Global Financial Crisis (Was: Subprime Meltdown)

[ewmayer]

Time to play the fun "What do these quotes have in common" game:

Bear Stearns CEO: "We have no liquidity issues"

George W. Bush: "Economy is strong"

NAR: "Housing Market should recover by 2nd half of 2008"

Me to the IRS: "The check was in the mail, but the dog ate it"

Bill Miller: "I think we have seen the bottom in financials and consumer stocks ... by far the worst is behind us. I think the credit panic ended with the collapse of Bear Stearns..."

Never thought I'd be saying this, but this guy has become almost as good a contrarian indicator as chief CNBC market shill Jim Cramer.

[ewmayer]

Kevin Phillips` [cf. post #196, and my comments in #123 about the bogus February CPI figures released by the US govt] latest article in the upcoming Harpers issue illuminates the kind of funny-numbers racket the USGov plays with economic statistics - devastating stuff.

On a lighter note:

eCONomic Scuttle Butt | Ditech Acknowledges Waterboarding Delinquent Homeowners -- LOL, some people just take life *so* seriously ... check out reader comment #1.


This Week's MotWee Award: "The Alan G. Reamspan Memorial Prize for bald-faced denial of responsibility" goes to ... some "I am zee varry outraged!" French dude:

Wall $treet Folly | Jerome Kerviel's former manager suing him for ruining his career

Despite an internal report that found that Jerome Kerviel's managers had received 76 alerts over his trades over an 18 month period, for some strange reason, some of his managers seem to feel that even though they were asleep at the wheel that they don't bear any responsibility for their poor oversight. In fact, at least one of them facing disciplinary charges for not reining him in is suing Kerviel for fucking up his career and that he had "suffered moral harm" as a result. Go figure.

Rather fittingly, Le Plaintiff, Monsieur Eric Cordelle, has hired a Le Shyster windbag lawyer named ... Maître Jean-René Farthouat. I sh*t you not ... his lawyer's name is "J. R. FartWhat." [Hey, why can't I say "sh*t" on live Internet? Why not? You let the quotebox get away with "fuck" just now - if I tried to say "f*ck" I'll bet it would get the *sterisk police down on my *ss faster than flies on sh*t. G*d D*mn double standard.]

Instead of filing a wimpy lawsuit and hiding behind his lawyer, he should just do what real men do, namely ... deny everything. Like I said to my stockborker^* yesterday, "Who is this guy Margin, and why does he keep calling me?"

===

^* [You read that correctly ... for those of you not intimately acquainted with the world of Haute Finance, a "borker" is somewhere in between a "broker" and a "boinker" in terms of his or her function - as their names imply, brokers help you go broke and boinkers tell you bend-over-and-try-to-relax-it'll-be-less-painful-that-way ... borkers do a bit of each.]

[R.D. Silverman]

Originally Posted by ewmayer

This Week's MotWee Award: "The Alan G. Reamspan Memorial Prize for bald-faced denial of responsibility" goes to ... some "I am zee varry outraged!" French dude:

Wall $treet Folly | Jerome Kerviel's former manager suing him for ruining his career

Rather fittingly, Le Plaintiff, Monsieur Eric Cordelle, has hired a Le Shyster windbag lawyer named ... Maître Jean-René Farthouat. I sh*t you not ... his lawyer's name is "J. R. FartWhat." [Hey, why can't I say "sh*t" on live Internet? Why not? You let the quotebox get away with "fuck" just now - if I tried to say "f*ck" I'll bet it would get the *sterisk police down on my *ss faster than flies on sh*t. G*d D*mn double standard.]



^* [You read that correctly ... for those of you not intimately acquainted with the world of Haute Finance, a "borker" is somewhere in between a "broker" and a "boinker" in terms of his or her function - as their name implies, brokers help you go broke and boinkers tell you bend over and try to relax-it'll-be-less-painful-that-way ... borkers do a bit of each.]

Talk about chutzpa!!!!!!!!

BOHICA

[ewmayer]

FDIC Head Calls for Massive Govt Bailout of Underwater Mortgage Holders

Sheila Bair, the chairman of the Federal Deposit Insurance Corp., wants the government to make loans to borrowers with mortgages they can't afford, particularly those buyers who had high levels of debt when they originally took out their home loans.

