Global Financial Crisis (Was: Subprime Meltdown)

[mdettweiler]

Originally Posted by markr

(Straight response - ignoring your smilies.) Here in Australia the one cent and two cent coins were removed from circulation some years ago. The total cost is rounded - ie up or down - to the nearest five cents when paying with real, physical cash. It made no difference to prices ending in .99 - surprise, surprise.

As for the supposed argument about the effect on charities, they were much more likely to have been helped by the change.

Really? I'm surprised that stores would still have prices ending in .99 even without a penny denomination. Of course, though, the .99 would still be charged the same as always if the customer was paying with either a check or some sort of electronic payment (credit card, debit card, etc.). Don't know why I didn't think of that at first.

[Fusion_power]

Ewmayer, please look at the date you bought those 1/3 silver nickels and the dollar amount you spent. Now tell us if you had put the same dollars in a bank CD earning 5%, how much money would you have today vs the metal value of your coins.

While I agree that the laws Phil Gramm sponsored were a factor in today's brouhaha, I would be far more likely to place blame on greedy mortgage lenders who made the loans. The legislation enabled securitization of mortgages which in and of itself is not a bad thing. The lenders who misused the law have far more responsibility in my opinion. You might argue who has more responsibility, the person who opened the barn door, or the person who led the horse out. Not defending Gramm btw, just interested in your response to my effort at helping some blackbirds come home to roost.

DarJones

[ewmayer]

Originally Posted by Fusion_power

Ewmayer, please look at the date you bought those 1/3 silver nickels and the dollar amount you spent. Now tell us if you had put the same dollars in a bank CD earning 5%, how much money would you have today vs the metal value of your coins.

Luckily, the original receipt was still in the box with the bulk bag-o-nickels ... cost was 4x face value [including shipping], this was in 1995. You do the math.

[ewmayer]

Record 2008 deficit - Bush Administration official: A budget deficit headed to $490 billion, as revealed by top Bush administration official, would easily overtake 2004 record.

A deficit approaching $490 billion would easily surpass the record deficit of $413 billion set in 2004.

An administration official revealed the $490 billion figure Monday on condition of anonymity because the new estimate had not been formally released. Administration officials were scheduled to do that at a news conference later in the day.

The new figure actually underestimates the deficit, since it leaves out about $80 billion in war costs. In a break from tradition - and in violation of new mandates from Congress - the White House did not include its full estimate of war costs.

That's our Georgie - lie, deny and obfuscate all the way to your well-deserved political ignominy and oblivion. [Some would like to tack on a visit to the Hague War Crimes Tribunal, but I fear that is too much to hope for, especially as they are going to have their hands full with another Slobodan-Milosevic-style political circus trial, this time of his accomplice Karadzic. So now we get to hear a months-long litany of "a thousand years of Serb grievances", as expostulated by ol' Radovan K.]


FDIC shutters two more regional banks

CARSON CITY, NEV. (AP) -- The 28 branches of 1st National Bank of Nevada and First Heritage Bank N.A., operating in Nevada, Arizona and California, were closed late Friday by federal regulators.

The banks, owned by Scottsdale, Ariz.-based First National Bank Holding Co., were scheduled to reopen on Monday as Mutual of Omaha Bank branches, the Federal Deposit Insurance Corp. said.

...

Arizona Gov. Janet Napolitano spokeswoman Shilo Mitchell said in a statement that the FDIC's takeover of 1st National is not indicative of the overall banking climate in Arizona.

Pull the other one, Janet - however, on a positive note, it looks like these Friday-night FDIC bank-shuttering-and-pizza parties are going to become a regular thing. They really should try harder to make them more fun, family-friendly events ... some giant party ballons and a live band would be nice.


Bloomberg | Lehman Hit by Biggest Rise in Debt Yields Since 2000

July 28 (Bloomberg) -- Bondholders are demanding the highest interest rates for Wall Street debt since 2000, threatening the industry's business model of acquiring assets with borrowed money.

