The National Association of Insurance Commissioners on Monday said that starting July 1, it would offer a substitute rating for municipal bonds backed by downgraded insurers so that insurance companies are not pressured to sell such debt.
Hey guys, how about helping me whip up a big end-of-day Yen borrowing orgy (and sending FXY back below 95 where it belongs) so we can turn this thing around with the help of that hellish repository of toxic global-economy-destroying radioactive waste that is the Bank of Japan.
Not a big surprise of course. Earnings out next month and everyone is positioning themselves in advance of them. It's likely there will be more questionable accounting for level III assets and more equity/preferred issues.
I'm happy they started to downgrade all those junk companies (JPM, MS, etc.), so now only the really stable, highly profitable companies with a sound business model could stay AAA (like MBIA, or Ambac).
This is how all the investment banks made their profits in the last few quarters. The more I read about this stuff the stupider I feel. No wonder I can never be a CFO of a financial institution. Their "Creativity" is incomprehensible for mere mortals.
Wall Street Says -2 + -2 = 4 as Liabilities Get New Bond Math
Don't Worry guys its all priced in. This is just fear. The market is just reloading for another thrust up.This will be like pulling back a catapult before letting it go
Is this going to mean forced trips to the confessional later this year? I think so.
Anonymous writes:
The National Association of Insurance Commissioners on Monday said that starting July 1, it would offer a substitute rating for municipal bonds backed by downgraded insurers so that insurance companies are not pressured to sell such debt.
Oh... I'm so glad its contained. IB's, investment banks, and now playing charades with insurance companies. Oh... goodie. Nothing to see here, move along... that's right folks, nothing to see here.
Man... everything is lining up for a Fall (probably late fall) change in investment emotions towards real estate. Enjoy the "summer of denied fear."
Tons of red on bloomberg today...
Those tickers at the bottom of the screen are 100% blood... oh wait, Amgen, Celgene, GM, energy stocks(about five), Garmin, Express scripts, and Direct TV are the exceptions. Seriously, everything else is red!
Bloomberg has a great article today about an accounting rule that allows firms to book as revenue the slide in their own bonds. The article suggests that Wall St. so far booked $12 billion as revenue in this fashion.
For example, Merrill apparently has recorded $4 billion in revenue from the slide in Merrill's bonds. Mind you -- Merrill hasn't redeemed the bonds and actually "cashed" out the gains. Nor is it obvious, how they mind do so profitably -- given their cost of capital has obviously had to go up.
This is a remarkable discussion of the fiasco that is Wall Street today.
cd writes:
tyaresun-borrowing costs rise..
cd | 06.02.08 - 2:09 pm
And their revenues increase as they mark to market their own debt/liabilities which being worth less in the open market are now positive revenues for them thanks to some arcane accounting rulz....
These two S&P research articles(here and here) caused a rally in March, it would be interesting to see what has changed.
Maybe the one entitled "More Subprime Write-Downs To Come, But The End Is Now In Sight For Large Financial Institutions" was really not saying the End is now in sight for writedowns but for the financial institutions themselves .
And for years I thought that the titans of wall street earned their many millions through the serious, well-reasoned, allocation of resources to the best ends thus ensuring a prosperous future.
In an earlier thread someone was saying Cramer & Cass were crazy for saying the bottom in financials could be in this week, so I wrote the following.
I would suggest Cramer/Kass(argument) is as follows:
Like in March, a bunch more writedowns will be announced starting Monday in financials. After the drops, this should be the last of the minor announcments(relatively speaking) so by next week financials should rally like they did in March up until the July 8k's come out and the big banks say(except citi) "See, we're OK, the worst has passed(for us, anyway)."
A month ago I qould have concurred, but the issue of HELOC writedowns now is clouding things. Is CFC's servicing incompetence unique to the industry(re delayed disclosure of past HELOC defaults)? Much depends on that issue.
Regional banks aee a whole different kettle of rotting fish.
I should have written bad news instead of writedowns, but the gist remains the same.
I really am amazed at how few bank failures there have been, big or small. Maybe securitization really has spread the risk around more than in the old S&L days.
I hate to say it, but while these downgrades are a bit worrying, remember that almost all of the big investment and commercial banks have ratings which are higher than most US nonfinancial companies.
