Global Financial Crisis (Was: Subprime Meltdown)

[xilman]

http://news.bbc.co.uk/1/hi/business/7523234.stm


Paul

[Xyzzy]

http://news.yahoo.com/s/nm/20080804/...s_fortune_dc_1

"I felt nothing," he said of the sale that cost him $1 billion, leaving his net worth at about $600 million. "You got a bad grade on your test. That's it. No appeal. I felt sad for me and sad for my Bear Stearns family."

[ewmayer]

Given what we recently learned about the esteemed Mr. Hamilton, I am beginning to feel a bit more sympathetic to Aaron Burr. Interestingly, as the wikipage on Hamilton details, he was not only the first U.S. Treasury secretary, but also began the long tradition of government bailouts, and the whole "profits are private, losses are socialized" kind of government-orchestrated looting of the taxpayer we see reaching fever pitch in Washington these days:

Report on Public Credit

In the Report on Public Credit, the Secretary made a controversial proposal that would have the federal government assume state debts incurred during the Revolution. This would, in effect, give the federal government much more power by placing the country's most serious financial obligation in the hands of the federal, rather than the state governments.

The primary criticism of the plan was spearheaded by Secretary of State Thomas Jefferson and Representative James Madison. Some states, like Jefferson's Virginia, had paid almost half of their debts, and felt that their taxpayers should not be assessed again to bail out the less provident. They further argued that the plan passed beyond the scope of the new Constitutional government.

Madison objected to Hamilton's proposal to cut the rate of interest and postpone payments on federal debt, as not being payment in full; he also objected to the speculative profits being made. Much of the national debt had been bonds issued to Continental veterans, in place of wages which the Continental Congress did not have the money to pay; as these continued to go unpaid, many of these bonds had been pawned for a small fraction of their value. Madison proposed to pay in full, but to divide payment between the original recipient and the present possessor.

What the wikipage fails to mention is that prior to the above proposal, Hamilton and his bankster buddies had assiduously scoured large parts of the U.S., buying said bonds from veterans of the revolutionary war for pennies on the dollar. Hamilton et al were thus in a perfect position to profit handsomely from this scammery, since one of the Chief Looters was none other than the U.S. Treasury secretary himself. I suspect the 50/50 part of the proposal was to prevent the likely insurrection which would have occurred had only the present bondholders stood to receive payment, and the legions of dispossesed veterans realized they had been robbed.

Originally Posted by xilman

One year on --- a BBC analysis

For bank bosses, regulators and politicians, the damage inflicted has been to their reputation for competence rather than financial security.
...
The Federal Reserve has put the cost to the bottom line of banks and other lenders of their sub-prime misadventures at $100bn.

I would prepend "ill-deserved" to the "...reputation for competence" bit. Anyone can look the financial whiz when he is sitting astride the flow of money during the greatest roaring bull market in recent history, and taking a nice cut of the proceeds. Also, the Fed`s "estimate" is a complete joke and is at least 10 times too low. I suspect they know this full well - mustn`t start a run for the exits now, that would bad for business. [The IMF would seem to agree.] Consider that Citigroup *alone* currently has over $1 Trillion in off-balance sheet "shadow assets", most of which are "marked to fantasy" rather than what the market is dictating. [See last week`s post about Merrill Lynch's latest debt fire-sale for the kind of price such debt is currently fetching.]

Originally Posted by Xyzzy

"I felt nothing," he said of the sale that cost him $1 billion, leaving his net worth at about $600 million. "You got a bad grade on your test. That's it. No appeal. I felt sad for me and sad for my Bear Stearns family."

In Jimmy's defense, he was probably comfortably numb at the time.


Fearlessly onward to today's [and the preceding weekend's] news:

----------------------

WSJ | After the Bubble, Ghost Towns Across America

BENTONVILLE, Ark. -- Dennis Pflueger and his wife won a rent-free year in a nice new house in an expensive subdivision not far from the headquarters of Wal-Mart Stores Inc. As part of the prize, they then have the option to buy the four-bedroom home for $452,000.

