NEW YORK, Dec 19 (Reuters) - Moody's Investors Service on Wednesday said it is continuing to review the debt of SLM Corp (SLM - news), better known as Sallie Mae, for downgrade, on concerns about liquidity and weakening in the student lender's financials.
Moody's had originally place SLM on review for a ratings cut due to its proposed leveraged buyout, which would have saddled it with additional debt, though the deal has since fallen through.
"The rationale for its ratings review has now changed," Moody's said in a statement. Moody's rates SLM's senior debt "Baa1," the third lowest investment grade.
"Since Moody's last revision of SLM's ratings on August 14, 2007, the credit markets have weakened significantly," Moody's said. "This deterioration is quite evident in the asset-backed funding markets that currently form the basis of SLM's funding plan."
Moody's said its review will focus on SLM's ability to access the term and asset-backed commercial paper (ABCP) markets.
"In this regard, Moody's will focus closely on the company's plans and prospects for completing replacement facilities for the $30 billion interim ABCP facility provided by JP Morgan and Bank of America in conjunction with the proposed buyout transaction," the rating agency said.
This facility matures 90 calendar days after February 15, 2008, with no new borrowings after that date, Moody's said.
(Reporting by Karen Brettell; Editing by Diane Craft)
Japan's Mitsubishi UFJ Financial Group Inc, Sumitomo Mitsui Financial Group Inc and Mizuho Financial Group Inc have rejected requests to participate in a rescue fund to be created by US banks to deal with the credit crunch, the Nikkei reported Thursday without citing sources.
The banks' decision comes after careful consideration of the requests, the business daily said.
They were each asked to set up a credit line of up to 5 US billion dollars for the fund, it said.
The three groups concluded that setting up huge credit lines in US dollars would be difficult in the current financial environment, while they also doubted the effectiveness of the fund, the report said.
Sallie Shares Plunge After CEO Talks
Wednesday December 19, 5:36 pm ET
By Alan Zibel, AP Business Writer
Sallie CEO Says Company Looking at Dividend Cut As He Tries to Reassure Investors
WASHINGTON (AP) -- Just days into his second turn as CEO of Sallie Mae, Albert L. Lord couldn't find the right words to soothe Wall Street.
With frustrated analysts seeking more details about the struggling student lender's finances than Lord was willing -- or able -- to provide, a half-hour conference call was punctuated by awkward exchanges and an expletive. When it was over, Sallie's stock soon plummeted to a five-year low.
One by one the wounded fall. The battle is just beginning.
Lord's frustration with the call showed near its end.
"There's no questions, let's get the (expletive) out of here," he said before wrapping up the call.
This article must be a mistake. Ben Stein says there is a small problem with subprime mortgages and he says subprime mortgages are only a timy portion of the GDP. Mr. Stein is on Kudlow's show right now explaining how he is buying his 13th property and he called his bank to get a loan and all they wanted to know was when he wanted to close. Ben Stein also keeps buying Ryland Homes on the dips.
When asked for further comments, S&P declined and stated they were pulling an Albert Lord (SLM CEO) and "getting the F#$K out of here!"
The acceleration of bad news is like an all aluminum ZL-1 big block powered dragster racing down the quarter mile with no parachute!
The federal governments total liabilities translates into a de facto mortgage of about $455,000 for every American household and theres no house to back that mortgage. In other words, our government has made a whole lot of promises that, in the long run, it cannot possibly keep without huge tax increases.
- GAO Comptroller General David Walker
awgee, my reconciliation sheet indicates that Ben Stein is not only a GOP shill, but also one of the biggest douchebags to ever exist, in this or any other reality.
" What do student loans have to do with mortgages?"
Same dynamic at work: lending money to people who can't pay it back. Maybe somebody shouldn't take out $40K in student loans to get a career as a schoolteacher making $35K, or $60K to enroll in a culinary academy which qualifies you for a $15/hr chef's job. But they do. And lenders make the loans. And securitize them and sell them. And a lot of the loans aren't getting paid back. And... you know the drill.
The next series of the ABX, a synthetic index of mortgage-backed securities, was due to be rolled out on Jan. 19. But that's been put off for three months because there have been so few residential mortgage-backed securities issued during the second half of 2007, according to Markit, which helps run the index.
This should not make any real difference. The current series from 2006 and 2007 constitute a good proxy for all that paper out there.
The federal governments total liabilities translates into a de facto mortgage of about $455,000 for every American household and theres no house to back that mortgage. In other words, our government has made a whole lot of promises that, in the long run, it cannot possibly keep without huge tax increases. - GAO Comptroller General David Walker
Good thing its only in dollars or we'd be in real trouble.
My apologies if this has already been beaten to death in previous discussion, but, the auction results today indicate the continued stress in the credit markets, the need for liquidity, and the desire to remain completely anonymous through the use of this auction.
I did not anticipate seeing the results of the auction at roughly a 10bps difference to th discount rate.
In my opinion, clear signs of improvement would be results closer to fed funds.
Can you explain how the auction is more anonymous than the discount window? How can a bank or person find out who went to the discount window but not know about the auction participants. Why make the distinction?
"Mr Potanin hired Citigroup to help raise $10 billion from Western markets but the credit crunch has made this impossible. The oligarch is thought to have raised about $5 billion from two Russian banks but unless he can find last-minute financing in the Middle East or China, the option will lapse."
My how the times have changed. The place to find dollars is outside the US. Wonder how they got there (and how many more will follow)?
UPDATE 1-ACA Capital won't have to post collateral for 4 wks
Wed 19 Dec 2007 7:06 PM CST
(Adds background)
NEW YORK, Dec 19 (Reuters) - Bond insurer ACA Capital Holdings said on Wednesday it will not have to post collateral until at least Jan. 18, 2008, in a move that could save the bond insurer from a potentially crippling cash crunch.
During the four-week forbearance period, ACA said it will work to stabilize its access to funds and its capital position.
Ratings agency Standard & Poor's cut its ratings on ACA unit ACA Financial Guaranty Corp deep into junk status. Ratings cuts can be devastating for bond insurers, who use their credit ratings to turn other issuers' bonds into higher-rated instruments.
A downgrade could have forced the bond insurer to post collateral in some transactions, straining its finances.
ACA said it was surprised by the S&P move, which came as part of a broad evaluation of the bond insurance sector.
ACA has exposure through derivatives to some $68 billion of repackaged debt known as collateralized debt obligations.
That type of exposure contributed to ACA's $1 billion loss for the third quarter. The company's shares were suspended from the New York Stock Exchange earlier this month as part of the delisting process, and now trade in the Pink Sheets.
ACA's losses could be Wall Street's as well, a credit derivatives trader said last month. ACA sold billions of dollars of credit protection using derivatives to Wall Street firms, which in turn sold similar protection to other customers.
If ACA is unable to make good on its end of the trade, Wall Street firms will lose money on the protection they sold, and will not be able to record gains on the protection they bought. Banks and brokers could lose billions of dollars, the trader said.
The New York Times reported on Wednesday that Merrill Lynch & Co Inc (MER - news) and Bear Stearns Cos Inc (BSC - news) and other large banks are in talks about bailing out ACA.
(Reporting by Dan Wilchins; editing by Carol Bishopric, Richard Chang)
WASHINGTON (AP) -- Just days into his second turn as CEO of Sallie Mae, Albert L. Lord couldn't find the right words to soothe Wall Street.
Lord's frustration with the call showed near its end.
"There's no questions, let's get the (expletive) out of here," he said before wrapping up the call.
This crucifiction wouldn't receive as much historical sympathy as others I won't mention.
"What do student loans have to do with mortgages?"
Hhhmmm let's see: negative savings rate, higher credit card balances, more BKs due to medical expenses, car loans for longer terms and greater amounts, rolling over car loans (!?!?!),you can finance consumer electronics, jumbo mortgages, zero down mortgages, stated income mortgages, teaser rates, HELOCS, record student loan debt, rapidly expanding payday loan business, record government debt, debt/GDP ratios greater than the depression etc etc...
It's the BIGGEST CREDIT BUBBLE THE EARTH HAS SEEN!!!
I read the transcript of the Hovnanian conference call. One of the interesting points was about the cancellation rates. Even at 40% its a bit worse than appears, they had the national sales event at were aggressively trying to remove spec inventory during the quarter. The fallout from this sales was only 22%.. and this sales represented a significant portion of sales.. meaning the cancellations from "normal" homebuilding sales was significantly higher.
Yes but i am asking how do you watch it and why is it that you cant watch the auction. If they dont want the window to be stigmatised why allow it to be viewable?
Its a "package the security so I can maximize my bonus" problem... just like this:
Hedge Funds Bag New COLOSTOMY Product
'Investment Dealers are excited to announce the newest structured finance product - Constant Obligation Leveraged Originated STructured Oscillating MoneY Bridged Asset GuaranteeS, or COLOSTOMY BAGS.
Designed to accommodate the most sophisticated investment strategies, Colostomy Bags contain the equity tranches of Structured High Interest Taxable Derivatives, or SH IT, and are leveraged an infinite amount of times through the innovative use of derivatives.
We believe that what is needed is a new Resolution Trust Corporation (RTC)... Congress would establish this new RTC to buy up subprime mortgages at deep discounts. The RTC would establish, say, five tiers of mortgages, offering, say, 70 cents on the dollar for tier A, 60 cents for tier B, 50 cents for tier C, and so on. Interested sellers would have to pay the RTC a fee for evaluating and classifying any mortgages they wished to sell.
Nemo, homeowners should be able to buy their mortgages back at a discount too- do ya think?
Hey, time to make sure that I look like subprime C paper too;-}
nades has it right- first out of the dollar into something stable wins- I think I will buy some Nestle, people always eat chocolate, especially women cut off from credit cards;-}
America- your shopping spree is over!
That is the upshot of the deal, dust- we are already getting to call for some nasty nationalization of the problem to bail out Wall Street- see the journal carry the water;-}
Thanks for posting that and yup, that's the mechanism that I was aware of for breaking through the veil of anonymity. But of course, the same technique can be used for the TAF borrowing - the institutions had to phone up their local ( one of 12 ) district Fed bank.
Granted, instead of say just 1 bank going to the San Francisco Fed ( CFC, the banking side anybody ?) we now will have 2 or three all at the same time ( Wells Fargo, WAMU AND CFC ), but still.
Another thing I've read somewhere is that the banks have to disclose ( SEC Regs? ) if they access the Fed window but I've never seen evidence for that assertion. In any case if there is such a SEC rule, I'd have thought it applied to the TAF use too, no ?
ignore the nonpc parts- just that comment tossed off at the end, followed by the walk away.
I hope the management of this country takes a long hard look at wall street and decides that all the deregulation was abused. Some new regulation seems to be necessary.
The Sallie call is fantastic. The new CEO had a 1.2 million share sale, and it sounded like it was a margin call from his bank, by his description. That is is hilarious. He was levered up in his own account.
read the FDIC press release. looks like they're looking for a quick way to disqualify depositors from claiming insurance. doesn't give me the warm and fuzzies
I have the last 40 seconds of the call from youtube on my blog. I really think that Lord will be out of a job by this Friday, next Friday the latest. Any takers?
Lord, please make these wicked people eat dirt, kinda like the way them injuns taught them folks a lesson about he value of land and money.....anyone remember that one?
as far as the stigma, the penalty rate alone speaks of desperation. I would also think that "internal" reporting as to frequency of borrowings could bring fear of regulators.
as to the auction, I'll state the obvious, many participants competing on rates, potentially at levels closer to fed funds. The fed benefits from the ability to gauge the disarray in the credit markets due to participation. In the end, could the implications be the same? Possibly.
This line from the FDIC link above, 'FDIC Proposes Rule to Enhance the Process for Determining Insurance in the Event of a Large Bank Failure', is quite intriguing:
By using the end-of-day ledger, the FDIC will be able to apply a single standard across all failed banks in order to treat every transaction equally.
More than one? Citi has company?
v2, The Haunting of Level 3
(you'll never return from Level 3)
I am hopeful that any IBs that push the envelope with their end-of-year accounting to squeeze out one last round of outsized bonuses will be sued for fraud.
If HOV's cancellation rate for its three day Deal of the Century sale was only 22%, then the cancellation rate for the remaining 87 days of the quarter was 150%.
150%..............now that is some cancellation rate. Upcoming reports from public HBs could be very interesting.
Market players cheered media reports that Japan's three megabanks are poised to turn down a U.S. request to provide about 5 billion dollars each in lending to a bailout fund that major U.S. banks plan to set up to alleviate the global credit crunch caused by the U.S. subprime mortgage problem.
"If Japanese banks were to participate in creating the U.S. credit line, they would likely face shareholder lawsuits and cause the subprime fallout to spread in Japan," Akio Yoshino, chief economist at Societe Generale Asset Management (Japan) Co., said.
"I am hopeful that any IBs that push the envelope with their end-of-year accounting to squeeze out one last round of outsized bonuses will be sued for fraud."
That's a possiblity, but pigmen who the bonuses walk away with the loot anyway.
The FDIC last updated its deposit insurance determination process in 1999. The largest number of deposit accounts in a failed institution for which the FDIC had to make an insurance determination was about 175,000 for NetBank, FSB, Alpharetta, Georgia, on September 28, 2007. Today, some of the larger banks have more than 50 million deposit accounts.
Who do suppose they might be talking about there ?
I'm always impressed by how he doesn't flinch or even acknowledge the exposion behind him while he gives his little speech. Perhaps I should rethink that emotion. I've always thought it was great acting. But he was merely playing a part in a movie being made in a jungle that he probably didn't expect anyone to ever see. We have actors now, on the world economic stage, also not flinching when explosions are going off. Perhaps that isn't a skill we should admire? Speaking of that, how did that war end?
Im seeing burnout here and thus a lack of interest in ongoing financial explosions and implosions, which to me is a very bad sign, and a sign that this meltdown is becoming a non-issue, just like the attitude which this crisis was built upon!
MMMM,Ray,just a possibility of a minor diffugulty.No worries though,the Prez said that the EEEKonomic fundlementals are Good.Since he are a fundlementalist I'm sure he would know.This IS the USA so you will always be able to put food on your family.Sleep well.
RayOnTheFarm - FDIC's insured and uninsured deposit process has more to do with its current and projected staffing in the Claims Department than anything else. The FDIC has less than 100 trained Claims Agents all based in Dallas, TX to process the nation's depositor claims in the event of bank failures. I personally know many of these claims agents. The FDIC's staffing is so low that it is impossible for the FDIC to staff 2 large bank failures at the same time or 2 large bank failures back to back. And, when I say large I mean over $1 billion in assets. The FDIC has said it will hire contractors if and when needed.
The number of U.S. citizens who moved to Canada last year hit a 30-year high, with a 20 percent increase over the previous year and almost double the number who moved in 2000.
In 2006, 10,942 Americans went to Canada, compared with 9,262 in 2005 and 5,828 in 2000, according to a survey by the Association for Canadian Studies.
I was talking today to a friend who runs an area of Morgan Stanley. An upper middle manger, not high up, but his area is strategic and keeps making money. He said people all over the firm were screaming the last two days about how small their bonuses are. One-third what they expected. Then today it all started to make sense.
Nobody at MS thought it would be this bad. All the losses were created in a small department of MS. Every other department has clear and consistently enforced risk guidelines. "Nobody can understand how a loss this large could happen here, with what we live with every day." Everybody blames senior management. A lot of people want to leave.
People are upset that "the Chinese now own us." There's a feeling that things are spinning out of control in regard to foreign ownership. Everybody who works there felt MS was the quality shop on Wall Street. Now, they are wondering.
U.S. lawmakers vowed on Wednesday to pass legislation to pressure China to revalue its currency, after the U.S. Treasury Department again said Beijing was not manipulating the renminbi, or yuan, for trade gains.
Allen said: "That is the upshot of the deal, dust- we are already getting to call for some nasty nationalization of the problem to bail out Wall Street- see the journal carry the water;-}"
The entire US economy is $14 trillion or so in contrast to $42.6 trillion in credit default swaps. The entire Derivatives Trade Soars To Record $681 Trillion. Lets see the gubberment inflate out of this... you are on the wrong side of the trade. Anyone long "inflation" is going to get rammed up the a$$.
Bargain houses largely unsold - Real Estate - Modbee.com
Another foreclosure record was set in November as 1,336 properties were offered to the highest bidder on the courthouse steps in Modesto, Merced and Stockton.
Now here's the real surprise: Only 17 of them sold, despite lenders offering deeply discounted prices.
Every weekday, starting about noon, auctioneers seek buyers for foreclosed properties of all shapes and sizes. But more times than not, no one bids.
That's because foreclosed homes typically have unpaid mortgage debt far in excess of their current value. When no bidder is willing to pay off that debt, lenders usually get stuck owning the homes.
On Friday, O'Toole said, a foreclosed five-bedroom Modesto home on Hemstead Avenue went up for auction with a starting bid of $301,500, even though the lender was owed $537,000 from a delinquent mortgage.
But that $235,500 discount apparently wasn't enough. O'Toole said no one bid, so the lender now owns the house.
FDIC,
Thanks for your contributions. They are very informative. I have a sort of "hypothetical" question. Lets say I have a relative who I haven't been keeping abreast of the very latest of economic and financial developments. Let's say this relative was rate shopping and just bought some Countrywide CDs that are FDIC insured. If Countrywide goes under, how long would you guestimate until the money is available.
I know. I know. But, we deal with what comes along.
A guess, 2 to 6 months. If a few banks fail then the process will stretch out. Keep everything under $100,000 right? Make sure that the "CD" is a type of account that is FIDC insured.
U.S. lawmakers vowed on Wednesday to pass legislation to pressure China to revalue its currency, after the U.S. Treasury Department again said Beijing was not manipulating the renminbi, or yuan, for trade gains.
Is it really possible that these people don't understand the mechanisms involved in currency manipulation and the cheap funding of our completely out of control deficits? Is our "leadership" really that uniformed and stupid?!?!
Fitch said the ratings outlook on the second-largest U.S. investment bank remained negative, meaning it could reduce the rating over the intermediate term.