For an interesting look at the shrinking number of US companies with AAA ratings (2005-before the bubble burst) see Decline and Fall of the Triple-A
"The negative actions reflect prospects of continued weakness in the investment banking business and the potential for more write-offs, though not of the magnitude of those of the past few quarters,'' Tanya Azarchs, an S&P analyst, said today in a statement.
"...though not of the magnitude of those of the past few quarters"
So Tanya, I guess the magnitude could be greater than those of the last few quarters?
But seriously, why do we have so many financial institutions in the first place? Couldn't we make do with about half of the financial "industry" that we have today? Couldn't the people in the financial industry be redeployed into productive jobs? Ever here of creative destruction?
They can post substantial gains as a result of a decline in their own creditworthiness,'' said James Cataldo, a former director of treasury risk management for the Federal Home Loan Bank of Boston and now an assistant professor of accounting at Suffolk University in Boston.It's completely legitimate, but it doesn't make sense by any way we currently have of thinking of net income.''
"I hate to say it, but while these downgrades are a bit worrying, remember that almost all of the big investment and commercial banks have ratings which are higher than most US nonfinancial companies."
I don't think those ratings have anything to do with their relative health. What companies are most closely tied with the ratings agencies?
I read somewhere that when they came out with their earnings after BSC went belly up they had more income from writing down their liabilities than they did from operations. In other words they really lost money except for the mark to market accounting rule. For a great analysis on LEH and to see how scary it is lookup a speech David Einhorm gave on May 21 at the Ira Sohn Investment research conference. Scary stuff.
"The Market seems to have shrugged off this news today."
I don't know, just about every stock I own went down. Why should stocks of wothwhile, productive, companies go down just because of problems in some carp Investment Banks?
"On the cusp of a recession and perhaps the implosion of Lehman, which companies are those exactly?"
Ok, if we are on the cusp of a recession, that would affect a lot of companies. However, the implosion of Lehman or any other IB shouldn't matter. Hopefully most of the IBs will implode. It will be good for the country. Clear out the dead wood.
you people should understand why this comes now - connect the dots you know. IBs ain't making any money except writing their liabilities down? well look at what happened to these spreads post Q1. so now's the time to move'em spreads wider (especially since most of the IBs been issuing into this rally like crazy).
Bloomberg has a great article today about an accounting rule that allows firms to book as revenue the slide in their own bonds. The article suggests that Wall St. so far booked $12 billion as revenue in this fashion.
Well, this is the same accounting rule that requires holders of derivatives to declare losses when the liabilities increase, even if not exercised for years. Not too inconsistent. Someone loses; someone gains.
Hell, the IRS requires a corporation to declare as income money saved when buying back bonds that had declined in value.
"tai writes:
Bloomberg has a great article today about an accounting rule that allows firms to book as revenue the slide in their own bonds. The article suggests that Wall St. so far booked $12 billion as revenue in this fashion.
Well, this is the same accounting rule that requires holders of derivatives to declare losses when the liabilities increase, even if not exercised for years. Not too inconsistent. Someone loses; someone gains."
It certainly looks stupid from here. But the rule would make more sense for issuers whose bond yields rise as a result of a general rise in interest rates. In such a case case, they did lock in what are now sub-market rates. If you are looking at entities who invest in long duration assets and issue long duration liabilities, you should mark to market both sides of their balance sheet, if you are going to do any such adjustments.
However, the accounting treatment is not cost free. They (presumably) have to accrue interest on the liabilities at the new, higher rate.
Why don't they just write all the banks down to negative one trillion or so. That way, when the real numbers come out, they will look better no matter what. Then the stock market can rally by 50% because the banks "crushed" the estimates. Heck, it's working for everything else.
The National Association of Insurance Commissioners on Monday said that starting July 1, it would offer a substitute rating for municipal bonds backed by downgraded insurers so that insurance companies are not pressured to sell such debt.
U.S. insurance chiefs plan substitute muni rating
| Reuters
"Please don't squeeze the Charmin"
What does a negative outlook mean? What is the average default rate for financial companies with a negative outlook? Anybody has numbers?
tyaresun-borrowing costs rise..