Wall Street faced higher debt costs in 2000, when the U.S. Federal Reserve's base lending rate was 6.5 percent. What's different now is the Fed rate is at 2 percent, showing that elevated yields of bank debt are all related to risk premium, or the spread investors demand to lend to brokers rather than the government. Firms like Lehman also rely increasingly on access to capital these days, rather than on fees or commission income.

``This is almost self-induced balance-sheet destruction,'' said Joseph Balestrino, a fixed-income strategist at Pittsburgh- based Federated Investors Inc., which manages about $330 billion. ``This is far beyond just your basic slowdown.''

Article goes on to discuss how Merrill Lynch is in nearly as bad a shape as Lehman. Both companies are significantly larger than Bear Stearns was, so a failure of either would be major-league bad news: Even if the government promises to bail out until their own credit rating gets wrecked, any confidence that "the worst of the credit crisis is over", or "perhaps not yet behind us, but we are definitely closer to the as-yet-unreached-bottom than we were at the beginning", or "banks are successfully shoring up their balance sheets" [by issuing debt at the aforementioned skyrocketing interest rates] will be shattered.

Also, "Business model of acquiring assets with borrowed money" - that neatly sums up the current mortgage crisis as well as Wall Street's business model, doesn't it? There is of course no inherent problem with borrowing to acquire assets, as long as the assets are fairly valued and the borrowing costs are reasonably well-correlated with the risk of default by the borrower. The latter is where the Fed's decade-long easy-money policy comes into play. That the assets either produce added value [e.g. a growing business borrowing money to fund an expansion in capacity] or appreciate in value at a rate at least as great as the borrowing cost is also crucial. That's where the "hosuing will always go up" myth enters into the equation.


National Australia Bank writes down 90% of US AAA CDOs

NAB sends a bleak message to the world

July 26, 2008

Other banks will now examine their exposure, conduit exposure especially.

NAB's decision to book an $830 million charge against $1.2 billion of US home loan exposure to carry write-downs to 90% of the original value sends an extremely gloomy message to the global banking system and the world's sharemarkets.

NAB chief executive John Stewart says it is a worst-case view. Investors everywhere will have to hang on and hope it is not confirmed.

NAB's write-down relates to indirect "conduit" exposure to US mortgages, and reflects NAB's view about how the US housing market slump will unfold over two or three years, as defaults continue to rise, the queue of unsold houses continues to lengthen, and forced sales generate nowhere near enough to cover the mortgage. In some cases, sales were recouping as little as 50% of the outstanding mortgage, Stewart said yesterday.

The write-down reflects two ultra-conservative calls. First, the bank is valuing its US mortgage exposure on a worst-case view of how that process of defaults and forced house sales occurs. Second, it has decided, after some internal discussion, to front-load the expected losses, instead of trickling them out.

There is no way NAB's 90% write-down will be mirrored by every bank with US mortgage exposure. Measured by the mortgage debt, the US housing market is worth about $US5000 billion ($A5212 billion). It simply is not going to fall to 10%, or $US50 billion.

But after NAB's move other banks will examine their exposure, conduit exposure especially.

Banks around the world have so far written off $US410 billion in the credit crisis, and the new consensus is that losses will reach between $US1000 billion and $US1300 billion before it is over (the first, shocking estimate nine months ago was $US200 billion).

NAB's 90% write-down begs the question: is even $US1300 billion enough? NAB has so-called conduit exposure to US home loans. This a guarantee, in effect, on securities called collateralised debt obligations (CDOs) that it issued, which in turn were (and are) backed by the US mortgages.

As the credit crisis unfolded in the second half of last year, banks everywhere began acknowledging that their balance sheets ultimately supported the CDOs. But John Stewart and his team remained confident that the call on the balance sheet would not be made.

The mortgages concerned are not subprime junk. In fact, they had received an AAA credit rating originally, which as Stewart said yesterday, implied a one in 10,000 chance of default.