The ratings agency said it viewed "positively" the raising of $5 billion in capital through a mandatory convertible security issued to China Investment Corp, a sovereign investment fund controlled by China.
And it said the bank might yet claw back some of the losses recorded.
"Fitch ... believes that some of the recognized losses may eventually be recovered as current marks to market result from very dire assumptions about default probabilities and severity for U.S.-based mortgages. Further declines are possible but considered unlikely," it said.
FDIC,
I am from Texas near Houston. Did you ever read Lance Armstrong's description of Plano? I tend to agree. I think the suburbs of Dallas will be slums in 20 years, maybe less.
Those homes look pretty nice right now.
Red Pill - I think it is going to depend on the timing of the failure and of course what type of failure transaction. Depositors in banks that fail sooner rather than later may receive better faster service until the FDIC quickly becomes overwhelmed, overworked and understaffed. If the transaction is an assumption by another financial institution or a total bailout by the Feds then there should be a very minimal wait. If the transaction is a new type of recovery say something we have never seen before or a payout whereby there is NO assuming bank and the FDIC simply pays off all 'insured' depositors then get in line and wait your turn and hope the books balance. Whatever happens it will be very difficult for the FDIC to keep up with the pace based on its staffing and 2008 staffing increases of about 100 more employees mostly examiners and not Claims agents who handle the depositors. The FDIC has not begun hiring new Claims agents yet and many current agents are either eligible to retire or will be in the next 1-3 years.
People said the same thing going into the late 90's with the RTC, and what happened? Inflation. While assets might go begging, so what?
All I know is they raised the price of my Macallan 12 y.o., again.
No inflation, bupkis. Drive your vehicle or buy food, get healthcare or pay taxes- geez, inflation.
Even the dmned property taxes *still went up 15% percent from last year. And I have another two years of increases built in just to get to what my mortgage is on the old homestead.
Someday this war's gonna end...as for R.D.'s stoic take- remember he can really act- it was shot in one take right after the planes went over the napalm exploding. FFC left that in for effect, he could have cut those seconds out, but chose not too. Art I can appreciate.
Can you say, I have been given a script from someone that has money and heres what it says, word, by word...dah:
U.S. Senator Charles E. Schumer issued the following statement Wednesday regarding Morgan Stanley's $5 billion agreement with China Investment Corporation:
"This agreement will provide capital for Morgan Stanley and thus strengthen one of New York's premier companies. This will help New York preserve jobs and keep its position as the globe's financial center."
"When I took office, our economy was beginning a recession," Bush said in a speech at a Mississippi high school. "Then our economy was hit by terrorists. Then our economy was hit by corporate scandals. But I'm certain of this: We won't let fear undermine our economy and we're not going to let fraud undermine it either."
In a congressional election year, the administration seems determined to avoid the apparent mistakes of the first President Bush, who lost a bid for a second term after the Clinton campaign took advantage of the perception that Bush was not paying close enough attention to the economy.
The current Bush administration's claim that it inherited a recession from Clinton became somewhat more credible last week, when the Commerce Department revised its estimates of GDP, the broadest measure of economic growth, in the first, second and third quarters of 2001, showing that it shrank in all three quarters.
Earlier estimates found economic activity contracted in only the third quarter of 2001, due mostly to a dramatic, temporary slowdown in activity after the Sept. 11 terror attacks.
Since one popular rule-of-thumb definition of a recession is two or more consecutive quarters of shrinking GDP, it became possible, based on the revised data, to say a recession began in January 2001.
It was also easier for Bush and Cheney to point to the two quarters of growth so far in 2002 and claim that the tax cuts and economic stimulus packages they pushed in 2001 had helped the economy recover.
"Rebate checks, a rate reduction on tax day and a stimulus package helped turn three quarters of decline into two quarters of growth," Cheney said in a speech to the Commonwealth Club of California.
Have any of you ever had money in a failed US bank or S&L. I have. In about 20. When they went under - the transition from failure to FDIC control and complete access to money took from 4 pm until 9 am the next day.
And I was curious - so I looked at the liens my HOA has pending. There are exactly 2 - out of 1000 houses - which is actually kind of below the norm (usually about 5-10 over the last decade).
Is it possible that a very small number of geographical areas - like Stockton CA - have huge problems - and most places are kind of muddling along.
Is it possible that a very small number of geographical areas - like Stockton CA - have huge problems - and most places are kind of muddling along.
Robyn | 12.19.07 - 11:19 pm | #
Might have said that a couple years ago - not anymore. Even in my small midwest town completely isolated from rust belt or bubble we're starting to see it... foreclosures are up... all ways the same story too. Folks loaded up on funky mortgages, bought more than they could afford and now are falling behind.
Morgan Stanley pays high cost for funding The investment bank said on Wednesday that it was selling up to 9.9 percent of itself to China's foreign exchange fund for about $5 billion, using securities known as mandatory convertibles. Those securities pay 9 percent a year to the investors until they convert to shares in August 2010.
That 9 percent a year translates to about $450 million of cash out the door next year, equal to about 18 percent of this fiscal year's earnings.
It also means that in about 2-1/2 years, Morgan Stanley will have to issue a large chunk of new stock, diluting current shareholders.
Investors cheered the move, in part because the new capital will shore up Morgan Stanley's balance sheet. The company's shares rose 4.2 percent on Wednesday, after the investment bank said it wrote down $9.4 billion, an amount equal to about a quarter of its third-quarter equity of $35 billion.
"It's a strange world we live in where dilutive capital raising is considered a positive by the market," said James Ellman, portfolio manager at hedge fund Seacliff Capital.
Went through one S&L takeover in Richmond, VA in 1990. Happened incredibly fast (closed hour early on Friday and had a new owner by Monday AM) but impression now is that things could take a bit longer.
Problems in my rural PA area as multiple families in small town are laboring under multiple mortgages from being unable to sell their properties (several homes and one flip). Frankly think that due to not pricing to 2007 but instead 2005.
Sold my house in August in 4 days...most common description of our price (swear to God...) was "affordable". Wife thinks that we undersold but I point out those other families. Yes, had been reading this blog for some months before putting house on the market. I still marvel that the mortgage broker could look me straight in the eye and tell me that we could handle three notes should old property not sell. My response was that I understand that there are black holes but I don't care to encounter one.
I've also taken the liberty of contacting Veribanc and ordering reports for my area as well as for in-laws in Virginia. Will start shift of funds into "safer" bank post Xmas.
As to ways to make money in the new environment, I'm trying to recollect how to make cheap booze with surplus auto parts.
"I a lynch-pin hat like a tin foil colander?
albrt"
The Super Colander Tin Foil Hat is now at an alert higher than I've ever seen. It's like HAL for 2001, I have to keep it on, but I can't shut off the alerts.
Might have said that a couple years ago - not anymore.
I agree. I live in Renton, WA. I'm not technically within the city limits (you wouldn't know it by looking though) but am certainly in the greater Seattle metropolitan area.
I've seen a LOT of construction. I'm now seeing "price reduced" on the existing homes that are for sale.
Rents should continue to climb 6 percent a year for the next three years -- a little more than the past three years, but less than the 9 percent jump over the past year, Dupre + Scott predicted.
Robyn - I don't doubt your good experience with the FDIC's claims process. I worked at FDIC for 19 years and saw first hand how well depositors were handled back then. However, the FDIC has dramatically downsized all thru the 1990s and as I said now has less than 100 Claims agents to handle these future claims at failed banks. These 100 employees cannot possibly handle the crush of claims that surely will come again without additional help.
Morgan Stanley loved Darden Restaurants though, right up until it dropped 21% today anyway. It is no longer the "strong buy" it once was and is now simply an "outperform", lol.
"However, the FDIC has dramatically downsized all thru the 1990s and as I said now has less than 100 Claims agents to handle these future claims at failed banks."
Oh well that's gotta be good.I mean with ACA going teats up we can't have many account failures coming. I'm going out this weekend and exchanging my dollars for seaweed. Should be a good hedge against this shite.
Earlier thread commented on question of inflation v deflation and someone coined terms like contango and torqueification (both pretty good). I'd wondered same thing - how could have both simultaneously?
I'm starting to lean towards deflation - and me in a new house...
Reading Schlesinger's "Crisis of the Old Order - 1919 - 1933" and this period is startlingly like 1920s re bottoms-up resentment of the upper economic crust (i.e. Wall Street).
FT - S&P paints bleak picture of 2008 debt outlook. The outlook for European corporate and financial debt will turn distinctly more negative next year with credit ratings downgrades set to outnumber upgrades by two to one... FT.com / Capital Markets - S&P paints bleak picture of 2008 debt outlook
Speaking of real estate pictures, here are some of Harry Potter's new digs in NYC. About four rooms, cost a bit over 4 million. Ergo a million a room. What a screaming bargain!
Journeyman - Yes for now. Inner city locations like Lakewood and the M streets will fall but not as fast as the burbs. Older homes that have not been redone to the max are harder to sell now in all areas because the flippers are not buying them to redo and flip. There are several flips that have been redone to the max in my hood and they are not moving now. Prices are still sky high in Lakewood.
Robyn Is it possible that a very small number of geographical areas - like Stockton CA - have huge problems - and most places are kind of muddling along.
The answer to that question is a decisive no. The default rates on subprime ARMs are headed for depression-like numbers, the default rates on some Alt-A issues now look like subprime ratios, and prime defaults have already moved to Alt-A territory, but are doing their best to catch up. Prime ARMs are actually degenerating faster than fixed subprimes.
Fannie's worst defaults are coming in the midwest. Both coasts are being hit hard by funny money Alt-A and subprime defaults. Of course, much of the south is being hit too, especially Arizona.
According to LoanPerformance, only 40% of its tracked zip codes have stable or increasing home prices.
But that isn't the whole story. At least 25% of the population is underwater on their car loans, and the reason why holiday sales dropped off in December is that spikes in CC defaults caused a bunch of banks to panic and hike rates on lower-income borrowers this fall. A bunch of people who would have purchased on credit are waiting until they get their next SS/pension check.
The easy credit for homes and price appreciation was masking a whole range of problems. A lot of lower income people were living on credit, and that is going to unwind very quickly over the next year. A lot of them are elderly.
The experienced inflation rate for lower/moderate income households is causing severe problems.
Eric - Ask the inflation-istas how we will inflate-away 600 trillion in Derivatives... you'll get a blank stare. When people say its different this time... they mean it.
Everything points to deflation and the FED|Government|Treasury is powerless to stop it. Notice that those over 50 years old really, really want inflation. Why? Because they are long debt and close to retirement... if not retired already. They are going to get hammered.
They will compare everything to the 70's which is bassakwards to the present situation. Private debt and money creation is 5 to 10 times greater than public. The market is no longer just the "US"... its completely global and its un-officially been bust since August.
How many more 500 billion injections will move a market that is insolvent from the top down? ZERO.
Bear Stearns reported a fourth-quarter loss of $6.90 a share and took a larger-than-forecast $1.9 billion in mortgage-related write-downs. Bear said members of its executive committee won't receive 2007 bonuses.
"We are obviously upset with our 2007 results, particularly in light of the fact that weakness in fixed income more than offset strong and, in some areas, record-setting performance in other businesses," said Chairman and Chief Executive James E. Cayne. "Our underlying fixed income franchise remains strong and we have taken steps to size the division to market conditions."
so everything's cool now, cayne can go back to the golf course, playing bridge and smoking pot. and they even didn't need the chinese investors - what capital shortfall?!
Dec 20, 2007: S&P's action sent shivers through most of the financial markets, renewing the flight to quality in Treasuries, bringing their prices up and yields down sharply. But the muni market treated it as old news.
So, it's not for nothing that tax-free munis yield as much as their taxable equivalents. And not everyone thinks it's time to buy.
And we find leverage here too: Currently, many closed-end muni funds trade at big discounts, which means that investors can buy a dollar's worth of bonds for 90 cents or less. In addition, many closed-end muni funds use leverage, that is, borrowed funds. That increases their risk but also can increase the funds' returns, especially if the Federal Reserve continues to lower short-term rates. Information on closed-end funds is available at etfconect.com, including various screening tools to find CEFs with certain characteristics, such as those with the biggest discounts.
Closed-end muni funds should not be confused with recently introduced exchange-traded funds that invest in munis. The ETFs tend to track their NAVs and don't use leverage, so they just track the market.
Dec. 20 (Bloomberg) -- SunTrust Banks Inc., the seventh- largest U.S. lender, said it will buy $1.4 billion of securities from two of its money-market funds to protect investors from possible losses.
Dec 18, 2007: More U.S. state pension funds faced shortfalls that might threaten their ability to pay in 2005 than they did in 2002, according to data released on Tuesday.
"Despite a strong economy and solid growth in tax revenues since 2002, many states have failed to achieve a higher funded status of their pension plans," analysts at Loop Capital Markets wrote in a report.
"Of the 74 state pension plans that we monitor, 58 posted lower funding ratios in 2005 than in 2002," the report said.
And here's the winning last paragraph:
Many state pension funds say they need to have at least an 8 percent average annual investment return to keep up with their obligations.
I hope they've all been playing in the commodity futures.... [/sarcasm]
WASHINGTON (AP) -- More people signed up for unemployment benefits last week, suggesting that the job market is softening as the economy loses speed.
The Labor Department reported Thursday that new applications filed for jobless benefits rose by a seasonally adjusted 12,000 to 346,000. It was a larger increase than economists were expecting. They were forecasting claims to rise to 335,000 last week.
The four-week moving average of new claims for unemployment benefits rose by 4,250 to 343,000 last week, the highest level in two years.
Bear Stearns vs Oracle. I'm starting to ask myself how long it can continue to be the case for all the financial companies to do terribly and so many of the non-financial ones to do great? I know most of you will say it can't continue. I have to say, I don't know. A lot of these companies are very cash-rich right now and don't need to access the credit markets. As a Biochemist, I find it passing strange how often so-called laws in Economics get violated.
As a Biochemist, I find it passing strange how often so-called laws in Economics get violated.
My favorite definition of an economist comes from Ronald Reagan: one who sees something that works in practice and wonders whether it would work in theory.
If economists had to come right out and admit that the flow of money and capital in our species had more to do with psychology than with mathematics ... well, let's put it this way, there's no Nobel Prize in Psychology.
But is the performance of Oracle irrational? Their customers are cash-rich corporations, primarily. They expect to be in business long after this credit crunch is a distant memory and are making prudent investments to make sure that happens. I know everyone on this blog wants to take the most alarmist view of everything, but very large segments of the economy are doing very well. In the real (i.e., non-financial, non housing) world people will keep innovating and driving wealth creation.
Yes, Psychology is key and it can change on a dime (whether the dime is devalued or not).
"Same dynamic at work: lending money to people who can't pay it back. Maybe somebody shouldn't take out $40K in student loans to get a career as a schoolteacher making $35K, or $60K to enroll in a culinary academy which qualifies you for a $15/hr chef's job."
This "dynamic" was/is extremely puzzling to me, loan money to ANYONE regardless of major or prospects for success.
My sympathies to any politician who has to shut down this gravy train; try getting the American public to accept that their children need to be trained to earn their living as a small cog in a very big wheel.
Note to many on this blog, I'm sure that doesn't worry you because your children will likely be spared the indignity of wage slave employment.
New Deal financial reform stood on two pillars: Disclosure and separation. That is, it tried to ensure transparency in the financial system. And it built firebreaks between different sectors, so that--to take the Glass-Steagall example--banks could no longer be easily sunk by leveraged losses in the markets.
You may note, both of those pillars have now been toppled. In the current crisis, nobody can tell who the bagholders are, what risks have been assumed, or what the shady non-bank banking system is up to. Nor, obviously, are there any firewalls to keep contagion from spreading.
Perhaps these are two ideas--disclosure and separation--that our current crop of regulators and legislators might like to remember.
The short term economic picture looks deflationary. The inflation argument looks more like this:
government has huge liabilities at home and abroad and is already in debt. As economy slows and there is less money to be had from tax payers and new foreign borrowing, government will have to make a choice on how to pay the liabilities.
Choice A: severely cut benefits on medical, social security, cut govt jobs.
Choice B: print some money, pay the bills, repeat until inflation adjustments are so far behind the curve that you arrive at choice A without having to pass any laws.
Choice B is much less efficient (more economically destructive) from the point of view of an economist, however it is better from the point of view of a politician because you don't have to vote for unpopular laws that kill your political career. This leads many people to believe that longer-term picture is inflationary.
Same dynamic at work: lending money to people who can't pay it back.
The underlying root cause is the same, as well: the enormous boom in securitization and derivatives trading ensured that the people making the loans weren't the ones holding the loans. From the lender's standpoint, it became no pain, all gain (in the short term, at least).
But Milton Friedman explained, quite clearly, what invariably happens with "Type IV" spending: when you spend other people's money on other people. What made anyone think that lending other people's money to other people was going to turn out any differently?
energyecon: No smoke, I'm far from 100% long stocks right now. I just think we'll muddle through the next few years with sub-par growth but a long way from the diastrous scenarios that some insist on painting. Some people might find a good rewarding life is possible without granite countertops.
I hope you are right, however the risk of experiencing some of the fat tail events is real...and we seem to think that we have been exempted from the business cycle in that the concept of a recession seems nearly impossible to entertain. That increases our risks IMNSHO.
No, a recession is certainly possible (maybe 50:50, but I'm no expert). One is about due in the business cycle anyway. I would call a recession muddling through, since we have muddled through them every 5 years or so in the past. I am certainly treading carefully-I have some stocks that are more linked to company-specific news than the economy- and holding quite a bit of cash. I'm just not out burying Krugerrands in the backyard.
By the way, do you remember Ravi Batra (sp?) who wrote the Crash of 86? I hear he is out now pedalling the newly revised Crash of 08. People have been predicting the end of the world since the beginning of the world. It's been a losing bet so far, but some time in the next billion years, they will be right....
(Can you find more of Merino's work, or citations to it in subsequent work? I'm really curious about the difference between "restoring trust" and "actually protecting investors" -- if our hosts here permit, it could be a very interesting thread to follow as a separate subject)
Whoops, and how could I forget corporate debt? "Troubled" is doubling.
