February 28, 2008
Barry tells it like it is
http://bigpicture.typepad.com/comments/2008/02/why-the-fed-is.html
Imagine if the Fed fessed up to what we know to be true, and what we suspect the future might bring:
Opening statement of the FOMC Chair, Senate Testimony
February 27, 2008:Senators, we find ourselves in a very challenging situation.
Following the dot com implosion, my predecessor at the Fed slashed rates to a generational low of 1%; the FOMC then kept rates at 1% for over a year.
While that re-inflated the economy, it also set off a shock wave of inflation unseen since the 1970s. Houses doubled in price, Oil is up 5 fold, food stuffs have tripled, and the dollar has collapsed. Gold is at multi-decade highs.
As always happens, these price increases in hard assets attracted speculators, and that made the situation — especially in housing — much more complex. Even worse, the housing speculation contributed to a debacle, while these other assets are actually accelerating in price.
Further, as was the political fashion, deregulation and a lack of interest in the oversight role of the banking system allowed an unprecedented expansion of credit, including to the least credit worthy consumers. Additionally, derivative selling — at is heart, an unregulated form of insurance — expanded from a few billion dollars to $46 trillion dollars.
The credit crunch is unprecedented, far worse than the S&L collapse and Long Term Capital Management — combined.
All of these factors have combined to create our present situation. Inflation remains very elevated and worse, quite sticky. Growth continues to slide towards zero — and possibly beyond.
Like many others, our forecasts in these areas have been wrong. We expected the slowing economy to moderate inflation, and so far, that has not happened. Demand for commodities from China and India is keeping prices elevated. The weakening dollar — now at levels last seen in the 1960s — is forcing all dollar denominated commodities higher. I don’t necessarily believe in “Peak Oil,” but the fact that the Saudis are one of the world’s biggest investors in alternative energy research might tell you something.
The last time a slowing economy failed to moderate prices was the 1970s. Even as the economy slid into recession, we had major spikes in the prices of energy, food, clothing.
What is particularly worrisome to me is that as we have slashed interest rates 225 basis points, consumer loans — mortgages and revolving credit — have actually moved higher.
Gentleman, this is a major problem. And our internal, non-public projections forecast it is only going to get worse for the next 4 quarters . . .
Now you understand why the Fed fibs. If they told the full and unvarnished truth, it would be beyond fugly.
February 27, 2008
February 17, 2008
Financial Armageddon: Too Many Bulls for a Bottom
Financial Armageddon: Too Many Bulls for a Bottom
Too Many Bulls for a BottomHistory suggests that when a true market bottom arrives, most investors don’t even notice.
Given that, it seems like there are way too many bulls around these days for the equity market to have seen its lows for the year. In fact, in a column I wrote last Tuesday for TheStreet.com’s Real Money subscription service, “The Real Contrarian Trade: Sell Financials,” I said as much. I noted that several well-known investors recently went public (on Bloomberg Television and in the Wall Street Journal) with bullish views on the signficantly underperforming financial sector (and, in some cases, the overall market), which has been one of the biggest drags on the S&P 500 index in recent months. Not exactly a sign of excessive pessimism.
From Panzer @ Financial Armageddon
No Longer an ‘Impending Catastrophe’?
Based on the following report from the New York Times’ Gretchen Morgenson, “Arcane Market Is Next to Face Big Credit Test,” it looks like we may find out fairly soon whether or not this is the case.
…
Credit default swaps form a large but obscure market that will be put to its first big test as a looming economic downturn strains companies’ finances. Like a homeowner’s policy that insures against a flood or fire, these instruments are intended to cover losses to banks and bondholders when companies fail to pay their debts.
The market for these securities is enormous. Since 2000, it has ballooned from $900 billion to more than $45.5 trillion — roughly twice the size of the entire United States stock market.
…In a credit default swap, two parties enter a private contract in which the buyer of protection agrees to pay the seller premiums over a set period of time; the seller pays only if a particular credit crisis occurs, like a default. These instruments can be sold, on either end of the contract, by the insurer or the insured.
…As investors who have purchased such swaps try to cash them in, they may have trouble tracking down who is supposed to pay their claims.
…Because these contracts are sold and resold among financial institutions, an original buyer may not know that a new, potentially weaker entity has taken over the obligation to pay a claim.
…It would be as if homeowners, facing losses after a hurricane, could not identify the insurance companies to pay on their claims. Or, if they could, they discovered that their insurer had transferred the policy to another company that could not cover the claim.
Credit default swaps were invented by major banks in the mid-1990s as a way to offset risk in their lending or bond portfolios. At the outset, each contract was different, volume in the market was small and participants knew whom they were dealing with.
Years of a healthy economy and few corporate defaults led many banks to write more credit insurance, finding it a low-risk way to earn income because failures were few. Speculators have also flooded into the credit insurance market recently because these securities make it easier to bet on the health of a company than using corporate bonds.
Both factors have resulted in a market of credit swaps that now far exceeds the face value of corporate bonds underlying it. Commercial banks are among the biggest participants — at the end of the third quarter of 2007, the top 25 banks held credit default swaps, both as insurers and insured, worth $14 trillion, the currency office said, up $2 trillion from the previous quarter.
JPMorgan Chase, with $7.8 trillion, is the largest player; Citibank and Bank of America are behind it with $3 trillion and $1.6 trillion respectively.
