Below is an email I sent to a radio presenter, whom I have also spoken with again, subsequent to his comment that I was "talking rubbish". Note date is December 2007.
Well, early this evening he apologised for having got the property market and the money market future predictions wrong; not to me - but to all listeners in London.
I have recorded extracts of today's discussion on the radio regarding the Banking crisis and the Property Market; wherein this specific radio presenter apologised for getting his predictions wrong in Dec 2007.
I will be putting his apology on site in the next few days.
Unfortunately, I did not record the original conversation last year.
This demonstrates how radio presenters statements can be incorrect, by way of ignorance, bias or neglect... thrice from my personal experience.
Below is the initial email I sent him, to which he stated on the radio I was "talking rubbish". Well, now we have been proven correct.
--------------------------------
My original email to presenter on LBC. Dec 2007
I am afraid your guests appear to be talking nonsense.
See article 1 and then the reason below in article 2.
Suggest you also listen to my interview with John Loeffler of Steel on
Steel about 15 minutes through - or on my current News Review near the
beginning after 10 minutes... $600 billion in debt default 40%+non
enforceable and non paying ... $.600+++ injected... INFLATION.
Suggest you also listen to my interview with John Loeffler of Steel on
Steel about 15 minutes through - or on my current News Review near the
beginning after 10 minutes... $600 billion in debt default 40%+non
enforceable and non paying ... $.600+++ injected... INFLATION.
Harold Hoffman
http://britanniaradio.co.uk/?q=node/4969
Crisis may make 1929 look like a 'walk in the park'.
a.. View
b.. Edit
Submitted by h.hoffman on Sun,12/23/2007 - 07:58.
Crisis may make 1929 look a 'walk in the park'
As central banks continue to splash their cash over the system,
so far too little effect. Ambrose Evans-Pritchard argues things
are rapidly spiralling out of their control.
$20bn dollars here, $20bn there, and a lush half-trillion
from the European Central Bank at 'give-away' rates for Christmas. Buckets of
liquidity are being splashed over the North Atlantic
banking system, so far with meagre or fleeting effects.
Read more from Ambrose Evans-Pritchard.
Is the crisis getting worse? Get the latest comment as the credit paralysis stretches through its fifth month. A chorus
of economists has begun to warn that the world's central banks are fighting
the wrong war, and perhaps risk a policy error of epochal proportions.
Faces of power: The Fed’s Ben Bernanke, the BoE’s Mervyn King, the ECB’s
Jean-Claude Trichet
"Liquidity doesn't do anything in this situation," says Anna Schwartz, the
doyenne of US monetarism and life-time student (with Milton Friedman) of the
Great Depression.
"It cannot deal with the underlying fear that lots of firms are going
bankrupt. The banks and the hedge funds have not fully acknowledged who is
in trouble. That is the critical issue," she adds.
Lenders are hoarding the cash, shunning peers as if all were sub-prime
lepers. Spreads on three-month Euribor and Libor - the interbank rates used
to price contracts and Club Med mortgages - are stuck at 80 basis points
even after the latest blitz. The monetary screw has tightened by default.
York professor Peter Spencer, chief economist for the ITEM Club, says the
global authorities have just weeks to get this right, or trigger disaster.
Advertisement "The central banks are rapidly losing control. By not cutting
interest rates nearly far enough or fast enough, they are allowing the money
markets to dictate policy. We are long past worrying about moral hazard," he says.
"They still have another couple of months before this starts imploding.
Things are very unstable and can move incredibly fast. I don't think the
central banks are going to make a major policy error, but if they do, this
could make 1929 look like a walk in the park," he adds.
The Bank of England knows the risk. Markets director Paul Tucker says the
crisis has moved beyond the collapse of mortgage securities, and is now eating into the bedrock of banking capital. "We must try to avoid the vicious circle in which tighter liquidity conditions, lower asset values,
impaired capital resources, reduced credit supply and slower aggregate
demand, feed back on each other." he says.
New York's Federal Reserve chief, Tim Geithner, echoed the words warning of
an "adverse self-reinforcing dynamic", banker-speak for a downward spiral.
The Fed has broken decades of practice by inviting all US depositary banks
to its lending window, bringing dodgy mortgage securities as collateral.
Quietly, insiders are perusing an obscure paper by Fed staffers David Small
and Jim Clouse. It explores what can be done under the Federal Reserve Act
when all else fails.
Section 13 (3) allows the Fed to take emergency action when banks become
"unwilling or very reluctant to provide credit". A vote by five governors
can - in "exigent circumstances" - authorise the bank to lend money to
anybody, and take upon itself the credit risk. This clause has not been
evoked since the Slump.
Yet still the central banks shrink from seriously grasping the rate-cut
nettle. Understandably so. They are caught between the Scylla of the debt
crunch and the Charybdis of inflation. It is not yet certain which is the
more powerful force.
America's headline CPI screamed to 4.3 per cent in November. This may be a
rogue figure, the tail effects of an oil, commodity, and food price spike.