But of course those C&D loans are performing great, ahhh, oops, not exactly. Really, we are living in a world of correlation, and it is an ugly place to be.
That could happen. The question is; what kind of collateral are they going to take in exchange for the money. Two, is that money actually going to make a difference or is it merely servicing debt on another obligation.
As we've seen since August, the money coming from the the window isn't doing anything to clear the lock up. Its bolstering some nasty balance sheets so banks can appear solvent.
It's been about a quarter decade since my Econ Money/Banking course...what's the effect then of perhaps lowering the capitalization rate req'd by law? That helpful?
IMHO, the pace of debt destruction will soon overtake credit creation. If we get any kind of significant rise in unemployment (likely), we will have severe deflation and a depression. It will not matter how the authorities, whether Democrats or Republicans, attempt as a fix.
NY Times
"In another indication that credit markets remained unhinged, the Federal Reserve said that its auction of $20 billion in short term loans to the banking system drew 93 bids, seeking more than THREE TIMES the amount available." Bond Insurer Cut to Junk; Negative Outlook for 4 More - NY Times
All this being said, perhaps I'll just forego changing banks and pull everything out for the mattress.
Talked w/someone at coin shop recently and she was commenting that they advise folks taking care of property left by deceased elderly relatives to first rent a metal detector to go over house floors/walls before selling. Apparently a lot of loot squirreled away by the Great Depression survivors.
Home - They got around the reserve requirement a long time ago. Have you seen the "Level 3" assets thee guys have? Positively insolvent if marked to market.
Just think abut this if the .gov feigns a "bailout";
The 9 trillion in debt put the US gov into a corner. If the treasury holders smell a "real" bailout, the cost of gov debt will jump huge. Just think if they have to rollover 9 trillion on a 10% interest rate. I think they will keep putting out "hope" bullshit programs.
Homedad,
use the below for you energy and electric generation. At the very least for your brew creation. !!
Plant a few of these jatropha as a hedge. The fruit provides oil. jatropha
You could also change your diesel car to run on SVO (straight veggi oil).
(search for "SVO diesel" and you will come up with many leads
i.e use the jatropha oil to run your car.
<a href=http://journeytoforever.org/biodiesel_svo.html>diesel car to run on SVO (straight veggi oil)</a>
It's strange to see this whole thing unfold from here in the Silicon Valley. Very few people even seem to be aware of the magnitude of this crisis. Most still think that our housing market is immune. Over the next two years, as Alt-A and Prime loans default in numbers, that will change.
Even in other areas already seeing defaults, a change in psychology will play a big role in how this thing intensifies. Across the country and the world, folks still have the notion that dips (in stocks and in houses) are a buying opportunity. At some point they will panic, revulsion will set in, and there won't be many vultures willing to swoop in and buy houses and stocks. It's called capitulation, and we're not even close to that yet.
Yeah, there was a chart somewhere with all of the various IB banks and their "assets". Its like a 3:1 ratio (level 3 to level 1) but in hundreds of billions. U-G-L-Y.
Then you get into the swaps and derivatives all written in the caymans. They have quadrupled to the 2nd power our total economy... 42 trillion (US economy) vs. 600+ trillion. The inflation-istas believe (wrongly) that we can "print" our way out of this. Its not going to happen. We are at system reset.
The rate of credit creation slows precipitously as the list of assets that can be pledged dwindles down.
The interest and principal payments due on existing debt get close to and ultimately exceed the amount of money in the system, as the rate of credit (money) creation slows.
Those who detect this while they still have money pay off their debts, (correctly) deducing that a "reset" is about to take place - and that cash (assets) will have value, while debt will be a millstone that will drag you underwater.
Those who are unable to pay off their debts will find that a contracting credit (money) supply leaves them with insufficient funds to pay their debts. Debt defaults at a rapidly increasing rate.
The creditors (who granted the credit) will repossess the assets pledged for the debt in lieu of payment, while the debtors are financially destroyed.
The destruction of outstanding credit via default shrinks the money supply further, and we go back to #1.
Have thought for some time that the Fed/Treasury folks were whistling in the graveyard.
Honestly, I don't see what previous economic history has to offer for tips short of going back to early 1700s (I believe the South Seas Bubble). People got killed on margin calls in '29 but US was still net creditor nation to Europe - reading history on this is eye-opening as present-day China takes on role of USA in remake of 1929 classic production.
I don't see what arrows are really left in the quiver except hope that teh band-aids hold long enough for folks to gain some kind of handle on their debt issues.
Very few people even seem to be aware of the magnitude of this crisis.
Truer words never spoken, and we're talking everyone, not just bay area denizens. John Q. still only has an uneasy feeling about what's ahead, but is still mostly clueless.
That's a point I've been hammering home for a while now -- that in many respects we're in a lot worse shape now than in the late 20's. Doesn't bode well for the future.
And the thing is, most don't WANT to know. They want to believe that college/retirement fund is still sitting in their home's equity. It was a very uncomfortable subject with folks when I discussed it with them two years ago. Now today, they still don't want to discuss. Too depressing.
Never heard of Jatropha but have actually considered SVO; spoke w/someone who stated that driving car such equipped was like driving in a french fryer due to smell.
Even my in-laws (one retired, one almost) are getting nervous...as one said to me, "we realized last week that apart from our house, all of our assets are paper."
They're the ones I ordered the extra Veribanc report for.
Eric - Ask the inflation-istas how we will inflate-away 600 trillion in Derivatives... you'll get a blank stare. When people say its different this time... they mean it.
Blank stare? Really? Okay, here goes. Due to the magnitude of the problem the paper fiat currency backing it becomes 100% worthless. Nobody trusts the currency at all once the derivatives ("financial weapons of mass destruction" - Warren Buffett quote) implode. Problem solved.
Everything points to deflation and the FED|Government|Treasury is powerless to stop it. Notice that those over 50 years old really, really want inflation. Why? Because they are long debt and close to retirement... if not retired already. They are going to get hammered.
"Everything" does not point to deflation, just like "everything" does not point to inflation. Why do people tend to see things in black and white, when gray is also a choice? Further, do you think the people over 50 years old are really the ones with all the debt? Seriously? I can tell you this. My mom is not wealthy. She's not in debt either. Since she is on a fixed income, she is most certainly not praying for inflation. I'm not 50 yet, but using your logic I must be praying for stagflation because I am in debt. I am most certainly not. I'm a SAVER.
They will compare everything to the 70's which is bassakwards to the present situation. Private debt and money creation is 5 to 10 times greater than public. The market is no longer just the "US"... its completely global and its un-officially been bust since August.
Deficit spending is a the path to inflation, since eventually the faith in the currency is undermined. What's going to stop it? This commodity boom is unlike the 1970s? The following Time Magazine article from 1974 must also be bassakwards.
We have never had a serious deflation off of the gold standard. Never. Coincidence? Even Japan's deflation was mild (less than 1% per year in their CPI). There will never be a time in my life when I am comfortable burying fiat paper dollars in my backyard in hopes that it will someday be worth a heck of a lot more. That being said, I have most of my savings in TIPS and I-Bonds. If anything, I'm hoping I'm not being TOO optimistic that we don't head down the hyperinflation path.
If you really want to prove your point on deflation, back up the truck on the 4.46% 30-year treasury bond and we'll talk again in 30 years. I certainly don't have the courage. I think there will be ample opportunity in the next 30 years for inflation to strike with a vengeance. There is way too much money floating around (as can be seen quite clearly in the MZM).
Agreed. The general attitude is both "LALALALALALA" (hands over ears) and "the government will fix it". That's what you get when a populace gets fat & happy. It's going to be a rude awakening.
Nobody trusts the currency at all once the derivatives implode.
Stag Mark,
IMHO all fiat currencies have ridden on the back of the credibility of the dollar, the "reserve currency" aka "petrodollar". Once that faith is lost, all fiats will be toast.
tj said, in many respects we're in a lot worse shape now than in the late 20's.
Yes, and also compared to Japan in the 80's. Folks on this sight (like dryfly) are very intelligent, but I don't understand why they keep throwing out the "We're not Japan" platitude when minimizing the chance of deflation. When compared to the US in the 20's or Japan in the 80's, I see our situation as much more vulnerable to a severe deflation. When you have a service economy that's dependent on consumer spending, what happens when the consumer is forced to cut back? So many people's livelihood comes from discretionary services that I could see job losses on a level of the Depression, easily.
"Due to the magnitude of the problem the paper fiat currency backing it becomes 100% worthless. Nobody trusts the currency at all once the derivatives ("financial weapons of mass destruction" - Warren Buffett quote) implode. Problem solved."
You don't understand the basic arithmetic problem to start. Then read up on the money/credit/debt cycle and answer that question again. Do you even know what a derivative is?
Keep thinking its the 70's...lol. If your truly a saver, you'll be ok by default. You inflation/stagflation fellas slay me with humor.
Ya'll have to remember that most of the population voted for Bush and they never understood Enron and they sure as hell dont know why The Pension Reform Act allows pension funds to trade your savings accounts with hedge funds that promise them yield enhancements....but, go ask the dumb cluck ex-Treasurer in Florida that just pissed away some pension cash...ask him, if he had any idea what The Pension Reform Act is about...ask him, why he was allowed to invest in junk bonds.......this is the new American dream, i.e, to have somebody smart bet your pension like a lotto ticket....oh well, no one cares... why do I bother?
Deflationists have to explain how a piece of paper that is essentially of no value is going to rise in value.
How can that happen????
And fiat money is not debt. Fiat money is just a piece of paper. It is whatever anybody with authority decides it is.
Burying cash in the back yard in the expectation it will rise in value has got to be the craziest thing ever.
IF you are lucky it will keep at least some fraction of its purchasing ability in the backyard for when you need it once it is dug up.
IF the deflationary reset is so inevitable and so inevitably leading to social distruction then responsible government will overnight devalue the currency and overnight devalue the debt. But why bother? it can just be inflated to do the same job.
Money, in the simplest (and most correct) definition is simply "a medium of exchange."
Through the years feathers, bones, foodstuffs and jewels have been used as money.
But - how is money created? Clearly, money must be controlled somehow, right? Otherwise you could walk over to your closest copier and run some off for yourself..... as much as you'd like. That would anger people, don't you think?
The first thing to get your mind around is that money, credit and debt are all interchangeable. In the world of economists these are known as "fungible" - that is, interchangeable without limit.
Today, when you go to the store and swipe your debit card, you are actually spending credit.
Let's say you walk into a restaurant and eat lunch. At the instant you order, you are in debt for $10 - the cost of the lunch. When you pay with your debit card, you settle that debt by moving $10 worth of credit from your account at the bank to the account at the restaurant.
So far so good.
But - where did the $10 you spent come from?
It was created through credit - that is, debt!
Let's start with a world where there is no money but some people own land. With land I can grow a crop to feed my family, but I first must acquire some seeds. Joe down the street has seeds, but he does not have land. We would both like to eat.
Therefore, I issue a debt to Joe in exchange for some seeds; I create money! I give him a promise to pay him part of my crop if he will give me some seed. He does; what he holds in his hands is, in fact, money. I have created it out of thin air by putting myself in debt.
Now what's the problem with that? Well, what happens to Joe if there is a drought? He has given up his seeds, but there is no crop! He loses. That's called risk.
Because of this risk, he will charge me "interest". That is, he wants somewhat more than the value of his seeds to cover the chance that I will in fact produce nothing with them.
And from this - risk - we sow the seeds of what ultimately causes headaches for the monetary system.
It doesn't help that these days half the population gets their checks through government agencies, either directly (via military & civil service, pensions, SS, welfare) or indirectly (via government contracts).
You don't understand the basic arithmetic problem to start. Then read up on the money/credit/debt cycle and answer that question again. Do you even know what a derivative is?
That is just so incredibly arrogant. Of course I know what a derivative is. So does Warren Buffett.
Perhaps YOU should read more of Warren Buffett and understand how someone who worried about the housing bubble back in 2005, derivatives, and a possible bubble in commodities could still recommend TIPS.
I don't share the certainty of some deflationists posting on this site, and I respect the inflationary/stagflationary arguments. I own a good amount of I-Bonds and cash to go with my gold bullion.
However, I doubt "the authorities" ability and/or will to inflate us out of this. At least not before there is a severe deflation that causes an eruption of popular support for massive bailouts. For an example of why I say this, look at the objection that politicians are already facing for their non-bailout of foreclosure victims.
They cannot really print money or bail folks out at this point. By the time they can, it will be too late to stop the deflationary cycle.
I just don't see how you can write one sentence about the incredible disparity between our 42 trillion economy and 600 trillion in derivatives and call the problem solved. While I agree that the problem is simple, I don't think it will just go poof.
The inflation-istas have one argument;
The government will fix it.
Well, when has that EVER worked? Better question, how will that work now?
I appreciate that. I'd vastly prefer a friendly debate! I will apologize as well for my rather heated tone. Sorry!
You will be happy to know that I am in a short-term deflationary mood as seen in the upper left hand corner of my homepage. Some of our disagreement might simply be a matter of time frames.
I am bracing for 1974 style pain, and that would be temporarily disinflationary at the very least.
Exactly the point made by two of my favorite writers. Their work is no longer easy to find online, but try a library. The bit I have is identified as "Prepared for the 1997 IPA Conference, Manchester, England"
The authors are
Barbara D. Merino, Alan G. Mayper
A few snippets I kept from when some of their papers were still free online ------excerpts follow--------
"... securities regulation in the United States in the 1930s ... should be viewed as symbolic, i.e., not expected to result in significant changes in distribution of economic resources, but as a means of restoring investor confidence and preserving the status quo. Since that time, a number of traditional and critical studies have examined that thesis ...."
"... securities legislation can best be understood as an effort to reestablish the viability of what has
been labeled the "American Dream." ... as a response to a moral crisis of capitalism, generated by the
"immoral behavior" ... to establish the moral legitimacy of capitalism by restoring trust in the existing system."
"... we view the American Dream, as a combination of an elitist economic model, based on noblesse oblige that justifies significant inequalities in income distribution, and the Jeffersonian democratic model that requires "real equality," including equality in income distribution...."
"... We are not suggesting that any of the framers of securities regulation viewed this legislation as an effective means of controlling the power of the monied interests; they did not. They all sought to make the American Dream viable.... assuring that all could participate in the nation's economic growth through
investment in the private sector."
"... the American Dream justifies enormous discrepancies in distribution of wealth that result in what Jefferson deemed real freedom being reserved for the successful. While Jefferson's name is often invoked in a patriotic fashion by political leaders, his democratic theory is rarely examined. It is dismissed as antiquated and not relevant to an industrial age.
"But, in his later works, Jefferson recognized that America would not remain agrarian. He knew industrialization was inevitable; he hoped the conditions in the cities of the "old country," where a dependent wage class had lost their independence and lived in misery, could be avoided....
"Jefferson perceived a basic conflict between capitalism and democracy because capitalism, if not curbed, would lead to concentrated wealth and widespread poverty. He concluded this would destroy democracy. Greed, in Jefferson's view, did not increase morality, he wrote that "in general, men's honesty does not increase with their riches."
...
" Only if all Americans had an equal opportunity to became stockholders (owners), could the discrepancy between concentration of wealth and democratic values be reconciled. Once again, all Americans could aspi
ok, here's the last bit, forget the middle. it's enough for the point and the caution about where we find outselves and a reminder -- been there, done that. Ask your grandmother ...
----finishing the excerpt----
" the depression created not only a profound economic crisis, it threatened the principle logic underlying the democratic system. Capitalism and democracy ... are inexorably tied in the American dream. With 95% of the population working for wages, the only way to achieve the Jeffersonian vision of an independent, middle class was through stock ownership.
"Truth in securities" served as a powerful metaphor to assure the populace that they would not be fleeced by unscrupulous financial capitalists...."
a letter written by Frankfurter (November 16, 1934) to William O.
Douglas, reflects the concerns that many New Dealers had:
"you'll put the whole prestige of the federal government behind financial transactions that are too complicated or supported by too much power to be stopped by the officials that would pass on them...."
...
"the "American Dream" had reduced democratic freedoms to formal legal/political freedoms for the populace, not the "real" freedom that Jefferson believed could come only with an equitable distribution of income among the nation's citizenry. Securities legislation was far less threatening to the monied interests. It did not have to be implemented to be effective.
Reestablishing the American Dream
Securities legislation was a means to rekindle the American Dream. Symbolic legislation can be effective as a rhetorical device if it silences public outrage. Free land no longer existed as a refuge for the wage earner; but if the opportunity existed for all wage earners to become owners through widespread stock ownership, then the American Dream remained viable. But, the investment arena had to be perceived as a "fair game."
------end excerpts-----
These excerpts came from material I can no longer find online, identified as ""Prepared for the 1997 IPA Conference, Manchester, England"
The authors are
Barbara D. Merino, Alan G. Mayper.
Ask a librarian for help if you want more, that's all I can suggest.
The authors note dryly in several places in their writing that the securities legislation need not actually work -- all that's needed is for it to be believed to work.
They quote someone to the effect that what is most important is to restore trust in the economic system, because "you can't cheat someone who does not trust you."
That sure sounds like the current bind all the financial geniuses are in.
That is certainly not my argument. Mine goes all the way back to the 1980s. People thought the government fixed it, but could be wrong!
In order to get us to stop hoarding goods the government had to give us a positive real rate of return on savings. That real return simply postponed inflation. By giving us extra money to not spend money, that money has been allowed to grow. It still exists. You can see it in the MZM.
Should the government fail to continue to offer carrots for us savers, we're likely to shift our saving tendencies to things like, well, canned goods, paper towels, toilet paper, sheets, and so on.
I've been doing that. I'm just one person though. Imagine if everyone did. We'd see my preferred hoarding store (Costco) doing well, wouldn't we?
Nobody ever went broke hoarding toilet paper that I know of.
Clearly we are not a nation of savers on average. That is a valid deflationist case. However, I would argue that there are enough savers (and therefore potential hoarders) amongst us though, since the averages do not tell the full story.
