Shopping at Amazon?
Wait! If you click on the Amazon banner link at the top of the page first, HCN will get a percentage of anything you purchase for 24 hours!
Open predictions
Our local book authors
User login
Who's online
There are currently 2 members and 144 guests online.
did you make that picture?
What makes you think I have sufficient skills to make such a picture?
Gee, Prince has got a great tan! Does he hang out with Angelo?
Who is it (in the picture)?
Ed, that's Citi CEO Charles (Chuck) Prince.
As long as the music is playing, youve got to get up and dance. When the music stops, in terms of liquidity, things will be complicated.
Chairman and Chief Executive Charles Prince, July 2007
What makes you think I have sufficient skills to make such a picture?
oh yeah, i always forget old people don't know how to use photoshop!
anyways, too little text!
Nick Leeson only lost about a billion and a half for his bank.. I bet a new record is in the making somewhere today.
Mr. Steel proposed the new superconduit of securities and suggested that the banks pick a group of evaluators, which would represent potential buyers, to approve all securities before they are contributed to the pool."
Mark to Model, now replacing Mark to Model.
The game continues... We all see the rating services as the last man to recognize there is a problem. They screwed it the first time and they have zero incentive to change.
As long as the idiots (and they are idiots irrespective of what money they steal from the deal table) at S&P/Moody's are the ones who define quality of the paper, the paper is and will FOREVER be suspect.
This is a shell game. There will be zero tolerance for the Treasury or the robber-baron bankers to later say, "Duh, we didn't know the SIV paper packaged into this SuperConduit was not AAA or AA." But expect those words to be the BS line emanating from the Muskateer Bankers, and the RipVanWinkle Treasury wonks.
The laxity of the Treasury and the FedRes in the face of what has been known by thousands of businesspeople over the past now multiple years is glaring. It's an "Administration Vision Thing." We got it. Now, the same permissiveness which lead to corruption (as in disingenuous pricing, idiotic quality rating, and a wanton disregard for anything other than profit...ah, unbridled capitalism at its worst, leads us to Super Duper SuperConduit #1 of many HUNDREDS more.
The markets are no longer tolerant or foregiving. The USD is dropping, PM's are rising. The problem did not get swept under the rug. The White Elephant is standing clearly in the center of the White House living room; the occupants are busy...after all, there's a wedding to plan for.
At NY opening, in spot gold, there is a $5 opening gap on the daily chart. It's one of three things. It will get closed today, it's an exhaustion gap, or it's a breakaway gap. We watch. If this SuperConduit #1 is launched (expect many more, as in trillions more), this would be a breakaway gap, in spite of the the grinding, long move to gold's current price.
This Administration is going to be taught its lesson, and the American People who voted for those clowns, 2 times, will continue to be force fed crow. In case you're not watching, both HK and Shanghai are up in the 2% range, day over day! That is stunning. The world's money is pouring into those markets. (Yes, they'll adjust severely, but this is how disgusted the rest of the world is with the constant dishonesty of this current US Administration and the politically high-handed actions being foisted on the cow-brained publics of the world.)
ot: check out this guy...he's a hero.
How a Bed-Ridden Maryland Mortgage Broker Effortlessly Raked in $48,291.33
I'm really having a hard time understanding how this will work exactly. In hedge fund parlance this appears to be one big "side pocket" where all the illiquid stuff is being transferred, will remain unvalued, and which will be sold over time (like 10 years). As a lot of this is funded by 3 month CP, the redemptions are coming due soon. Now either the CP gets paid back or they prevent the CP holders from "redeeming". I'm guessing this is a way to pay current CP outstanding back in full but not sure how additional funding will get done? Is the new CP issued going to be backed by the assets in the SIV or is it by guarantees from the participating banks. If its the former I can't see anyone funding it. If its the latter, how is this done without bringing it on the banks' balance sheets? Why would banks that don't have these liabilities at present participate?
Moin,
and some people still wondering why gold is doing well.....
who can take an SIV?
bundle it with love?
Sell it to the Taxpayer for it's value and above?
The Treasury Can!
The Fed Reserve Can!
Londernow:
nobody expects this to work. I have asked all the same questions you have. And the obvious answer is:
it has no way of working.
thus, bundle the crap. get it further off the books.
use mark to model or whatever accounting tricks to keep it afloat for a while.
then it will surprisingly fail. (who could possibly have known?).
now a bailout is assured (by the taxpayer).
the taxpayer MIGHT think about letting Citibank fail. (they're too big to fail, but who knows after the recent abuses in the marketplace, as well as our country shifting leftward?)
but they wouldn't let a consortium of banks (let's say the 6 biggest) fail.
It's "too big to fail" squared.
we as taxpayers will eat all of this. there is absolutely no doubt.
An excellent write up on this super conduit here. CR I believe referenced this earlier as well.
The Smoke and Mirrors SIV Rescue Plan « naked capitalism
Did we not hear the UST will buy 1/3 of this SuperConduit, or act as ultimate lender for 1/3, so the worst of the happy AAA and AA can be crammed down the US public's throat? Eat that J6P, er, I mean spread the risk onto the public rather than make the bankers who earned real fees from the creation of this side pocket money maker disgorge one red cent due to their abhorrant (imo) behavior.
When the banks cause the dilution of the store of value to be accepted by every hard-working saver who holds their funds in USD valuations, is this not a crime? The bank robber gets sentenced to 10 or 15 years for their act. These bank robbers will be getting new and extra incomes for their efforts to sell these SuperConduits, and will be praised for doing such a great sales job to boot.
The brokerage on $100 billion will be amazing! You and I and our families could retire forever from that commission.