If so, the Fed missed its chance months ago to prepare the markets for such
a case. It is now stymied.
This has eerie echoes of Japan in late-1990, when inflation rose to 4 per
cent on a mini price-surge across Asia. As the Bank of Japan fretted about
an inflation scare, the country's financial system tipped into the abyss.
In theory, Japan had ample ammo to fight a bust. Interest rates were 6 per
cent in February 1990. In reality, the country was engulfed by the tsunami
of debt deflation quicker than the bank dared to cut rates. In the end,
rates fell to zero. Still it was not enough.
When a credit system implodes, it can feed on itself with lightning speed.
Current rates in America (4.25 per cent), Britain (5.5 per cent), and the
eurozone (4 per cent) have scope to fall a long way, but this may prove less
of a panacea than often assumed. The risk is a Japanese denouement across
the Anglo-Saxon world and half Europe.
Bernard Connolly, global strategist at Banque AIG, said the Fed and allies
had scripted a Greek tragedy by under-pricing credit long ago and seem
paralysed as post-bubble chickens now come home to roost. "The central banks
are trying to dissociate financial problems from the real economy. They are
pushing the world nearer and nearer to the edge of depression. We hope they
will eventually be dragged kicking and screaming to do enough, but time is
running out," he said.
advertisementGlance at the more or less healthy stock markets in New York,
London, and Frankfurt, and you might never know that this debate is raging.
Hopes that Middle Eastern and Asian wealth funds will plug every hole lifts
spirits.
Glance at the debt markets and you hear a different tale. Not a single junk
bond has been issued in Europe since August. Every attempt failed.
Europe's corporate bond issuance fell 66pc in the third quarter to $396bn
(BIS data). Emerging market bonds plummeted 75pc.
"The kind of upheaval observed in the international money markets over the
past few months has never been witnessed in history," says Thomas Jordan, a
Swiss central bank governor.
"The sub-prime mortgage crisis hit a vital nerve of the international
financial system," he says.
The market for asset-backed commercial paper - where Europe's lenders from
IKB to the German doctors and dentists borrowed through Irish-based
"conduits" to play US housing debt - has shrunk for 18 weeks in a row. It
has shed $404bn or 36pc. As lenders refuse to roll over credit, banks must
take these wrecks back on their books. There lies the rub.
Professor Spencer says capital ratios have fallen far below the 8 per cent
minimum under Basel rules. "If they can't raise capital, they will have to
shrink balance sheets," he said.
Tim Congdon, a banking historian at the London School of Economics, said the
rot had seeped through the foundations of British lending.
Average equity capital has fallen to 3.2 per cent (nearer 2.5 per cent sans
"goodwill"), compared with 5 per cent seven years ago. "How on earth did the
Financial Services Authority let this happen?" he asks.
Worse, changes pushed through by Gordon Brown in 1998 have caused the de
facto cash and liquid assets ratio to collapse from post-war levels above 30
per cent to near zero. "Brown hadn't got a clue what he was doing," he says.
The risk for Britain - as property buckles - is a twin banking and fiscal
squeeze. The UK budget deficit is already 3 per cent of GDP at the peak of
the economic cycle, shockingly out of line with its peers. America looks
frugal by comparison.
Maastricht rules may force the Government to raise taxes or slash spending
into a recession. This way lies crucifixion. The UK current account deficit
was 5.7 per cent of GDP in the second quarter, the highest in half a
century. Gordon Brown has disarmed us on every front.
In Europe, the ECB has its own distinct headache. Inflation is 3.1 per cent,
the highest since monetary union. This is already enough to set off a
political storm in Germany. A Dresdner poll found that 71 per cent of German
women want the Deutschmark restored.
With Brünhilde fuming about Brot prices, the ECB has to watch its step.
Frankfurt cannot easily cut rates to cushion the blow as housing bubbles pop
across southern Europe. It must resort to tricks instead. Hence the half
trillion gush last week at rates of 70bp below Euribor, a camouflaged move
to help Spain.
The ECB's little secret is that it must never allow a Northern Rock failure
in the eurozone because this would expose the reality that there is no EU
treasury and no EU lender of last resort behind the system. Would German
taxpayers foot the bill for a Spanish bail-out in the way that Kentish men
and maids must foot the bill for Newcastle's Rock? Nobody knows. This is
where eurozone solidarity stretches to snapping point. It is why the ECB has
showered the system with liquidity from day one of this crisis.
advertisement
Citigroup, Merrill Lynch, UBS, HSBC and others have stepped forward to
reveal their losses. At some point, enough of the dirty linen will be on the
line to let markets discern the shape of the debacle. We are not there yet.
Goldman Sachs caused shock last month when it predicted that total crunch
losses would reach $500bn, leading to a $2 trillion contraction in lending
as bank multiples kick into reverse. This already seems humdrum.