I would also add that we are currently shipping our money to an economy that has negative interest rates (China) in exchange for goods. I expect China to recreate our Great Depression at some point. I could be wrong. If true, that would put us in the role of Great Britain during our Great Depression. We therefore might not get nearly as much deflation as we might expect.
I'm of the belief that the stock market and housing markets will most likely fall. How far I have no idea. However, I'm also of the belief that real yields will also fall.
In order for the deflationists to be 100% correct in my opinion, real yields have to go up. The aftermath of the Great Depression saw amazingly high real yields, as hoarded dollars became worth more. The aftermath of the dotcom bubble saw amazingly low real yields though and have yet to recover.
If I am right, real yields might even turn negative in a few years as all those with savings seek even more safety.
The blasts from the past are always fun, don't you think?
That being said, real yields were also high at the conclusion of the 1970s. I just have a hard time seeing the prosperous times of the 1980s forming so easily. It seems to me that the pain is just getting started.
Hi! Your blog is really excellent.
Mortgage Interest rates are probably the most important part about buying a house. After all, your aim is borrow the money you need for the least possible cost, so you need to assess which type of interest rate is best for your particular circumstances.
The mortgage lender that funds your loan is called the originator. A loan originator may be a bank, credit union, or other type of financial institution. On the date of funding, the money flows out of the originator's hands and into yours. You then turn that money over to the seller of the home.
It is boring to keep reading in the comments about the huge notional totals of derivative contracts out there. They are just that: notional. Dollar risks are much smaller and involve small differences per settlement date. Risk management departments expend a lot of time to make sure a counterparty or country or exchange failure doesn't sink the company given their total derivative book at any point in time.
It is if I buy a boatload of out of the money call options on an expensive stock for 5c each, and read someone fret that I am "controlling" a vast amount of the issued shares. No, I'm not, very little real money is either at risk or in play in the trade.
Not to say there might not be systemic risks as yet unknown. But talking of notional sums vs GDP is comparing apples and .. and .. something else, not even fruit-like.
Robyn - I don't doubt your good experience with the FDIC's claims process. I worked at FDIC for 19 years and saw first hand how well depositors were handled back then. However, the FDIC has dramatically downsized all thru the 1990s and as I said now has less than 100 Claims agents to handle these future claims at failed banks. These 100 employees cannot possibly handle the crush of claims that surely will come again without additional help."
I wish I could link directly to a table in a report.
Table 4a, Page 59.
US Bank Failures, 1980 - 2000.
($ billions)
1. Texas Assets, $196.9 Cost $ 75.8 Number of Institutions 850
There were a couple of waves -- energy lending gone bad and fallout from S&L crisis. Most of them were in late 80's early 90's.
Unfortunately, Robyn seems to be on the other end of transactions, since see had assets and I had debts. I had an ARM at a S&L (a 'good deal' ) that was taken over. It was reassigned. Not a big problem. However, I had unfortunately exercised an option to 'lock in' my 8% rate. That paperwork never made it to the next servicing carrier and my mortgage adjusted downward. I wanted to correct the error, but it was just too much trouble, so I just went along with the lower rate.
According to the BIS report, the cost was less then 2% of the US GDP to resolve the S&L Crisis. I dont know if that is 1 year's GDB or a couple of years. It is all in the report.
"Not to say there might not be systemic risks as yet unknown. But talking of notional sums vs GDP is comparing apples and .. and .. something else, not even fruit-like.
Justin"
I agree. I was looking at tables from BIS and noted the huge numbers. The problem that I have is for some of the figures, 15bp is a huge numbers. You can take 3 zeros off and still have a large number.
Comments (on credit derivatives) from a prominent US investor who people are tired of seeing quoted, but here it is anyway:
... nobody ever wrote a contract and recorded a loss at the time they wrote it. In fact, I find it extraordinary that if you have two derivative dealersDealer A and Dealer Band both write a ticket, Dealer A records a profit and Dealer B records a profit, particularly if its a 20-year contract. That is the kind of world Id love to live in, but I havent found it yet.
Recognition of profits is accelerated and unprofitable derivatives are rolled over into new contracts where the vig is paid up. If things start to unwind then we could see a multi-year process of recognition of loss making derivative contracts.
Ben Stein is a Bush-lover (not kidding: he once wrote he loves GWB)and a fake patriot. I don't know why he's allowed to spout his sentimental b****** in the NYT. And as for David Broooks. Grrrrrrrrr---
I said it was coming, now the msm seems to have picked it up-
"In coming months, subprime losses will reach into almost every home in the U.S. as pension funds reveal setbacks, the former Moody's analyst Raynes says. Some funds won't show the extent of their subprime losses until they issue reports for the current fiscal year, some as late as September 2008.
``The smallest investor, not Wall Street, is the one who will pay the ultimate price because he trusted the fund managers who blindly followed the rating agencies,'' Raynes says.
Jose Sepulveda, 57, worked 34 years as a reading teacher and elementary school principal in southern Texas towns along the banks of the Rio Grande, the border between the U.S. and Mexico. Now retired in Weslaco, Texas, he says he thought he was as far as he could be from the mortgage crisis roiling markets in New York, London and Tokyo.
He wasn't far enough. The Austin-based Teacher Retirement System of Texas, the manager of Sepulveda's retirement money, holds $6 billion of securities backed by assets that include subprime mortgages, most of it rated AAA, according to a report on the fund's Web site.
``How could anyone think that investments backed by subprime loans were safe?'' Sepulveda says."
"The results for the quarter include losses of approximately $129 million related to securities issued by structured investment vehicles (SIV losses) held by Asset Management. "
page 15-
"
At November 30, 2007, the investment portfolios of Morgan Stanley Bank (Utah) and Morgan Stanley Trust FSB (collectively, the "Subsidiary Banks") include certain subprime-related securities. The securities in the Subsidiary Banks' portfolios are part of the Company's overall Treasury liquidity management portfolio. Such portfolios do not contain any subprime whole loans, subprime residuals or CDOs.
The market value of the Subsidiary Banks' subprime-related securities, all of which are AAA-rated residential mortgage-backed securities, was $5.5 at November 30, 2007. Of that total, $4.3 are comprised of ABS bonds collateralized by first lien subprime mortgages of which $1.1 are further enhanced by FHLMC and AAA-rated monoline insurers. The remaining $1.2 of ABS bonds are collateralized by 2nd lien subprime mortgages and are enhanced by financial guarantees from AAA-rated monoline insurers. An 'other than temporary' impairment charge of $0.4 was reflected in net loss for the three months ended November 30, 2007. At November 30, 2007, the securities in the Subsidiary Banks' portfolio were redesignated as trading securities; prior to that date these securities were classified as 'available for sale' in accordance with SFAS 115, Accounting for Certain Investments in Debt and Equity Securities. "
" Net Exposure is defined as potential loss to the Firm in an event of 100% default, assuming zero recovery, over a period of time. The value of these positions remains subject to mark-to-market volatility. Positive amounts indicate potential loss (long position) in a default scenario. Negative amounts indicate potential gain (short position) in a default scenario.
(2) In determining the fair value of the Firms ABS CDO super senior related exposures which represent the most senior tranches of the capital structure of subprime ABS CDOs Morgan Stanley took into consideration observable transactions and data for relevant benchmark instruments in synthetic subprime markets. The deterioration of these inputs have led to significant declines in the estimates of fair value. These declines reflect increase in implied losses across this portfolio. These implied loss levels are consistent with the losses in the range between 13% - 20% implied by the ABX indices. These cumulative loss levels, at a severity rate of 50%, imply defaults in the range of 43% - 50% for 2005 and 2006 outstanding mortgages.
(3) In calculating the fair value of the Firms U.S. subprime mortgage related exposures including loans, total rate-of-return swaps, ABS bonds (including subprime residuals) and ABS CDS Morgan Stanley took into consideration observable transactions, the continued deterioration in market data, as evidenced by the sharp decline in the ABX indices, and other market developments, including updated cumulative loss data.
(4) Statement of financial condition is presented on a net basis, which is a non-GAAP measure. These balances are presented on a gross basis in the Company's statement of financial condition. " The resource cannot be found.
You still have not answered why you think it is ok for mugabe to have 1000% inflation but the US is powerless to produce 1%
IM(simplistic)O, Mugabe's inflation is a currency inflation and US (et most)'s is more a credit inflation.
I believe credit-fueled tidal cycles eventually wet all Central Bankers' feet despite any King Canute-like commands to halt.
And assuming it possible to create sufficient physical currency to offset credit liquidity vaporization, wouldn't real-life repercussions (increased interest rates compensating for unwillingness to lend) snuf any supposed benefits of printing physical notes and minting physical coin?
IOW, a .gov* may be able to unilaterally create physical currency, but it cannot unilaterally create a willingness to borrow.
".gov" is a term coined (I believe) by the poster named "nobody" who has been posting on this inflation/deflation topic at the MarketTicker blog. Worth reading some back threads. I look forward to listening in on a conversation between her (she's whip-smart just like our tanta) and dryfly.
Sales in the seven days through Dec. 15 fell 0.4 percent from a year earlier, following declines of 2.7 percent and 4.4 percent the previous two weeks, Chicago-based ShopperTrak RCT Corp. said yesterday.
dryfly asked me in other thread how (after living through hyperinflationary economy in late 1980's in Poland) I see the inflation prospects.
In Poland in late 1980, the government was virtually bankrupt. The political crisis of 1981 was squashed with force but the economic problems got stronger and stronger. People started to demand raises after their wages didn't follow inflation (mild inflation of several percent a year but after 7 years the buying power of wages got much lower). And the government increased printing money. I didn't know how it was done technically but they ordered the central bank to provide them with money and they got it and they spent it. The first in line were calmed by increases but the latter was impoverished by fast increasing prices. And they demanded even more money. So the government printed even more money. And soon it went of of control. The government couldn't pay their bills without ever increasing printing of money. It stopped when the government collapsed and the new democratically-elected one stopped this process with essentially an economic depression. However, later inflation expectations were so anchored (and after the sharp depression the new government didn't want to apply the same medicine any more and did not stop completely the inflationary spending) that it took almost ten years to get to single-digit inflation.
I think the current credit crisis is deflationary in short term but the government (Congress and Fed) could react with money pumping. Even if they cannot literally print money, Congress can allow it any time or simply ask Fed for an exponentially increasing credit line which would work essentially in the same way as printing. Then there is a thin line after such process can get out of control. Of course there is a whole spectrum of intermediate scenarios. But it all just depends how willing the government would be to pump money. I don't believe that deflation is practically possible with fiat money (Japan's deflation was at worst case a non-inflation).
``It's not just a subprime problem,'' Joshua Rosner, managing director at New York-based research firm Graham Fisher & Co., said ..."
Get out of here.
Wed 19 Dec 2007 5:43 PM CST
NEW YORK, Dec 19 (Reuters) - Moody's Investors Service on Wednesday said it is continuing to review the debt of SLM Corp (SLM - news), better known as Sallie Mae, for downgrade, on concerns about liquidity and weakening in the student lender's financials.
Moody's had originally place SLM on review for a ratings cut due to its proposed leveraged buyout, which would have saddled it with additional debt, though the deal has since fallen through.
"The rationale for its ratings review has now changed," Moody's said in a statement. Moody's rates SLM's senior debt "Baa1," the third lowest investment grade.
"Since Moody's last revision of SLM's ratings on August 14, 2007, the credit markets have weakened significantly," Moody's said. "This deterioration is quite evident in the asset-backed funding markets that currently form the basis of SLM's funding plan."
Moody's said its review will focus on SLM's ability to access the term and asset-backed commercial paper (ABCP) markets.
"In this regard, Moody's will focus closely on the company's plans and prospects for completing replacement facilities for the $30 billion interim ABCP facility provided by JP Morgan and Bank of America in conjunction with the proposed buyout transaction," the rating agency said.
This facility matures 90 calendar days after February 15, 2008, with no new borrowings after that date, Moody's said.
(Reporting by Karen Brettell; Editing by Diane Craft)
looks like a typo in there...37.3
Japan's Mitsubishi UFJ Financial Group Inc, Sumitomo Mitsui Financial Group Inc and Mizuho Financial Group Inc have rejected requests to participate in a rescue fund to be created by US banks to deal with the credit crunch, the Nikkei reported Thursday without citing sources.
The banks' decision comes after careful consideration of the requests, the business daily said.
They were each asked to set up a credit line of up to 5 US billion dollars for the fund, it said.
The three groups concluded that setting up huge credit lines in US dollars would be difficult in the current financial environment, while they also doubted the effectiveness of the fund, the report said.
Business finance news - currency market news - online UK currency markets - financial news - Interactive Investor
Do we look like idiots round eyes?
"It's not just a subprime problem,"
Somewhere, SOMEWHERE, I've heard that beore. Hmm... where could it have been? Where?
Sallie Shares Plunge After CEO Talks
Wednesday December 19, 5:36 pm ET
By Alan Zibel, AP Business Writer
Sallie CEO Says Company Looking at Dividend Cut As He Tries to Reassure Investors
WASHINGTON (AP) -- Just days into his second turn as CEO of Sallie Mae, Albert L. Lord couldn't find the right words to soothe Wall Street.
With frustrated analysts seeking more details about the struggling student lender's finances than Lord was willing -- or able -- to provide, a half-hour conference call was punctuated by awkward exchanges and an expletive. When it was over, Sallie's stock soon plummeted to a five-year low.
One by one the wounded fall. The battle is just beginning.
scratch that, the typo is in my mind.
I like the name 'Lord' in the above context
Haven't heard from Tanta in a while, hope she is doing all right.
Back on topic, I hope this will help keep the "let FNM and FRE buy jumbos" ravening wolf crowd at bay.
Bite your tongue, anon 6:56 . . . Mizuho got into the CDO game just as the market was turning back into the frog it always was.
Tanta is busy meeting the other three horsemen to come up with an appropriate rescue package for Mozillo, oops troubled home-borrowers.
James
I thought you were joking! shares down 20%!
Lord's frustration with the call showed near its end.
"There's no questions, let's get the (expletive) out of here," he said before wrapping up the call.
Next wave is the Prime wave - particularly the 2nd liens....the HELOCs as it were...
Many of these "consumption" loans are on the back of subprimes, Alt-As, and Prime firsts....
This is where the rubber hits the road in 2008, and where the next BIG wave of mortgage loan "deflation" will occur.
Gary, Tanta has had some computer issues and a few other things. I expect her back online tomorrow.
Best Wishes.
Yeah ... the whole "refinance your mortgage to pay off your credit cards" business doesn't shine so brightly in a depreciating housing market.
This article must be a mistake. Ben Stein says there is a small problem with subprime mortgages and he says subprime mortgages are only a timy portion of the GDP. Mr. Stein is on Kudlow's show right now explaining how he is buying his 13th property and he called his bank to get a loan and all they wanted to know was when he wanted to close. Ben Stein also keeps buying Ryland Homes on the dips.
I'm thinking of the scene The Jerk
"ah X amount, that's very good isn't it"
"ah, getting around the crap, that's good"
"select class, very, very good"
yeah, yeah, were gonna keep out the Alt A's.
"Sir!!! You are talking to an ALT A!"
When asked for further comments, S&P declined and stated they were pulling an Albert Lord (SLM CEO) and "getting the F#$K out of here!"
The acceleration of bad news is like an all aluminum ZL-1 big block powered dragster racing down the quarter mile with no parachute!
Gosh,Josh,who could have foreseen this problem?
Perhaps we're all jumbo subprime now
The federal governments total liabilities translates into a de facto mortgage of about $455,000 for every American household and theres no house to back that mortgage. In other words, our government has made a whole lot of promises that, in the long run, it cannot possibly keep without huge tax increases.
- GAO Comptroller General David Walker
Okay, someone who understands this stuff better than me ... how is Sallie Mae a part of this? What do student loans have to do with mortgages?
"There's no questions, let's get the (expletive) out of here," he said before wrapping up the call.
I can forgive the expletive but not the poor grammar.
Students are the subprime of the subprime...don;t you think?
Citigroup has failed to secure $10 billion (£5 billion) in financing...credit crunch!
Credit market turmoil thwarts Citigroup's bid to raise $10bn for oligarch - Times Online
"What do student loans have to do with mortgages?"
70% of the US economy comes from consumer spending. The housing bust began because people could not afford their loans as they reset.
Student loans is in there somewhere with money entering the economy - less loans means less money for mortgages.
awgee, my reconciliation sheet indicates that Ben Stein is not only a GOP shill, but also one of the biggest douchebags to ever exist, in this or any other reality.
Discrepancy resolved!
And CR, thanks for the update. i'm glad to hear Tanta will be back here in the saltmines soon.
" What do student loans have to do with mortgages?"
Same dynamic at work: lending money to people who can't pay it back. Maybe somebody shouldn't take out $40K in student loans to get a career as a schoolteacher making $35K, or $60K to enroll in a culinary academy which qualifies you for a $15/hr chef's job. But they do. And lenders make the loans. And securitize them and sell them. And a lot of the loans aren't getting paid back. And... you know the drill.
From Marketwatch:
The next series of the ABX, a synthetic index of mortgage-backed securities, was due to be rolled out on Jan. 19. But that's been put off for three months because there have been so few residential mortgage-backed securities issued during the second half of 2007, according to Markit, which helps run the index.
This should not make any real difference. The current series from 2006 and 2007 constitute a good proxy for all that paper out there.
I do not own a home. Am I still subprime?
Sallie Mae was securitizing student loans, securitization for all types of debts has stopped. Credit is contracting.
Credit contraction dont bode well for economic conditions.
The federal governments total liabilities translates into a de facto mortgage of about $455,000 for every American household and theres no house to back that mortgage. In other words, our government has made a whole lot of promises that, in the long run, it cannot possibly keep without huge tax increases. - GAO Comptroller General David Walker
Good thing its only in dollars or we'd be in real trouble.
If we could only keep our debt in dollars and our assets in yuan or euro or wampum for that matter... we'd be all set in a matter of years....
My apologies if this has already been beaten to death in previous discussion, but, the auction results today indicate the continued stress in the credit markets, the need for liquidity, and the desire to remain completely anonymous through the use of this auction.