...More-commonly know as "speculators" and "people who took on way more house than they could afford". Yeah, I *really* want my and my fellow citizens' tax dollars to go to these folks, especially seeing as how their speculative excesses have driven the rates-of-interest-on-savings for the [apparently few] folks who actually made an effort to live within their means to near zero - oh, and drastically slashed the value-in-terms-of-real-commodities of the resulting savings, due to the Fed's effort to bail out the speculators by deflating the value of the dollar. Yes, in fact I want the USGov to hike our tax rates to help out folks like these, and the banks who profited from their speculative excesses.

Borrowers would use the money to pay down up to 20 percent of their outstanding principal balance, reducing their obligation to their lender and, in some cases, staving off foreclosure.

So, see, the way it works is this: y'all borrowed way more money than you should have, and now you can't pay the interest. So to bail you out, we're gonna lend you money, but at an artificially low, taxpayer-subsidized rate, thus putting all the default risk on the mighty U.S. Taxpayer. It's all in keeping with our "profits are private, but risk is socialized" economic philosophy.

In exchange for the federal loan, banks and other mortgage investors would restructure the remaining mortgage into fixed-rate 30-year loans with interest rates capped at national average rates, according to the FDIC proposal.

"Only the federal government is in a position to help arrest the downward cycle in housing markets by facilitating temporary aid to borrowers," the FDIC said in a fact sheet outlining the proposal.

The key word here being "cycle" - apparently a massive speculative "up" part of the cycle is just fabulous, but the inevtibale "down" part must be arrested at all costs. In other words, the FDIC doesn't want distressing old "cycles", they want perpetual speculative price inflation. Yeah, really good idea there.

The Treasury Department would sell $50 billion in debt to fund the plan. Payment of the government's loan would be delayed for five years. If a borrower defaulted, the government would get paid off before the bank.

Uh ... "paid off" by whom, exactly? The borrower who just defaulted? No ... he's broke. The bank who holds the other part of the now-worthless mortgage-backed debt paper? Nope ... they're trying to get paid, too. Hmm ... who could possibly be left holding the bag here? It couldn't well be "the taxpayer", could it? [Lights start flashing and game-show-style "you are a winner" sound effects in background].

Now, Ms. Bair's misguided and rewarding-all-the-wrong-parties proposal would be eminently worthy of a MotWee award, but in fact this week's award has already been claimed by an even bigger moron, whose name I shall reveal Friday. [Unless an even more-colossal moron comes along between now and then, which is eminently possible].


On a lighter note, Mr. Shorty Mantle, a.k.a. "Professor eCON 101", has a more practical way for communities around the country to deal with their housing-bubble aftermath, and support their friendly local neighborhood defense contractor in the process:

eCONomic Scuttle Butt: Banks Walking Away From Foreclosed Homes

Thousands of failed housing gamblers have walked away from their homes in California, leaving banks as bagholders. Now banks are walking away too, burdening taxpayers with carrying costs.

...

As banks walk away, cities and towns are becoming the new bagholders.

Overwhelmed by debt and carrying costs, and on the verge of bankruptcy, City Manager Horace Hardblew has decided to take drastic steps to rid San Estupido of its housing problem in one fell swoop this weekend...

[ewmayer]

April Jobs - Another Report From Bizarro World
The rundown: All the significant job losses were in real, high-paying job sectors. All the "gains" were either in low-wage service jobs or were a result of outright statistical fabrication by the BLS, using its handy-dandy [and completely discredited] boom-economy-based birth/death model.


Clinton, Obama Back Bill to Punish China on Currency

New York Senator Clinton signed on yesterday, and Illinois Senator Obama followed today, becoming the ninth and 10th senators supporting a bill to give U.S. companies the ability to petition for import duties to compensate for the effect of a weak currency. A weak currency makes a country's products cheaper in world markets.

Weak currency ... You mean, like the US dollar? I thought we were talking about China, and now here y'all have me confused by bringing up the dollar.

The measure, which is backed by labor unions, textile producers and many U.S.-based factory owners, labels ``currency misalignment'' as a foreign subsidy. That means import duties could be applied to products from any nation artificially undervaluing its currency.

Ah, so now we're going to raise government revenue by labeling the Fed's dollar-deflation policy a "foreign subsidy" and then applying "import duties" to our own exports? Interesting ... but would this require Ben Bernanke to obtain Canadian citizenship for the scheme to pass constitutional muster in the "foreign subsidy" aspect?