"Our counterparties are telling us that losses may reach $700bn," says Rob
McAdie, head of credit at Barclays Capital. Where will it end? The big banks
face a further $200bn of defaults in commercial property. On it goes.
The International Monetary Fund still predicts blistering global growth of 5
per cent next year. If so, markets should roar back to life in January, as
though the crunch were but a nightmare. There again, the credit soufflé may
be hard to raise a second time.
Have your say
»
a.. h.hoffman's blog
b.. -------------------------------------
c.. In a nutshell, heres the problem:
Mortgage notes put in securitization pools typically
appear as data transfers rather than actual legal transfers,
a move intended to speed the process.
However, if the mortgage note in question has not been
legally transferred and assigned to the securitization trust,
the trust has no legal standing to foreclose.
Trillions in CDOs Could Be Stuck in Court
Another worry for big banks: They might have trouble even
proving they own your home.
The massive repackaging of loans into collateralized debt
obligations (CDOs)  $6.5 trillion in outstanding securitized
mortgage debt, by one estimate  is making it hard enough to
price investment risk.
But a recent court ruling could make it hard for banks to
foreclose at all, adding to the potential losses as each case ends
up in court instead, adding interminable legal time to the process.
Ohio Federal Court Judge Christopher A. Boyko dismissed 14 foreclosures
actions brought on behalf of mortgage investors. He ruled that they failed
to prove their ownership of the properties on which they wanted to
foreclose.
d.. In a nutshell, here’s the problem: Mortgage notes put in
securitization pools typically appear as data transfers rather than actual
legal transfers, a move intended to speed the process.
e.. However, if the mortgage note in question has not been legally
transferred and assigned to the securitization trust, the trust has no legal
standing to foreclose.
f.. “The institutions seem to adopt the attitude that since they
have been doing this for so long, unchallenged, this practice equates with
legal compliance. Finally put to the test, their weak legal arguments compel
the court to stop them at the gate,†Boyko wrote in his ruling.
g.. Editor’s Note: The Mother of All Financial Disasters. Protect
Yourself Now.
h.. Industry observers and consumer advocates note that mortgage
securities make fixing troubled loans difficult because their complex
structure and disparate ownership make identifying just who hold their
mortgage notes difficult if not impossible.
i.. "This court ruling in Ohio means that the securitized trusts own
nothing," according to Bob Chapman of the International Forecaster. "The
investors in these securities might have assumed  wrongly, it turns
out  that they actually owned some real estate in these deals. The
problem is, they own nothing."
j.. The ruling involves foreclosure actions brought by Deutsche Bank
National Trust Company, which acts as trustee for the mortgage
securitization pools that claimed to hold the underlying mortgages DBNTC
wanted to reclaim.
k.. Deutsche Bank attorneys provided documents that showed intent to
convey mortgage rights rather than actual proof of mortgage ownership on the
date the foreclosure actions were filed.
l.. The Ohio court’s action is expected to bolster the position of
attorneys representing distressed borrowers and may encourage other judges
to demand more compelling evidence of ownership from lenders bringing
foreclosure actions.
m.. Once the lender with which the borrower initially deals with grants
the loan, it typically becomes part of a pool that contains thousands of
other mortgage loans. Once such a pool is created, it’s offered to
investors.
n.. A trustee bank oversees the pool’s operations to make sure that
investors receive the payments borrowers make. However, there is no central
repository for securitized mortgages, which can show up in more than one
pool.
o.. Attorneys arguing for borrowers assert that trustees acting for
investors frequently do not produce proof of mortgage ownership.
p.. Their assertions are supported by a recent study of 1,733 foreclosures
conducted by University of Iowa associate professor of law Katherine M.
Porter, which reported that 40 percent of the foreclosing creditors studied
did not show proof of ownership.
q..
------------------------------------------
IF YOU GUYS THINK THIS IS JUST A BLIP... THINK AGAIN. WHAT WE ARE SEEING
HERE IS JUST THE TIP OF THE ICEBERG. WAIT 'TILL THE DERIVATIVE AND HEDGE FUND
MARKETS BLOW. YOU AIN'T SEEN NOTHING YET... TOMORROW IN MY NEWS REVIEW, I SHALL
DISCUSS THIS IN GREATER DETAIL AND I MAY BE INTERVIEWED BY JOHN LOEFFLER, STEEL ON STEEL.
Fortune favours brave billionaires.
"Even with recession in the air, fortunes are being made on Wall St,"
says Philip Delves Broughton.
"Buy when the blood is running in the streets," said Baron Nathan Rothschild,
the 19th century financier who made a fortune during
the Napoleonic wars. While the streets of London and New York are
not yet running red, a bold few have followed Rothschild's dictum
and are profiting from the foul economic weather.
Last week, it was Warren Buffet, America's second richest man, who began
deploying the $45bn in cash he holds at his company Berkshire Hathaway.
Buffett bought $2.1bn worth of TXU junk bonds, charging a usurious 11 per
cent a year for his money.
