and yet the major indices continue to march forward. i'm sorry but i am a conspiracy theorist.

idoc,

window dressing in the search for bagholders, the ten year tells the real tale...

i've studied sudden selloffs in numerous stocks over the years and there is clearly a support system in place for all stocks to prevent a full on tank; probably by the market makers. and who here doesn't believe mkts are manipulated other than Banker?

sorry "aren't manipulated" is what i meant.

OT,

File under general economy:

Bristol-Myers to Trim Jobs, Factories
Wednesday December 5, 1:18 pm ET
Bristol-Myers to Lay Off 4,300 Workers, Close More Than Half of Manufacturing Plants

NEW YORK (AP) -- Pharmaceuticals maker Bristol-Myers Squibb Co. on Wednesday said it would lay off about 4,300 employees and close more than half of its manufacturing plants, part of a broad restructuring aimed at cost savings of $1.5 billion by 2010.

[snip]

Dirk,
Does anyone track the follow-through of stock buybacks?
I have a slightly tinfoil hat theory that some of these companies announce buybacks then never execute them to the same extent they promised. It's good for the share price...short term anyway.
Thanks,

OT but not,

Criteria for the "Mr. Freeze" bailout discussed in some detail on Bloomberg:

Subprime Rate Five-Year Fix Eyed by U.S. Regulators (Update4)
By Alison Vekshin

[snip]

The freeze may apply to mortgages issued between January 2005 and July 2007 that are currently scheduled to reset between January 2008 and July 2010, said a person who has seen a draft proposal. Borrowers whose credit scores are below 660 out of a possible 850 and haven't risen by 10 percent since the loan was issued will be given priority.

[snip]

This is but one potential catalyst for a full blown financial panic. Even if Dirk is correct about them being able to patch things up fairly quickly (and I certainly know nothing to the contrary), a downgrade would probably have some very big immediate effects.

One of the funds that blew up for those Norwegian cities apparently fell simply because of the potential failure of U.S. municipal bond insurers caused a drop in value of the bonds.

Sure, these insurers might get bailed out OK, but we are still a couple bail-outs behind right now, with the subprime triage plan and the super-SIV both in some sort of muddled negotiation phase...

Can anyone right now honestly say they have a handle on how this will play out? From what I've read, the management of the players didn't understand most of the bizarre vehicles they have going. The guy he authired the super-SIV rescue plan didn't know what a SIV was a few weeks before!

Cal

i actually like that Meredith Whitney. i saw her on Fox a few days ago with Peter Schiff and she seems like a straight shooter. not afraid to go against the grain. could be another Ivy Zelman.

idoc,

I parse her analysis from Cal's post thusly: "It's the leverage, stupid!"

"I love the smell of capital destruction in the morning... it smells like systemic risk."

re: 10 rumors. So much for #9..... even though those figures don't jive with reality.

boy, i don't usually panic but those early covers on MBI and ABK cost me a fortune! i'm not sure i go along with the continued rally to years end.

Bush to outline 5 year rate freeze plan on Thursday 'Teaser freezer' plan (Hey Paulie & Sheiba - where did we store that mighty fine Mission Accomplished banner in 2003?)
Bush to outline 5-year rate freeze plan: sources
| Reuters
Mission Accomplished Wikipedia
Mission Accomplished - Wikipedia, the free encyclopedia

OT,

anecdotal data point: stopped in at a plumbing supply house this morning. asked the owner how business was, etc etc. He observed that business related to new construction was very slow, but he was seeing some biz coming from repairs and remodeling. One septic tank installer that normally does $4k/mo business, was now doing less than $1k.

Slip out the back Jack,
Make a new plan Stan,
And set yourself free...

Bush administration reaches mortgage deal
updated 3 minutes agoFont size: Agreement with industry to freeze rates on certain subprime loans
WASHINGTON - Congressional aides say the Bush administration has hammered out an agreement with industry to freeze interest rates for certain subprime mortgages for five years in an effort to combat a soaring tide of foreclosures.

These aides, who spoke on condition of anonymity because the details have not yet been released, said the five-year moratorium represented a compromise between desires by banking regulators for a longer time frame of as much as seven years and industry arguments that the freeze should only last one to two years.

Another person familiar with the matter said the rate-freeze plan would apply to borrowers with loans made at the start of 2005 through July 30 of this year with rates that are scheduled to rise between Jan. 1, 2008, and July 31, 2010.

The administration said that President Bush will speak on the agreement at the White House on Thursday and the Treasury Department announced that Treasury Secretrary Henry Paulson and Housing and Urban Development Secretary Alphonso Jackson would hold a joint news conference Thursday afternoon with officials of the mortgage industry.

© 2007 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

If we sink into Japanese style deflation and rates go to half a percent, do the subprime borrowers still stay frozen at their current rates? Sounds like an interesting speculation on bank stocks to me!

Oh, he'll give details all right!