They should be fired and prosecuted by a UN agency. Instead, they're gonna get new houses and cars, and fat bank accounts.
Weimar, Stage 1 = SuperConduit #1.
Expect about 100 more of these SuperConduits, at the low end...the new Edsel now replacing CDO's, MBS's, piers, you name it. If it stinks, it will get socialized.
And as I've said, the world's economic community is done with these shenanigans. The USD is dropping; the precious metals are rising; the Asian markets are rising. This smells and feels way too much like Weimar 1922 to be seen as a sideshow.
Are you protecting yourself? If you don't believe it, turn around and look at the USD, PM, commodities charts. Then look at the marginal rates of change... and if you still don't believe it, then I'll prescribe that you cut back on the Prozac.
the American People who voted for those clowns,
What makes you think it will just be the ones who voted for those clowns?
http://graphics8.nytimes.com/images/2007/10/15/business/20071015FUND_190.jpg
So ABCP is heading back to 2005 levels. And this is a crisis? The big crisis is that the US has ZERO credibility in both the financial and military affairs of the world.
Are you protecting yourself?
I got a gold and silver rubber will that work.
"The big crisis is that the US has ZERO credibility in both the financial and military affairs of the world."
Agreed. Just at a time where it needs more foreign buying of its treasuries than ever before. How people cannot see that this is going to end up with long rates shooting to the moon (unless the treasury monetizes debt) and the dollar plummeting is beyond me.
I just watched the undersecretary on booomberg. Prophylatics are to late... the gag reflex already kicked in.
"and some people still wondering why gold is doing well....."
Jaysus, up ten bucks just this morning. Seems like some big players have made a decision against the dollar. I wonder what they know that I only suspect....
A substantial part of my pitiful store of capital in gold, but certainly not the majority. Aside from buying gold, what else does someone who knows relatively little about the investment world do to protect the remaining capital against a falling dollar?
Bob Dobbs
ur where u should be.
Tanta (or other experts), obviously for most mortgage servicers their expenses are strongly going up because of many FC. It's reasonable to believe that they will eventually be able to recover all their expenses and even make some money. My question: how do they account for these expenses? Will they have to show these expenses as they incur them, so they will get a hit to earnings in the current quarter?
Think of it this way. The banks, under the direction of the US Treasury, are setting up a fund to buy from themselves.
Financial alchemy got us into this mess, it is not going to get us out. Again, banks set up a bigger fund to buy from themselves. Left pocket to buy from the right pocket, ...thing is they only report the books on the right pocket which charges fees to the left pocket. Why banks were allowed to set up these SIVs off their balance sheet in the 1st place is a question that I have seen few openly ask and discuss. For this to ultimately to be corrected, this practice needs to be discontinued ASAP, not set up a Super fund to worsen it. I have no faith anymore whatsoever in the Treasury, Fed or financial leaders in this country..none. If anything the past few months have shown, is they are no different than any white collar fraud artist trying to cover their tracks.
Stuart, w/r/t alcoholism it's called enabling.
this is a move from individual responsibility to collective responsibility which by extension moves eventually to taxpayer responsibility-guaranteed.
Tanta - Thank you so much for interpreting what's going on in a way even I can understand! Appreciate your illuminations. Please keep it up for us non-ubers.
"but this is how disgusted the rest of the world is with the constant dishonesty of this current US Administration and the politically high-handed actions being foisted on the cow-brained publics of the world.)"
I thought gold was up because of oil and oil was up because Nancy Pelosi figured now was a good time to piss off our only ally in the middle east over some WWI noise. Damn impressive one-upping GW on stupid and arrogant foreign policy blunders. I don't know what's worse- to do this for some Armenian campaign money or because you truly believe in prancing around on your moral highhorse.
"Left pocket to buy from the right pocket, ...thing is they only report the books on the right pocket which charges fees to the left pocket."
I swear Ken Lay went to jail for that.
This is "mark to fantasy." Conjure Bag and I will watch with great interest and amusement as some Wall Street firms are de-populated by this financial neutron bomb.
I swear Ken Lay went to jail for that.
That what I be thinking.
Another nail in the coffin for assset
prices.
Treasury sales may rise 50% as deficit suddenly grows.
The first decline in corporate tax revenue since 2003 increased the shortfall by 12 percent to $162.8 billion for the year ended in September, from $144.8 billion in the 12 months through April.
Treasury Sales May Rise 50% as Deficit Suddenly Grows (Update2) - Bloomberg.com
I thought gold was up because of oil.
Gold and oil are both up because big bone Benny and hammering Hank decided it was better to finish hollowing out the middle class in this country to bail out the banks by debasing the currency. The problem is is the rest of the world is kinda tired of our deadbeat, nose trouble, empire ass.
As long as the music is playing, youve got to get up and dance. When the music stops, in terms of liquidity, things will be complicated.
If people never stop piling on more and more leverage, this won't be a problem, will it?
The Ghost of Weimar Past.
Act 1, Scene 5. Early 1922. LBO Captains and their Financiers Try to Stir Life Back Into Their Pots of Stale Coffee.
inflation rates
India 8%
China 6%
Russia 7%
in case you are wondering about Gold.
Flight to saftey may also be an issue.
Every time this super SIV is more clearly defined, it makes less sense. The Times says:
To maintain its credibility with investors from whom it would raising money, the conduit will not buy any bonds that are tied to mortgages made to people with spotty, or subprime, credit histories. Rather, it will buy debt with the highest ratings AAA and AA and debt that is backed by other mortgages, credit card receipts and other assets.