Buffet's move was typically smart. Earlier in the year, TXU Corp, a major
Texan energy company, was acquired by a private equity consortium. To pay
for their acquisition, the buyers persuaded their bankers to give them
high-interest loans, known as 'junk bonds'. Just a year ago, the banks had
no trouble selling on these loans to investors eager to lend money to
private equity firms. Not any more. With TXU's banks struggling to find
anyone willing to buy the junk bonds, Buffett sniffed his moment and
bought $2.1bn worth of them, charging TXU a usurious 11 per cent a year for
his money.
One telephone call no chief executive wants to receive these days is from
Citadel Investment Group, a giant Chicago-based fund which specialises in
'distressed' situations. Its CEO, Ken Griffin, began trading bonds in his
undergraduate digs at Harvard. He is now 39, a multi-billionaire, and
compounds his fortune each year by identifying wounded beasts on the
corporate landscape and swooping.
At the end of November, he rescued the faltering online bank and trading
company E*Trade, which was exposed to sub-prime mortgages, losing customers
and heading for a Northern Rock situation. Griffin
bought the company's $3bn portfolio of asset-backed securities, mostly
linked to mortgages, for just $800m or 27 cents on the dollar.
To do what Griffin and Citadel do takes great nerve and a readiness to deal
with ugly situations, which is how they justify their profits. There is now
an estimated $600bn sitting in 'distressed debt' funds as investors await
more corporate defaults and the impact of a recession. Many believe the
worst is yet to come and are fearful of wading in before the markets have
bottomed out. Such trepidation, however, means missing out on the more
immediate opportunities.
BlackRock, a debt specialist based in New York, is one of the few to have it
both ways. It has been designated the main asset manager for the $75bn fund
established by US banks, at the urging of the federal government, to shore
up the wobbling credit markets.
It will not only reap enormous fees from managing such colossal pots of
money but also start to understand better than anyone how to profit from the
sub-prime and credit derivatives fiasco. It was also called in to stabilise
a multi-billion fund run by the state of Florida which had seen investors
panic and withdraw $12bn in just a few days as news emerged of its
exposure to bad mortgages.
Citadel CEO
Ken Griffin compounds his fortune each year by identifying wounded corporate
beasts and swooping
Goldman Sachs' success in navigating this year's problems has been well
documented and its employees are now set to divvy up a $17bn bonus pool,
with an estimated $75m going to its chief executive, Lloyd Blankfein.
And then of course, there are those who bet what would happen in 2007 and
have already exited, their pockets bulging with loot. The leader of this
group is John Paulson, the manager of a $28bn hedge fund in New York.
Paulson worked for Goldman Sachs before striking out on his own, and lives
in an Upper East Side mansion lined with busts of great Romans.
Even Crassus would have approved of his performance this year: a $12bn
trading profit from betting on the housing slowdown, the mortgage crunch and
difficulties for banks. Paulson himself will take home more than $2bn for
his efforts.
FIRST POSTED DECEMBER 13, 2007
=======================
SO IMPORTANT 10c-27c- ON THE $ ---
says Philip Delves Broughton.
"Buy when the blood is running in the streets," said Baron Nathan Rothschild,
the 19th century financier who made a fortune during
the Napoleonic wars. While the streets of London and New York are
not yet running red, a bold few have followed Rothschild's dictum
and are profiting from the foul economic weather.
Last week, it was Warren Buffet, America's second richest man, who began
deploying the $45bn in cash he holds at his company Berkshire Hathaway.
Buffett bought $2.1bn worth of TXU junk bonds, charging a usurious 11 per
cent a year for his money.
Buffet's move was typically smart. Earlier in the year, TXU Corp, a major
Texan energy company, was acquired by a private equity consortium. To pay
for their acquisition, the buyers persuaded their bankers to give them
high-interest loans, known as 'junk bonds'. Just a year ago, the banks had
no trouble selling on these loans to investors eager to lend money to
private equity firms. Not any more. With TXU's banks struggling to find
anyone willing to buy the junk bonds, Buffett sniffed his moment and
bought $2.1bn worth of them, charging TXU a usurious 11 per cent a year for
his money.
One telephone call no chief executive wants to receive these days is from
Citadel Investment Group, a giant Chicago-based fund which specialises in
'distressed' situations. Its CEO, Ken Griffin, began trading bonds in his
undergraduate digs at Harvard. He is now 39, a multi-billionaire, and
compounds his fortune each year by identifying wounded beasts on the
corporate landscape and swooping.
At the end of November, he rescued the faltering online bank and trading
company E*Trade, which was exposed to sub-prime mortgages, losing customers
and heading for a Northern Rock situation. Griffin
bought the company's $3bn portfolio of asset-backed securities, mostly
linked to mortgages, for just $800m or 27 cents on the dollar.