I did not anticipate seeing the results of the auction at roughly a 10bps difference to th discount rate.
In my opinion, clear signs of improvement would be results closer to fed funds.
Eagerly awaiting future auction results.
Risk Capital
Can you explain how the auction is more anonymous than the discount window? How can a bank or person find out who went to the discount window but not know about the auction participants. Why make the distinction?
Barley @ 7:46 pm
"Mr Potanin hired Citigroup to help raise $10 billion from Western markets but the credit crunch has made this impossible. The oligarch is thought to have raised about $5 billion from two Russian banks but unless he can find last-minute financing in the Middle East or China, the option will lapse."
My how the times have changed. The place to find dollars is outside the US. Wonder how they got there (and how many more will follow)?
UPDATE 1-ACA Capital won't have to post collateral for 4 wks
Wed 19 Dec 2007 7:06 PM CST
(Adds background)
NEW YORK, Dec 19 (Reuters) - Bond insurer ACA Capital Holdings said on Wednesday it will not have to post collateral until at least Jan. 18, 2008, in a move that could save the bond insurer from a potentially crippling cash crunch.
During the four-week forbearance period, ACA said it will work to stabilize its access to funds and its capital position.
Ratings agency Standard & Poor's cut its ratings on ACA unit ACA Financial Guaranty Corp deep into junk status. Ratings cuts can be devastating for bond insurers, who use their credit ratings to turn other issuers' bonds into higher-rated instruments.
A downgrade could have forced the bond insurer to post collateral in some transactions, straining its finances.
ACA said it was surprised by the S&P move, which came as part of a broad evaluation of the bond insurance sector.
ACA has exposure through derivatives to some $68 billion of repackaged debt known as collateralized debt obligations.
That type of exposure contributed to ACA's $1 billion loss for the third quarter. The company's shares were suspended from the New York Stock Exchange earlier this month as part of the delisting process, and now trade in the Pink Sheets.
ACA's losses could be Wall Street's as well, a credit derivatives trader said last month. ACA sold billions of dollars of credit protection using derivatives to Wall Street firms, which in turn sold similar protection to other customers.
If ACA is unable to make good on its end of the trade, Wall Street firms will lose money on the protection they sold, and will not be able to record gains on the protection they bought. Banks and brokers could lose billions of dollars, the trader said.
The New York Times reported on Wednesday that Merrill Lynch & Co Inc (MER - news) and Bear Stearns Cos Inc (BSC - news) and other large banks are in talks about bailing out ACA.
(Reporting by Dan Wilchins; editing by Carol Bishopric, Richard Chang)
WASHINGTON (AP) -- Just days into his second turn as CEO of Sallie Mae, Albert L. Lord couldn't find the right words to soothe Wall Street.
Lord's frustration with the call showed near its end.
"There's no questions, let's get the (expletive) out of here," he said before wrapping up the call.
This crucifiction wouldn't receive as much historical sympathy as others I won't mention.
"What do student loans have to do with mortgages?"
Hhhmmm let's see: negative savings rate, higher credit card balances, more BKs due to medical expenses, car loans for longer terms and greater amounts, rolling over car loans (!?!?!),you can finance consumer electronics, jumbo mortgages, zero down mortgages, stated income mortgages, teaser rates, HELOCS, record student loan debt, rapidly expanding payday loan business, record government debt, debt/GDP ratios greater than the depression etc etc...
It's the BIGGEST CREDIT BUBBLE THE EARTH HAS SEEN!!!
Pop!
Why make the distinction?
Worried | 12.19.07 - 8:13 pm | #
Because I am watching the FED window. If you are weak enough to have to go there, I withdraw my funds before the real panic begins.
Who is entering into a forbearance agreement with ACA?
Wouldn't they be in default with everyone? That's a lot of frantic negotiations.
I read the transcript of the Hovnanian conference call. One of the interesting points was about the cancellation rates. Even at 40% its a bit worse than appears, they had the national sales event at were aggressively trying to remove spec inventory during the quarter. The fallout from this sales was only 22%.. and this sales represented a significant portion of sales.. meaning the cancellations from "normal" homebuilding sales was significantly higher.
"Because I am watching the FED window."
Yes but i am asking how do you watch it and why is it that you cant watch the auction. If they dont want the window to be stigmatised why allow it to be viewable?
SLM,
Here's the link to the conference call. Not sure it will work.
https://image.minyanville.com/assets/FCK_Aug2007/File/s2162664.mp3
Cheers,
Bite your tongue, anon 6:56
When I saw posts like that I thought ya'll were quoting some secret bible...
Worried-
footnote 1, page 7-
http://www.ku.edu.tr/ku/images/EAF/erf_wp_0708.pdf
FDIC Reports Third Quarter 2007 Financial Results for the Deposit Insurance Fund
FDIC: Press Releases - PR-104-2007 12/19/2007
FDIC Board Approves 2008 Corporate Operating Budget (includes projected staffing increase)
FDIC: Press Releases - PR-105-2007 12/19/2007
FDIC Proposes Rule to Enhance the Process for Determining Insurance in the Event of a Large Bank Failure
FDIC: Press Releases - PR-106-2007 12/19/2007
Its not a subprime problem.....
Its a "package the security so I can maximize my bonus" problem... just like this:
Hedge Funds Bag New COLOSTOMY Product
'Investment Dealers are excited to announce the newest structured finance product - Constant Obligation Leveraged Originated STructured Oscillating MoneY Bridged Asset GuaranteeS, or COLOSTOMY BAGS.
Designed to accommodate the most sophisticated investment strategies, Colostomy Bags contain the equity tranches of Structured High Interest Taxable Derivatives, or SH IT, and are leveraged an infinite amount of times through the innovative use of derivatives.
dryfly,
"Good thing its only in dollars or we'd be in real trouble."
Yeah we actually manufacture those...Phew...I'm glad this is all contained.
Oh wait the beurorat shut of the containment field already. Here's a discussion of it at the NY Fed.
YouTube -
Cheers,
"FDIC Proposes Rule to Enhance the Process for Determining Insurance in the Event of a Large Bank Failure"
----"Houston: we've had a problem."
Apollo 13, April 13th 1970
A Proposal for Reviving the Credit markets
We believe that what is needed is a new Resolution Trust Corporation (RTC)... Congress would establish this new RTC to buy up subprime mortgages at deep discounts. The RTC would establish, say, five tiers of mortgages, offering, say, 70 cents on the dollar for tier A, 60 cents for tier B, 50 cents for tier C, and so on. Interested sellers would have to pay the RTC a fee for evaluating and classifying any mortgages they wished to sell.
4822,
YouTube - Jim Lovell Interview
Cheers,
Nemo, homeowners should be able to buy their mortgages back at a discount too- do ya think?
Hey, time to make sure that I look like subprime C paper too;-}
nades has it right- first out of the dollar into something stable wins- I think I will buy some Nestle, people always eat chocolate, especially women cut off from credit cards;-}
America- your shopping spree is over!
That is the upshot of the deal, dust- we are already getting to call for some nasty nationalization of the problem to bail out Wall Street- see the journal carry the water;-}
footnote 1, page 7-
risk capital
Thanks for posting that and yup, that's the mechanism that I was aware of for breaking through the veil of anonymity. But of course, the same technique can be used for the TAF borrowing - the institutions had to phone up their local ( one of 12 ) district Fed bank.
Granted, instead of say just 1 bank going to the San Francisco Fed ( CFC, the banking side anybody ?) we now will have 2 or three all at the same time ( Wells Fargo, WAMU AND CFC
), but still.
Another thing I've read somewhere is that the banks have to disclose ( SEC Regs? ) if they access the Fed window but I've never seen evidence for that assertion. In any case if there is such a SEC rule, I'd have thought it applied to the TAF use too, no ?
So, this anonymity thing is still a puzzle to me.
-K
4822,
Unfortunately it won't go so well this time.
Then we had Krantz and Lowell.
Now we have the Three Stooges, Shrubboy, Bernutty, and Paulson. Not good.
"Houston, we've decided just to hook the dead O2 tank to the good one. Should be alright in a few...gasp...gahhhh...ksshhh."
Cheers,
my tagline video-
YouTube -
ignore the nonpc parts- just that comment tossed off at the end, followed by the walk away.
I hope the management of this country takes a long hard look at wall street and decides that all the deregulation was abused. Some new regulation seems to be necessary.
Someday this war's gonna end...
The Sallie call is fantastic. The new CEO had a 1.2 million share sale, and it sounded like it was a margin call from his bank, by his description. That is is hilarious. He was levered up in his own account.
read the FDIC press release. looks like they're looking for a quick way to disqualify depositors from claiming insurance. doesn't give me the warm and fuzzies
I have the last 40 seconds of the call from youtube on my blog. I really think that Lord will be out of a job by this Friday, next Friday the latest. Any takers?
Lord, please make these wicked people eat dirt, kinda like the way them injuns taught them folks a lesson about he value of land and money.....anyone remember that one?
I propose a new RTC, Rope Those Criminals.
Barclay's sues Bear Stearns. Lawyers licking chops. Drooling.
Barclays sues over sub-prime losses |
Business |
The Guardian
Worried-
as far as the stigma, the penalty rate alone speaks of desperation. I would also think that "internal" reporting as to frequency of borrowings could bring fear of regulators.
as to the auction, I'll state the obvious, many participants competing on rates, potentially at levels closer to fed funds. The fed benefits from the ability to gauge the disarray in the credit markets due to participation. In the end, could the implications be the same? Possibly.
Banks borrow $34 billion from central banks. Strong demand seen at special auctions for EOY funds...
Banks borrow $34 billion from central banks - MarketWatch
It seems the banks have put off the day of reckoning till next year....
This page is available to GlobePlus subscribers
This line from the FDIC link above, 'FDIC Proposes Rule to Enhance the Process for Determining Insurance in the Event of a Large Bank Failure', is quite intriguing:
By using the end-of-day ledger, the FDIC will be able to apply a single standard across all failed banks in order to treat every transaction equally.
More than one? Citi has company?
v2, The Haunting of Level 3
(you'll never return from Level 3)
foo,
Gotta ensure those year end bonuses.
what happens to muni bonds connected to AAA toxic stuff?
I am hopeful that any IBs that push the envelope with their end-of-year accounting to squeeze out one last round of outsized bonuses will be sued for fraud.
CAL,
If HOV's cancellation rate for its three day Deal of the Century sale was only 22%, then the cancellation rate for the remaining 87 days of the quarter was 150%.
150%..............now that is some cancellation rate. Upcoming reports from public HBs could be very interesting.
Market players cheered media reports that Japan's three megabanks are poised to turn down a U.S. request to provide about 5 billion dollars each in lending to a bailout fund that major U.S. banks plan to set up to alleviate the global credit crunch caused by the U.S. subprime mortgage problem.
"If Japanese banks were to participate in creating the U.S. credit line, they would likely face shareholder lawsuits and cause the subprime fallout to spread in Japan," Akio Yoshino, chief economist at Societe Generale Asset Management (Japan) Co., said.
"I am hopeful that any IBs that push the envelope with their end-of-year accounting to squeeze out one last round of outsized bonuses will be sued for fraud."
That's a possiblity, but pigmen who the bonuses walk away with the loot anyway.
Cheers,
The FDIC last updated its deposit insurance determination process in 1999. The largest number of deposit accounts in a failed institution for which the FDIC had to make an insurance determination was about 175,000 for NetBank, FSB, Alpharetta, Georgia, on September 28, 2007. Today, some of the larger banks have more than 50 million deposit accounts.
Who do suppose they might be talking about there ?
my tagline video-
I'm always impressed by how he doesn't flinch or even acknowledge the exposion behind him while he gives his little speech. Perhaps I should rethink that emotion. I've always thought it was great acting. But he was merely playing a part in a movie being made in a jungle that he probably didn't expect anyone to ever see. We have actors now, on the world economic stage, also not flinching when explosions are going off. Perhaps that isn't a skill we should admire? Speaking of that, how did that war end?
Now we have the Three Stooges, Shrubboy, Bernutty, and Paulson. Not good.
"Houston, we've decided just to hook the dead O2 tank to the good one. Should be alright in a few...gasp...gahhhh...ksshhh."
Cheers,
Misean | 12.19.07 - 8:53 pm | #
Let's just hope they don't light up a cigar in celebration of their Mission Accomplished.
Im seeing burnout here and thus a lack of interest in ongoing financial explosions and implosions, which to me is a very bad sign, and a sign that this meltdown is becoming a non-issue, just like the attitude which this crisis was built upon!
What does that mean, when people are in denial?
MMMM,Ray,just a possibility of a minor diffugulty.No worries though,the Prez said that the EEEKonomic fundlementals are Good.Since he are a fundlementalist I'm sure he would know.This IS the USA so you will always be able to put food on your family.Sleep well.
RayOnTheFarm - FDIC's insured and uninsured deposit process has more to do with its current and projected staffing in the Claims Department than anything else. The FDIC has less than 100 trained Claims Agents all based in Dallas, TX to process the nation's depositor claims in the event of bank failures. I personally know many of these claims agents. The FDIC's staffing is so low that it is impossible for the FDIC to staff 2 large bank failures at the same time or 2 large bank failures back to back. And, when I say large I mean over $1 billion in assets. The FDIC has said it will hire contractors if and when needed.
Sippn
when i read your post "colostomy bags" at 8:41 i was drinking home made wine and spit a mouthful in laughter all over the key board
right o
The number of U.S. citizens who moved to Canada last year hit a 30-year high, with a 20 percent increase over the previous year and almost double the number who moved in 2000.
In 2006, 10,942 Americans went to Canada, compared with 9,262 in 2005 and 5,828 in 2000, according to a survey by the Association for Canadian Studies.
doc
I hear great things about Montreal, might be time to go scouting.
I was talking today to a friend who runs an area of Morgan Stanley. An upper middle manger, not high up, but his area is strategic and keeps making money. He said people all over the firm were screaming the last two days about how small their bonuses are. One-third what they expected. Then today it all started to make sense.
Nobody at MS thought it would be this bad. All the losses were created in a small department of MS. Every other department has clear and consistently enforced risk guidelines. "Nobody can understand how a loss this large could happen here, with what we live with every day." Everybody blames senior management. A lot of people want to leave.
People are upset that "the Chinese now own us." There's a feeling that things are spinning out of control in regard to foreign ownership. Everybody who works there felt MS was the quality shop on Wall Street. Now, they are wondering.
A little GAO birdy told me that the U.S. Government took out a 55 trillion dollar option-ARM.
A little GAO birdy told me that the U.S. Government took out a 55 trillion dollar option-ARM.
lemme guess...stated income?
rich- "Nobody at MS thought it would be this bad."
And it's going to get worse.
U.S. lawmakers vowed on Wednesday to pass legislation to pressure China to revalue its currency, after the U.S. Treasury Department again said Beijing was not manipulating the renminbi, or yuan, for trade gains.
UPDATE 3-U.S. lawmakers vow action on China after report
| Reuters
There are going to be some unintended consequence due to these fools screwing with the dragon.
Banking and strategy don't go together.
Mark to market means profit now (private), loss later (public).
There is no quality on Wall Street, whether for Moregain Stanley or Goldmine Sachs or is it Goldmine Sacks.
Your friend is still hallucinating. The losses just haven't been recognized in his department yet.
Allen said: "That is the upshot of the deal, dust- we are already getting to call for some nasty nationalization of the problem to bail out Wall Street- see the journal carry the water;-}"
The entire US economy is $14 trillion or so in contrast to $42.6 trillion in credit default swaps. The entire Derivatives Trade Soars To Record $681 Trillion. Lets see the gubberment inflate out of this... you are on the wrong side of the trade. Anyone long "inflation" is going to get rammed up the a$$.
Bargain houses largely unsold - Real Estate - Modbee.com
Another foreclosure record was set in November as 1,336 properties were offered to the highest bidder on the courthouse steps in Modesto, Merced and Stockton.
Now here's the real surprise: Only 17 of them sold, despite lenders offering deeply discounted prices.
Every weekday, starting about noon, auctioneers seek buyers for foreclosed properties of all shapes and sizes. But more times than not, no one bids.
That's because foreclosed homes typically have unpaid mortgage debt far in excess of their current value. When no bidder is willing to pay off that debt, lenders usually get stuck owning the homes.
On Friday, O'Toole said, a foreclosed five-bedroom Modesto home on Hemstead Avenue went up for auction with a starting bid of $301,500, even though the lender was owed $537,000 from a delinquent mortgage.
But that $235,500 discount apparently wasn't enough. O'Toole said no one bid, so the lender now owns the house.
Moregain Stanley, strategy, risk management
One statement doesn't go with the next.
If they had a strategy, why are the big swinging free market dicks at MS looking to the Chinese Communists to be bailed out.
If they had risk management, why did one small trading desk blow a big lost?
FFDIC: The FDIC has said it will hire contractors if and when needed.
Time for my obligatory joke:
I didn't know Halliburton had a bank failure consulting division.
No bid asset auction.
FDIC,
Thanks for your contributions. They are very informative. I have a sort of "hypothetical" question. Lets say I have a relative who I haven't been keeping abreast of the very latest of economic and financial developments. Let's say this relative was rate shopping and just bought some Countrywide CDs that are FDIC insured. If Countrywide goes under, how long would you guestimate until the money is available.
I know. I know. But, we deal with what comes along.
A guess, 2 to 6 months. If a few banks fail then the process will stretch out. Keep everything under $100,000 right? Make sure that the "CD" is a type of account that is FIDC insured.
I drove 50 miles east of Dallas, TX today to these empty homes for sale. There were about a dozen homes with several unfinished in various stages of construction. These homes (below) appear to be completed for the most part. The entire area is rural.
Search Results - Dallas Real Estate
Search Results - Dallas Real Estate
Search Results - Dallas Real Estate
Search Results - Dallas Real Estate
U.S. lawmakers vowed on Wednesday to pass legislation to pressure China to revalue its currency, after the U.S. Treasury Department again said Beijing was not manipulating the renminbi, or yuan, for trade gains.