If they truly mean nothing tied to subprime, why is it necessary at all? The bonds that can't be valued are all tied to subprime mortgages, either directly, or through CDOs.
Or do they only mean highly rated debt? We now know that BBB and below subprime debt was packaged into CDOs that were blessed with AAA and AA ratings.
While the market seems to want transparency, it's being fed another layer of opacity.
Might I suggest a nice portfolio of Swiss companies that make a very small profit, but will continue to make cheese and chocolate for centuries to come.
On the other hand, fast money seems to be draining out of this economy faster than you can say "Gone!"
Did anybody see this article:
site map - azcentral.com - arizona web site
I love it! Foreclosures are moving upscale!!!
Movin' on down, movin' on down, to a deluxe apartment in the sty,
we're movin' on down, we finally lost our piece o' the pie!!!
Ode to the upper middle class.
Someday this war's gonna end...but in the meanwhile, life is sure getting interesting!!!
Moin again,
the tensions on the Turkish/Kurdish/Irak issue doesn´t hurt oil and gold either......
Or do they only mean highly rated debt? We now know that BBB and below subprime debt was packaged into CDOs that were blessed with AAA and AA ratings.
You don't even have to go to the level of CDO here. The subprime RMBS themselves had AAA and AA tranches.
As far as I can tell, the BBB tranches got unloaded into the CDOs. The SIVs are holding the senior tranches of this same stuff.
Anyone who knows more can correct me if I'm wrong, but that's what it looks like to me. How a Bloomberg reporter can be making the tranche rating/collateral rating mistake at this late stage of the game is well beyond me. I thought we just spent the last six months having a learning experience about that.
ac If people never stop piling on more and more leverage, this won't be a problem, will it?
Ah, but leverage is not an unlimited instrument, as the EPDs for the leveraged mortgages showed us. Eventually, it gets to the point where people and corporations just can't perform. The reason why this is all happening is that we got to that point.
here's some s&p on SIVs:
Daily projected cash inflows and outflows from the SIV drive the SIV's liquidity requirements. In SIV transactions, liquidity facilities do not cover 100% of the assets because the SIV is assumed to be able to manage the assets appropriately through stressed market conditions, and that the analysis measures the potential liquidation of the assets.
These liquidity tests address fundamental structural analyses, including possible market disruptions, and the structure's features, including invested assets that are being funded by shorter maturity liabilities.
Standard & Poor's evaluates whether a SIV is able to pass liquidity tests commonly referred to as net cumulative outflow (NCO) tests (specifically the NCO 5 and NCO 15 tests). These tests are frequently performed by a SIV's manager and administrator. The NCO 5 test, which addresses "market disruption" risk, is often referred to as the "peak" NCO test because it asks the SIV managers to look at the liability profile for one year and then takes an assumed "stressed," or "peak," need for cash to pay off maturing liabilities, such as CP. This test measures the maturing profile of CP and other senior liabilities and the inflows coming from coupons or maturing assetsnot asset sales. To pass this test, a SIV needs to have sufficient liquidity coverage such that if a SIV cannot issue, or chooses not to issue, CP for a week in which it has senior liabilities coming due, cash would be available to pay maturing CP and senior liabilities by using the cash from the liquidity facilities. SIVs have not yet issued extendible CP because they perform and meet the NCO5 test and, therefore, are expected to have sufficient liquid assets to cover a temporary failure to roll. The NCO 5 test helps a manager avoid any unexpected immediate need to sell assets at any given time, even during a market disruption.
SIVs also have an NCO 15 test that has the effect of requiring the structure to hold a portion of the portfolio of assets that is designated as very liquid obligations. This test focuses on the SIV's ability to meet the maturing CP obligations over a three-week horizon, compared to the NCO 5 test's one-week horizon. The SIV holds a portion of its portfolio in these highly liquid assets. The presence of these highly liquid assets provides the SIV with the flexibility to liquidate, if necessary, these "liquidity eligible assets" rather than liquidate less-liquid assets over shorter time horizons. This is in line with our assumed stress case assumptions and is designed to mitigate SIVs' exposure to any one particularly bad period of liquidity in the markets.
http://www2.standardandpoors.com/portal/site/sp/en/us/page.article/3,1,1,0,1148446828709.html
inflation rates
India 8%
China 6%
Russia 7%
in case you are wondering about Gold.
Flight to saftey may also be an issue.
The US is actually one of the more attractive countries as far as inflation rates go, but if we're going to further wreck our economic future with more bubbles, then it hardly matters.
Also, one of the ironies of living in a world of hot money is that declining rates cause capital to be redirected to other countries with higher inflation rates leading to higher effective rates in the low inflation countries -- the opposite of what makes sense.
By breeding this sort of hyper-irrationalism and inverting market logic the world over, the Fed has basically hobbled it's own ability to bailout the US economy with it's typical course of easy money therapy.
You reap what you sow.
"How a Bloomberg reporter can be making the tranche rating/collateral rating mistake at this late stage of the game is well beyond me. I thought we just spent the last six months having a learning experience about that."
Ha, if the Bulls were as smart as they are strong, us bears would be out of business.(he,he,he)
Such a phrase "pillars of society"...and in that rather humble context needing our support...our little bags...
So much depends upon
The white doggie bags
Carrying steaming piles
Off the freshly mown grass
Nomura to Post Pretax Loss, Cut Jobs on Subprime Woes
Nomura to Post Pretax Loss, Cut Jobs on Subprime Woes (Update5) - Bloomberg.com
Nomura Holdings Inc., Japan's largest securities company, will post its first quarterly pretax loss in more than four years after losing 73 billion yen ($620 million) on U.S. home loans.
