter, one way or another, when it's over.
I keep scratching my head over this report:
That $474 billion in net new cash flow in 2006 subtracted from the YE '05-'06 total increase of $1.674 trillion implies and investment return of 8.18%. The increase in value of $1.2 trillion is more than 9% of the entire GDP.
There is now over $17 trillion in private retirement investment accounts - the fellows on the other side of the "distressed merchandise" transactions sure aren't going to be short of funds.
I'd appreciate knowing just how the FED tracks privately owned, unregulated , non transparent derivative funds?
I don't think tracking what you're describing is within their purview. They did issue a final draft of proposed regulations concerning reporting "Risk-Based Capital Standards: Advanced Capital Adequacy Framework — Basel
II" which appears to address the derivatives issue as it relates to major US players.
I don't think I'll read all
629 pages in order to offer an opinion as to whether the proposed regulation offers more "security" than the previous regulation.
For some reason I'm always a little leary of scope definitions which rely upon notional numbers such as "459 gazillion" in reference to derivatives.
I'd rather think about the probability that the explicit assumptions upon which the BLS bases its employment and economic projections
might be severely flawed. They are counting upon millions of Boomers to keep showing up for work instead of retiring. I don't believe that to be a well founded assumption and the impact upon wages, should they prove to have erred, is going to be very interesting.
''the fellows on the other side of the "distressed merchandise" transactions sure aren't going to be short of funds''
Naw, and if they can buy @ a discount that looks in the early stages to be at least twice the amount of the overvaluation of the underlying asset (the overvaluation that "is" the problem), and then hold for the lenders to quit hoarding liquidity and re-liquify the retail mkt, then once again turtle beats hare.
Two financials that will--probably--rise on the others' fall. Haven't bought 'em yet but am getting sweaty palms.
Mkts just closed--Dow, Naz, SP up ~ 120, 30, 20--with oil/gold/commods up big, USD flat, rates stable, and the financials rallying up a percent or two. Significantly, Fannie Mae was up 6%.
Very powerful bid underneath this market.
Yet--as per habu's posts--there have been few times when there was more fear.
So, how to rationalize this divergence?
Occam sez, the fear is a ripple in the near term at the margin, and the bid originates in the tidal wave 5% global growth rate.
IOW, if you won't be needing your cash in the near term, leave it in the market--two billion folks now making $2K/yr are working their way up into a new global middle class that WILL live higher on the hog.
"there have been few times when there was more fear"
That's why I keep looking at that $17 trillion in private retirement money. IMO, the Dems are misreading the "fear" factor.
When has a Dem ever protected wealth?
Rick Ballard, R i c k B a l l a r d ...are you the same Rick Ballard that barred me from comments on another website because I disagreed with one of the other posters?
Hey, we can't squabble over the economy if we're squabbling over squabbling.
Anyway, i was having the same thought--about democrats--about how they will cast this correction as asn indictment of the mkts. They'll never 'get' it that train wrecks happen when you run trains. The only cure for the odd train wreck is "no trains".
IOW free movement of capital means that the margins have to be 'found' by hitting up against them.
To prevent this train wreck phenom, "too much" free movement has to be identified, and then regulated into something less free than "too free".
Balance is everything.
...meant to say, "no trains" sounds GREAT to anyone who has ever been in or around a train wreck--so there's those politics.
The fact that mule caravans are a whole lot more costly than train transport always takes awhile to show up, and maybe the next feller'll be in office by then.
rick ballard. I believe it was on the site TigerHawk wasn't it?
was that back when you had The Scotsman lobbying Buckingham Palace to declare war on Florida?
could have been ..just like to know if it's the same SOB.
we're probably ALL the same SOB, LOL. I know I am. My latest self-help turn-over-a-new-leaf book, "You Too Can Be Johnathan Livingston Seagull" by Dr Richard Bach, was a flop as i could never find anyone to sing along with the self-actualization mantra. Not that i didn't try, but the sheriff told me to go home and stay there awhile.
Well you know me Buddy. He can run but he can't hide. I'll ask him every time he posts here until he gives a yea or nay.
I'm confident it's the same person. Why? I made a bitch about it, I believe on this site and you assured me that you knew Rick was a stand up guy.
You are now in a diplomatic posture, ergo it's gotta be the same SOB who had some control over at Tigerhawk and censored me because I disagreed with a regular poster there. Heck he might even be TigerHawk I never bothered to find out. He thru down the persona non grata and barred my postings. Poor form.
I deleted some ad hominem comments made by you to another contributor at Flares - which is a Blogger site as is TigerHawk. One of the draw backs to Blogger is that there is no method by which a commenter can be blocked or barred.
As to running or hiding - why in the world would anyone bother? Unsupported opinion isn't particularly threatening.
Do you have the particular ad hominem attacks or a archived page where the entire thread can be re-read?
I'd love to see the heights one had to reach to have been edited out.
Also, and I could easily be wrong, but I do not recall posting at a site called Flares.
Did you have any authority at TigerHawk?
Rick..just forget the last post...it's petty and you're a great poster here..whatever was done was done...so be it....plus Buddy did say you were a good guy and I'm coming off as a supreme jerk, which is a role I don't relish.
Let's go forward and chew on the topics of today.
No thanks, Habu. If you can't remember where you were and what you said, it just ain't my job to straighten it out. Buddy does remember - where if not precisely when.
I'll be perfectly content to reduce my comments to you below even a response to a direct question - honest.
LOL--y'all are both very, very good at the dry cut--a pleasure to behold--esp in the bystander role.
I make a rapprochement, answered by:
"No thanks, Habu. If you can't remember where you were and what you said, it just ain't my job to straighten it out."
That isn't a diplomatic answer. It's aggressive. So here's what. I'll still say your an SOB, and we've agreed it's a fact that you edited me, however we know neither the topic, context , or wording used.....only your word that the attacks were ad hominem...so I'll just say your a lying SOB, that you were protecting a regular contributor from a thrashing and we'll leave it at that.
What we have established is that you are the Rick Ballard that did what I said you did. The remainder falls into your court to prove context,topic, and wording used ..otherwise you simply remain an inferior editor, a task well suited to what talent you have.
You and I are not going to get along on this blog.
habu, you just enjoy the swordplay. Go ahead, admit it.
Look at Sarbox--managed to drive Hong Kong and London into hugely serendipitous--for them--parity w/ NY, has cost lord only knows how much in competetiveness, underwriting, new investment attraction, and plain old in-house G&A--and yet along comes the housing bubble.
Always a new black swan behind the black swan you just expensively killed.
Grrr...see upthread where i mentioned WFC (Wells Fargo) as a sweaty-palm getting ready to buy ?
I'm sitting here watching the late Cramer's Mad Money --and damn if he ain't featuring WFC--even interviewing the CEO John Stumpf.
Jeez--it'll gap open tomorrow. I was farting off in the blog comments instead of taking care of business and missed the last good entry point for a long while.
Tempis Fugit, dammit.
l'audace l'audace toujours l'audace!
ok ok ok i just relized it's not my fault. it was habu making me argue during business. I'd've bought 200 sh and now they'll be up 3 in the morning so habu, you owe me 600 bucks and can send it care of the Salvation Army, shelter #5, downtown Austin.
on second thought, it was probly half my fault--let's just split it 50/50, only send 400.
There still will be time to buy the banks, methinks.
You're right--WFC opened flatter'n a fritter. So much for Cramer. No really, overall overnight downdraft--stalled yesterday's closing rally. Chinese finance minister wanting to add Euros, big loss @ GM. On it goes, the weather pattern as market.