Hey guys, how about helping me whip up a big end-of-day Yen borrowing orgy (and sending FXY back below 95 where it belongs) so we can turn this thing around with the help of that hellish repository of toxic global-economy-destroying radioactive waste that is the Bank of Japan.
Not a big surprise of course. Earnings out next month and everyone is positioning themselves in advance of them. It's likely there will be more questionable accounting for level III assets and more equity/preferred issues.
The world is slowly trying accept the obvious:
Not only are the financials losing money now,
But there is a realization that they can't go back to "business as usual" since that is why they are losing money now.
All the "profits" they made in the good times were an illusion.
Party on Calc.
For financials to make money they have to adequately price for risk.
If they correctly price for risk they have to charge more for money.
If the cost of money rises, their current assets become further impaired.
Catch 22.
I'm happy they started to downgrade all those junk companies (JPM, MS, etc.), so now only the really stable, highly profitable companies with a sound business model could stay AAA (like MBIA, or Ambac).
This is how all the investment banks made their profits in the last few quarters. The more I read about this stuff the stupider I feel. No wonder I can never be a CFO of a financial institution. Their "Creativity" is incomprehensible for mere mortals.
Wall Street Says -2 + -2 = 4 as Liabilities Get New Bond Math
Wall Street Says -2 + -2 = 4 as Liabilities Get New Bond Math - Bloomberg.com
anonymous- "The National Association of Insurance Commissioners on Monday said that starting July 1, it would offer a substitute rating..."
Conjure Bag says, "BWAHAHAHAHA!"
First,
Your blog is without a doubt in a class by itself.
Sometimes I get a little frustrated on how the mainstream press reports issues.
Thanks for putting out such informative and well presented information.
Don't Worry guys its all priced in. This is just fear. The market is just reloading for another thrust up.This will be like pulling back a catapult before letting it go
Who knew the golden paved road would have so many twists?
Whoocoodanode?
Is this going to mean forced trips to the confessional later this year? I think so.
Anonymous writes:
The National Association of Insurance Commissioners on Monday said that starting July 1, it would offer a substitute rating for municipal bonds backed by downgraded insurers so that insurance companies are not pressured to sell such debt.
Oh... I'm so glad its contained. IB's, investment banks, and now playing charades with insurance companies. Oh... goodie. Nothing to see here, move along... that's right folks, nothing to see here.
Man... everything is lining up for a Fall (probably late fall) change in investment emotions towards real estate. Enjoy the "summer of denied fear."
Tons of red on bloomberg today...
Seriously, everything else is red!
Those tickers at the bottom of the screen are 100% blood... oh wait, Amgen, Celgene, GM, energy stocks(about five), Garmin, Express scripts, and Direct TV are the exceptions.
Got Popcorn?
Neil
Bloomberg has a great article today about an accounting rule that allows firms to book as revenue the slide in their own bonds. The article suggests that Wall St. so far booked $12 billion as revenue in this fashion.
For example, Merrill apparently has recorded $4 billion in revenue from the slide in Merrill's bonds. Mind you -- Merrill hasn't redeemed the bonds and actually "cashed" out the gains. Nor is it obvious, how they mind do so profitably -- given their cost of capital has obviously had to go up.
This is a remarkable discussion of the fiasco that is Wall Street today.
http://www.bloomberg.com/apps/news?pid=20601109&sid=a2ppBYA0ELaU&refer=home
cd writes:
tyaresun-borrowing costs rise..
cd | 06.02.08 - 2:09 pm
And their revenues increase as they mark to market their own debt/liabilities which being worth less in the open market are now positive revenues for them thanks to some arcane accounting rulz....
From Bloomberg this morning
Story
Mr Beach beat me to it...
Don't lean too hard.
Index option put/call ratio is above 100 for the first time since March.
Slightly into oversold territory, could be pretty deep by Thu, Fri. Maybe start taking a little something off on the short side by Wednesday-ish.
I, too, have decided to offer a "substitute rating."
(I do not know, but I guess, that my rating may not be exactly the same as the Commissioners' Association.)
Mr. Beach- "This is a remarkable discussion of the fiasco that is Wall Street today."
Conjure and I love fiascos. They present limitless opportunities to take money away from incompetent people.