California Association of Realtors: Median Home Prices Down 29% [YOY] In March: Home sales decreased 24.5 percent compared with the same period a year ago
Been looking at the SF Bay Area sales-volume and price trends from DataQuick which the San Jose Mercury News publishes every weekend in their Saturday Surreal Estate section. Here, sales volume has fallen off a cliff -down 40-50% across the board, and in all areas - but the price drops are most in the East and South bay [where new housing and condo complexes were sprouting up like weeks over the past 10 years] and the Santa Cruz mountains - Silicon valley housing prices still holding their bubble values fairly well, especially in areas like Palo Alto, Cupertino, Los Altos/Los Gatos and downtown Mountain View, where one has the magic combination of great schools, desirable geographic/social-stratum locale, and lots of SiVal money from firms lime Apple and Google propping up prices.


On a lighter note, Florida Ream Estate numbers are similarly [and predictably, if you believe in speculative boom/bust cycles] bad, but at least the Fla. Legislature has things, um, "well in hand" as far as their priorities go:

Reuters | Florida legislature moves to ban fake testicles on vehicles

Senate lawmakers in Florida have voted to ban the fake bull testicles that dangle from the trailer hitches of many trucks and cars throughout the state.

Republican Sen. Cary Baker, a gun shop owner from Eustis, Florida, called the adornments offensive and proposed the ban. Motorists would be fined $60 for displaying the novelty items, which are known by brand names like "Truck Nutz" and resemble the south end of a bull moving north.

And Friday would simply be incomplete without a Moron of the Week award: This week's coveted MotWee goes to real estate finance maven "Bill D of California, Maryland", who, in reader reply #1 [bottom of page] to this CNN/Money article discussing Oppenheimer Inc financial analyst [and enemy #1 of the Ponzi-scheming bankers] Meredith Whitney's skeptical take on Citigroup's latest "we have no liquidity issues" raising of cash via dilutive stock sale, proposes the following surefire scheme for solving our economic woes:

Meredith Whitney needs to get a life.

Please consider a change in the number of years associated with a typical mortgage. Raise the number of years from 15, 20, 30 to 40, 50, 60, or 100 year mortgages. The Rational is simply to allow homeowners to purchase quality houses at an affordable rate that can be passed down from one generation to another as well as sold upon the death of a family member.

This would optimize Banks long term interest and give American families the capability to extend their payment options as well as the ability to pass down equity to their children. Win for Banks, Win for Homeowners.
Posted By Bill D, California, Maryland : April 30, 2008 8:30 am

Very nice - just cleverly rename "crippling debt" to "equity", and then "pass it down" to your heirs ... "they're all family heirlooms ... they're just not paid for yet, since they were overpriced". I suppose we shouldn't expect too much from a fellow who can't even tell us with certainty which state he's in - would that be "state of Confusion" or "state of Denial", Bill?

[ewmayer]

Another great example of most of the real high-quality insightful financial analysis and reporting during the current credit crunch occurring outside the mainstream financial press: Aaron Krowne of the various Implode-o-Meter sites discusses Minsky cycles of credit expansion and Ponzi finance:

Sic Semper Tyrannis: Gleaning The Wrong Lesson From Minsky

Minsky mostly focused on credit bubble dynamics within the private sector. Fractional reserve lending-driven cycles of easy credit and panic have been going on since this form of banking has existed (over 400 years). Indeed, the notion that there is a credit cycle as part of the "business cycle" has largely been lost to modern, mainstream economics. This is one reason Minsky's work has appeared more relevant lately. Mainstream economists -- even Nobel Laureate academic eggheads -- did not anticipate the current crisis at all. This is not surprising, since their favored macro-economic metrics do not involve credit at all (and where credit is included, it is counted more or less interchangeably with money supply and "wealth").

But In my opinion, Minsky's great insight is not so much that there is a credit cycle -- this has been argued separately by Austrian economists like von Mises -- but to detail this cycle, pointing out that it culminates in finance so unsound and reckless that Minsky called it "Ponzi finance" (which is perpetrated by "Ponzi units"). Ponzi units can only stay alive by extending more credit to both new borrowers and old ones (re-financing), even when they are already in distress, and knowingly do so as a business strategy.

Sound familiar?

It should, especially if you've checked out my Mortgage Lender Implode-o-Meter in the past year, which has documented the implosion of hundreds of what were essentially Ponzi finance units.

The shuttered Bear Stears, numerous hedge funds, and the rest of the ailing money center banks (now rapidly selling off pieces of themselves to foreigners to stay afloat) amidst this crisis have also fallen victim to the blowup of Ponzi finance units (their own and others).