Nomura will cut 400 jobs in the U.S. and report a 40 billion yen to 60 billion yen pretax loss for the fiscal second quarter, it said in a statement to the Tokyo Stock Exchange.
It's all contained to US jobs market....
It's reasonable to believe that they will eventually be able to recover all their expenses and even make some money. My question: how do they account for these expenses? Will they have to show these expenses as they incur them, so they will get a hit to earnings in the current quarter?
Reimbursable expenses show up as advances (should be offset with a receivable). Those are expenses that are contractually required to be advanced by the servicer and reimbursed by the investor out of liquidation proceeds. There is no other way for a servicer to recoup costs in a foreclosure--servicer overhead is just an expense against servicer revenue (MSR or servicing fees).
You can display whatever level of cynicism about the risk in that receivable that you want. Historically they have been pretty low risk, since they are the first claims out of REO liquidation, and you'd need a 100% loss severity to have nothing to pay the servicer with.
In my view the biggest risk there is that pissy investors (and MIs) might challenge the validity or level of those advances and refuse to pay them at 100% of advance amount. It's just like the game your health insurer pays: declare the claim to be above the usual and customary charge, and refuse to cover the excess amount.
I also have some trouble believing that all of these servicers can really handle the advance level given how slowly the REO is liquidating. Apparently the rating agencies are getting interested in this, too; we're seeing some downgrades of servicer ratings because of worries that they are adequately capitalized enough to carry their advances until the REO finally sells.
Ac,
How is this for a scenario. Trading range for S&P 500 for the next 5 years. I will be shorting every
nominal new high.
Privatize gains; socialize losses. It's the Republican Way.
And we shall deam the m-lec account the number 88888
The virtues of this plan are clear. The Treasury Secretary, formerly of Wall Street, can show his boss that he is doing something. When the next Congressional hearing is held, he and the heads of various banks can point to a grand public/private effort to get constituents off the Congresscritter's back. The financial press reports that "something is being done" (though early reports are not entirely unskeptical). There is great value in this plan.
Oh, yeah, and to the extent that all this preening and glossing works to help SIVs roll over CP to investors other than the banks with money in the conduit, it also has value in a practical sense.
Ops:
1. Set up master patnership
2. Assign a credit ratng
3. Issue shares
4. Sell shares to the public
5. Unwind the partnership
6. Hose off the balance sheet
Completely on topic: I thought companies were to compete with each other...smells a bit like collusion IMHO.
more from s&p...
In most U.S. RMBS transactions, servicing agreements permit the servicer to be reimbursed for advances at the top of the transaction waterfall from late payments from the related mortgagor, and from all liquidation proceeds and other payments or recoveries (including insurance proceeds and condemnation proceeds) for the related mortgage loan, unless the advance is deemed a Nonrecoverable P&I Advance or Nonrecoverable Servicing Advance (both of which may be reimbursed from the total proceeds collected from all mortgage loans).
In some transactions, servicers have been reimbursed for Capitalization Reimbursement Amounts at the top of the transaction waterfall from total P&I collections. If total P&I collections from all loan groups are used to reimburse servicers, the issuer may have less cash available to pay interest and principal to the rated securities. In certain stress scenarios, this practice could result in a shortfall of current interest due on the securities.
To mitigate the potential negative impact of permitting these reimbursements from total P&I collections, servicers may be reimbursed for Capitalization Reimbursement Amounts in two ways. The servicer may reimburse itself for Capitalization Reimbursement Amounts from either the principal remittance amounts (and not the interest amounts) from the related loan group, or solely from amounts received on the related modified loan.
Furthermore, for transactions where a Loan Modification Limit is specified, once a modified loan passes the Loan Modification Performance Test, the loan may be excluded from the Loan Modification Limit calculation. This feature will allow the Loan Modification Limit to be replenished, if applicable, as the servicer completes successful Loan Modifications.
I heart Gaudia Ray's rants.
As long as the music is playing, youve got to get up and dance..."
The music kept playing in his ears long after it had stopped in reality. He needs (needed) an ear exam.
Consumers have SUV's. Why can't we have our SIV's? Bwahahaha
Ralph Peters argues that the House Resolution on the Armenian genocide is aimed at forcing an end to the war in Iraq. If it does play that way this could get ugly fast.Ever read The Ten Thousand?
So we basically then have the creation of a private market amongst the major banks whereby they set their own value to prop up the CP market. The financial blood of the world now rests upon a private financial market rooted on level 2 and level 3 accounting. Good god!
The SIVs have to be saved as many domestic corporations and mutual funds own ABCP as well.
Marking the ABCP to market could put companies in chapter 11 and break the buck (NAV) on numerous mutual funds.
Moab, Utah, UMTRA Project
the moab tailings project...
move the hazardous materials from the pretty places....
171 visitors online. Leading indicator confirmation.
I'm still confused. You've got a half dozen steaming piles of "noodles." The problem is no one wants to buy your noodles because they have all they want and/or all they can handle. Besides that the last steaming heaps of noodles you sold them were overpriced and went bad quickly and didn't satisfy. So in a marketing blitz straight out of the Ford/Carter Era we take all our rotting noodles and make one great big steaming pile of rotting noodles and change the labels and expiration dates and nutritional data. One third of this will go up on the shelves with the Government Peanut Butter and Cheese Wheels from that same Ford/Carter Era. Whip Inflation Now. M-LEC Tomorrow.
Barley:
"Completely on topic: I thought companies were to compete with each other...smells a bit like collusion IMHO."
My neck also snapped at the potential antitrust implications of this coordinated effort. Face it... this is definitely collusion among sellers to raise the price of what they are all selling (CP). Someone might want to buy that stuff at fire sale prices, and might have a lawsuit.