Now, NAB has decided that the US housing crisis is so severe that up to 90% of the $1.2 billion value of the CDOs will be lost.

And lastly, our insanely popular chart-of-the-day segment - This one is whimsically titled "Ascending delta function^*":

[cheesehead]

Originally Posted by ewmayer

[Some would like to tack on a visit to the Hague War Crimes Tribunal, but I fear that is too much to hope for

If conservatives thought that all people (not just women with unwanted pregnancies) should suffer the consequences of their actions, then ...

And lastly, our insanely popular chart-of-the-day segment - This one is whimsically titled "Ascending delta function^*":

Now, that is a chart that could use a logarithmic ordinate scale (such as the first chart at http://primes.utm.edu/notes/faq/NextMersenne.html).

[ewmayer]

McCain's son resigns from Silver State Bank board

Another one of those "In great shape! All is well! Business as usual! Nothing to see here, folks!" Arizona banks. [See my post of yesterday]. Given McCain Sr's role in the 1980s S&L crisis, it seems that once again, the apple doesn't fall far from the tree.

[Heh - one of Mish's readers refers to Daddy McC as "McCain't". But I digress...]


Merrill Sells $8.55 Billion of Stock, Unloads Money-Losing CDOs

July 29 (Bloomberg) -- Merrill Lynch & Co., the third- biggest U.S. securities firm, sold $8.55 billion of stock and will liquidate $30.6 billion of bonds at a fifth of their face value to shore up credit ratings imperiled by mortgage losses.

Another *hugely* dilutive [38% dilution for existing shareholders] capital-raising effort from a company which has repeatedly lied about (or at best drastically underestimated, if you believe that repeated huge lowballing could possibly be mere accident or overoptimism) its need to raise capital. They're getting 22 cents on the dollar for the CDOs - that bodes very poorly indeed for the numerous financial and investment firms who still have a trillion dollars' worth of this garbage on (or better, are hiding it off) their balance sheets, e.g. in Level 3 "marked to fantasy" asset land.

Temasek Holdings Pte., the Singapore-owned fund that became Merrill's biggest investor by acquiring shares in December, agreed to buy $3.4 billion of the new stock, Merrill said yesterday in a statement. The New York-based company is paying Temasek $2.5 billion to offset losses on its earlier investment. Merrill will also book $5.7 billion of writedowns in the third quarter.

Lovely - not only are they diluting their common by nearly 40%, they're also having to provide multibillion-dollar rebates for *earlier* dilutive share offerings to their big Singaporean White Knight, because their shares kept dropping since the earlier dilution. I bet Temasek has a similar clause built into their latest purchase, so if MER shares keep dropping, Merrill will be facing additional such "rebates" at the same time their ability to raise more capital is eroding even further. In other words, MER is just one or two more "unexpected additional writedowns" away from liquidating the rest of the company, or declaring bankruptcy if they can't find another Greater Fool.

``While third-quarter results and the future capital raise would be yet another burden, we do believe there is light at the end of the tunnel,'' wrote Douglas Sipkin, an analyst at Charlotte-based Wachovia Corp. who has a ``market perform'' rating on Merrill, in a note to clients today.

Perhaps that kind of "analysis" is how Wachovia got itself into insolvency [not yet official - but I suspect there's another "FDIC Friday" coming there sometime this Fall.] However, the "market perform" rating is accurate, not because Mr. Sipkin means it to be anything other than a delusional "bottom must really be in now!" permabull fantasy, but rather because the financial markets have been performing abysmally. Hey, Dougie - that light at the end of the tunnel? Better hope it's not an oncoming train.

Bank of America Corp. analyst Michael Hecht estimated Merrill will report a full-year loss of $11.55 a share and he cut his price target for the stock to $40 from $47, according to a note to clients.