Mr. Pflueger, a telephone-cable installer who describes himself as an "old redneck," is in the middle of his free year. But the Pfluegers are a bit lonely. Just one other family lives in any of the 28 new or unfinished houses on Foxboro Court. Up the street, a sign announcing "Elegant Homes" sits on a lot choked with weeds. The block is as quiet as an old ghost town.

...

Daily life in these developments seems a bit post-cataclysmic. Children play on elaborate but empty playgrounds. They walk their dogs past rows of shiny houses that have never been lived in. Voices echo up and down the block. Unfinished houses and vacant lots strewn with construction debris clutter the horizon.

Robert Waltenspiel lives with his wife and two daughters in a unfinished subdivision in Auburn Hills, Mich. Standing in front of his house, he can see more than 30 weed-choked lots where new houses were supposed to go. The developer halted construction more than two years ago.

"As far as working on my yard and saying, 'Hey, neighbor, want a beer?,' that's not going to happen," says Mr. Waltenspiel, an account manager for Hewlett-Packard Co.

The hot tub at the community center doesn't work. The communal fountains are dry. Mr. Waltenspiel's kids have no one in the subdivision to play with, so he has to take them to a nearby park for social interaction. His 4-year-old "will walk up to strange girls in the park and say, 'Hey, will you be my friend?' " he says. "A, it's adorable. B, it's sad."

In the past year, roughly 15% to 20% of residential developers have gone out of business, suspended operations or changed their line of work, according to an estimate by the National Association of Home Builders.

...

When their 12 months end, the Pfluegers will move on too -- perhaps to that trailer on their daughter's property. Mr. Pflueger recently found a job but still can't afford to buy the house. "That's way out of my league," Mr. Pflueger says. Unless someone else moves in, only one family will be left in the 28 houses on Foxboro Court.

The last paragraph serves as an apropos metaphor for the speculative mortgage bubble ... millions of folks whose actual income *should* have them living in trailers or starter homes were willingly allowing themselves to get pushed into buying half-million-dollar suburban McMansions. Well, the boom went bust, their income didn`t magically triple at the same time their neg-am ARMs reset to 3x teaser rate, and now it's back-to-the-trailer time, unless the government "succeeds" in its efforts to reflate the bubble, at taxpayer expense, of course.


New York to Cite Citigroup Over Auction-Rate Sales

Aug. 1 (Bloomberg) -- New York Attorney General Andrew Cuomo plans to ``charge'' Citigroup Inc., the largest U.S. bank by assets, with ``fraudulent'' sales of auction-rate securities as safe, money market-like investments.

Citigroup destroyed ``documents under subpoena,'' Cuomo said in a letter sent today to the bank following a five-month investigation by his office. He said he plans to cite the bank under the state's Martin Act, which permits civil suits and criminal action.

``The investigation has revealed that Citigroup has repeatedly and persistently committed fraud by making material misrepresentations and omissions in connections with Citigroup's underwriting, distribution and sale of auction-rate securities,'' Cuomo said in the letter.

Citigroup Posts Loss on Credit-Card Securitizations

Aug. 4 (Bloomberg) -- Citigroup Inc. reported its first loss since at least 2005 on credit-card securitizations, signaling that risks may be growing in a business that generated $3.5 billion of revenue in the past three years.

The biggest U.S. credit-card lender lost $176 million in the second quarter packaging card loans into securities, the company said in an Aug. 1 regulatory filing. The New York-based bank completed fewer deals and was forced to mark down its own $9 billion stockpile of the debt instruments and other stakes the company amassed while selling them to investors.

Led by Chief Executive Officer Vikram Pandit, 51, Citigroup manages about $202 billion of credit-card loans worldwide, about $111 billion of which have been turned into securities and sold, according to the filing. Delinquencies on the securitized portion have jumped by 16 percent since the end of last year to $2.16 billion as of June 30, Citigroup said. The firm's results may portend similar losses for rivals.

Now that the real estate bubble has popped, looks like Citi has found their next class of about-to-go-bad debt to repackage into "AAA guaranteed!" securitized sausages with which to fleece investor-dupes. They just don`t get it - the herd of once-rampaging American consumerBots is broke [or at least a frighteningly large percentage of the CBs is] and is now running up its credit card balances as a debt-of-last-resort measure.