So Minsky was right about where this would lead.

Now on to the point about the "government saving us".

I see two huge problems with a push for that, and if Minsky were around now, he would probably agree (he never witnessed the greatest of the bubble excesses).

The first problem is that, far from happening privately and in isolation from the government, the government actually aided, abetted, exacerbated, encouraged, and enabled the bubble. This has been its modus operandi for the better part of thirty years. Low interest rates, lax bank regulation in terms of reserves, failure to police predatory lending, and the implied guarantees and "safety nets" of the FDIC, Federal Home Loan Banks, FHA, and Fannie and Freddie, all actively factored into blowing not only the current bubble but a series of bubbles stretching back to the 1980s.

In fact the government's "bail out on the public dime" reaction to the S&L bubble and collapse simply emboldened the banking system to take even greater risks. The "shadow bailout" of Long Term Capital Management (the hedge fund that imploded in 1998) had a similar effect on hedge funds, private equity, and proprietary trading operations at banks.

Some would even argue that the severe moral hazard that is now baked into America's financial cake goes back to the bailout of Crysler in 1979. But now this is all routine and surprises no one. For example, in 2006 Delta Airlines filed bankruptcy, and the government happily folded its pension liabilities (one of the biggest factors weighing on them) into the government Pension Benefit Guarantee Corporation. No one batted an eyelash. The same will probably happen for GM.

The "Greenspan put" of interest rate lowering was notorious during the last Fed Chairman's tenure, and now under Bernanke there is a "Bernanke put" of inventing arbitrary debt laundering facilities and debt backstopping (some of it arguably illegal), which has put even the Maestro to shame.

So government, far from a bystander, has set the stage for our most recent Minsky cycles of credit and collapse.

I would argue, based on that fact, that the proper correction to the problem is to get the government out of the business of active intervention in business and finance. There should be no "last" bailout; because then there will never be a true "last" bailout. Any intervention should not extend beyond basic law and order and personal welfare: making sure the predatory are punished and their victims made whole, and making sure everyone has shelter and food and a fair chance to start over if they've lost everything. Hint: they will only get such a fair chance if the government stops its mass manipulation of the private sector, especially the banking system.

And as to why none of the usual financial interventions, bailouts, stimuli, what-have-you will work this time around:

The upshot is we aren't going to be able to increase our borrowing to fix the problems now. And we can't enter a war to generate the necessary stimulus (a-la FDR) because we're already completely extended fighting two of them. Production is already at a peak, so there's no way to increase it to generate surplus output we can use to paper over the problem economic areas. In fact these latter two points are connected -- virtually all of the capital investment in America in the past three decades went into the military and military-related expenditures overseas, rather than truly productive areas like manufacturing back here at home, so we have nothing we can gear up to generate surplus output.

We are thus faced with the farcical situation where the government has already begun "bailing", but it is having to borrow even more to do so. Since we're past the point of exhaustion (beyond the "Minsky moment") already, this borrowing is apt to have increasingly disastrous effects. Look at the $160 billion emergency stimulus bill congress passed a few months ago (with checks having started going out in the mail a few days ago). The government is immersed in a record-breaking fiscal deficit -- so bad the Treasury Borrowing Committee is crying "uncle" -- so where is it going to get the money to pay these checks?

More borrowing, of course. But what happens when you add more borrowing when the supply of lenders is shrinking? Interest rates go up.

The Fed currently has a policy of holding interest rates down, to hold together the creaking financial system. As we discussed, borrowing is already dramatically ramping up because of structural spending needs, the war, and now bailouts. These two objectives are in conflict. Something will have to give.

Whether the Fed allows it or not, interest rates will rise. The Fed may succeed in artifically holding down interbank rates, but this will not help most of us. Soon we will be faced with the ultimate farce of mortgage rates dramatically rising because of all of our national borrowing, even though much of it has been piled on to help out those harmed by the housing bubble! Push down in one place, the misery moves somewhere else.

It is time to give up and start over. Because the Minsky cycle and Ponzi finance dynamics have risen to the national scale, there is no way out. We simply have to let the bubble burst, help our neighbors out the best we can, and build a new financial system that isn't dependent on a series of ever-increasing props from the government to survive.

[ewmayer]

In the wake of Yahoo's post-Microsoft-walks-away haircut today, 3 guesses as to who the 2nd-largest YHOO shareholder was...now predictably clamoring for a bailout, by way of share buyback-at-the-higher-recent-price.