Anyone have opini0ons about anti-trust problems with this beast?
"It's a stunningly devious attempt to impede our war effort in Iraq and force premature troop withdrawals."
You know, I actually believe this is possible. The Democrats can't bring themselves to put a stop to treason in the White House, so they fight treason with treason.
Nice country we got here.
Marking the ABCP to market could put companies in chapter 11 and break the buck (NAV) on numerous mutual funds
Why would that be the case?
If a mutual fund bought the short-term paper, and they don't want to roll it over when it matures because they think the assets are trash, then they have to be paid. If the SIV can't or won't sell assets to pay off the noteholders, then the Big Bad Bank who covenanted to backstop the SIVs pays off the noteholders. The "liquidity problem" at the moment seems to be that the MFs are, precisely, not rolling over those notes. They're out. That means, if nobody else is in, Citicorp owns the problem.
If the Big Bad Bank doesn't want to own a bunch of junky assets that it promised it would fund if the worst happened, then it goes whining to Paulson and we come up with a way for a SIV squared to buy the assets of the original SIV so that the pain never actually touches Citicorp's balance sheet.
Am I misunderstanding the whole thing here? I don't see how the MFs were ever at risk here: they bought short-term notes and they did not promise to roll them over. Citi agreed to cover the SIV in precisely the event that buyers of the paper exited the market.
Anyone have opini0ons about anti-trust problems with this beast?
They'er banks which are special, home land secuity and all that you know top secret, clasified, don't ask, don't tell, loose lip sink ships, for the publics well being. I think it might be earmarked somewhere. Shhhhhhhh
Over the next couple decades Republicans will be spewing many variations on the "stab in the back" mantra to explain away Bush's disastrous war. Murdoch's NY Post, "fair and balanced", always. Sheesh!
Tanta just wrote,
"If the Big Bad Bank doesn't want to own a bunch of junky assets that it promised it would fund if the worst happened, then it goes whining to Paulson and we come up with a way for a SIV squared to buy the assets of the original SIV so that the pain never actually touches Citicorp's balance sheet."
That is exactly it. EXACTLY. The epitome of morale hazard, and they just got a do NOT go to jail card from the Treasury. This is an absolute outrage.
Tanta,
At least one of these articles made it sound as if the banks are not on the hooks for the entire debt of the SIVs, except as far as they need to preserve their reputations.
As far as the holders of ABCP, your scenario (that an investor in the paper can just not roll over and get their money back) is dependent on the issuer either being able to find someone else to buy the next round of paper, or be able to sell the underlying assets. Both of those are dependent on the perceived value of the underlying assets. Right?
RE: what can go into the Super-Sieve
and Tanta's comment earlier
You don't even have to go to the level of CDO here. The subprime RMBS themselves had AAA and AA tranches.
For once I don't understand what you are saying. From the nakedcapitalism post of a NY Times quote
"the conduit will not buy any bonds that are tied to mortgages made to people with spotty, or subprime, credit histories. Rather, it will buy debt with the highest ratings AAA and AA and debt that is backed by other mortgages, credit card receipts and other assets."
I also read the same in another article ( either WSJ or FT ). Taking into account words like "bonds", "tied to", It reads to me as if they won't buy ANY of the tranches of the Mortgage Backed Securities, not even the top tier AAA or AA ones, that are made out of packaging subprime mortgages. Am I misunderstanding this ?
Based on that interpretation, I agree with nakedcapitalism's puzzlement at what the Super-sieve is supposed to accomplish in real terms.
-K
Got a question for the better informed than I:
Oil is hitting all time highs, but gas prices, at least in Tucson where I am, are not rising much. Why the disconnect? I thought gas prices followed the price of oil when it went up?
So, what hedge fund has the guts (and funding) to bet against this super-size-SIV thing? Can it even be done?
I'm not sure that a taxpayer bailout of the assets has been pledged yet. The Treasury at this moment seems to have engaged in some "group therapy" to help the banks figure a way out of this mess. Kinda odd that these institutions that specialize in negotiating deals couldn't come up with something on their own. Could the Masters of the Universe not agree on the shape of the table or what? Just so long as we're only on the hook for a couple of power lunches and some Chinese takeout and a little higher air conditioning bill for the Treasury offices I'm happy to have been of service with my tax dollars. Of course we get New Yorker in the White House all bets are off....
Don,
There's 2 'New Yorker's in the race for prez, both at the top of their party's polls. Which one did you mean?
At least one of these articles made it sound as if the banks are not on the hooks for the entire debt of the SIVs, except as far as they need to preserve their reputations.
Well, I don't know where they get that.
The WSJ reporting says that Citi's SIVs have a backup line of credit with Citi, precisely for a situation in which the notes don't roll over. That means Citi backstopped the original SIV, which was the porkchop tied around its neck in the first place so the little investor dogs would play with it.
Now the SIVs are drawing on Citi to cover those maturing notes. Citi can either force the SIV to liquidate assets into a firesale, which just makes the unwind worse, or Citi can bring the whole shootin' match onto its balance sheet, where it arguably belongs since that backstopping line of credit implies that Citi never did get far enough away from the risk.
Or, Citi can get Treasury to help get a bunch of other banks to buy the assets for the SUPERFUND at not-firesale prices. MLEC is Door Number 3.
If the mutual funds were still in the game, I don't understand what the problem would be that this is claimed to be a solution for. I translate "liquidity problem" as "nobody will buy our paper." Not, "nobody will buy the assets behind the paper," that we already knew. They weren't supposed to have to sell the assets, but now they have to because nobody wants to roll over their notes, and so the SIV has to liquidate assets to pay off.