Dude, are you on drugs? The stock is trading at half that, and even that is probably very generous. Just gotta love all these banks and brokerages in horrible shape, doing their best to pump up the share prices of their bankster buddies.

Thain, who worked as a mortgage trader during his 25-year career at Goldman Sachs Group Inc., said July 17 that he was ``hopeful'' that Merrill could sell its CDOs, while adding he didn't ``want to do dumb things'' by selling them too cheap.

In yesterday's statement, Thain said, ``the sale of the substantial majority of our CDO positions represents a significant milestone in our risk-reduction efforts.''

Goldman Sachs - otherwise known as "the shadow U.S. government". So Thsain didn't want to do a dumb thing by cutting his losses months ago - better to wait even longer so you can sell at an even lower price. Yeah, great strategy there. At least the statement is accurate, because extrapolating out, it is clear that once you go bankrupt, your capital risk reaches zero.

Losses on CDOs and the associated hedging contracts have accounted for about $27 billion of the total $41 billion of total writedowns taken by Merrill over the past year. The firm was one of the largest underwriters of CDOs before the credit crisis hit last year, and Merrill was stuck with more than $50 billion of them on its books when buyers fled the market.

The remaining CDOs may be less worrisome to investors. About $7.2 billion of the $8.8 billion left are hedged with ``highly rated counterparties,'' the firm said in the statement.

Oh, "highly rated", are they? You mean like those garbage "AAA rated by S&P and Moody's!" CDOs which got you here?

MER shares are [or at least briefly were] *up* on all this fabulous news - only on Wall Street... I honestly don't know why we see this pattern over and over, bank/brokerage takes huge writedown, issues dilutive share offering in desperate attempt to raise cash, stock goes up. I don't know if it's a form of mass-market delusional "worst is surely over!" psychology, or a set of organized short squeezes, which force a brief [but often quite fierce] short-covering rally, which then allows the insiders to dump their shares at a better price than market would dictate. Then the slide inevitably resumes, and the delusional fools who bought the covering rally are left holding the bag. Interestingly, Wall Street Big Finance may be shooting itself in the foot by getting the SEC to restrict naked short selling of the Group of 19 "special" financial firms - if the ban on naked shorting proves effective [which is dubious, but possible], that would mean no more short-covering rallies for the insiders to exploit in this way.

[ewmayer]

Bennigan's Restaurants File for Chapter 7 Bankruptcy, Face Liquidation

National restaurant chains Bennigan's and Steak & Ale have closed their doors and filed for Chapter 7 bankruptcy protection, shuttering more than 300 locations and letting go of thousands of employees.

It is one of the country's largest restaurant bankruptcies and eliminates two sit-down chains that have been part of the casual-dining landscape for decades. The chains will liquidate and aren't likely to re-open.

I guess that would qualify as the final, corporate-level "Bennigan's Holiday". Note that independently-owned Bennigan's restaurants [about half the total] can remain open, but given the economic conditions that led to the national chain filing BK and the loss of the advertsing exposure bought by the national chain, many of the "independents" will surely go by the wayside soon, as well. Food was typical mass-market American supersaturated-fat-bomb-a-rama fare [MASS BARF] anyway, so as with more-Americans-cycling-to-work-due-to-high-gas-prices, this will actually be good for the national waistline. The downsizing of America - it`s not just for mortgages, vehicles, state budgets and the stock market anymore.

We should start a "chain restaurant dead pool" to try to predict which MASS BARF chain will go bloated-belly-up next. Will it be

Chili's?
Applebee's?
Hobee's?
Olive Garden?
Outback Steakhouse?
Red Lobster?
Bombay Bicycle Club?
Ponderosa Steakhouse?
TJ's?
Cheesecake Factory?

Where will we Americans go to find our four-thousand-calorie meals in the coming years? Dear me, this looks dire indeed.


