Man, January is looking really ugly. Primeiro?

BAC has some HB to unload.

Wouldn't surprise me at all.

What bugs me now is the "You have to have good credit history for a good rate..."

How...creditist.

F. Frederson writes:
Stark - banks fail all the time. FDIC can handle one or a few, but not one that is "too big to fail" or a systemic crisis - at least not without a taxpayer backstop.

I know banks fail. My humor fails too, even more often. I still hope someone can explain what happens to the bank's assets, such as foreclosed real estate, when that happens. What happened after the S&L debacle, for example? Do the feds wind up with title to the real estate that they eventually sell to recoup some of the losses?

MAB

u were asking about dividends and SRS yesterday. i don't think they do have to pay b/c most of its holdings are CDS's. the other advantage is there u can take long term capital gains on SRS if u hold long enuf.

If the CDO market is frozen, how are any nonconforming loans at all getting written, and how are other businesses that rely on CDOs keeping their doors open?

This is the exact the same lie as yesterday. The deals are getting written just at numbers that don't enrich the Wall Streeters.

"OK, everybody continue to act surprised so we don't have to restate and give back our performance bonuses as SOX-404 dictates."

Stress Test 1
Modern Finance 0

watching the dow or s&p drop is like watching a leviathan scream and groan.

CDoh!

So how long before the Fed starts accepting these things at the discount window / TAF?

F. Frederson writes:
Stark - start here. The short version is that the government set up an entity that took control of the bank assets and sold them off for less than the government spent making depositors whole.

Thanks. This is what I assumed would happen.

No, It's not so much about price. There really aren't many buyers for a lot of it...and there's a lot of it.

No, it is about price. At the right price, somebody would be willing to buy.

The problem is that, both financially and in a regulatory sense, the holders of these particular decks' black Queens can't afford to sell at that price. Because then that would lay out in black and white what they, and everyone with half a brain, already know: once you mark them to market, the major holders of much of this debt are completely bankrupt.

Norma has it exactly right ... this is a true Mexican standoff. And our participants have no choice but to float self-serving, transparent, and increasingly preposterous plans for rescue from the outside ... because, here in the circle, everyone's trigger fingers are, shall we say, getting itchy.

I miss Banker, too.

My recollection was that he said that duration of the credit crunch was key. If it ended withing 2-3 months, there would be no significant economic effects.
If it lasted longer (winter? November? December? The new year? St. Patrick's Day?), then in the words of Robocop, there would be.............trouble.

HB's couldn't keep up their gains. have rolled over.

HB's cannot keep open their doors. They will roll over and over right to BK court.

I had been expecting inflation, but I am starting to think things are happening too fast for fiscal policies to rescue the situation - plus, the dollar amounts needed are so large I question whether there is any practical ability to move that much borrowed money into the economy that fast.

Deflation.

If the government is deeply in debt going in to deflation, I am wondering whether default on the debt is inevitable.

idoc writes:
CNBC-60% of companies have reported and earnings off 28% YOY. WOW!

Conjure says, "mp, more torpedos! Schnell"

Why is the dollar up today? Makes no much sense in the face of weak economic data.

Traders moving out of U.S. economy-dependent foreign currencies and in to treasuries?

--
"Everything is down. Damn. Is this deflation?"

MA,

The biggest inflation in the world is in American Egos, American Ignorance, and Political Power of America's Crooks.

All these will deflate in due course of time. Economics is all about behavior of the participants, leaders as well as the led. In America, both have been behaving badly.

Jas

"Why is the dollar up today? Makes no much sense in the face of weak economic data."

Aside from what anonymous said, there has been some talking in the media from Deutsche Bank that the dollar should soon begin to strengthen against the Euro. They're expecting rate cutes in Euroland.

i actually think that when the ECB starts cutting rates glod will go to $1000.

Well, looks like the counter trend rally in HBs and financials has run its course, eh? Hope all of you shorties did ok. Me, I got burned but learned a good lesson about playing these bear markets.

--
"Begin the morning by saying to thyself, I shall meet with the busybody, the ungrateful, arrogant, deceitful, envious, unsocial. All these things happen to them by reason of their ignorance of what is good and evil." -- Meditations of Marcus Aurelius.

American dopes don't know that banking and finance Crooks are evil even when they built Debt Concentration Camps and piped them with financial poison gas.

Jas

--
“Rating agencies have been practicing junk science”! – Analyst Tavakoi on Bloomberg.