Page Not Found | Reuters.com
b...942772420071220
Is it really possible that these people don't understand the mechanisms involved in currency manipulation and the cheap funding of our completely out of control deficits? Is our "leadership" really that uniformed and stupid?!?!
Fitch said the ratings outlook on the second-largest U.S. investment bank remained negative, meaning it could reduce the rating over the intermediate term.
The ratings agency said it viewed "positively" the raising of $5 billion in capital through a mandatory convertible security issued to China Investment Corp, a sovereign investment fund controlled by China.
And it said the bank might yet claw back some of the losses recorded.
"Fitch ... believes that some of the recognized losses may eventually be recovered as current marks to market result from very dire assumptions about default probabilities and severity for U.S.-based mortgages. Further declines are possible but considered unlikely," it said.
If they had risk management, why did one small trading desk blow a big lost?
christofay
That is not the question of the day.
The question is...why were they allowed more rope by far than any other MS department?
Who really was pulling these strings? I get the feeling the people who work there think: not us, somewhere else. But who?
Sorta makes the PPT more real, don't it?
FDIC,
I am from Texas near Houston. Did you ever read Lance Armstrong's description of Plano? I tend to agree. I think the suburbs of Dallas will be slums in 20 years, maybe less.
Those homes look pretty nice right now.
Red Pill - I think it is going to depend on the timing of the failure and of course what type of failure transaction. Depositors in banks that fail sooner rather than later may receive better faster service until the FDIC quickly becomes overwhelmed, overworked and understaffed. If the transaction is an assumption by another financial institution or a total bailout by the Feds then there should be a very minimal wait. If the transaction is a new type of recovery say something we have never seen before or a payout whereby there is NO assuming bank and the FDIC simply pays off all 'insured' depositors then get in line and wait your turn and hope the books balance. Whatever happens it will be very difficult for the FDIC to keep up with the pace based on its staffing and 2008 staffing increases of about 100 more employees mostly examiners and not Claims agents who handle the depositors. The FDIC has not begun hiring new Claims agents yet and many current agents are either eligible to retire or will be in the next 1-3 years.
dust, we will print, just watch.
People said the same thing going into the late 90's with the RTC, and what happened? Inflation. While assets might go begging, so what?
All I know is they raised the price of my Macallan 12 y.o., again.
No inflation, bupkis. Drive your vehicle or buy food, get healthcare or pay taxes- geez, inflation.
Even the dmned property taxes *still went up 15% percent from last year. And I have another two years of increases built in just to get to what my mortgage is on the old homestead.
Someday this war's gonna end...as for R.D.'s stoic take- remember he can really act- it was shot in one take right after the planes went over the napalm exploding. FFC left that in for effect, he could have cut those seconds out, but chose not too. Art I can appreciate.
Off to the suns 2nd half and my macallan.
Even Maker's Mark has gone up quite a bit lately.
Red Pill
Pasadena? My hometown.
Can you say, I have been given a script from someone that has money and heres what it says, word, by word...dah:
U.S. Senator Charles E. Schumer issued the following statement Wednesday regarding Morgan Stanley's $5 billion agreement with China Investment Corporation:
"This agreement will provide capital for Morgan Stanley and thus strengthen one of New York's premier companies. This will help New York preserve jobs and keep its position as the globe's financial center."
--Sen. Charles E. Schumer
"Is our 'leadership' really that uniformed and stupid?!?!"
They are stupid, and I suspect we will all soon be uniformed. But we will still have freedom to choose between brown shirts and orange jumpsuits.
Wild eyed prediction:
In exchange for the US dropping currency revaluation pressure, US will broker a cash infusion from China into the insurers.
The insurers are the lynch-pin hat cannot fail.
I a lynch-pin hat like a tin foil colander?
Oldies & Goodies Time:
"When I took office, our economy was beginning a recession," Bush said in a speech at a Mississippi high school. "Then our economy was hit by terrorists. Then our economy was hit by corporate scandals. But I'm certain of this: We won't let fear undermine our economy and we're not going to let fraud undermine it either."
In a congressional election year, the administration seems determined to avoid the apparent mistakes of the first President Bush, who lost a bid for a second term after the Clinton campaign took advantage of the perception that Bush was not paying close enough attention to the economy.
The current Bush administration's claim that it inherited a recession from Clinton became somewhat more credible last week, when the Commerce Department revised its estimates of GDP, the broadest measure of economic growth, in the first, second and third quarters of 2001, showing that it shrank in all three quarters.
Earlier estimates found economic activity contracted in only the third quarter of 2001, due mostly to a dramatic, temporary slowdown in activity after the Sept. 11 terror attacks.
Since one popular rule-of-thumb definition of a recession is two or more consecutive quarters of shrinking GDP, it became possible, based on the revised data, to say a recession began in January 2001.
It was also easier for Bush and Cheney to point to the two quarters of growth so far in 2002 and claim that the tax cuts and economic stimulus packages they pushed in 2001 had helped the economy recover.
"Rebate checks, a rate reduction on tax day and a stimulus package helped turn three quarters of decline into two quarters of growth," Cheney said in a speech to the Commonwealth Club of California.
What a cheerful bunch.
Have any of you ever had money in a failed US bank or S&L. I have. In about 20. When they went under - the transition from failure to FDIC control and complete access to money took from 4 pm until 9 am the next day.
And I was curious - so I looked at the liens my HOA has pending. There are exactly 2 - out of 1000 houses - which is actually kind of below the norm (usually about 5-10 over the last decade).
Is it possible that a very small number of geographical areas - like Stockton CA - have huge problems - and most places are kind of muddling along.
"I hear great things about Montreal, might be time to go scouting"
un uh. Ottawa.
Is it possible that a very small number of geographical areas - like Stockton CA - have huge problems - and most places are kind of muddling along.
Robyn | 12.19.07 - 11:19 pm | #
Might have said that a couple years ago - not anymore. Even in my small midwest town completely isolated from rust belt or bubble we're starting to see it... foreclosures are up... all ways the same story too. Folks loaded up on funky mortgages, bought more than they could afford and now are falling behind.
I met Ben once. He was pretty cool.
We are all subprime now.
Signs of Hope in Detroit
doc, for F&*K's sake, chill. If you are wondering what the source of the burnout is, just grab a mirror. You're killin us.
Morgan Stanley pays high cost for funding
The investment bank said on Wednesday that it was selling up to 9.9 percent of itself to China's foreign exchange fund for about $5 billion, using securities known as mandatory convertibles. Those securities pay 9 percent a year to the investors until they convert to shares in August 2010.
That 9 percent a year translates to about $450 million of cash out the door next year, equal to about 18 percent of this fiscal year's earnings.
It also means that in about 2-1/2 years, Morgan Stanley will have to issue a large chunk of new stock, diluting current shareholders.
Investors cheered the move, in part because the new capital will shore up Morgan Stanley's balance sheet. The company's shares rose 4.2 percent on Wednesday, after the investment bank said it wrote down $9.4 billion, an amount equal to about a quarter of its third-quarter equity of $35 billion.
"It's a strange world we live in where dilutive capital raising is considered a positive by the market," said James Ellman, portfolio manager at hedge fund Seacliff Capital.
Robyn and Dryfly:
Went through one S&L takeover in Richmond, VA in 1990. Happened incredibly fast (closed hour early on Friday and had a new owner by Monday AM) but impression now is that things could take a bit longer.
Problems in my rural PA area as multiple families in small town are laboring under multiple mortgages from being unable to sell their properties (several homes and one flip). Frankly think that due to not pricing to 2007 but instead 2005.
Sold my house in August in 4 days...most common description of our price (swear to God...) was "affordable". Wife thinks that we undersold but I point out those other families. Yes, had been reading this blog for some months before putting house on the market. I still marvel that the mortgage broker could look me straight in the eye and tell me that we could handle three notes should old property not sell. My response was that I understand that there are black holes but I don't care to encounter one.
I've also taken the liberty of contacting Veribanc and ordering reports for my area as well as for in-laws in Virginia. Will start shift of funds into "safer" bank post Xmas.
As to ways to make money in the new environment, I'm trying to recollect how to make cheap booze with surplus auto parts.
"I a lynch-pin hat like a tin foil colander?
albrt"
The Super Colander Tin Foil Hat is now at an alert higher than I've ever seen. It's like HAL for 2001, I have to keep it on, but I can't shut off the alerts.
Gah!
Cheers,
dryfly,
Might have said that a couple years ago - not anymore.
I agree. I live in Renton, WA. I'm not technically within the city limits (you wouldn't know it by looking though) but am certainly in the greater Seattle metropolitan area.
I've seen a LOT of construction. I'm now seeing "price reduced" on the existing homes that are for sale.
Meanwhile:
A wealth of condos sets stage for renters
King County rents have been lower than an "expected" rent, based on 25 percent of per capita income, since 1987.
Rents should continue to climb 6 percent a year for the next three years -- a little more than the past three years, but less than the 9 percent jump over the past year, Dupre + Scott predicted.
Barclays sues Bear over hedge fund hype.
Business, financial, personal finance news - CNNMoney.com
Robyn - I don't doubt your good experience with the FDIC's claims process. I worked at FDIC for 19 years and saw first hand how well depositors were handled back then. However, the FDIC has dramatically downsized all thru the 1990s and as I said now has less than 100 Claims agents to handle these future claims at failed banks. These 100 employees cannot possibly handle the crush of claims that surely will come again without additional help.
sbarrkum,
Morgan Stanley loved Darden Restaurants though, right up until it dropped 21% today anyway. It is no longer the "strong buy" it once was and is now simply an "outperform", lol.
Investors Steamed
FFDIC,
"However, the FDIC has dramatically downsized all thru the 1990s and as I said now has less than 100 Claims agents to handle these future claims at failed banks."
Oh well that's gotta be good.I mean with ACA going teats up we can't have many account failures coming. I'm going out this weekend and exchanging my dollars for seaweed. Should be a good hedge against this shite.
Cheers,
Show of hands - Who votes for: inflation or deflation as a result of all this?
FT - Barclays lodges lawsuit against Bear
FT.com / Financials - Barclays lodges lawsuit against Bear
Eric,
Deflationary Nuclear Bombs...this is going badly.
Cheers,
Earlier thread commented on question of inflation v deflation and someone coined terms like contango and torqueification (both pretty good). I'd wondered same thing - how could have both simultaneously?
I'm starting to lean towards deflation - and me in a new house...
Reading Schlesinger's "Crisis of the Old Order - 1919 - 1933" and this period is startlingly like 1920s re bottoms-up resentment of the upper economic crust (i.e. Wall Street).
Hey FDIC,
Are Lakewood and the M Streets holding their value?
FT - S&P paints bleak picture of 2008 debt outlook. The outlook for European corporate and financial debt will turn distinctly more negative next year with credit ratings downgrades set to outnumber upgrades by two to one...
FT.com / Capital Markets - S&P paints bleak picture of 2008 debt outlook
Speaking of real estate pictures, here are some of Harry Potter's new digs in NYC. About four rooms, cost a bit over 4 million. Ergo a million a room. What a screaming bargain!
404 Not Found
Journeyman - Yes for now. Inner city locations like Lakewood and the M streets will fall but not as fast as the burbs. Older homes that have not been redone to the max are harder to sell now in all areas because the flippers are not buying them to redo and flip. There are several flips that have been redone to the max in my hood and they are not moving now. Prices are still sky high in Lakewood.
Homedad, if you want to shift why wait till after Christmas?
Guardian - Barclays sues over sub-prime losses (more detail here)
Barclays sues over sub-prime losses |
Business |
The Guardian
Eric,
Show of hands - Who votes for: inflation or deflation as a result of all this?
I'd really like to use both hands!
I tend to agree. I think the suburbs of Dallas will be slums in 20 years, maybe less.
I worked at a university in Dallas for the early part of this decade. The inner ring suburbs like Irving are already there.
Sheer logistics dictate wait. multiple kids + still unpacking new house (ouch) + Xmas + upcoming trip to inlaws.
I don't think that imminent collapse in next two weeks so will do so - actually on calendar - immediately after New Year.
Believe me, I really considered that one.
Robyn Is it possible that a very small number of geographical areas - like Stockton CA - have huge problems - and most places are kind of muddling along.
The answer to that question is a decisive no. The default rates on subprime ARMs are headed for depression-like numbers, the default rates on some Alt-A issues now look like subprime ratios, and prime defaults have already moved to Alt-A territory, but are doing their best to catch up. Prime ARMs are actually degenerating faster than fixed subprimes.
Fannie's worst defaults are coming in the midwest. Both coasts are being hit hard by funny money Alt-A and subprime defaults. Of course, much of the south is being hit too, especially Arizona.
According to LoanPerformance, only 40% of its tracked zip codes have stable or increasing home prices.
But that isn't the whole story. At least 25% of the population is underwater on their car loans, and the reason why holiday sales dropped off in December is that spikes in CC defaults caused a bunch of banks to panic and hike rates on lower-income borrowers this fall. A bunch of people who would have purchased on credit are waiting until they get their next SS/pension check.
The easy credit for homes and price appreciation was masking a whole range of problems. A lot of lower income people were living on credit, and that is going to unwind very quickly over the next year. A lot of them are elderly.
The experienced inflation rate for lower/moderate income households is causing severe problems.
Eric - Ask the inflation-istas how we will inflate-away 600 trillion in Derivatives... you'll get a blank stare. When people say its different this time... they mean it.
Everything points to deflation and the FED|Government|Treasury is powerless to stop it. Notice that those over 50 years old really, really want inflation. Why? Because they are long debt and close to retirement... if not retired already. They are going to get hammered.
They will compare everything to the 70's which is bassakwards to the present situation. Private debt and money creation is 5 to 10 times greater than public. The market is no longer just the "US"... its completely global and its un-officially been bust since August.
How many more 500 billion injections will move a market that is insolvent from the top down? ZERO.
I guess I'm in the deflation camp.
Any advice on the safest institutions to keep cash and roth IRAs?
As Chegewara mentions above---
WSJ Breaking:
Bear Stearns reported a fourth-quarter loss of $6.90 a share and took a larger-than-forecast $1.9 billion in mortgage-related write-downs. Bear said members of its executive committee won't receive 2007 bonuses.
Article now up
Bear's Woe: Beyond Mortgages - WSJ.com
"We are obviously upset with our 2007 results, particularly in light of the fact that weakness in fixed income more than offset strong and, in some areas, record-setting performance in other businesses," said Chairman and Chief Executive James E. Cayne. "Our underlying fixed income franchise remains strong and we have taken steps to size the division to market conditions."
so everything's cool now, cayne can go back to the golf course, playing bridge and smoking pot. and they even didn't need the chinese investors - what capital shortfall?!
OT: Barron's: Munis' Bad News Is Good News for Bond Buyers
Munis' Bad News Is Good News for Bond Buyers - Barrons.com
Dec 20, 2007: S&P's action sent shivers through most of the financial markets, renewing the flight to quality in Treasuries, bringing their prices up and yields down sharply. But the muni market treated it as old news.
So, it's not for nothing that tax-free munis yield as much as their taxable equivalents. And not everyone thinks it's time to buy.
And we find leverage here too:
Currently, many closed-end muni funds trade at big discounts, which means that investors can buy a dollar's worth of bonds for 90 cents or less. In addition, many closed-end muni funds use leverage, that is, borrowed funds. That increases their risk but also can increase the funds' returns, especially if the Federal Reserve continues to lower short-term rates. Information on closed-end funds is available at etfconect.com, including various screening tools to find CEFs with certain characteristics, such as those with the biggest discounts.
Closed-end muni funds should not be confused with recently introduced exchange-traded funds that invest in munis. The ETFs tend to track their NAVs and don't use leverage, so they just track the market.
MBIA facing further downgrades......
More containment in the money markets:
SunTrust Invests $1.4 Billion to Protect Money Funds (Update1)
SunTrust Invests $1.4 Billion to Protect Money Funds (Update1)
By David Mildenberg
Dec. 20 (Bloomberg) -- SunTrust Banks Inc., the seventh- largest U.S. lender, said it will buy $1.4 billion of securities from two of its money-market funds to protect investors from possible losses.
[snip]
Sorry if this was linked before but:
Many U.S. state pension funds not fully funded-data
| Reuters
Dec 18, 2007: More U.S. state pension funds faced shortfalls that might threaten their ability to pay in 2005 than they did in 2002, according to data released on Tuesday.
"Despite a strong economy and solid growth in tax revenues since 2002, many states have failed to achieve a higher funded status of their pension plans," analysts at Loop Capital Markets wrote in a report.
"Of the 74 state pension plans that we monitor, 58 posted lower funding ratios in 2005 than in 2002," the report said.
And here's the winning last paragraph:
Many state pension funds say they need to have at least an 8 percent average annual investment return to keep up with their obligations.
I hope they've all been playing in the commodity futures.... [/sarcasm]
what do you call a company that lies about its exposures and is rated AAA?
OT-
did anybody read Market Ticker yesterday? Re: ACA's downgrade? Thoughts? Observations?
Ankh,
Found your paper from 1997 IPA conference:
Prophets or Puppets of Profit:
The Securities Legislation and the Accounting Profession in the 1930s
by Barbara D. Merino and Alan G. Mayper
http://les1.man.ac.uk/ipa97/papers/merin105.html
ABL
Anyone catch what the continuing claims number was?
More People Sign Up for Unemployment Benefits
AP
Thursday December 20, 8:56 am ET
More People Sign Up for Unemployment Benefits, Suggesting That Job Market Is Softening
WASHINGTON (AP) -- More people signed up for unemployment benefits last week, suggesting that the job market is softening as the economy loses speed.
The Labor Department reported Thursday that new applications filed for jobless benefits rose by a seasonally adjusted 12,000 to 346,000. It was a larger increase than economists were expecting. They were forecasting claims to rise to 335,000 last week.
The four-week moving average of new claims for unemployment benefits rose by 4,250 to 343,000 last week, the highest level in two years.
[snip]
Bear Stearns vs Oracle. I'm starting to ask myself how long it can continue to be the case for all the financial companies to do terribly and so many of the non-financial ones to do great? I know most of you will say it can't continue. I have to say, I don't know. A lot of these companies are very cash-rich right now and don't need to access the credit markets. As a Biochemist, I find it passing strange how often so-called laws in Economics get violated.
what gets violated in economics is not laws, it's common sense
Y'all just need to know the law better, "The market can stay irrational longer than you can stay solvent."