FORTUNE Daily Briefing: Bill Miller wants Yahoo buyback

Monday’s selloff in Yahoo (YHOO) is creating more pain for value manager Bill Miller. Miller is chief investment officer at Legg Mason Capital Management, which at Dec. 31 was Yahoo’s second-biggest shareholder, with a 6.9% stake, according to Lionshares.com. Yahoo had been one of the standout performers in Miller’s Legg Mason Value Trust, which lost 20% of its value in the first quarter as big bets on beaten-down financial stocks such as Bear Stearns (BSC) went sour. But Monday’s 14% decline in Yahoo takes the stock about half the way back to where it was trading before Microsoft (MSFT) unveiled its $31-a-share bid on Feb. 1. Should they stick, Monday’s declines will reduce the fund’s gains in Yahoo accordingly.

Miller indicates in an interview with The New York Times that he’s surprised by Microsoft’s decision to walk away from Yahoo, and eager to see Yahoo do something to justify shareholders’ patience. He wants to see CEO Jerry Yang turn some of Yahoo’s cash holdings toward a share buyback, he says in the interview. “It would be almost incoherent not to do so,” Miller said. “You can’t maintain that $33 undervalues your company, have your stock trade below that, and not buy back stock.”

Really? You can't do that? I must have missed the rule in the SEC regulations to the effect that "If CEO deems shares should be trading at value
X, above current market Y, and share price does not rise accordingly, company must initiate share-buyback program in order to boost share price to X." Shows you how much I still have to learn about the stock market ... here I was thinking the relevant rule was "if you bet on a stock rising and it goes down instead, in the absence of provable malfeasance, it's tough beans for you, bucko."

Also, why on earth would anyone be surprised by MSFT's deciding to walk away? They originally offered $29 per share - a full $10 above what YHOO was then trading at - and eventually agreed to the even-higher price of $33. Instead of Yahoo being thankful for that, they ask for another $4 per share, i.e. nearly double what the company was trading for before MSFT expressed interest. As one Yahoo finance poster put it:

"Worth silver, offered gold, they gave the finger and demanded platinum.

Greedy, retarded, and nasty.

What happens next is exactly what is deserved."

In all fairness to Mr. Miller, he just bought a new yacht, and all those much-needed customizations to help meake 'er seaworthy likely were quite distracting. Plus, it can take time for a landlubber - even a once-legendary-six-sigma-market-beating-one - to get his sea legs ... some never do, in fact. And too much ocean motion and dramamine can make looking at market data and stock charts difficult. Poor Bill ... my sympathies go out to him, as he now has to endure the slings and arrows of the non-six-sigma unwashed rabble.

[ewmayer]

Analysts agree "Worst is yet to come":

Fannie Mae loses $2.2B in 1Q, warns of severe weakness

WASHINGTON (AP) -- Fannie Mae reported losses of $2.2 billion in the first quarter and the nation's largest buyer of home loans said Tuesday it would cut its dividend and raise $6 billion in new capital, with expectations that the housing slump will persist into next year.

Home prices fell faster in the first quarter than Fannie Mae had expected, the government-sponsored company said, and it will open a $4 billion share offering immediately, with the remainder being offered in the "very near future."

Fannie Mae's federal regulator, the Office of Federal Housing Enterprise Oversight, announced Tuesday that following the stock sale, it will cut the capital surplus cushion the company has to maintain by 5 percentage points to 15 percent. Another five-point cut will come in September, provided there is "no material adverse change" in the company's regulatory compliance.

Um, to most folks without a political agenda to peddle, slashing the capital cushion not once but twice would likely constitute a clear sign of an ongoing "material adverse change" in the company's finances. And look what the huge *reported* loss was hiding:

The company's estimated fair value of net assets as of March 31 was $12.2 billion, down 66 percent from $35.8 billion at the end of December. The huge decline was attributed to falling home prices and changes made to reflect new accounting methods. The assets are not counted toward the overall loss.

So much for "marking to market"...now let's have a look at the "outlook going forward", as the experts in the Department of Redundancy Department like to call it:

Fannie Mae's first-quarter loss contrasts with a profit of $961 million in the January-March period last year. The company reported Tuesday that the early 2008 loss was equivalent to $2.57 a share. It earned 85 cents a share a year earlier.

Wall Street analysts polled by Thomson Financial had expected the company to lose 81 cents a share in the latest period.

Following Fannie's earnings release, Moody's Investors Service downgraded Fannie's financial strength rating because of the potential for credit losses over the next two years.