To do what Griffin and Citadel do takes great nerve and a readiness to deal
with ugly situations, which is how they justify their profits. There is now
an estimated $600bn sitting in 'distressed debt' funds as investors await
more corporate defaults and the impact of a recession. Many believe the
worst is yet to come and are fearful of wading in before the markets have
bottomed out. Such trepidation, however, means missing out on the more
immediate opportunities.
BlackRock, a debt specialist based in New York, is one of the few to have it
both ways. It has been designated the main asset manager for the $75bn fund
established by US banks, at the urging of the federal government, to shore
up the wobbling credit markets.
It will not only reap enormous fees from managing such colossal pots of
money but also start to understand better than anyone how to profit from the
sub-prime and credit derivatives fiasco. It was also called in to stabilise
a multi-billion fund run by the state of Florida which had seen investors
panic and withdraw $12bn in just a few days as news emerged of its
exposure to bad mortgages.
Citadel CEO
Ken Griffin compounds his fortune each year by identifying wounded corporate
beasts and swooping
Goldman Sachs' success in navigating this year's problems has been well
documented and its employees are now set to divvy up a $17bn bonus pool,
with an estimated $75m going to its chief executive, Lloyd Blankfein.
And then of course, there are those who bet what would happen in 2007 and
have already exited, their pockets bulging with loot. The leader of this
group is John Paulson, the manager of a $28bn hedge fund in New York.
Paulson worked for Goldman Sachs before striking out on his own, and lives
in an Upper East Side mansion lined with busts of great Romans.
Even Crassus would have approved of his performance this year: a $12bn
trading profit from betting on the housing slowdown, the mortgage crunch and
difficulties for banks. Paulson himself will take home more than $2bn for
his efforts.
FIRST POSTED DECEMBER 13, 2007
=======================
SO IMPORTANT 10c-27c- ON THE $ ---
YOU GUYS AIN'T SEEN NOTHING YET! WE TOLD
YOU ALL THIS WOULD HAPPEN AT LEAST 1-2-3 YEARS AGO...
The housing 'blow-up' is having dire effects on global financial
markets. The credit crunch has spread throughout Europe where
lending standards are tightening and industrial growth is
threatened by the falling dollar. Consumer confidence has
plummeted in Europe just like in the US. Last week, the
Dow Jones slipped below its August low of 12,850 following
the path of the Transports. The stock market continues to lurch
back and forth furiously like an overloaded washing machine;
soaring 100 points one day and then plunging 200 the next.
The volatility is just another indication that we are entering
a primary bear market. Dow Theory suggests that the trajectory
will continue downward into recession.
The subprime debacle has cast doubt on whether the “structured
finance” model of securitizing debt will survive. On Monday,
there were crucial new developments in this story that will have profound
effects on the future of many the country's largest
investment banks. E*Trade Financial has been forced to liquidate $3 billion
of its mortgage-backed securities. Up to now, the banks, hedge funds an
other holders of these toxic MBS and CDOs have been reluctant to sell,
fearing that trillions of dollars in asset value would be immediately wiped
out (for similar investments) once a firm “market price” is established.
Well, the Day of Reckoning arrived on Monday and the only thing missing was
the funereal dirge and the wreath of fresh lilies.
According to Reuters:
“Financial analysts on Friday said E*Trade got anywhere from 11 cents to 27
cents on the dollar for its $3.1 billion portfolio of asset-backed
securities. The portfolio sale was part of a $2.5 billion capital infusion
from a group led by hedge fund Citadel investment Group.
"The portfolio sale, one of the few observable trades of such assets, has
very clear, generally negative, implications for the valuation of like
assets on brokers' balance sheets," Credit Suisse analyst Susan Roth Katzke
said.
$.27 on the dollar! Yikes. No doubt they'll be pulling a few weepy bankers
off the ledge before the week is out.
What is particularly distressing about the E*Trade sale is that over 60% of
the $3 billion portfolio “WERE RATED DOUBLE-A OR HIGHER”. That means that
even the best of these mortgage-backed bonds are pure, unalloyed garbage.
This is really the worst possible news for Wall Street. It means that
trillions of dollars of bonds which are currently held by banks, insurance
companies, retirement funds, foreign banks and hedge funds will be slashed
to $.27 on the dollar OR LOWER. Banks will have to hoard reserves to meet
the new capital requirements on the falling value of their assets, which
means that they'll have less money to loan to businesses and consumers. In
fact, this is already taking place. (which is the real reason the Fed keeps
injecting money into the banking system) The E*Trade “firesale” confirms
that the country--and perhaps the world---is now headed into a downward
deflationary spiral. The Fed will HAVE to cut interest rates 50 basis points
on December 11, just to keep the financial system from freezing up entirely.
That will, of course, further emasculate the dollar and send food and energy
prices through the roof.
There's really no way to overstate the importance of the E*Trade sell-off.