As a Biochemist, I find it passing strange how often so-called laws in Economics get violated.
My favorite definition of an economist comes from Ronald Reagan: one who sees something that works in practice and wonders whether it would work in theory.
If economists had to come right out and admit that the flow of money and capital in our species had more to do with psychology than with mathematics ... well, let's put it this way, there's no Nobel Prize in Psychology.
But is the performance of Oracle irrational? Their customers are cash-rich corporations, primarily. They expect to be in business long after this credit crunch is a distant memory and are making prudent investments to make sure that happens. I know everyone on this blog wants to take the most alarmist view of everything, but very large segments of the economy are doing very well. In the real (i.e., non-financial, non housing) world people will keep innovating and driving wealth creation.
Yes, Psychology is key and it can change on a dime (whether the dime is devalued or not).
man, where do i even start. in the real "non-housing, non-financial world"? which is just what, 25% of the economy?
"Same dynamic at work: lending money to people who can't pay it back. Maybe somebody shouldn't take out $40K in student loans to get a career as a schoolteacher making $35K, or $60K to enroll in a culinary academy which qualifies you for a $15/hr chef's job."
This "dynamic" was/is extremely puzzling to me, loan money to ANYONE regardless of major or prospects for success.
My sympathies to any politician who has to shut down this gravy train; try getting the American public to accept that their children need to be trained to earn their living as a small cog in a very big wheel.
Note to many on this blog, I'm sure that doesn't worry you because your children will likely be spared the indignity of wage slave employment.
chegawara-Where do I start? I start from a positive mind set. Not sure where you start?
re: New Deal securities regulation.
New Deal financial reform stood on two pillars: Disclosure and separation. That is, it tried to ensure transparency in the financial system. And it built firebreaks between different sectors, so that--to take the Glass-Steagall example--banks could no longer be easily sunk by leveraged losses in the markets.
You may note, both of those pillars have now been toppled. In the current crisis, nobody can tell who the bagholders are, what risks have been assumed, or what the shady non-bank banking system is up to. Nor, obviously, are there any firewalls to keep contagion from spreading.
Perhaps these are two ideas--disclosure and separation--that our current crop of regulators and legislators might like to remember.
Most everyone is positive here, I positively cannot stand having smoke blown up my...hat!
(Full disclosure, I was 100% long equities until this July, no longer)
The short term economic picture looks deflationary. The inflation argument looks more like this:
government has huge liabilities at home and abroad and is already in debt. As economy slows and there is less money to be had from tax payers and new foreign borrowing, government will have to make a choice on how to pay the liabilities.
Choice A: severely cut benefits on medical, social security, cut govt jobs.
Choice B: print some money, pay the bills, repeat until inflation adjustments are so far behind the curve that you arrive at choice A without having to pass any laws.
Choice B is much less efficient (more economically destructive) from the point of view of an economist, however it is better from the point of view of a politician because you don't have to vote for unpopular laws that kill your political career. This leads many people to believe that longer-term picture is inflationary.
Oh and by the way, if you think Fed is 'powerless' to stop deflation, it is not. This is how it does it:
Federal Reserve System - Wikipedia, the free encyclopedia
Same dynamic at work: lending money to people who can't pay it back.
The underlying root cause is the same, as well: the enormous boom in securitization and derivatives trading ensured that the people making the loans weren't the ones holding the loans. From the lender's standpoint, it became no pain, all gain (in the short term, at least).
But Milton Friedman explained, quite clearly, what invariably happens with "Type IV" spending: when you spend other people's money on other people. What made anyone think that lending other people's money to other people was going to turn out any differently?
energyecon: No smoke, I'm far from 100% long stocks right now. I just think we'll muddle through the next few years with sub-par growth but a long way from the diastrous scenarios that some insist on painting. Some people might find a good rewarding life is possible without granite countertops.
curve,
I hope you are right, however the risk of experiencing some of the fat tail events is real...and we seem to think that we have been exempted from the business cycle in that the concept of a recession seems nearly impossible to entertain. That increases our risks IMNSHO.
No, a recession is certainly possible (maybe 50:50, but I'm no expert). One is about due in the business cycle anyway. I would call a recession muddling through, since we have muddled through them every 5 years or so in the past. I am certainly treading carefully-I have some stocks that are more linked to company-specific news than the economy- and holding quite a bit of cash. I'm just not out burying Krugerrands in the backyard.
By the way, do you remember Ravi Batra (sp?) who wrote the Crash of 86? I hear he is out now pedalling the newly revised Crash of 08. People have been predicting the end of the world since the beginning of the world. It's been a losing bet so far, but some time in the next billion years, they will be right....
Thank You to:
Academic Business Librarian
(Can you find more of Merino's work, or citations to it in subsequent work? I'm really curious about the difference between "restoring trust" and "actually protecting investors" -- if our hosts here permit, it could be a very interesting thread to follow as a separate subject)
Out of curiosity, what would be the impact of 500 billion DOLLARS done by the Fed?
I was taken aback at the size of the ECB injection today. $20 Bn here seems like a spit in the bucket by comparison.
The Collapse of the Modern Day Banking System / Staring Into the Abyss /by Mike Whitney
The Collapse of the Modern Day Banking System
Whoops, and how could I forget corporate debt? "Troubled" is doubling.
But of course those C&D loans are performing great, ahhh, oops, not exactly. Really, we are living in a world of correlation, and it is an ugly place to be.
Home -
That could happen. The question is; what kind of collateral are they going to take in exchange for the money. Two, is that money actually going to make a difference or is it merely servicing debt on another obligation.
As we've seen since August, the money coming from the the window isn't doing anything to clear the lock up. Its bolstering some nasty balance sheets so banks can appear solvent.
Dustdevil:
It's been about a quarter decade since my Econ Money/Banking course...what's the effect then of perhaps lowering the capitalization rate req'd by law? That helpful?
IMHO, the pace of debt destruction will soon overtake credit creation. If we get any kind of significant rise in unemployment (likely), we will have severe deflation and a depression. It will not matter how the authorities, whether Democrats or Republicans, attempt as a fix.
NY Times
"In another indication that credit markets remained unhinged, the Federal Reserve said that its auction of $20 billion in short term loans to the banking system drew 93 bids, seeking more than THREE TIMES the amount available."
Bond Insurer Cut to Junk; Negative Outlook for 4 More - NY Times
All this being said, perhaps I'll just forego changing banks and pull everything out for the mattress.
Talked w/someone at coin shop recently and she was commenting that they advise folks taking care of property left by deceased elderly relatives to first rent a metal detector to go over house floors/walls before selling. Apparently a lot of loot squirreled away by the Great Depression survivors.
Wow.
Home - They got around the reserve requirement a long time ago. Have you seen the "Level 3" assets thee guys have? Positively insolvent if marked to market.
Just think abut this if the .gov feigns a "bailout";
The 9 trillion in debt put the US gov into a corner. If the treasury holders smell a "real" bailout, the cost of gov debt will jump huge. Just think if they have to rollover 9 trillion on a 10% interest rate. I think they will keep putting out "hope" bullshit programs.
Ah. Now I get it (lights on...).
Hadn't registered that the levels (1, 2, 3) were basically way to get around the cap reqts. (Am I correct here?)
So much time w/kids that missed some basic changes. Appreciate the clarification.
Homedad,
use the below for you energy and electric generation. At the very least for your brew creation. !!
Plant a few of these jatropha as a hedge. The fruit provides oil.
jatropha
You could also change your diesel car to run on SVO (straight veggi oil).
(search for "SVO diesel" and you will come up with many leads
i.e use the jatropha oil to run your car.
<a href=http://journeytoforever.org/biodiesel_svo.html>diesel car to run on SVO (straight veggi oil)</a>
It's strange to see this whole thing unfold from here in the Silicon Valley. Very few people even seem to be aware of the magnitude of this crisis. Most still think that our housing market is immune. Over the next two years, as Alt-A and Prime loans default in numbers, that will change.
Even in other areas already seeing defaults, a change in psychology will play a big role in how this thing intensifies. Across the country and the world, folks still have the notion that dips (in stocks and in houses) are a buying opportunity. At some point they will panic, revulsion will set in, and there won't be many vultures willing to swoop in and buy houses and stocks. It's called capitulation, and we're not even close to that yet.
Did I mention I vote for deflation?
Yeah, there was a chart somewhere with all of the various IB banks and their "assets". Its like a 3:1 ratio (level 3 to level 1) but in hundreds of billions. U-G-L-Y.
Then you get into the swaps and derivatives all written in the caymans. They have quadrupled to the 2nd power our total economy... 42 trillion (US economy) vs. 600+ trillion. The inflation-istas believe (wrongly) that we can "print" our way out of this. Its not going to happen. We are at system reset.
Dust:
Have thought for some time that the Fed/Treasury folks were whistling in the graveyard.
Honestly, I don't see what previous economic history has to offer for tips short of going back to early 1700s (I believe the South Seas Bubble). People got killed on margin calls in '29 but US was still net creditor nation to Europe - reading history on this is eye-opening as present-day China takes on role of USA in remake of 1929 classic production.
I don't see what arrows are really left in the quiver except hope that teh band-aids hold long enough for folks to gain some kind of handle on their debt issues.
Homedad,
Missed the most important part
Lister engines run on SVO (straight veggie oil)
and can be use to run a generator
Very few people even seem to be aware of the magnitude of this crisis.
Truer words never spoken, and we're talking everyone, not just bay area denizens. John Q. still only has an uneasy feeling about what's ahead, but is still mostly clueless.
homedad43,
That's a point I've been hammering home for a while now -- that in many respects we're in a lot worse shape now than in the late 20's. Doesn't bode well for the future.
tj,
And the thing is, most don't WANT to know. They want to believe that college/retirement fund is still sitting in their home's equity. It was a very uncomfortable subject with folks when I discussed it with them two years ago. Now today, they still don't want to discuss. Too depressing.
sbarrkum:
Never heard of Jatropha but have actually considered SVO; spoke w/someone who stated that driving car such equipped was like driving in a french fryer due to smell.
Thanks for the links.
tj:
I've noted your comments, believe me.
Even my in-laws (one retired, one almost) are getting nervous...as one said to me, "we realized last week that apart from our house, all of our assets are paper."
They're the ones I ordered the extra Veribanc report for.
Eric - Ask the inflation-istas how we will inflate-away 600 trillion in Derivatives... you'll get a blank stare. When people say its different this time... they mean it.
Blank stare? Really? Okay, here goes. Due to the magnitude of the problem the paper fiat currency backing it becomes 100% worthless. Nobody trusts the currency at all once the derivatives ("financial weapons of mass destruction" - Warren Buffett quote) implode. Problem solved.
Everything points to deflation and the FED|Government|Treasury is powerless to stop it. Notice that those over 50 years old really, really want inflation. Why? Because they are long debt and close to retirement... if not retired already. They are going to get hammered.
"Everything" does not point to deflation, just like "everything" does not point to inflation. Why do people tend to see things in black and white, when gray is also a choice? Further, do you think the people over 50 years old are really the ones with all the debt? Seriously? I can tell you this. My mom is not wealthy. She's not in debt either. Since she is on a fixed income, she is most certainly not praying for inflation. I'm not 50 yet, but using your logic I must be praying for stagflation because I am in debt. I am most certainly not. I'm a SAVER.
They will compare everything to the 70's which is bassakwards to the present situation. Private debt and money creation is 5 to 10 times greater than public. The market is no longer just the "US"... its completely global and its un-officially been bust since August.
Deficit spending is a the path to inflation, since eventually the faith in the currency is undermined. What's going to stop it? This commodity boom is unlike the 1970s? The following Time Magazine article from 1974 must also be bassakwards.
The Year That the Building Stopped
We have never had a serious deflation off of the gold standard. Never. Coincidence? Even Japan's deflation was mild (less than 1% per year in their CPI). There will never be a time in my life when I am comfortable burying fiat paper dollars in my backyard in hopes that it will someday be worth a heck of a lot more. That being said, I have most of my savings in TIPS and I-Bonds. If anything, I'm hoping I'm not being TOO optimistic that we don't head down the hyperinflation path.
If you really want to prove your point on deflation, back up the truck on the 4.46% 30-year treasury bond and we'll talk again in 30 years. I certainly don't have the courage. I think there will be ample opportunity in the next 30 years for inflation to strike with a vengeance. There is way too much money floating around (as can be seen quite clearly in the MZM).
Just opinions of course.
ShortCourage,
Agreed. The general attitude is both "LALALALALALA" (hands over ears) and "the government will fix it". That's what you get when a populace gets fat & happy. It's going to be a rude awakening.
Nobody trusts the currency at all once the derivatives implode.
Stag Mark,
IMHO all fiat currencies have ridden on the back of the credibility of the dollar, the "reserve currency" aka "petrodollar". Once that faith is lost, all fiats will be toast.
tj said, in many respects we're in a lot worse shape now than in the late 20's.
Yes, and also compared to Japan in the 80's. Folks on this sight (like dryfly) are very intelligent, but I don't understand why they keep throwing out the "We're not Japan" platitude when minimizing the chance of deflation. When compared to the US in the 20's or Japan in the 80's, I see our situation as much more vulnerable to a severe deflation. When you have a service economy that's dependent on consumer spending, what happens when the consumer is forced to cut back? So many people's livelihood comes from discretionary services that I could see job losses on a level of the Depression, easily.
"Due to the magnitude of the problem the paper fiat currency backing it becomes 100% worthless. Nobody trusts the currency at all once the derivatives ("financial weapons of mass destruction" - Warren Buffett quote) implode. Problem solved."
You don't understand the basic arithmetic problem to start. Then read up on the money/credit/debt cycle and answer that question again. Do you even know what a derivative is?
Keep thinking its the 70's...lol. If your truly a saver, you'll be ok by default. You inflation/stagflation fellas slay me with humor.
Ya'll have to remember that most of the population voted for Bush and they never understood Enron and they sure as hell dont know why The Pension Reform Act allows pension funds to trade your savings accounts with hedge funds that promise them yield enhancements....but, go ask the dumb cluck ex-Treasurer in Florida that just pissed away some pension cash...ask him, if he had any idea what The Pension Reform Act is about...ask him, why he was allowed to invest in junk bonds.......this is the new American dream, i.e, to have somebody smart bet your pension like a lotto ticket....oh well, no one cares... why do I bother?
Deflationists have to explain how a piece of paper that is essentially of no value is going to rise in value.
How can that happen????
And fiat money is not debt. Fiat money is just a piece of paper. It is whatever anybody with authority decides it is.
Burying cash in the back yard in the expectation it will rise in value has got to be the craziest thing ever.
IF you are lucky it will keep at least some fraction of its purchasing ability in the backyard for when you need it once it is dug up.
IF the deflationary reset is so inevitable and so inevitably leading to social distruction then responsible government will overnight devalue the currency and overnight devalue the debt. But why bother? it can just be inflated to do the same job.
Half the people on this site think the FED can "print" money. LOL... These are the smart ones that "get it". You bet your ass I'm scared.
Worried - Still clueless? Yes you are.
Money, in the simplest (and most correct) definition is simply "a medium of exchange."
Through the years feathers, bones, foodstuffs and jewels have been used as money.
But - how is money created? Clearly, money must be controlled somehow, right? Otherwise you could walk over to your closest copier and run some off for yourself..... as much as you'd like. That would anger people, don't you think?
The first thing to get your mind around is that money, credit and debt are all interchangeable. In the world of economists these are known as "fungible" - that is, interchangeable without limit.
Today, when you go to the store and swipe your debit card, you are actually spending credit.
Let's say you walk into a restaurant and eat lunch. At the instant you order, you are in debt for $10 - the cost of the lunch. When you pay with your debit card, you settle that debt by moving $10 worth of credit from your account at the bank to the account at the restaurant.
So far so good.
But - where did the $10 you spent come from?
It was created through credit - that is, debt!
Let's start with a world where there is no money but some people own land. With land I can grow a crop to feed my family, but I first must acquire some seeds. Joe down the street has seeds, but he does not have land. We would both like to eat.
Therefore, I issue a debt to Joe in exchange for some seeds; I create money! I give him a promise to pay him part of my crop if he will give me some seed. He does; what he holds in his hands is, in fact, money. I have created it out of thin air by putting myself in debt.
Now what's the problem with that? Well, what happens to Joe if there is a drought? He has given up his seeds, but there is no crop! He loses. That's called risk.
Because of this risk, he will charge me "interest". That is, he wants somewhat more than the value of his seeds to cover the chance that I will in fact produce nothing with them.
And from this - risk - we sow the seeds of what ultimately causes headaches for the monetary system.
ShortCourage,
It doesn't help that these days half the population gets their checks through government agencies, either directly (via military & civil service, pensions, SS, welfare) or indirectly (via government contracts).
You inflation/stagflation fellas slay me with humor.
That's okay. You arrogant types that only see one side to an argument and only see things in black and white slay me with humor too.
Ivy Zelman webcast with slides:
Event Lobby (EVENT: 98310)
You don't understand the basic arithmetic problem to start. Then read up on the money/credit/debt cycle and answer that question again. Do you even know what a derivative is?
That is just so incredibly arrogant. Of course I know what a derivative is. So does Warren Buffett.
Perhaps YOU should read more of Warren Buffett and understand how someone who worried about the housing bubble back in 2005, derivatives, and a possible bubble in commodities could still recommend TIPS.
Sorry Mark. You right and I apologize. I will phase my replies better to foster a good debate. Ok?
Stag Mark,
I don't share the certainty of some deflationists posting on this site, and I respect the inflationary/stagflationary arguments. I own a good amount of I-Bonds and cash to go with my gold bullion.
However, I doubt "the authorities" ability and/or will to inflate us out of this. At least not before there is a severe deflation that causes an eruption of popular support for massive bailouts. For an example of why I say this, look at the objection that politicians are already facing for their non-bailout of foreclosure victims.