Reflecting the ravages of the housing crisis, Washington-based Fannie Mae was forced to set aside $3.2 billion to account for bad loans. The losses were greatest in the hardest-hit states: California, Florida, Michigan and Ohio.

And the company said it only expects credit losses to worsen next year.

FNM shares up nearly 4% on this fabulous news! [Perhaps in no small part due to the paid CNBC shills pumping it for all they're worth. Of course it could also be the obligatory "things are improving!" spin:

Fannie Mae says improves loan quality, share value

Fannie Mae , which reported its third quarterly loss on Tuesday and said it plans to raise $6 billion in added capital as credit losses mount, said it is improving the quality of its mortgage portfolio and "creating significant shareholder value."

So you're going to raise that capital how, exactly ... a bake sale? The only part of that sentence which makes any sense whatsoever is the "as credit losses mount" part, which of course contradicts all the other bits. The art of propaganda at its finest ... Josef Göbbels would be proud, if he weren't so underwater on his mortgage just now. Like last Friday's Bureau of Lies, Damn Lies and ..., erm, I mean, Bureau of Labor Statistics April jobs report, the latter piece is another report out of Bizarro world.

Edit: More details on just "how Bizarro" Fannie's accounting methods are are detailed here.

And speaking further of "improbable events", In Vegas and elsewhere, "HELOC Freezes Over":

Countrywide Freezes nearly all HELOCs in Vegas

May 6 (Bloomberg) -- Countrywide Financial Corp. has suspended the home equity credit lines of almost all its Las Vegas customers, including the $60,000 Christopher Whipple says he needed to expand his cell-phone accessories business.

``I hope this doesn't break me,'' the 35-year-old retailer said. His credit score was 790 out of a possible 850, putting him in the top 40 percent of borrowers. ``It's going to hurt more than I thought.''

Suggest liberal application of a high-quality water-based personal financial lubricant there, Chris - that's what you get for years of "Whippling it out" - your credit card, that is - on a moment's notice.

Since January, Countrywide, Bank of America Corp., Washington Mutual Inc. and IndyMac Bancorp Inc. have frozen about 600,000 equity credit lines nationwide, said Michael Kratzer, president of a Bankrate Inc.-owned Web site that's fielding consumer complaints. The lenders are targeting borrowers in cities where property values are falling, including Las Vegas, Chicago and Los Angeles, he said.

Indeed ... lenders suddenly "wanting to get paid back" - what a bizarre concept! This is completely at odds with the infallible teachings of Greenspanian eternal-credit-expansion-based macroBubbleomics. Apostasy!

Frozen credit and real estate declines are putting a chill on spending and hurting the economy. In February, taxable sales in Clark County, Nevada, which includes Las Vegas, fell 3.1 percent from a year earlier, dropping 13 percent at furniture stores and 6 percent for durable-goods wholesalers. In the same month, as it became harder to borrow money across the U.S., consumer spending rose at the slowest pace in more than a year.

``It's really putting borrowers in a panic,'' said Kratzer, president of feedisclosure.com in North Palm Beach, Florida. The amount of credit frozen nationally may be $6 billion, based on an assumption that the 600,000 borrowers each had $10,000 available, he said.

How dare lenders deprive borrowers of their Constitutional right to live beyond their means? I suspect a major class-action suit will come out of this.


And speaking of really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really "improbable events" [That's 25 "really"s, one for each alleged sigma of improbability]:

GHoldman Sachs Math Whizzes Blame "Multiple 25-sigma events" for big fund losses

The Financial Times reports:

“In a rare unplanned investor call, the bank revealed that a flagship global equity fund had lost over 30 per cent of its value in a week because of problems with its trading strategies created by computer models. In particular, the computers had failed to foresee recent market movements to such a degree that they labelled them a ‘25-standard deviation event’ - something that only happens once every 100,000 years or more.

“‘We are seeing things that were 25-standard deviation events, several days in a row,’ said David Viniar, Goldman’s chief financial officer.”

That's right, 25-sigma improbable ... not just once, but several days in a row. That's like, 50 or 75 sigmas, or something - even without factoring sigma compounding, variance amortization, and kurtosis distributions, and stuff. I could go into more details of all the rigorous math here, but I find it's best to just leave it up to the finance whizzes at Goldman, Long Term Capital Management [currently closed to new investments, alas] and similar outfits.