These two S&P research articles(here and here) caused a rally in March, it would be interesting to see what has changed.
Maybe the one entitled "More Subprime Write-Downs To Come, But The End Is Now In Sight For Large Financial Institutions" was really not saying the End is now in sight for writedowns but for the financial institutions themselves
.
And for years I thought that the titans of wall street earned their many millions through the serious, well-reasoned, allocation of resources to the best ends thus ensuring a prosperous future.
Naive Outsider
It's about time! Reality and truth are finally starting to clean up this mess - on a Monday no less !
Rate increases? HA!
0% here we go...
In an earlier thread someone was saying Cramer & Cass were crazy for saying the bottom in financials could be in this week, so I wrote the following.
I would suggest Cramer/Kass(argument) is as follows:
Like in March, a bunch more writedowns will be announced starting Monday in financials. After the drops, this should be the last of the minor announcments(relatively speaking) so by next week financials should rally like they did in March up until the July 8k's come out and the big banks say(except citi) "See, we're OK, the worst has passed(for us, anyway)."
A month ago I qould have concurred, but the issue of HELOC writedowns now is clouding things. Is CFC's servicing incompetence unique to the industry(re delayed disclosure of past HELOC defaults)? Much depends on that issue.
Regional banks aee a whole different kettle of rotting fish.
I should have written bad news instead of writedowns, but the gist remains the same.
Signal for short-gun marriages.
Who's the next two-buck-up-chuck?
MS
MER
LEH
The market is betting on it being LEH first.
Right on Cue the mysterious SPY action appears and the TV people have no idea who or what.
Totally obvious
And I say LEH
Ciao
MS
LEH would be my best guess.
I saw all the option volatility over a week ago and ignored it.
The big question is, who swallows them?
Mike in Long Island | 06.02.08 - 3:12 pm | #
Mr Beach beat me to it...
Nope. Actually Anon123 | 06.02.08 - 2:28 pm beat both of you
Anon123 | 06.02.08 - 2:28 pm | #
Wall Street Says -2 + -2 = 4 as Liabilities Get New Bond Math
I really am amazed at how few bank failures there have been, big or small. Maybe securitization really has spread the risk around more than in the old S&L days.
I hate to say it, but while these downgrades are a bit worrying, remember that almost all of the big investment and commercial banks have ratings which are higher than most US nonfinancial companies.
For an interesting look at the shrinking number of US companies with AAA ratings (2005-before the bubble burst) see Decline and Fall of the Triple-A
"The negative actions reflect prospects of continued weakness in the investment banking business and the potential for more write-offs, though not of the magnitude of those of the past few quarters,'' Tanya Azarchs, an S&P analyst, said today in a statement.
"...though not of the magnitude of those of the past few quarters"
So Tanya, I guess the magnitude could be greater than those of the last few quarters?
But seriously, why do we have so many financial institutions in the first place? Couldn't we make do with about half of the financial "industry" that we have today? Couldn't the people in the financial industry be redeployed into productive jobs? Ever here of creative destruction?
sbarrkum writes:
Mike in Long Island | 06.02.08 - 3:12 pm | #
Mr Beach beat me to it...
Nope. Actually Anon123 | 06.02.08 - 2:28 pm beat both of you
Anon123 | 06.02.08 - 2:28 pm | #
Wall Street Says -2 + -2 = 4 as Liabilities Get New Bond Math
sbarrkum | Homepage | 06.02.08 - 3:47 pm | #
Yep. Missed that post - thanks for correcting me...
ZackAttack- "I saw all the option volatility over a week ago and ignored it."
As you're doubtless aware, rumors about LEH have been swirling around for several weeks, just as they did with Bear Stearns.
Good news for the investmentsbanks..
They can post substantial gains as a result of a decline in their own creditworthiness,'' said James Cataldo, a former director of treasury risk management for the Federal Home Loan Bank of Boston and now an assistant professor of accounting at Suffolk University in Boston.It's completely legitimate, but it doesn't make sense by any way we currently have of thinking of net income.''
http://www.bloomberg.com/apps/news?pid=20601109&sid=a2ppBYA0ELaU&refer=home
"I hate to say it, but while these downgrades are a bit worrying, remember that almost all of the big investment and commercial banks have ratings which are higher than most US nonfinancial companies."