But many speculators, particularly hedge funds, have flocked to these instruments to bet on a company failure easily. Before the insurance was developed, such a bet would require selling short a corporation’s bond and going into the market to borrow it to supply to the buyer.
The market’s popularity raises the possibility that undercapitalized participants could have trouble paying their obligations.
…In 2000, $900 billion of credit insurance contracts changed hands. Since then, the face value of the contracts outstanding has doubled every year as new contracts have been written. In the first six months of 2007, the figure rose 75 percent; the market now dwarfs the value of United States Treasuries outstanding.
…
There is no exchange where these insurance contracts trade, and their prices are not reported to the public. Because of this, institutions typically value them based on computer models rather than prices set by the market.
Neither are the participants overseen by regulators verifying that the parties to the transactions can meet their obligations.
The potential for problems in sizing up the financial health of buyers of these securities leads to questions about how these insurance contracts are being valued on banks’ books. A bank that has bought protection to cover its corporate bond exposure thinks it is hedged and therefore does not write off paper losses it may incur on those bond holdings. If the party who sold the insurance cannot pay on its claim in the event of a default, however, the bank’s losses would have to be reflected on its books.
Investors are already reeling from the recognition that major banks inaccurately estimated losses from the mortgage debacle. If further write-downs emerge as a result of hedges that did not work, investor confidence could take another dive.
To be sure, the $45 trillion in credit default swaps is not an exact reflection of what would be lost or won if all the underlying securities defaulted. That figure is impossible to pinpoint since the amounts that are recovered in default situations vary.
But one of the challenges facing participants in the credit default swap market is that the market value amount of the contracts outstanding far exceeds the $5.7 trillion of the corporate bonds whose defaults the swaps were created to protect against.
To the uninitiated trying to understand this complex market, its size might initially seem a comfort, as if there were far more insurance covering the bonds than could ever be needed. But because each contract must be settled between buyer and seller if a default occurs, this imbalance can present a problem.
Typically, settling the agreements has required the delivery of defaulted bonds if the insurance buyer wants to be fully covered. If the insurance contracts exceed the bonds that are available for delivery, problems arise.
For example, when Delphi, the auto parts maker, filed for bankruptcy in October 2005, the credit default swaps on the company’s debt exceeded the value of underlying bonds tenfold. Buyers of credit insurance scrambled to buy the bonds, driving up their price to around 70 cents on the dollar, a startlingly high value for defaulted debt.
Market participants worked out an auction system where settlements of Delphi contracts could be made even if the bonds could not be physically delivered. This arrangement was done at just over 36 cents on the dollar; so buyers of protection on Delphi who did not have the bonds received $366.25 for every $1,000 in coverage they had bought. Had they been valuing their Delphi insurance coverage at $1,000 per bond, they would have had to write off that position by $633.75 per $1,000 bond.
That is why the valuation of these contracts is of such concern to some participants.
As with other securities that trade privately and by appointment, assigning values to credit default swaps is highly subjective. So some on Wall Street wonder how much of the paper gains generated in these instruments by firms and hedge funds last year will turn out to be illusory when they try to cash them in.
….
February 16, 2008
“Why don’t you kick some shit about the kids, man? The fuckin kids?!”
Kids Dj Sara and Ryusei
February 15, 2008
Great comparison from Mish posted on Minyanville first
http://www.minyanville.com/articles/housing-Bubble/index/a/15935
An Alternative Viewpoint
Using the Japanese land bust model as my guide, here is how I have called things in real time.
The Spring 2008 arrow was just added. The arrow is one notch closer to its final destination.
February 14, 2008
The Big Picture – The Monolines Are F#@%ed!
The Monolines Are F#@%ed!
As I noted on CNBC Tuesday, these firms have become financial terrorists, holding the muni bond business as their hostage. They know what happens to bank robbers and bad guys once they let the hostages go — they get riddled with bullets.
I like this even just for the title.
Great graph!
http://www.financialarmageddon.com/2008/02/is-aggressive-f.html
from financial armageddon. ‘nuf said.
Mish’s Global Economic Trend Analysis: Galling Actions of MBIA and Ambac
Mish’s Global Economic Trend Analysis: Galling Actions of MBIA and Ambac
For starters anyone blaming shorts is in trouble. It is an act of desperation that has a 100% failure rate for as long as I can remember. Any company baling shorts deserves to have shareholders walk away. It is an implicit admission of failure. Companies that execute well, welcome shorts. The shorts provide fuel for driving the market higher.
What’s galling is the request for taxpayer money for the sole purpose of bailing out the company doing the asking. This is not about “far reaching effects on the U.S. and global economies” this is a request for a government handout.
In Buffett’s Kiss of Death I noted Warren Buffet’s offer to reinsure 800 billion dollars in municipal bonds. The offered was declined. It was declined because the monolines are not telling the truth about what the rest of their business is worth. The answer is tens of billions of dollars in the hole.
Now MBIA is asking taxpayers to pony up money just to keep their failed business model in business. If this was really about saving the Muni market they would accept Buffett’s offer. This is really about keeping the gravy train going for MBIA officers.
Dunton and Chaplan wrecked their company and deserve salaries of $0. They should be asking forgiveness from shareholders. Instead they are asking for a handout that will cost tens of billions of dollars, just so they can keep their personal gravy trains rolling.
I wonder if Mish’s audience includes anyone in Congress. Doubt it, but I one could hope.