"When this Plan is impermented, millions of homeownerers will stay in their houses. Unless they decide to go shopping more, but then they will still have houses to come home to. And banks will continue to receive payments. On mortgages and credit cards. Especially mortgages. The Plan is fairness and responsibility and is backed by solid intelligence. I mean, it's an intelligent plan. And fair. Thank you."

I wonder if this rate freeze covers the Option Arm? and if so, how?

Even if it froze the IR, it wouldn't help much. It would need to prevent the resets to full amortization in order to bail those out.

There was the question above if 652 billion $ is a lot. I wonder too if I read about the derivatives numbers +/- 140 trillion, the last sum appears to me (a layman) so unbelievable that if this figure is true quibble over 652 billion is really nitpicking of pennypinchers...

Mike,

Most people don't really understand what's going on in finance. They especially do not understand all of these derivatives.

While the notional amount of outstanding derivatives (swaps and the like) is well above several hundred trillion dollars, the actual amount of currency in circulation (in say US$) is probably around 4 - 5 trillion. Total U.S. currency in circulation is less than $1 Trillion.

So.. yes... $652 billion is a shitload.

Well, when Greenspan suggested those who took ARM's saved more money than those idiots who agreed to higher rates that were fixed, little did he know that the real money would be saved by those ARM buyers when they were locked in at artificially low fixed rates.

Ironic huh?

who here actually thinks a gov't related mortgage industry rate freeze could have been worked out this fast?

MarkS,

From now on is it "my folks ex-broker recommended....."?

idoc,

I don't know if this is consistent or not but I've basically concluded that the market is the market and what gets manipulated is the news.

Do I think it's possible for some big outfit to move prices in a strategic direction? Yes and I think they do for strategic reasons. Is that manipulation? Well whatever it is, it's the market.

Did you ever read "Reminiscences of a Stock Operator"? It's a good story and it's all about manipulation or it's all about the market, depending on one's perspective.

Regards,

This is but one potential catalyst for a full blown financial panic. Even if Dirk is correct about them being able to patch things up fairly quickly (and I certainly know nothing to the contrary), a downgrade would probably have some very big immediate effects.

The biggest impact will be to banks regulatory capital requirements.

Capital requirements are calculated based on risk. A ratings downgrade will increase the amount of capital that banks are required to hold against the risky securities.

If banks fall below regulatory capital requirements they will either need to:

1) Raise new equity through stock offerings or preferred shares (Citi, Fannie Mae)

2) Reduce its balance sheet by not making new loans as old loans mature and are paid off

3) Reduce its balance sheet by selling off other assets

Banks are also taking a hit to their regulatory capital because of defaults (losses), conduits that they are forced to take back onto their balance sheets, and SIVs that they are voluntarily taking back onto their balance sheets. Of course, this is offset by any profits they make on the spread between deposit rates and the returns on their portfolio.

With the leverage that banks have $1 shortfall in regulatory capital means $20 less credit (money) floating around in the real economy.

Holding interest rates artificially low should have an immediate impact on the carrying value of the mortgages. Debt instruments in Holding Securities were valued for a certain interest repayment at a certain value. If the interest repayment is reduced outside the original terms, the value of the instrument should be reduced. How much they should be written down is open for some discussion, probably based projections of LIBOR rates, etc.

Taxpayer -->> ???? --Great Depression

We already had that one. You gotta come up with a new name for this mess.

Regards,

For anyone interested in checking up on notional amounts of outstanding (!) derivatives, check the ISDA:

ISDA - International Swaps and Derivatives Association, Inc. 

They release market surveys on derivatives.

In first half of 1998, we were sitting on notional amounts of around $37 trillion in interest rate and currency derivatives.

In first half of 2007, we had about $347 trillion.

Now.. that's just interest rate and currency derivatives. More than anything, it tells me that interest rates and currency levels are being forced into a tight range.

If interest rates snapped like they did in the '80s or moved outside of whatever range the counter-parties are maintaining margin for, this would cause all hell of trouble. So, my guess is that interest rates are stuck.. they can only move in whatever manner the swaps have dictated.

This could severely limit what central banks can do in response to drastic problems.

Now, the notional amount of credit default swaps grew from $631 billion in first half of 2001 to almost $41.5 trillion in the first half of this year.

The notional amount of equity derivatives is a "paltry" $10 trillion.

Remember.. world currency in circulation is $4 - $5 trillion.

Let's hope that all the numbers move in the ways the counter parties are expecting them to.. or there could be some very large issues.

Bobby, how about:

"The Great Unsecuritization"
or
"The Great Eviction"

The ADP data about private employment was disconcerting and now I have serious doubt about 50 rate cut. If Fomc cuts only 25 bp I think that the probability of a sell off is very high. Besides the sentiment among options traders is no longer pessimistic, but quite the contrary, some complacency can already be seen.

I think that's probably the motive behind the rally today -- an attempt to set off a short covering rally using money borrowed in Yen if the jobs reports means we're not going to get the big rate cut.