It is the equivalent of a neutron bomb detonating in the heart of the
financial district. Yes, everyone is still milling around with their caramel
Macchiatos clutching their Blackberries just like before. But the game is
over. Trillions of dollars of market capitalization will be lost and some of
the biggest names in banking will be carted off to the boneyard. It will be
a miracle if the Fed's interest rate cuts are enough to keep the economy
sputtering along while the losses are written-down and the country recovers
its footing.
$.27 on the dollar should be inscribed on the headstone of every Wall Street
fraudster and every chiseling “financial innovator” who transformed the
world's most powerful and resilient markets into a carnival sideshow. It
should include every subprime “no doc--no down” homeowner who lied on his
loan application to goose the system and get another 50 grand for a jet-ski
and 42” liquid TV; every cheesy realtor who fudged the paperwork to put
unemployed busboys with bad credit in $550 McMasions in Loma Verde; every
ratings agency stooge who got carpal-tunnel from stamping each shaky
subprime loan with with AAA seal of approval; every lacquer-hair banker in a
two-toned shirt who bundled up garbage loans and dumped them on Wall Street;
every shabby hedge fund manager who used the subprime loans to beef-up his
own personal administrative fees by leveraging the MBSs and CDOs at rates of
10 to 1; every regulator who serenely looked the other way while the market
was dousing itself in jet-fuel and reaching for the matches; and, of
course--above all--the Federal Reserve, who initiated this whole boondoggle
by producing trillions of dollars of low interest credit which flooded the
system creating the greatest speculative frenzy in the world history. Alan
Greenspan—the Ponzi Ringleader-- deserves a place of honor at the head of
the chain-gang as they are frog-marched to some remote black site where they
can pay for their transgressions.
The rest of us will have to stay put and endure the fallout from a
“completely avoidable” Great Depression. We're dead ducks.
Managing Director of Pimco Managed Funds, Bill Gross, summarized our present
conundrum in a recent article:
“What we are witnessing is essentially the BREAKDOWN OF OUR MODERN DAY
BANKING SYSTEM, a complex of levered lending so hard to understand that Fed
Chairman Ben Bernanke required a face-to-face refresher course from hedge
fund managers in mid-August. My PIMCO colleague, Paul McCulley, has labeled
it the "SHADOW BANKING SYSTEM" because it has lain hidden for
years —untouched by regulation — yet free to magically and mystically create
and then package subprime mortgages into a host of three-letter conduits
that only Wall Street wizards could explain.” (Bill Gross, “The Shadow
Knows”, Pimco Funds)
A few months ago, Gross's observations would have been dismissed as the
ravings of a doomsday alarmist. Now they are part of mainstream analysis.
Gross is a realist. The financial markets are broken; it's time to strap the
patient to the gurney and wheel it in to I.C.U. No more band aids, thank
you.
Closing Thoughts
The President of the St. Louis Fed, William Poole, discussed many of these
issues in a speech last week. Poole insisted that it is not the Fed's
intention to “pump up the stock market” or to protect investors from losses
by lowering the Fed's Fund Rate. Rather, the rate cuts are supposed “to restore normal market processes. He said, “ An active financial market is
central to the process of economic growth and it is that growth, not prices
in financial markets per se, that the Fed cares about.”
Fair enough.
He added, “One of the most reliable and predictable features of the Fed’s
monetary policy is action to PREVENT SYSTEMIC FINANCIAL COLLAPSE. If this regularity of policy is what is meant by the “Fed put,” then so be it, but
the term seems to me to be extremely misleading. The Fed does not have the
desire or tools to prevent widespread losses in a particular sector but
should not sit by while a financial upset becomes a financial calamity
affecting the entire economy.”
The Federal Reserve is now actively trying to forestall “a systemic
financial crisis”. (Poole's words) The trillions of dollars that were loaned
to mortgage applicants--and which ignored traditional criteria for
lending---have created the likelihood of a decades-long downturn in the
housing industry as well as a meltdown in the broader financial markets. The
bundling of dodgy subprime liabilities and selling them as valuable assets
to unsuspecting investors; is a scam that any competent regulator should
have spotted immediately. And stopped. It doesn't take genius to see that
offloading sketchy MBSs and “marked to model” CDOs to gullible institutions
is wrong and a danger to the entire system.
Financial innovation has created a dilemma for which there is no easy
solution. The Genie cannot be put back in the lamp. Paulson's remedies have
no chance of succeeding. Mortgage-backed securities have been so chopped up
and spread throughout the system; it would be easier to to unravel a bowl of
spaghetti , separate each strand, one by one, and lie them next to each
other without touching. It can't be done. The bad debts will have to be
written down, banks will have to fail, and government will have to
investigate affordable housing alternatives for millions of defaulting
homeowners.
Deregulation has created a monster. The prevailing Reagan-era, “supply side”,
free market doctrine has removed tariffs, subsidies and other state-created
price-distortions, but it has also eliminated all oversight and
accountability. Government agencies no longer play an active role in
policing the markets and, as a result, U.S. financial institutions have fallen
into disrepute.