Fewest Treasury Traders Since 1960 Hit Taxpayers as Record Deficit Widens

For the first time since 1960, when it created the network of securities firms obligated to buy and sell Treasury bonds, the U.S. government has the fewest bond traders making markets in its debt and a bigger burden for American taxpayers financing record federal deficits.

[R.D. Silverman]

Originally Posted by ewmayer

Now that the real estate bubble has popped, looks like Citi has found their next class of about-to-go-bad debt to repackage into "AAA guaranteed!" securitized sausages with which to fleece investor-dupes. They just don`t get it - the herd of once-rampaging American consumerBots is broke [or at least a frighteningly large percentage of the CBs is] and is now running up its credit card balances as a debt-of-last-resort measure.

Yep. And the next pile to hit the fan will be these same consumerBots
defaulting on their credit cards.........

To be fair, when one is out of work resorting to put weekly groceries
and other stuff on credit cards becomes NECESSARY for survival.

[ewmayer]

WSJ | Companies Tap Pension Plans To Fund Executive Benefits: Little-Known Move Uses tax Break Meant For Rank and File

By ELLEN E. SCHULTZ and THEO FRANCIS
August 4, 2008; Page A1

At a time when scores of companies are freezing pensions for their workers, some are quietly converting their pension plans into resources to finance their executives' retirement benefits and pay.

In recent years, companies from Intel Corp. to CenturyTel Inc. collectively have moved hundreds of millions of dollars of obligations for executive benefits into rank-and-file pension plans. This lets companies capture tax breaks intended for pensions of regular workers and use them to pay for executives' supplemental benefits and compensation.

The practice has drawn scant notice. A close examination by The Wall Street Journal shows how it works and reveals that the maneuver, besides being a dubious use of tax law, risks harming regular workers. It can drain assets from pension plans and make them more likely to fail. Now, with the current bear market in stocks weakening many pension plans, this practice could put more in jeopardy.

How many is impossible to tell. Neither the Internal Revenue Service nor other agencies track this maneuver. Employers generally reveal little about it. Some benefits consultants have warned them not to, in order to forestall a backlash by regulators and lower-level workers.

Even though the above is from page 1 of today`s Wall Street Journal, it`s not as if there was no warning of this - the same WSJ reporters have been warning about this for several years now.


Historical perspective on the Great Bear Markets - As the fellow in Spinal Tap so pithily put it, this might just be "too much f***ing perspective":

Financialsense.com | A Rare Kind of Bear?

Before going any further, we have absolutely no way of knowing if we've embarked on a big time bear. A big multi-standard deviation event. We just thought it topical to at least address the unthinkable as simply one possibility in a number of outcomes. As we've preached far too many times over the years, the key to successful investment management is risk management. And that quite simply means we need to have a game plan for all potential market outcomes. Although this is far from a pleasant thought, we're simply contemplating how we might identify "the big one," if you will, if indeed that is to occur at all. Sincerely, the reason we are addressing this rather unpleasant thought is that these types of devastating episodes often coincide with once in a generation financial market or real world events. In the 1930's, the devastating equity bear was accompanied by the peak of a generational credit cycle, ultimately leading to the reality of economic depression as reconciliation played out. In Japan during the late 1980's, the equity peak was accompanied by not only the obvious equity bubble, but also a generational bubble in real estate valuations driven by their own credit cycle mania of sorts, likewise leading to Japan's own version of a "contained depression" in economic activity in the aftermath of the bubble peak. Without attempting to sound melodramatic, at the moment and although intertwined in nature, the US is facing both potentialities - a possible generational credit cycle peak, and a generational bubble in real estate that is now deflating. We told you this was not going to be pleasant, didn't we? The following chart chronicles the credit cycle dating back to the early 1950's. Just as an FYI, the peak in the 1920's was estimated to have been 270%. We're just a touch beyond that at the current time, no?

Now the scary part about the U.S. equity markets in the context of the above author`s preferred metric, the 200-month moving average, is that the plummeting of the Nasdaq in the wake of the dotcom-bubble implosion was arguably only halted by the Fed-sponsored inflation of another and even larger speculative asset bubble, namely the one in real estate. Will there be another bubble that can be blown to bring back the Pollyannas this time around?