[ewmayer]

Did I say FNM up 4% on horrible financials and further-deterioration-ahead? How very premature of me - stock in fact was up over 10% at one point late this afternoon, before some profit taking late caused in finish up a "mere" 9%.

I can't help but be reminded of the height of the dotcom bubble in 2000-2001 - it seems the days of "fundamentals are for old fogeys - this here is a new paradigm" are back in the markets.

I wonder ... if Fannie had flat-out declared "We are insolvent. All out of money. Game over. Someone turn out the lights on their way out", would their stock have tripled, or merely doubled?

[ewmayer]

Vallejo, CA to File For Bankruptcy

May 7 (Bloomberg) -- Vallejo, California's city council voted to go into bankruptcy, saying the city doesn't have enough money to pay its bills after talks with labor unions failed to win salary concessions from fire fighters and police.

The city council's unanimous decision makes the San Francisco suburb the largest city in California to file for bankruptcy and the first local government in the state to seek protection from creditors because it ran out of money amid the worst housing slump in the U.S. in 26 years.

The city of 117,000 is facing ballooning labor costs and declining housing-related tax revenue that have left it near insolvency. The city expects a $16 million deficit for the coming fiscal year that starts July 1. Under bankruptcy protection, city services would keep running. It would freeze all creditor claims while officials devise a plan for emerging from bankruptcy.

``Nobody wants bankruptcy but there doesn't appear to be a whole lot of options left,'' said city councilwoman Joanne Schivley. ``We are going to be out of money by June 30. It's all a numbers game now.''

City and labor union officials have been meeting since January to revise the existing contracts. The unions have balked at pay cuts. By filing for bankruptcy, Vallejo is asking a judge to step in and force salary concessions from the labor unions.

Once the city files its petition, a federal bankruptcy judge must decide whether the city is actually insolvent. If so, the case can proceed. If the judge rules Vallejo isn't legally broke, the case would be dismissed, said the city's bankruptcy attorney Marc Levinson of Orrick, Herrington & Sutcliffe.

Slowing Economy

The fiscal strains afflicting Vallejo are reverberating across the U.S., as a housing slump and slowing economy curb revenue for states and local governments. U.S. state sales-tax collections fell in the first quarter for the first time in six years, according to a study by the Nelson A. Rockefeller Institute of Government in Albany, New York.

California Governor Arnold Schwarzenegger's office predicted the state's budget deficit may reach $20 billion, more than twice the size of previous estimates and enough to account for nearly one-fifth of the budget. States overall expect to have at least $26 billion less than they need to pay bills in the next budget year, according to an April report by the National Conference of State Legislatures.

I expect that state budget deficit figure - which has been steadily getting revised upward - to top $30 billion when all is said and done. If house prices keeping dropping next year [not unlikely] or even merely stabilize [best-case scenario], coupled with an inevitable ongoing decrease in spending by tapped-out consumers paying nearly $100 to fill up their gas tanks, it's going to be even worse in 2009. Similar tax revenue plunges are occurring in nearly all 50 states. At some point in the next 2 years, I fully expect one or more *states* to file for bankruptcy. Of course they - like squeezed homeowners - are far from blameless, since most kept ratcheting up their spending and didn't put away significant amounts of money for lean times. Lean times are something most Americans have either forgotten about or have never experienced. In the long run, this will do us good - but in the near term there will be pain aplenty.

On the silver-lining front, SUV sales are cratering:

Death of the SUV

Americans are turning away from the boxy, four-wheel-drive vehicles that have for years dominated the nation's highways. Sport utility vehicles and pickup trucks - symbols of Americans' obsession with horsepower, size, and status - are falling out of favor as consumers rich and poor encounter sticker shock at the pump, paying upward of $80 to fill gas tanks.

The sale of new SUVs and pickup trucks has dropped precipitously in recent months amid soaring gas prices and a weakening economy: SUV sales for the month of April alone fell 32.3 percent from a year earlier and small car sales rose 18.6 percent. This fundamental shift comes against a backdrop of relentless gas increases, and growing concerns over the environment and US oil consumption, according to auto analysts and car dealers.

"The SUV craze was a bubble and now it is bursting," said George Hoffer, an economics professor at Virginia Commonwealth University whose research focuses on the automotive industry. "It's an irrational vehicle. It'll never come back."

We can only hope Professor Hoffer is correct - but similar things were said about gas-guzzling 60s-style U.S. cars in the mid-70s, in the wake of the Arab oil embargo. Yes, they went away for the better part of a decade, then they came back with a vengeance - worse than before, in fact. One generation seems to be the limit for how long the hard lessons last in this country.