This is, first of all, a credibility problem and it will require astute
leaders with a strong moral foundation, not evasive bureaucrats who're
looking for a painless way to “cut their losses” and and keep the wheels of
industry clanking along. Asset-backed commercial paper--a $2 trillion
business--“is hardly trading at all.” The securitization of credit card
debt, mortgages and car loans has slowed to a crawl and is in danger of
stopping altogether. Many of the main engines for generating revenue for the
banks—the repackaging of debt and amplifying it through levered
derivatives—has vanished overnight. The financial markets have never been
under such stress. There's so much mortgage-backed gunk in the plumbing, the
system is grinding to a halt. This is no the time for “business as usual”
“garbage in, garbage out”. We need people who really understand what is
going on to step up to the plate and propose coherent “fiscal” policy
options that will steer the global economy away from the reef.
Forget about Paulson's “quick fix” snake oil. It's utter bunkum. The
credibility of the system is at at stake. It's time to get serious.
YOU ALL THIS WOULD HAPPEN AT LEAST 1-2-3 YEARS AGO...
The housing 'blow-up' is having dire effects on global financial
markets. The credit crunch has spread throughout Europe where
lending standards are tightening and industrial growth is
threatened by the falling dollar. Consumer confidence has
plummeted in Europe just like in the US. Last week, the
Dow Jones slipped below its August low of 12,850 following
the path of the Transports. The stock market continues to lurch
back and forth furiously like an overloaded washing machine;
soaring 100 points one day and then plunging 200 the next.
The volatility is just another indication that we are entering
a primary bear market. Dow Theory suggests that the trajectory
will continue downward into recession.
The subprime debacle has cast doubt on whether the “structured
finance” model of securitizing debt will survive. On Monday,
there were crucial new developments in this story that will have profound
effects on the future of many the country's largest
investment banks. E*Trade Financial has been forced to liquidate $3 billion
of its mortgage-backed securities. Up to now, the banks, hedge funds an
other holders of these toxic MBS and CDOs have been reluctant to sell,
fearing that trillions of dollars in asset value would be immediately wiped
out (for similar investments) once a firm “market price” is established.
Well, the Day of Reckoning arrived on Monday and the only thing missing was
the funereal dirge and the wreath of fresh lilies.
According to Reuters:
“Financial analysts on Friday said E*Trade got anywhere from 11 cents to 27
cents on the dollar for its $3.1 billion portfolio of asset-backed
securities. The portfolio sale was part of a $2.5 billion capital infusion
from a group led by hedge fund Citadel investment Group.
"The portfolio sale, one of the few observable trades of such assets, has
very clear, generally negative, implications for the valuation of like
assets on brokers' balance sheets," Credit Suisse analyst Susan Roth Katzke
said.
$.27 on the dollar! Yikes. No doubt they'll be pulling a few weepy bankers
off the ledge before the week is out.
What is particularly distressing about the E*Trade sale is that over 60% of
the $3 billion portfolio “WERE RATED DOUBLE-A OR HIGHER”. That means that
even the best of these mortgage-backed bonds are pure, unalloyed garbage.
This is really the worst possible news for Wall Street. It means that
trillions of dollars of bonds which are currently held by banks, insurance
companies, retirement funds, foreign banks and hedge funds will be slashed
to $.27 on the dollar OR LOWER. Banks will have to hoard reserves to meet
the new capital requirements on the falling value of their assets, which
means that they'll have less money to loan to businesses and consumers. In
fact, this is already taking place. (which is the real reason the Fed keeps
injecting money into the banking system) The E*Trade “firesale” confirms
that the country--and perhaps the world---is now headed into a downward
deflationary spiral. The Fed will HAVE to cut interest rates 50 basis points
on December 11, just to keep the financial system from freezing up entirely.
That will, of course, further emasculate the dollar and send food and energy
prices through the roof.
There's really no way to overstate the importance of the E*Trade sell-off.
It is the equivalent of a neutron bomb detonating in the heart of the
financial district. Yes, everyone is still milling around with their caramel
Macchiatos clutching their Blackberries just like before. But the game is
over. Trillions of dollars of market capitalization will be lost and some of
the biggest names in banking will be carted off to the boneyard. It will be
a miracle if the Fed's interest rate cuts are enough to keep the economy
sputtering along while the losses are written-down and the country recovers
its footing.
$.27 on the dollar should be inscribed on the headstone of every Wall Street
fraudster and every chiseling “financial innovator” who transformed the
world's most powerful and resilient markets into a carnival sideshow. It
should include every subprime “no doc--no down” homeowner who lied on his
loan application to goose the system and get another 50 grand for a jet-ski
and 42” liquid TV; every cheesy realtor who fudged the paperwork to put
unemployed busboys with bad credit in $550 McMasions in Loma Verde; every
ratings agency stooge who got carpal-tunnel from stamping each shaky
subprime loan with with AAA seal of approval; every lacquer-hair banker in a
two-toned shirt who bundled up garbage loans and dumped them on Wall Street;
every shabby hedge fund manager who used the subprime loans to beef-up his
own personal administrative fees by leveraging the MBSs and CDOs at rates of
10 to 1; every regulator who serenely looked the other way while the market
was dousing itself in jet-fuel and reaching for the matches; and, of
course--above all--the Federal Reserve, who initiated this whole boondoggle
by producing trillions of dollars of low interest credit which flooded the
system creating the greatest speculative frenzy in the world history. Alan
Greenspan—the Ponzi Ringleader-- deserves a place of honor at the head of
the chain-gang as they are frog-marched to some remote black site where they
can pay for their transgressions.