[ewmayer]

Fannie's Mudd Soothed Asian Investors as Bonds Rose

Aug. 4 (Bloomberg) -- Fannie Mae Chief Executive Officer Daniel Mudd was sitting down to a glass of wine with his wife at their Washington home around 10 p.m. on Saturday July 12 when Treasury Secretary Henry Paulson called.

Concerns about the financial health of the biggest U.S. mortgage finance company had driven Fannie Mae's borrowing costs to the highest since March the previous week and its shares had tumbled 45 percent on the New York Stock Exchange. Investors in Asia, the biggest foreign owners of Fannie Mae's $3 trillion of bonds, were asking the Treasury to bolster the government- sponsored company and its smaller competitor, Freddie Mac, said three people with knowledge of the talks.

Paulson told Mudd he had a plan to restore confidence in Fannie and Freddie, the core of the Bush administration's efforts to revive the U.S. housing market. ``At that point, the proposal began to take form,'' Mudd, 49, said in an interview. ``We're trying to solve a crisis of confidence. Would this do it?''

The next afternoon, before financial markets opened Monday in Asia, Paulson announced the rescue plan, saying he would seek authority to buy unlimited equity stakes in the companies and their bonds if needed, while the Federal Reserve would lend directly to Fannie and Freddie. Congress included the proposals in a broader housing bill that President George W. Bush signed into law last week.

Asian investors were among the most important groups to soothe because central banks, financial institutions and funds in the region own $800 billion of Fannie Mae and Freddie Mac's $5.2 trillion in debt, according to data compiled by the Treasury. U.S. officials were concerned that sales from the region would push lending rates higher, said the people, who declined to be named because the discussions were confidential.

China also owns over a half-trillion dollars in US treasury bonds - the threat of them simply not showing up for the next T-bill auction gives them enormous leverage over US monetary policy. Thus, the massive bailout of Fannie and Freddie announced last week - which gives the US Treasury virtually unlimited power to buy shares of the two GSEs and thus prop up their price - is as much a US-taxpayer-funded bailout of Asian bondholders as anything else. We have seen who our new financial taskmasters are, and the US government has no one to blame but itself.

More commentary on this story here and here.

The World’s Grandest Ponzi Scheme Unravels

Mike Morgan's RE Blog | The World’s Grandest Ponzi Scheme Unravels

I warned that Fridays would become known as F3 - FDIC Failure Fridays. And Voilá . . . two bank failures on Friday, July 25. Then another bank failure a week later, after the market closed, on August 1. Next week? Maybe none, but maybe 10 . . . or more. And here’s why.

I am on the ground, in the trenches, and behind enemy lines. To repeat for those new to my information, I own a real estate brokerage in Florida and I serve as a consultant to banks, financial institutions, mutual funds and hedge fund managers . . . as well as builders and developers. So when I talk, I talk from Behind Enemy Lines. Unfortunately for clients and readers, I can’t always share as much detail as I would like because of confidentiality concerns. My institutional clients appreciate that, because they can feel comfortable discussing their portfolios, problems and potential outs.

I can tell you this. We will see at least 100 bank failures before the end of the year. What’s important about that statement, is it is not another rear-view mirror statement from one of the financial experts on TV or some of the others that write blogs and columns . . . but never venture out into the world of reality. I will share what I am seeing on the ground and hearing from my institutional clients here and abroad.

[Detailed description of the messy, inefficient, expensive process of foreclosing RE elided]

The lenders I speak with know they are dead. They have no problem admitting it now. They realize their jobs are over, and they are on borrowed time. They are nothing more than liquidators now, and they are doing a lousy job at it.

We built too many homes and have too many builders. The markets are correcting that. We have too many mortgages and too many mortgage brokers. The markets are correcting that. And we have too many banks. The markets are correcting that as well. Paulson’s tinkering with the ability to short his Fav19 will come back to mark him in history. It was un-American. This is not Russia or Venezuela. If the markets were not working because of naked shorting, then put the bastards in jail that were violating the rules. Unfortunately, that would mean Paulson was going to have to throw his frat boys in jail. Paulson knew what he was doing with the Fav19, just as he did with the Housing Bill. Paulson had one purpose, and one purpose only in both the Fav19 and the Housing Bill . . . to bail-out his buddies. That’s it. Full Stop.