If you're a speculator a 25 bps rate cut might well be disconcerting, but if you have a long-term vested interest in the economy a 50 bps rate cut should be even moreso.

Especially if you live in an emerging economy which could be gutted for years ala some of the Asian Tigers by runaway speculation.

With the leverage that banks have $1 shortfall in regulatory capital means $20 less credit (money) floating around in the real economy.
Kicker

can u explain this? i thought banks were limited to 9-10 to one? or was that increased by decreased reserve reqs?

hey short,

I think those are good names as they are very discriptive but I also like derivatives in excess, we could call it DIE for short.

BTW, you guys do know of course that Shiller and Roubini among others are both campaigning for central banks across the board to agressively lower rates in hopes of mitigating the severity of what they think will be a nasty situation.

Regards,

FFDIC,

I expected the Fed to ease reserve requirements (which were pretty much gutted by Greenspan) but I didn't think they would be able to monkey with regulatory capital requirements.

My understanding is that regulatory capital requirements are set by international standards (Basel II) and couldn't as easily be set aside.

I also understood that Basel II (and the demand it created for AAA assets) is part of the reason a lot of those risky securities ended up on the balance sheets of European banks.

Wasn't part of the criticism of Basel II is that it unfairly benefited the big US banks?

I can't see how the US regulators can now say "Sorry, just kidding" without risking a capital flight from the US.

And, it would be for a good reason, you can't reduce tier one capital without greatly increasing the future risk of bank failure. In fact, according to theory (Kelly risk analysis) there is a point beyond which additional leverage actually decreases returns of even exceptional managers. Even if management is right, they can be wiped out simply due to noise (volatility) in the system (of course, bad management can always be wiped out).

Chart 2:
PIMCO - Investment Outlook- December 2006 "Reality Check"

Bobby,

Yeah, I kind of scratch my head when Roubini and Shiller favor more money creation (slashing rates) in response to this mess. Compared to them, I know nothing about economics, but how do you fix bad lending practices by bailing out the bad lenders? I understand they are more concerned about the collateral damage -- good companies that can be ruined by lack of access to credit markets. But when will the money machine be forced to reform itself by suffering the consequences of its mistakes?

It's immoral to stick the price tag for everything on our kids, their kids, and those folks who have behaved responsibly.

I share Jim Roger's view that a serious recession is not the end of the world. We've had 'em before and emerged stronger.

Misean - we all have a right to be spooked given the known circumstances and our inability to get at the whole truth perhaps for years or never. So spook away dude.
An example of recent bank capital requirements manipulation may be in the Fed's discount window collateral types of assets accepted. This blog beat to death boat loans so I'll refrain from elaborative rehearsal. The bank's requirements for pledging collateral under the Fed's Payments System Risk policy are the same as those for pledging to the Discount Window. However, there are some differences regarding the use of certain pledge accounts.
On 9/22/2006 a 97% margin was established for Bankers Acceptances, CDs, and Commercial paper with market prices and a duration of 0-5 years.
I've linked you up to the Fed's informative Guide to Discount Window Collateral Web site if interested. There was widespread outrage when collateral assignments were amended or dumbed down. More innovation or dumbing down may be implemented.
The Federal Reserve Bank Discount Window & Payment System Risk Website

My understanding is that regulatory capital requirements are set by international standards (Basel II) and couldn't as easily be set aside.
Kicker | 12.05.07 - 3:56 pm | #

Kicker,
The idea is if you have better "models" that can quantify your exposure/risk you can reduce capital requirements.
e.g. your exposure is not the notional, but npv/value or var if the model is great.

Of course we see how great the CDS/CDO "copulated model" has fared

If any of the mortgage insurers are downgraded, the jobs count won't matter much as it'll quickly be overwhelmed by credit distress news. In any event, be careful making inferences from the ADP data. Every November ADP has had surge in its November data going back years that ends up being double the BLS job tally. Not sure ho ADP tabulates November but it's an anomalous reading.

FFDIC,

So, you're suggesting the Fed will help banks skirt regulatory capital requirements instead of dropping them directly.

Something to watch for, but how do we know?

NC Jim,

1) Any opinions on the relationship between the implementation of sweeps and the beginning of the stock bubble in early 1995? Correlation is not causation but the timing is suggestive.

I wish I knew, but '95 is when M3 seemed to go vertical:

http://bigpicture.typepad.com/comments/images/m3_110205.jpg

All that new credit had to go somewhere.

2) Do depositors have to sign up for a sweep accout or is it automatic (and transparent) for checking accounts. I am too lazy to read the small print of my agreement.

Depositors have to setup target balances on the accounts so it isn't automatic.

But, if reserve requirements only apply to accounts with over 9.3M. I'm pretty sure if you are sitting around with 10M+ in a transaction account you'll get a phone call sooner or later from the bank about setting up a sweep.