They were serving the CROOKS!!!!!!!!

Everyone wanting a good-life in America is, or was, better of serving the Crooks, just as everyone wanting a good-life in Nazi Germany was serving the Nazi leadership. No, Americans are in no way better than the Germans during the period before and during the Nazis.

Jas

REBear

very good question about GS.

everyones saying we're gonna go thru a period of V shaped bottoms with gentle rolling tops as we head down. i'm not sure that we won't have a bunch of spiking, A shaped tops and V bottoms. why? the hedgies and everyone else know they're running short squeezes but as soon as they sense the tide turning i think everyone hits the sell button.

--
Marcus Aurelius,

Ignorant people always know when someone else is not behaving properly, but never know when they themselves are in error.

I am merely a critical observer of the American scene, which to me means the people.

Jas

Investors are being told by their brokers that the meltdown in earnings is due only to finance/mortgage and homebuilders. But it's a smokescreen.

Earnings are soft and weakening in many other sectors including telecommunications, semiconductors, hardware, restaurants, hotels, gambling, publishing, retail and food.

Inflation is killing costs and there's too much overcapacity and desperation to raise prices. Big companies are trying to grab share, even if it means losing money, and smaller companies are shark meat, especially if they are overleveraged (which most are).

The earnings scene is just carnage, and yet most investors still can't see it. If you could see it, you would dump all stocks right now. This kind of trend is a train, and it doesn't reverse fast.

rich,

I'm looking for a long, maybe year long, fall in the Russell 2000 for pretty much that reason. It has about the highest p/e ratio around, the companies are more dependent on bank credit than big caps, and they generally have less income from overseas.

"Agencies mull changes to structured finance ratings proposing a numerical scale from 1 to 21 as an example. The agency floated other ideas too, such as adding "sf" to current alphabetical ratings to highlight a structured finance security."

I like it. Leaves room to add new levels of low ratings from 22-99 as the need arises.

cd

mp,

Does Conjure have one of those U-boat commander hats on backward to operate the periscope?

[klaxon in background - "dive, dive, dive - this is not a drill - this is not a drill"]

Fitch puts MBIA ratings on Rating Watch Negative

Fitch puts MBIA ratings on Rating Watch Negative - MarketWatch

>
They are still watching.

u were asking about dividends and SRS yesterday. i don't think they do have to pay b/c most of its holdings are CDS's.

idoc,

One minor point, SRS (and other short proshares funds) hold general swaps contracts on whatever is being shorted.. not Credit Default Swaps.. those are just a specific type of swap.

Heck, if you need raw lifting power for all that money, I say go with the Russian AN-225. You could just load the Denver Mint into the cargo hold and literally print while you drop.

Of course, with our luck the Fed would end up dropping rolls of quarters over populated areas from 10K feet.

REBear,

Thanks for the link on the downgrade of U.S. Central Federal Credit Union. Anybody who has money in a credit union may want to read that article.

DNFTT

(do not feed the troll!)

x, get Firefox with Greasemonkey and the Killfile script and your Haloscan comment browsing is oh so much more peaceful.

"eli writes:
u were asking about dividends and SRS yesterday. i don't think they do have to pay b/c most of its holdings are CDS's.

idoc,

One minor point, SRS (and other short proshares funds) hold general swaps contracts on whatever is being shorted.. not Credit Default Swaps.. those are just a specific type of swap.
eli | 02.05.08 - 4:16 pm | # "

And to add some clarity - hopefully. The daily swaps held by the levered ETF's (like SRS) provide much more than 2 to 1 leverage such that SRS holds much of its assets in the form of very liquid cash equivalents and treasuries. Since they own treasuries they generate a fair amount of income that must be distributed out to shareholders - so yes SRS and other leveraged ETF's are likely to have income distributions or dividends if you prefer to call them that.

idoc, rich, other shorties...

You guys are just evil peer pressure...derivatives were a dirty word when I was learning about trading from my Patrician elders...always go long on fundamentals.

Well, nice pop on EEV today..thanks!!!

This is nerve wracking though

The daily swaps held by the levered ETF's (like SRS) provide much more than 2 to 1 leverage

Mike in Long Island,

whoa nelly.. pedant patrol here..

From my recollection the leverage is almost exactly 2:1.

They usually hold swaps where the notional value is 2x the cash they hold.