As regards that business about rating, I'm just pointing to the stupidity of saying they won't move any subprime-related assets, "just" AAA or AA rated ones. That seems to imply that there are no subprime-related bonds that are AAA or AA rated.
I'm with Yves at naked capitalism on that one: what the hell is the point of transferring the good stuff and keeping the toxicity? So those SIVs can get to the point that all they own is toxicity, everything else got transferred to MLEC?
If the SIV's can be left as a toxic dump, can the legal team invent a defense for CITI et al to permit BK'ing the SIV without recourse to the parent guarantor?
How tightly written would the g'tee be?
If I were guiding the team, I'd have the smartest noses sniffing that one intensely.
If they can strip the allegedly good stuff and leave the crap, there may be a way to force deep discount compromise with the SIV lenders to avoid their time loss prepping for trial (as again, there may be no obligation to pay interest beyond expiration date...another legal argument) and their risk of loss.
Time to spin the $1500/hour clocks at the law firms, for both sides.
Tanta-
Citi is not the only operator of SIVs.
The buck was almost broken on numerous MF.
I know this for a fact.
James
Oilmen elected not to raise gas prices until after the election so enjoy yourself and vote early and often.
CITI bank ru
I suppose it's too late to stroll into the climate-controlled humidor called the CR archives and re-tag all of the Chuck Prince fun with the tag "Dancing Machine."
It'd be fun, though. During this frivolity, Tanta, be sure to wear your monty python holy bunny slippers.
Anyone else find it odd that the acronym for this structure is the same as a dreaded disease?
The mixed metaphor index will hit an all time high if anyone reports that Citibank has been diagnosed with SIV.
Okay I totally don't understand this. Can someone explain to me in English? Are the banks pooling resources to buy their own debt? How could this work?
Don't worry, worker, nothing a little M-LEC can't cure!
FFDIC,
Thanks. Makes sense.
How bad is this for the banks? I mean how likely are some to go under? Citi and UBS took a big hit recently, but they have such immense assets they could absorb it, I suppose. Can they absorb this? In other words, will it just dent their earnings badly for a quarter or two, or will some collapse? Any informed opinions?
"If the SIV's can be left as a toxic dump, can the legal team invent a defense for CITI et al to permit BK'ing the SIV without recourse to the parent guarantor?
How tightly written would the g'tee be?
If I were guiding the team, I'd have the smartest noses sniffing that one intensely.
If they can strip the allegedly good stuff and leave the crap, there may be a way to force deep discount compromise with the SIV lenders to avoid their time loss prepping for trial (as again, there may be no obligation to pay interest beyond expiration date...another legal argument) and their risk of loss.
Time to spin the $1500/hour clocks at the law firms, for both sides."
Wouldn't that be like the buyer in an LBO actively manufacturing the material adverse change (MAC) in order to get them out of the deal? Any lawyer that can paper that one, I'd like to hire.
Naked Shorts on "Global Mega Dreck"
NakedShorts: The (Hank, not John) Paulson Put
very funny.
Can someone explain to me in English? Are the banks pooling resources to buy their own debt? How could this work?
Jeebus, you people in the real economy seats need to keep up!
The banks are pooling their assets to become the investors in a new off-balance sheet entity, Son of SIV, that will buy the assets from the SIVs that were created to take assets off the balance sheets of the banks.
Nobody's "buying their own debt," that is like sooo last century. They are creating joint investment opportunities that will function as a pillar of the economy.
Now toddle back to your "work," will you? We've got deals to cut.
Or to simplify further...
ENRON ENRON ENRON ENRON ENRON ENRON all over again.............. we're supposed to learn from mistakes of others, not emulate them.
Another annoying thing about this M-LEC story is the justification put forward that it is needed to "save" the CP market, which it is pointed is used for working capital by companies actually providing goods and services. Is there any evidence, at least now that the initial freeze up is past, that companies in the CP markets for this kind of transaction can't turn over debt? It seems that the main debt that won't rollover the the short term paper used to invest in longer term assests of incrreasingly questionable value, i.e. financial transactions and not "working capital". Over all it seems outstand CP has fallen from about 2.1 trillion to 1.8 trillion, significant but not devastating. Is it just me or is a false threat to the broader economy used as an alibi to bail out banks. I am also concerned that this new vehicle appears to continue the problem of borrowing short term to invest in longer term assets.
There's 2 'New Yorker's in the race for prez, both at the top of their party's polls. Which one did you mean?
chophouse
Both of them. IF the race comes down to Guil and Hill then I'm going to cast my vote for a third party. Doesn't particularly matter which one. Then I am going to ponder my foolishness at not being in a financial position to flee the country.
ENRON is a beautiful thing when you know you will not be prosecuted for it.
On a positive(?) note- this is the first step to real containment. As noted by so many, we have no way to know how much dreck is out there. Perhaps this is a way to make all the players fess up. And no matter how much we all will hate the pain, really, these guys are "too big to fail." With all the concerns about M-LEC and conflicts of interests apparent from the start, you've got to feel that someone in the government offices smells a financial catastrophe.
BTW- wasn't the mortgage problem supposed to be "contained" to 60B a few months ago?
I also read that the paper issued by the SIV's is not fully guarantied by the banks that set them up and that there were backup lines from the banks that would provide liquidity but weren't equal to entire value of the SIV's asset. I also read that there was an "implicit" guaranty from the sponsoring bank, simply due to its reputation being associated with the SIV (I would find the quote but I have a real job that wants me to stop reading this blog, let alone finding links to post). If the SIV paper was fully guarantied by the banks, then wouldn't the paper just basically have the same rating (and value) as short-term paper issued by the bank itself?