I don't think those ratings have anything to do with their relative health. What companies are most closely tied with the ratings agencies?
Cynicism is warranted.
It's offical: LEH is the new BSC. This stock's a gonner.
THEIR spouses could leave them when they discover that their net worth has collapsed to eight figures from nine.
It's Not So Easy Being Less Rich - NY Times
RE: LEH
I read somewhere that when they came out with their earnings after BSC went belly up they had more income from writing down their liabilities than they did from operations. In other words they really lost money except for the mark to market accounting rule. For a great analysis on LEH and to see how scary it is lookup a speech David Einhorm gave on May 21 at the Ira Sohn Investment research conference. Scary stuff.
But, again, who buys them?
The Market seems to have shrugged off this news today.
Conjure and I love fiascos. They present limitless opportunities to take money away from incompetent people.
mp, they will give it to you...you don't have to take it
LEH was my pick for the second ritual execution. But he keeps getting his appeal heard by the government...
"The Market seems to have shrugged off this news today."
I don't know, just about every stock I own went down. Why should stocks of wothwhile, productive, companies go down just because of problems in some carp Investment Banks?
Engineer Jim,
On the cusp of a recession and perhaps the implosion of Lehman, which companies are those exactly?
re: the drop in NYC incomes and resultant "catastrophes"
thx Dr. Strangemoney
These poor folks have no idea how vulnerable they are to a moderately deep downturn in NYC and elsewhere (in any crowded quarters i.e. major cities)
Not just financially either
"On the cusp of a recession and perhaps the implosion of Lehman, which companies are those exactly?"
Ok, if we are on the cusp of a recession, that would affect a lot of companies. However, the implosion of Lehman or any other IB shouldn't matter. Hopefully most of the IBs will implode. It will be good for the country. Clear out the dead wood.
you people should understand why this comes now - connect the dots you know. IBs ain't making any money except writing their liabilities down? well look at what happened to these spreads post Q1. so now's the time to move'em spreads wider (especially since most of the IBs been issuing into this rally like crazy).
...And yet Miss Dow's barely triple-digit loss barely registered the Oops-Upside-Your-Head sum of today's posts.
Anyway, it's all priced in. Almost!
YouTube -
Bloomberg has a great article today about an accounting rule that allows firms to book as revenue the slide in their own bonds. The article suggests that Wall St. so far booked $12 billion as revenue in this fashion.
Well, this is the same accounting rule that requires holders of derivatives to declare losses when the liabilities increase, even if not exercised for years. Not too inconsistent. Someone loses; someone gains.
Hell, the IRS requires a corporation to declare as income money saved when buying back bonds that had declined in value.
"tai writes:
Bloomberg has a great article today about an accounting rule that allows firms to book as revenue the slide in their own bonds. The article suggests that Wall St. so far booked $12 billion as revenue in this fashion.
Well, this is the same accounting rule that requires holders of derivatives to declare losses when the liabilities increase, even if not exercised for years. Not too inconsistent. Someone loses; someone gains."
It certainly looks stupid from here. But the rule would make more sense for issuers whose bond yields rise as a result of a general rise in interest rates. In such a case case, they did lock in what are now sub-market rates. If you are looking at entities who invest in long duration assets and issue long duration liabilities, you should mark to market both sides of their balance sheet, if you are going to do any such adjustments.
However, the accounting treatment is not cost free. They (presumably) have to accrue interest on the liabilities at the new, higher rate.
Lehman Put Open Interest: Just Like Bear Stearns
Nuff said.
Why don't they just write all the banks down to negative one trillion or so. That way, when the real numbers come out, they will look better no matter what. Then the stock market can rally by 50% because the banks "crushed" the estimates. Heck, it's working for everything else.
dr strangemoney - thx for the article...extremely moving, nearly wept.
Bad times movin' up the food chain. If you bankrupt the middle & upper-middle classes, then where do you go from there? Follow the money!
Rumors that an investment bank is tapping the Primary Dealer Credit Facility (PDCF).
You have to imagine it's LEH. But, who knows?
Watch carefully after the close Thursday, 4:30 PM, for the Fed's H.4.1 report.