They cannot really print money or bail folks out at this point. By the time they can, it will be too late to stop the deflationary cycle.
IMO.
I just don't see how you can write one sentence about the incredible disparity between our 42 trillion economy and 600 trillion in derivatives and call the problem solved. While I agree that the problem is simple, I don't think it will just go poof.
The inflation-istas have one argument;
The government will fix it.
Well, when has that EVER worked? Better question, how will that work now?
Dustdevil,
I appreciate that. I'd vastly prefer a friendly debate! I will apologize as well for my rather heated tone. Sorry!
You will be happy to know that I am in a short-term deflationary mood as seen in the upper left hand corner of my homepage. Some of our disagreement might simply be a matter of time frames.
I am bracing for 1974 style pain, and that would be temporarily disinflationary at the very least.
Exactly the point made by two of my favorite writers. Their work is no longer easy to find online, but try a library. The bit I have is identified as "Prepared for the 1997 IPA Conference, Manchester, England"
The authors are
Barbara D. Merino, Alan G. Mayper
A few snippets I kept from when some of their papers were still free online ------excerpts follow--------
"... securities regulation in the United States in the 1930s ... should be viewed as symbolic, i.e., not expected to result in significant changes in distribution of economic resources, but as a means of restoring investor confidence and preserving the status quo. Since that time, a number of traditional and critical studies have examined that thesis ...."
"... securities legislation can best be understood as an effort to reestablish the viability of what has
been labeled the "American Dream." ... as a response to a moral crisis of capitalism, generated by the
"immoral behavior" ... to establish the moral legitimacy of capitalism by restoring trust in the existing system."
"... we view the American Dream, as a combination of an elitist economic model, based on noblesse oblige that justifies significant inequalities in income distribution, and the Jeffersonian democratic model that requires "real equality," including equality in income distribution...."
"... We are not suggesting that any of the framers of securities regulation viewed this legislation as an effective means of controlling the power of the monied interests; they did not. They all sought to make the American Dream viable.... assuring that all could participate in the nation's economic growth through
investment in the private sector."
"... the American Dream justifies enormous discrepancies in distribution of wealth that result in what Jefferson deemed real freedom being reserved for the successful. While Jefferson's name is often invoked in a patriotic fashion by political leaders, his democratic theory is rarely examined. It is dismissed as antiquated and not relevant to an industrial age.
"But, in his later works, Jefferson recognized that America would not remain agrarian. He knew industrialization was inevitable; he hoped the conditions in the cities of the "old country," where a dependent wage class had lost their independence and lived in misery, could be avoided....
"Jefferson perceived a basic conflict between capitalism and democracy because capitalism, if not curbed, would lead to concentrated wealth and widespread poverty. He concluded this would destroy democracy. Greed, in Jefferson's view, did not increase morality, he wrote that "in general, men's honesty does not increase with their riches."
...
" Only if all Americans had an equal opportunity to became stockholders (owners), could the discrepancy between concentration of wealth and democratic values be reconciled. Once again, all Americans could aspi
Ah, most of it got thrown away by some word limit unannounced.
Too bad.
ok, here's the last bit, forget the middle. it's enough for the point and the caution about where we find outselves and a reminder -- been there, done that. Ask your grandmother ...
----finishing the excerpt----
" the depression created not only a profound economic crisis, it threatened the principle logic underlying the democratic system. Capitalism and democracy ... are inexorably tied in the American dream. With 95% of the population working for wages, the only way to achieve the Jeffersonian vision of an independent, middle class was through stock ownership.
"Truth in securities" served as a powerful metaphor to assure the populace that they would not be fleeced by unscrupulous financial capitalists...."
a letter written by Frankfurter (November 16, 1934) to William O.
Douglas, reflects the concerns that many New Dealers had:
"you'll put the whole prestige of the federal government behind financial transactions that are too complicated or supported by too much power to be stopped by the officials that would pass on them...."
...
"the "American Dream" had reduced democratic freedoms to formal legal/political freedoms for the populace, not the "real" freedom that Jefferson believed could come only with an equitable distribution of income among the nation's citizenry. Securities legislation was far less threatening to the monied interests. It did not have to be implemented to be effective.
Reestablishing the American Dream
Securities legislation was a means to rekindle the American Dream. Symbolic legislation can be effective as a rhetorical device if it silences public outrage. Free land no longer existed as a refuge for the wage earner; but if the opportunity existed for all wage earners to become owners through widespread stock ownership, then the American Dream remained viable. But, the investment arena had to be perceived as a "fair game."
------end excerpts-----
These excerpts came from material I can no longer find online, identified as ""Prepared for the 1997 IPA Conference, Manchester, England"
The authors are
Barbara D. Merino, Alan G. Mayper.
Ask a librarian for help if you want more, that's all I can suggest.
The authors note dryly in several places in their writing that the securities legislation need not actually work -- all that's needed is for it to be believed to work.
They quote someone to the effect that what is most important is to restore trust in the economic system, because "you can't cheat someone who does not trust you."
That sure sounds like the current bind all the financial geniuses are in.
The inflation-istas have one argument;
The government will fix it.
That is certainly not my argument. Mine goes all the way back to the 1980s. People thought the government fixed it, but could be wrong!
In order to get us to stop hoarding goods the government had to give us a positive real rate of return on savings. That real return simply postponed inflation. By giving us extra money to not spend money, that money has been allowed to grow. It still exists. You can see it in the MZM.
Should the government fail to continue to offer carrots for us savers, we're likely to shift our saving tendencies to things like, well, canned goods, paper towels, toilet paper, sheets, and so on.
I've been doing that. I'm just one person though. Imagine if everyone did. We'd see my preferred hoarding store (Costco) doing well, wouldn't we?
Costco Q1 results called 'quite positive'
Nobody ever went broke hoarding toilet paper that I know of.
Clearly we are not a nation of savers on average. That is a valid deflationist case. However, I would argue that there are enough savers (and therefore potential hoarders) amongst us though, since the averages do not tell the full story.
I would also add that we are currently shipping our money to an economy that has negative interest rates (China) in exchange for goods. I expect China to recreate our Great Depression at some point. I could be wrong. If true, that would put us in the role of Great Britain during our Great Depression. We therefore might not get nearly as much deflation as we might expect.
I meant to say that we are shipping our money to an economy that has negative real interest rates in that last post.
ShortCourage,
I'm of the belief that the stock market and housing markets will most likely fall. How far I have no idea. However, I'm also of the belief that real yields will also fall.
In order for the deflationists to be 100% correct in my opinion, real yields have to go up. The aftermath of the Great Depression saw amazingly high real yields, as hoarded dollars became worth more. The aftermath of the dotcom bubble saw amazingly low real yields though and have yet to recover.
If I am right, real yields might even turn negative in a few years as all those with savings seek even more safety.
Larry Kudlow on Real Interest Rates
The blasts from the past are always fun, don't you think?
That being said, real yields were also high at the conclusion of the 1970s. I just have a hard time seeing the prosperous times of the 1980s forming so easily. It seems to me that the pain is just getting started.
Dustdevil
You still have not answered why you think it is ok for mugabe to have 1000% inflation but the US is powerless to produce 1%
Essentially your argument came down to IT WONT HAPPEN!. IT CANNOT HAPPEN!
BELIEVE ME! IT IS IMPOSSIBLE HERE!
Thats not really an argument.
Hi! Your blog is really excellent.
Mortgage Interest rates are probably the most important part about buying a house. After all, your aim is borrow the money you need for the least possible cost, so you need to assess which type of interest rate is best for your particular circumstances.
The mortgage lender that funds your loan is called the originator. A loan originator may be a bank, credit union, or other type of financial institution. On the date of funding, the money flows out of the originator's hands and into yours. You then turn that money over to the seller of the home.
Allow me to offer up the current results of the inflation vs. deflation debate, as judged over the last six months by an impartial observer.
TIP vs. IEF
TIP is an inflation adjusted treasury bond fund (stagflationary).
IEF is a nominal treasury bond fund of similar duration (deflationary).
Is it any wonder the debate never ends? It is entirely possible both sides will continue to be right, even as we slide into the economic abyss.
I wouldn't go near anything with Larry Kudlow's name on it.
Krugman is a blind man at least with his hands somewhere on the elephant.
Kudlow is a blind man who's trying to get more blow out of the elephant's snout.
You pick.
christofay,
He's taking us to candy mountain! It's going to be an adventure!
Dustdevil,
I enjoyed the quotation, and agree with the gist of it. But unless you are Denninger himself, suggest you attribute your posts properly.
regards,
It is boring to keep reading in the comments about the huge notional totals of derivative contracts out there. They are just that: notional. Dollar risks are much smaller and involve small differences per settlement date. Risk management departments expend a lot of time to make sure a counterparty or country or exchange failure doesn't sink the company given their total derivative book at any point in time.
It is if I buy a boatload of out of the money call options on an expensive stock for 5c each, and read someone fret that I am "controlling" a vast amount of the issued shares. No, I'm not, very little real money is either at risk or in play in the trade.
Not to say there might not be systemic risks as yet unknown. But talking of notional sums vs GDP is comparing apples and .. and .. something else, not even fruit-like.
Robyn - I don't doubt your good experience with the FDIC's claims process. I worked at FDIC for 19 years and saw first hand how well depositors were handled back then. However, the FDIC has dramatically downsized all thru the 1990s and as I said now has less than 100 Claims agents to handle these future claims at failed banks. These 100 employees cannot possibly handle the crush of claims that surely will come again without additional help."
I wish I could link directly to a table in a report.
Table 4a, Page 59.
US Bank Failures, 1980 - 2000.
($ billions)
1. Texas Assets, $196.9 Cost $ 75.8 Number of Institutions 850
There were a couple of waves -- energy lending gone bad and fallout from S&L crisis. Most of them were in late 80's early 90's.
Unfortunately, Robyn seems to be on the other end of transactions, since see had assets and I had debts. I had an ARM at a S&L (a 'good deal' ) that was taken over. It was reassigned. Not a big problem. However, I had unfortunately exercised an option to 'lock in' my 8% rate. That paperwork never made it to the next servicing carrier and my mortgage adjusted downward. I wanted to correct the error, but it was just too much trouble, so I just went along with the lower rate.
According to the BIS report, the cost was less then 2% of the US GDP to resolve the S&L Crisis. I dont know if that is 1 year's GDB or a couple of years. It is all in the report.
How does sub-prime smash an Enzo Ferrari to pieces? Read this new piece and be amazed at what idiots with (subprime fees) can do:
Financial Armageddon: He Was Passionate about His Borrowers
"Not to say there might not be systemic risks as yet unknown. But talking of notional sums vs GDP is comparing apples and .. and .. something else, not even fruit-like.
Justin"
I agree. I was looking at tables from BIS and noted the huge numbers. The problem that I have is for some of the figures, 15bp is a huge numbers. You can take 3 zeros off and still have a large number.
http://www.bis.org/publ/qtrpdf/r_qa0712.pdf
Comments (on credit derivatives) from a prominent US investor who people are tired of seeing quoted, but here it is anyway:
... nobody ever wrote a contract and recorded a loss at the time they wrote it. In fact, I find it extraordinary that if you have two derivative dealersDealer A and Dealer Band both write a ticket, Dealer A records a profit and Dealer B records a profit, particularly if its a 20-year contract. That is the kind of world Id love to live in, but I havent found it yet.
Recognition of profits is accelerated and unprofitable derivatives are rolled over into new contracts where the vig is paid up. If things start to unwind then we could see a multi-year process of recognition of loss making derivative contracts.
Ben Stein is a Bush-lover (not kidding: he once wrote he loves GWB)and a fake patriot. I don't know why he's allowed to spout his sentimental b****** in the NYT. And as for David Broooks. Grrrrrrrrr---
I said it was coming, now the msm seems to have picked it up-
"In coming months, subprime losses will reach into almost every home in the U.S. as pension funds reveal setbacks, the former Moody's analyst Raynes says. Some funds won't show the extent of their subprime losses until they issue reports for the current fiscal year, some as late as September 2008.
``The smallest investor, not Wall Street, is the one who will pay the ultimate price because he trusted the fund managers who blindly followed the rating agencies,'' Raynes says.
Jose Sepulveda, 57, worked 34 years as a reading teacher and elementary school principal in southern Texas towns along the banks of the Rio Grande, the border between the U.S. and Mexico. Now retired in Weslaco, Texas, he says he thought he was as far as he could be from the mortgage crisis roiling markets in New York, London and Tokyo.
He wasn't far enough. The Austin-based Teacher Retirement System of Texas, the manager of Sepulveda's retirement money, holds $6 billion of securities backed by assets that include subprime mortgages, most of it rated AAA, according to a report on the fund's Web site.
``How could anyone think that investments backed by subprime loans were safe?'' Sepulveda says."
Rating Subprime Investment Grade Made `Joke' of Credit Experts - Bloomberg.com
So multiple wealth effects all coming at once. pensions, homes and jobs.
ms report-
page 10-
"The results for the quarter include losses of approximately $129 million related to securities issued by structured investment vehicles (SIV losses) held by Asset Management. "
page 15-
"
At November 30, 2007, the investment portfolios of Morgan Stanley Bank (Utah) and Morgan Stanley Trust FSB (collectively, the "Subsidiary Banks") include certain subprime-related securities. The securities in the Subsidiary Banks' portfolios are part of the Company's overall Treasury liquidity management portfolio. Such portfolios do not contain any subprime whole loans, subprime residuals or CDOs.
The market value of the Subsidiary Banks' subprime-related securities, all of which are AAA-rated residential mortgage-backed securities, was $5.5 at November 30, 2007. Of that total, $4.3 are comprised of ABS bonds collateralized by first lien subprime mortgages of which $1.1 are further enhanced by FHLMC and AAA-rated monoline insurers. The remaining $1.2 of ABS bonds are collateralized by 2nd lien subprime mortgages and are enhanced by financial guarantees from AAA-rated monoline insurers. An 'other than temporary' impairment charge of $0.4 was reflected in net loss for the three months ended November 30, 2007. At November 30, 2007, the securities in the Subsidiary Banks' portfolio were redesignated as trading securities; prior to that date these securities were classified as 'available for sale' in accordance with SFAS 115, Accounting for Certain Investments in Debt and Equity Securities. "
cont-
page 15-
" Net Exposure is defined as potential loss to the Firm in an event of 100% default, assuming zero recovery, over a period of time. The value of these positions remains subject to mark-to-market volatility. Positive amounts indicate potential loss (long position) in a default scenario. Negative amounts indicate potential gain (short position) in a default scenario.
(2) In determining the fair value of the Firms ABS CDO super senior related exposures which represent the most senior tranches of the capital structure of subprime ABS CDOs Morgan Stanley took into consideration observable transactions and data for relevant benchmark instruments in synthetic subprime markets. The deterioration of these inputs have led to significant declines in the estimates of fair value. These declines reflect increase in implied losses across this portfolio. These implied loss levels are consistent with the losses in the range between 13% - 20% implied by the ABX indices. These cumulative loss levels, at a severity rate of 50%, imply defaults in the range of 43% - 50% for 2005 and 2006 outstanding mortgages.
(3) In calculating the fair value of the Firms U.S. subprime mortgage related exposures including loans, total rate-of-return swaps, ABS bonds (including subprime residuals) and ABS CDS Morgan Stanley took into consideration observable transactions, the continued deterioration in market data, as evidenced by the sharp decline in the ABX indices, and other market developments, including updated cumulative loss data.
(4) Statement of financial condition is presented on a net basis, which is a non-GAAP measure. These balances are presented on a gross basis in the Company's statement of financial condition. "
The resource cannot be found.
@ Worried:
You still have not answered why you think it is ok for mugabe to have 1000% inflation but the US is powerless to produce 1%
IM(simplistic)O, Mugabe's inflation is a currency inflation and US (et most)'s is more a credit inflation.
I believe credit-fueled tidal cycles eventually wet all Central Bankers' feet despite any King Canute-like commands to halt.
And assuming it possible to create sufficient physical currency to offset credit liquidity vaporization, wouldn't real-life repercussions (increased interest rates compensating for unwillingness to lend) snuf any supposed benefits of printing physical notes and minting physical coin?
IOW, a .gov* may be able to unilaterally create physical currency, but it cannot unilaterally create a willingness to borrow.
Best regards,
Holiday Sales in U.S. Fall for Third Week After Winter Storms
Holiday Sales in U.S. Fall for Third Week After Winter Storms - Bloomberg.com
Sales in the seven days through Dec. 15 fell 0.4 percent from a year earlier, following declines of 2.7 percent and 4.4 percent the previous two weeks, Chicago-based ShopperTrak RCT Corp. said yesterday.
so bear stearns said they were net short mortgages. then month later write down $2bn. HALLO?!?!
dryfly asked me in other thread how (after living through hyperinflationary economy in late 1980's in Poland) I see the inflation prospects.
In Poland in late 1980, the government was virtually bankrupt. The political crisis of 1981 was squashed with force but the economic problems got stronger and stronger. People started to demand raises after their wages didn't follow inflation (mild inflation of several percent a year but after 7 years the buying power of wages got much lower). And the government increased printing money. I didn't know how it was done technically but they ordered the central bank to provide them with money and they got it and they spent it. The first in line were calmed by increases but the latter was impoverished by fast increasing prices. And they demanded even more money. So the government printed even more money. And soon it went of of control. The government couldn't pay their bills without ever increasing printing of money. It stopped when the government collapsed and the new democratically-elected one stopped this process with essentially an economic depression. However, later inflation expectations were so anchored (and after the sharp depression the new government didn't want to apply the same medicine any more and did not stop completely the inflationary spending) that it took almost ten years to get to single-digit inflation.
I think the current credit crisis is deflationary in short term but the government (Congress and Fed) could react with money pumping. Even if they cannot literally print money, Congress can allow it any time or simply ask Fed for an exponentially increasing credit line which would work essentially in the same way as printing. Then there is a thin line after such process can get out of control. Of course there is a whole spectrum of intermediate scenarios. But it all just depends how willing the government would be to pump money. I don't believe that deflation is practically possible with fiat money (Japan's deflation was at worst case a non-inflation).