The rest of us will have to stay put and endure the fallout from a
“completely avoidable” Great Depression. We're dead ducks.
Managing Director of Pimco Managed Funds, Bill Gross, summarized our present
conundrum in a recent article:
“What we are witnessing is essentially the BREAKDOWN OF OUR MODERN DAY
BANKING SYSTEM, a complex of levered lending so hard to understand that Fed
Chairman Ben Bernanke required a face-to-face refresher course from hedge
fund managers in mid-August. My PIMCO colleague, Paul McCulley, has labeled
it the "SHADOW BANKING SYSTEM" because it has lain hidden for
years —untouched by regulation — yet free to magically and mystically create
and then package subprime mortgages into a host of three-letter conduits
that only Wall Street wizards could explain.” (Bill Gross, “The Shadow
Knows”, Pimco Funds)
A few months ago, Gross's observations would have been dismissed as the
ravings of a doomsday alarmist. Now they are part of mainstream analysis.
Gross is a realist. The financial markets are broken; it's time to strap the
patient to the gurney and wheel it in to I.C.U. No more band aids, thank
you.
Closing Thoughts
The President of the St. Louis Fed, William Poole, discussed many of these
issues in a speech last week. Poole insisted that it is not the Fed's
intention to “pump up the stock market” or to protect investors from losses
by lowering the Fed's Fund Rate. Rather, the rate cuts are supposed “to restore normal market processes. He said, “ An active financial market is
central to the process of economic growth and it is that growth, not prices
in financial markets per se, that the Fed cares about.”
Fair enough.
He added, “One of the most reliable and predictable features of the Fed’s
monetary policy is action to PREVENT SYSTEMIC FINANCIAL COLLAPSE. If this regularity of policy is what is meant by the “Fed put,” then so be it, but
the term seems to me to be extremely misleading. The Fed does not have the
desire or tools to prevent widespread losses in a particular sector but
should not sit by while a financial upset becomes a financial calamity
affecting the entire economy.”
The Federal Reserve is now actively trying to forestall “a systemic
financial crisis”. (Poole's words) The trillions of dollars that were loaned
to mortgage applicants--and which ignored traditional criteria for
lending---have created the likelihood of a decades-long downturn in the
housing industry as well as a meltdown in the broader financial markets. The
bundling of dodgy subprime liabilities and selling them as valuable assets
to unsuspecting investors; is a scam that any competent regulator should
have spotted immediately. And stopped. It doesn't take genius to see that
offloading sketchy MBSs and “marked to model” CDOs to gullible institutions
is wrong and a danger to the entire system.
Financial innovation has created a dilemma for which there is no easy
solution. The Genie cannot be put back in the lamp. Paulson's remedies have
no chance of succeeding. Mortgage-backed securities have been so chopped up
and spread throughout the system; it would be easier to to unravel a bowl of
spaghetti , separate each strand, one by one, and lie them next to each
other without touching. It can't be done. The bad debts will have to be
written down, banks will have to fail, and government will have to
investigate affordable housing alternatives for millions of defaulting
homeowners.
Deregulation has created a monster. The prevailing Reagan-era, “supply side”,
free market doctrine has removed tariffs, subsidies and other state-created
price-distortions, but it has also eliminated all oversight and
accountability. Government agencies no longer play an active role in
policing the markets and, as a result, U.S. financial institutions have fallen
into disrepute.
This is, first of all, a credibility problem and it will require astute
leaders with a strong moral foundation, not evasive bureaucrats who're
looking for a painless way to “cut their losses” and and keep the wheels of
industry clanking along. Asset-backed commercial paper--a $2 trillion
business--“is hardly trading at all.” The securitization of credit card
debt, mortgages and car loans has slowed to a crawl and is in danger of
stopping altogether. Many of the main engines for generating revenue for the
banks—the repackaging of debt and amplifying it through levered
derivatives—has vanished overnight. The financial markets have never been
under such stress. There's so much mortgage-backed gunk in the plumbing, the
system is grinding to a halt. This is no the time for “business as usual”
“garbage in, garbage out”. We need people who really understand what is
going on to step up to the plate and propose coherent “fiscal” policy
options that will steer the global economy away from the reef.
Forget about Paulson's “quick fix” snake oil. It's utter bunkum. The
credibility of the system is at at stake. It's time to get serious.
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