Of course, the "implicit" guaranty arising from the "branding" of the SIV by the sponsoring bank might be exactly where the rubber is meeting the road right now. It all sounds eerily similar to the Bear Stearns relationship with those hedge funds (the "Super-Duper-Extra-Primo-Ultra-Enhanced-Leverage Fund"...or some similar name). And according to Business Week the investors in those funds are now lawyering up to take a run at Bear Stearns.
From my view as a rank amateur, this super-SIV thingy looks like a weird card trick. Or something dreamed up in a dorm room after a dozen bong hits. But, hey, it the folks doing this didn't know what they were doing, they wouldn't be in the position to do it, right? (heckuva job, Princey...)
Treasury Statement on Private-Sector Announcement Of Liquidity Facility for Asset Backed Commercial Paper
http://www.treas.gov/press/releases/hp609.htm
Under Secretary for Domestic Finance
Robert K. Steel - Welcome and Introductory Remarks Before the Initial Meeting of the Department of the Treasury's Advisory Committee on the Auditing Profession
http://www.ustreas.gov/press/releases/hp610.htm
So it is conventional wisdom (or conventional wishful thinking) on Wall St and in Washington that the current no-bid for SIV assets is a worse scenario than what is justified, and that those assets will receive a bid (albeit at some unknown but non-catastrophic discount) in the future.
It seems that the SIVs and their sponsors will be made to suffer loss, but a lower loss than would occur if there was a near-term forced liquidation and/or move of a SIV to its sponsor's balance sheet.
The would-be investors in the Super SIV are probably being pitched on the "unique" opportunity to gain at the SIV's expense, but it is at a higher price than the hedge funds or distressed debt buyers would want to see in a forced liquidation scenario.
Seems like a great way to try to generate a bid -- it will be interesting to see if it works!
There is awfully bad reporting on this as Tanta points out.
Also, the comments on blogs about this being a direct Treasury/Fed Gov bailout are way misplaced/premature, IMHO.
The M-LEC concept is a diversionary tactic.
If the reason for the M-LEC is to free up the CP market, all that needs be done is for each bank to create a new subsidiary, called SIV Two, and run the "good" CP operation through that SIV.
The old subsidiary would need to work off the bad paper and the good. As the reporters are getting fed, and feeding the public, this "fact" that only a tiny bit of the paper is "bad", about 3%, what is the risk to the bank owners here?
We must look at the monster openly and honestly. The equity positions of these participating banks, and others, like Wells Fargo, are thin, and they are not only threatened but they are BK if this one segment is marked to market or the losses are realized in the present time window. That's the only rational observation. It's not how big the asset pool is; it's how deep are the banks' equity positions?
The obvious answer is they're not deep enough to absorb the SIV losses.
Now, given what IMO is the truth here, what the heck are legitimate solutions here?
First, there's a desire to defer the loss and spread it over time. A simple solution will be to devalue the USD so the loss becomes painless.
There are political consequences. We're hearing and seeing them. The devaluation is a direct deduction of the stores of value around the world. As I said, it's a political question of the amount of economic pain that can be passed along. It's happening weekly at this time.
Next, there's the matter of liquidity. The UST has not yet shown its hand. Again, this is political. There's no reason to step up until the last moment, and then submit to socialization. What's amazing is this is a Republican administration and their recent cheerleaders ranging from Chris Cox (now Chair of the SEC, previously Representative of Orange County, CA) to Gingrich ad nauseum have all sworn on a stack of KingJames Bibles that they want to shrink government. How a shrinking govt is matched with a distribution of debt caused by the government has to be a feat worthy of study by the Enterprise Institute.
If someone would post the participating banks' net worths and a guesstimate of what share of the SIV, unfunded LBO, outstanding Commerical RE Mtg, residential Mtg, and other clearly-needing-honest-mark-to-market debt obligations are in their portfolios, the reality of what dollar write offs the banks must now absorb. Clarity will probably kill some banks, and set the others free.
Do we need some stupid phrase such as "Free the Banky" like "Free Willy" to get enough emotional strength to look at what's real, or are we in silent collusion with the self-serving, most-at-risk bankers by remaining silent when the stability of the medium of exchange and safety of the store of value are at great peril?
Free the Banky.
Wolfgang Munchau's comment at FT:
FT.com / Columnists / Wolfgang Munchau - Central bankers got us in this mess
Side note:
Ken Lay never made it to jail. He died before sentencing...
Andy Fastow is a better substitute...he is in jail & as Enron CFO was more likely to have known about Enron's off-balance shenanigans than Lay...
Somebody needs to ask Warren Buffett and Charlie Munger for their take on this mumbo-jumbo.
Pull up a chair and pass the popcorn.
Don: IF the race comes down to Guil and Hill then I'm going to cast my vote for a third party.
Bush
Clinton
Bush
Clinton
I view it as an event horizon on a blackhole. The system is approaching an asymptote. Or maybe a cellular automata that does and one-two blink before dying.
SIVs have covenants that force the fund to be unwound after they experience a certain amount of losses (per their convenants which is monitored monthly by the rating(s) agencies).
The SIV is wound down by selling assets. The bank is only liable to fund a temporary conduit to support the unwind.
SIVs will not end up on the balance sheet.
This is why it is such a huge problem.
JT,
Have the SIVs experienced losses? I interpreted the current situation as a lock-out from their source of funding (ABCP market) due to loss of confidence in the collateral, is this not the case?