I'll quadruple check.

eli,

Sorry to scare you. I didn't mean the entire fund was levered more than 2 to 1. I meant to say that since swaps are levered that the entire assets of the fund COULD NOT BE invested entirely in swaps and therefore had to invest in treasuries. The net result is 2 to 1 exposure to the daily index return.

eli is our resident swaps consultant:
1-800-eli-swaps.

I thought Jains were very understanding of others regardless of beliefs.

idoc writes:
eli is our resident swaps consultant:
1-800-eli-swaps.
idoc | 02.05.08 - 4:48 pm | #

Swaptions too? What's his daily rate? As long as he accepts some shiny new CDO's as collateral I might have a short term consulting gig for him...

In the meantime he shouldn't be left alone...
cadams |

ok, well ur nominated.

--
Dopes, invariably, are hypersensitive to criticism. And who could blame them.

It is the lack of critical thought that made them dopes in the first place. Dopes are enforcing the other dopes!

Jas

SRS is tied to the daily performance of the Dow Jones US Real Estate Index - more specifically negative 2 to 1. The fund will buy swaps to gain that exposure on a daily basis.

idoc and Mike,

Yah, Mike's right on.. Proshares enters into a swaps contract with some counter party... Proshares will pay out the daily return on a notional amount on the DJUSREI that's 2x the cash they hold. The counter party pays them the daily decline on that notional amount.

Look at the literal list of Proshares holdings here

eli

duh, help me with what u mean by a NOTIONAL amt on the REIT index.

duh, help me with what u mean by a NOTIONAL amt on the REIT index.

idoc,

here example.. if you short one share of a $100 stock while holding $50 margin in your account.. you are 2x leveraged and you are short a notional amount of $100.

The notional amount just tells you how much of the underlying thing (in this case USDJREI) is used for percent gain and loss calculations.

Does that make any sense... sometimes i can't tell.

i remember u and rich had a long discussion about the safety of these ultrashort vehicles using swaps. am i correct that u see these as risky in the event of counterparty default? any basis for that other than just intuitive sense?

I don't think it's necessarily dangerous with a capital "D".. just that, everyone should have their eyes open.

Swaps are not traded on exchanges... it's all OTC.. so you are dependent on the counterparty to pay up.

I guess... worst case scenario, you would be screwed out of a gain since the counterparty couldn't pay up.

(I'm ignoring the chance that the place Proshares holds their cash goes under.. then this is all sort of moot)

My official stance may be... i don't know what to think.. anything can happen.

Anon

thats way to d**n sensible.

eli,
Don't those swaps get expensive in a bear market? How do they still manage to pay out 2 times underlying index?

--
"They just dont have enough patriotism and sense to overcome their personal fear of doing something socially unacceptable - cutting spending."

It is amazing that politically impotent people expect their representatives to have *****. They want an easy job that pays well, especially, the retirement and health benefits! Easy and well-paying jobs involve serving the crooks!!

Jas

Is Conjure Bag really Nouriel R? See his headline on the right side of the blog.

--
Sorry, She got MAJOR problems in that department.

Jas

REBear,

Your question about the cost of swaps can be answered "No - they don't necessarily get more expensive".

Check out this link to a Bank of New York overview of how a swap transaction works -

Swap Description

The daily swaps are costing the proshares Libor + basis points.

If you gain exposure to $10million at days end you pay Libor + basis points on the $10 million notional value. If the reference security (the index or equity the swap is based on) loses value you owe that loss as well. Conversely if the reference security increases in value you get the gains payed out to you (less whatever Libor + basis points on the $10 million notional)

If your swap counterparty blew up you would be out that days return on the notional amount of the swap (in the case of proshares they have daily swaps - so the proshares max exposure would be to one days return). If the index went up (and your swap is levered 2 to 1 on the inverse of the index) and your counter party blew out - you'd have a windfall - you wouldn't owe them. So in the case of SRS you'd be concerned about a counterpary failing on a day when the index was down big (and therefore your 2 to 1 inverse swap was up huge).

Thanks Mike.

Mark writes:
"Jas: seems your model of the world always seems to conflict with everybody elses'."

Don't be so sure.

Jas makes a lot of sense, most of the time. Other times, he still makes sense, but most have been conditioned to dismiss his ideas without rational consideration. Perhaps he's being extreme, just to get you thinking? The world is a much larger place than it appears on Fox News.

--
Mark,

One of us is highly ignorant of the reality as it exists in America today. A dope automatically assumes that he is right because he thinks like, or is supported by, most others.

That is how democracy breeds dopes -- What do most others think?! Oh, I must be right.

Jas