[ewmayer]

Interesting contrast among the headline-economic news articles today - let's have a look:

Productivity in U.S. Increases More Than Forecast; Pending Home Sales Drop: U.S. worker productivity unexpectedly accelerated in the first quarter and helped curb inflation as companies showed no loss of output with fewer employees.

Note how the news about the massive glut of unsold vacant homes and further plummeting of demand and prices kinda gets buried in the latest batch of phony-baloney fuzzy-math statistics from the Ministry of Truth [by way of its affiliated agency the BLS]. This continues the trend we've been seeing for most of the year: All the real, measurable, verifiable data - even after upward-optimization by the folks at the NAR - look extremely dire. Fuzzy fudge-o-rama figures from the MoT, on the other hand [see recent articles about CPI and employment numbers and how the MoT manipulates those] continue to be "better than expected." That game appears to finally be played out, at least as far as credibility-amongst-the-masses is concerned. Next up, another bogus "surprise":

Surprise jump in consumer borrowing: Fed report shows Americans' personal debt increased by $15.3 billion in March.

Um, this was a "surprise" to whom, exactly? Home-as-ATM spigot almost completely choked off now, gas and food prices shooting into the stratosphere ... of course people are going to be going to their last-line-of-borrowing, their credit cards. Only a complete idiot would be "surprised" by this. Or better, only a complete idiot and, apparently, a whole legion of Wall Street "Analysts".


Great article detailing the situation the big banks and other financial playahs who made big markets in dubious mortgage-based paper find themselves in:

Credit Crisis Over? Not Likely

To believe the worst is over, [financial-derivatives guru Satyajit] Das notes, you would have to believe that bank managers have obtained a firm grip on their credit-related losses and have written down at least half of the ultimate total, and that declining home values won't create more losses. He thinks this is impossible because the banks own many of the same losing securities yet have variously written off anywhere from 30% to 80% of their face values.

Das figures that since few banks likely overestimated their losses, the variance in the write-offs means most banks continue to underestimate their losses. Thus he calculates that the $200 billion raised from outside sources so far is just a down payment and that banks have up to $700 billion more to go -- an amount far in excess of their total earnings over the past half-decade.

And it's not just losses on current holdings that are the problem. Das wishes to remind investors of the $1 trillion to $3 trillion that's still in the process of moving onto the banks' balance sheets from related entities where they were hidden. These off-balance-sheet units were created to permit banks to buy vast sums of credit derivatives that they had designed in exchange for big fees. The holdings of the units, called structured investment vehicles, or SIVs, were then used as collateral to do more borrowing from money market funds, again generating more fees.

Keeping these highly leveraged units off the books meant banks did not have to counterbalance them with any permanent capital, or equity. This was a crucial link in the global liquidity factory that provided funds for this decade's credit bubble.

Now that money market funds have stopped buying commercial paper issued by SIVs, banking regulations require the banks to bring them onto their books, and that means they must shore up their capital base by selling new shares or shedding other assets. Every dollar that is used for this purpose is a dollar that can't be used to make loans for corporate buybacks, commercial customers or hedge funds. Without such loans, banks' earnings growth will be greatly impaired.

Worse still, the buying power of two key drivers of the last bull market -- hedge funds and corporate Treasurys -- has been crippled because the leverage they've used to reap big profits has suddenly turned against them.

This is the reason why one sees outfits like Citigroup continually going back to the well by way of dilutive stock sales "which we totally don't need, dude", and engaging in unsustainable practices like issuing millions of preferred shares which pay over 8% in dividends - their need for short-term cash is forcing them to peddle paper that is virtually guaranteed to cause them bleed money in perpetuity [or until they find themselves in a position where they can afford to pay a hefty premium to buy it back].

Lastly, let's contrast the above article with the stated opinion of our Moron-of-the-Week Award winner, none other than U.S. Treasury Secretary, Henry "Yammering Hank" Paulson:

Paulson says credit crisis fading[quote]In an interview with The Associated Press, Paulson said that the turmoil that has gripped Wall Street and took a turn for the worse yet again in March has eased somewhat. "There's progress," he said. "I think we're closer to the end of this than the beginning."[quote]
By definition, as time passes, one will inevitably be closer to the end of a given process than the beginning. Interesting hedging-of-language, though - note he doesn't actually say that we a are "close" to the end of the credit crunch, just that we are "closer".