Is it a concern that the cut-off in funding will drive asset sales in a no-bid environment in order to make good on ABCP coming due? Is that the loss-generating event that drives the forced unwind?
And when does this hit bank earnings or balance sheets? Minyan Peter certainly suggested that these SIVs could be put on bank balance sheets.
Weren't there attempts to do a split good bank/ bad bank structure preceeding the S&L crisis? I feel like these efforts were for nought.
Anyone else have any more than hazy recollections?
Yes, it will be contained. To your bank account, my bank account, and the accounts of all taxpayers.
Mindboggling - I wish I could run my own finances in this insane a manner!
The last step needed is to invest all Social Security money in the Superfund, thus cleanly destroying everything at once.
Tanta, to the extant that some reasonable, non-toxic debt is being temporarily tarred with the "subprime" brush because the level of nontransparency, it DOES make sense to have a vehicle to make sure that the "good stuff" isn't forced onto the market right now at fire sale prices. The questions are: to what extant is that actually true? Do the banks believe it, or is that "we're only putting AA and AAA in there" just a sales pitch? And even if it is true, and they believe it, once this sausage machine is up and running, will they try their darnedest to put the floor sweeping in there? IMHO the answers are respectively yes for some, the young believe it, and without a doubt.
Possibility 1:
M-LEC will contain the worst of the worst. Banks are flat-out lying when they say it does not contain subprime ABS. There many be many AAA/AA subprime ABS out there waiting to be downgraded to junk status.
Possibility 2:
M-LEC will contain only good stuff. In that case, the existing SIVs will be left with bad stuff.
Possibility 3:
M-LEC is supposed be for good stuff only. But, banks manage to smuggle in a lot bad stuff also. The resulting super-SIV is just like any other SIV: we don't really know what are in them.
Any other possibilities? Which one is most likely?
P3 will leave us pretty much where we started. P1 and P2 will bring some changes, but is it for the better?
Hey I get it finally. JP Morgan and Bank of America have gotten strong armed into rescuing Citigroup. I'd be interested to know how that got done.
EG:
The new bailout fund -- called the Master Liquidity Enhancement Conduit or M-LEC -- would launch in the next 90 days and be used to buy distressed securities from SIVs. That would in turn give them the capital to pay off their commercial paper obligations, and ultimately extricate themselves from what otherwise might have been substantial losses.
By buying SIVs' distressed investments, the new fund would inject enough liquidity into the market to make investors more confident in buying commercial paper. The funds' backers said they will shy away from risky instruments and buy only highly rated asset-backed debt -- a market that is already beginning to show signs of life.
JPMorgan Chase and BofA do not operate SIVs, but will put money into the fund because they'll earn fees for helping arrange transactions. However, Citigroup has about $100 billion tied into SIV investments, and took the lead during discussions with the government.
Citigroup Chief Financial Officer Gary Crittenden said Monday the plan "could provide reassurance to the market and make the funding of very high-quality assets a little easier."
"To a skeptic, this MLEC might appear akin to re-arranging the deck chairs on the Titanic". Paul Kasriel.
They want to combine all their sh*t into something with the appearance of chocolate, put a nice wrapper on it, call it candy, and sell it to the investing public. And - to boot - take extra fees for "saving the credit markets". The nerve of them! How can they sleep at night??
Nobody is reporting directly on the main point of this story. The long-term markets are able to absorb an unwind of the SIVs. The U.S. treasury doesn't need to get involved with that. The big reason for a bail-out is certain large money market funds hold huge positions in SIV paper and there is fear they will lose money a lot of money. This is why the U.S. Treasury is involved. For example, a number of money market funds hold debt issued by a SIV named Sigma. Sigma is an independent operation not affiliated with a bank. The banks have very little obligation to support Sigma so why are they helping to bail it out? Because the U.S. government is orchestrating a bail-out of certain large Money Funds. In fact, certain fund companies likely drove the M-LEC plan. The banks are involved to make money. This is the story.
Let's see...
AAA paper is salable now.
AAA paper is salable when it's in an M-LEC.
SIV's can sell off their AAA paper any time they want, at going market prices because there is now a market for AAA.
Commissions will be extracted from AAA paper deposited into M-LEC's.
What rational economic reason is there for creation of the M-LEC?
What is the BS here?
And the plan is for the M-LEC to buy bonds from SIVs at 98% of Market Value.
Why wouldn't the SIVs sell bond into the market at 100% of Market Value?
Everybody who can't stand this crap that is going on should check out and sign this addressing abusive lending and these "off balance sheet" financial games.
Congress - Repair Our Financial System!
Pass it on to people you know...
Nick Leeson only lost about a billion and a half for his bank.. I bet a new record is in the making somewhere today.
wally | 10.15.07 - 9:02 am | #
Please Guiness Records people: index these things for inflation.
Somebody needs to ask Warren Buffett and Charlie Munger for their take on this mumbo-jumbo.
Warren has a simple sure fire way to value difficult to value assets: offer 5% to the market and see what you get for them. And no peeking or fudging ahead of time.
Minyanville has the best explanation of M-LEC so far:
Special Edition Five Things You Need to Know: Competing Wall Street Banks to Launch Incomprehensible Joint Venture to Bail Out Something You've Never Heard of Threatening to Do Something You Don&-Minyanville
Citi's thinking is more immediate and targeted: rolling over the massive amount of CP's coming due in November.
They are probably not thinking much beyond "how to avoid the November crisis."
Their hope is that a little more transparency and backups of other major banks will bring investors back to their CPs.
Even if this succeeds, it cannot continue forever. Some assets will continue to deteriorate and they need to be written them down at some point. In addition, they surely are paying the hefty fees to bring in other banks.