Speaking of unemployment, Paul Krugman has an interesting chart which exposes a classic Republican econo-myth:

Annual rates of employment growth, by president

And reader comment #8 to that exposes a second such myth:

Gathering monthly total returns for the S&P 500 starting February 1926 and comparing the index’s performance during Democratic and Republican administrations, the average annual return during Democratic administrations has been 13.8%; the average annual return during Republican administrations has been 6.7%.

The Wall Street Examiner's Russ Winter has an interesting little history lesson pertinent to the current "profits are private, losses are socialized" spate of government bailouts of financial and mortgage firms:

A Modern Day Alexander Hamilton

We are rapidly moving to the end game, where massive American assets are being marked down and sold to new foreign masters, and international finance front men. Whole new financial institutions will be created out of this fire sale as the old holders are wiped out. Ironically, Hank Paulson may go down in the history books as a modern day Alexander Hamilton for “facilitating” this process. With the new covered bond program and other schemes in place all the ducks are lined up for the transfer to begin.

For financial history aficionados, understand that Hamilton created New York banking and finance through the ultimate “socialize losses, privatize gains” insider trade. He gathered his minions (Friends of Hamilton or FOHs) and gave them insider information that the new US government was going to make good on the severely marked down scrip and notes (Continentals, a new Winterism) that were awash in the land. Armed with this clever plan, agents of the financial class then fanned into the back woods and countryside buying up notes from the rubes and Aunt Millies at 10-20 cents on the Dollar. Then these were stuffed into the new banks. Ultimately the insiders exchanged them for the marked up price, and voila a fully capitalized new banking system of powerful interests. This article describes the operation to a tee.

[cheesehead]

Originally Posted by ewmayer

"Bennigan's Holiday"

< snip >

Food was typical mass-market American supersaturated-fat-bomb-a-rama fare [MASS BARF] anyway,

According to that Wikipedia article (which has a current event warning),

In the early 1990's Bennigan's embarked on a major cost-cutting strategy that significantly lowered their food quality. Menu items that had been made fresh in store were contracted out to frozen food purveyors. And while most restaurants serve USDA Prime or Choice grades of steaks Bennigan's opted to serve lower cost and quality USDA Select and Standard grades of steaks, experimenting with a butter injection method of transferring flavor through fat molecules, rather than utilizing the natural fat marbling found in higher grades.

[Uncwilly]

Originally Posted by ewmayer

Olive Garden?

Red Lobster?

Same firm.

[ewmayer]

Originally Posted by Uncwilly

Same firm.

But different-themed fat-bomb-a-rama crapFood.

Originally Posted by cheesehead

In the early 1990's Bennigan's embarked on a major cost-cutting strategy that significantly lowered their food quality. Menu items that had been made fresh in store were contracted out to frozen food purveyors. And while most restaurants serve USDA Prime or Choice grades of steaks Bennigan's opted to serve lower cost and quality USDA Select and Standard grades of steaks

So they may in fact have been victims of a self-induced "Subprime Meatgage Market Meltdown", eh?


And hard on the heels of Bennigan's...

Mervyns files for bankruptcy: The retailer files for Chapter 11 protection; its stores will remain open as the company reorganizes.

Note that in Mervyns case, it's Chapter 11, i.e. a reorganization attempt, versus Bennigan's Chapter 7 liquidation. I'd better hit the Cupertino store in the next few days to see if I can order a couple dozen of my favorite style of their High Sierra jeans [which are really quite good for the price], just in case the reorg fails to stave off an eventual Chapter 7. Of course that would require me to keep my waistline constant in the years to come, but with the ever-dwindling number of MASS BARF purveyors, that should be easier to do. [Lucky for me I seem to have a genetic aversion to fast food, so the fact that Mickey Dee's is doing quite well during this economic downturn isn't a worry.]

[mdettweiler]

Originally Posted by ewmayer

But different-themed fat-bomb-a-rama crapFood.

Hey, come on, Olive Garden makes good food. (I haven't gone to Red Lobster much myself, so I can't vouch for their food.)