The Housing Bill is a complete, absolute and autarchic ploy by a man that has far too much power and control. I am not going to write about the Housing Bill. I am going to save that for our August 7th Conference Call. If you are interested in the Conference Call you can purchase a dial in code - Mike@MorganFlorida.org. Clients receive free access codes and will receive the replay link.

The remainder of the article has a lot of "Clients Only" flags, but you can pretty much replace those with "buy SKF", if you are a financial do-it-yourselfer and want to play a broadly diversified financial-short strategy.

[cheesehead]

Originally Posted by ewmayer

Given what we recently learned about the esteemed Mr. Hamilton, I am beginning to feel a bit more sympathetic to Aaron Burr. Interestingly, as the wikipage on Hamilton details, he was not only the first U.S. Treasury secretary, but also began the long tradition of government bailouts, and the whole "profits are private, losses are socialized" kind of government-orchestrated looting of the taxpayer we see reaching fever pitch in Washington these days:

So ... Mr. Emil W. Henry Jr. (posts #393 and 396) may not have considered the Treasury's Alexander Hamilton Award to have been a great honor?

[ewmayer]

Originally Posted by cheesehead

So ... Mr. Emil W. Henry Jr. (posts #393 and 396) may not have considered the Treasury's Alexander Hamilton Award to have been a great honor?

You'll have to ask the man yourself ... but yes, there is definitely some potential for "great distinction, dubiously named" here.

-------------------------

Detroit Free Press | Detroit 3 ask up to $40 billion in loans

Detroit's three automakers are urging Congress to make as much as $35 billion to $40 billion in low-cost loans available during the next two to three years to assure that the companies survive long enough to retool and build a new generation of fuel-efficient vehicles.
Advertisement

Chief executives Rick Wagoner, Alan Mulally and Robert Nardelli -- of General Motors Corp., Ford Motor Co. and Chrysler LLC, respectively -- talked Friday and agreed that access to capital is their most critical short-term need during this volatile period of high fuel prices and slumping SUV and truck sales, sources told the Free Press.

Top lobbyists for GM, Ford and Chrysler followed up Sunday with phone calls to leaders of Michigan's congressional delegation -- including U.S. Sens. Debbie Stabenow and Carl Levin, plus Reps. John Dingell and Sander Levin -- to drive the point home. All three Detroit companies are hemorrhaging cash and having trouble borrowing.

On Monday, Democratic presidential candidate Barack Obama proposed $4 billion to help Detroit's automakers build the cars of the future. Obama's advisers called it a first step. Stabenow told me some of the money would go to battery research, but a big chunk of it could be used to help leverage loans of more than $10 billion for retooling plants.
An elusive tally

It's unclear exactly how much help the Detroit Three will need, but sources at the companies and the congressional offices told me Monday it may well be twice as much as the $20 billion that was being discussed just a month or two ago.

But who's counting, anyway? After all, bailing out ill-run banks and other "too big to fail" companies by putting taxpayers into an exponentially expanding black hole of federal debt is What Made America Great or something, isn't it?


Iraq Government Has $79 Billion in Unspent Cash

The soaring price of oil will leave the Iraqi government with a cumulative budget surplus of as much as $79 billion by year’s end an American federal oversight agency has concluded in an analysis released on Tuesday.

The unspent windfall, which covers surpluses from oil sales from 2005 through 2008, appears likely to put an uncomfortable new focus on the approximately $48 billion in American taxpayer money devoted to rebuilding Iraq since the American-led invasion.

Gosh, you know I should really be upset about the rebuilding money [most of which went straight into the pockets of crooked war-profiteering companies like Halliburton et al], but somehow I`m just a little more annoyed about the Trillion-dollar-plus cost of waging the Holy Inept Crusade for Democracy itself ... to say nothing of the thousands of American lives and far greater number of Iraqi lives "sacrificed to the noble cause." The Iraqis lost more blood, but it seems they will emerge with a far sounder economy than the U.S. There may be some karmic justice in that.

[xilman]

Originally Posted by ewmayer

But who's counting, anyway? After all, bailing out ill-run banks and other "too big to fail" companies by putting taxpayers into an exponentially expanding black hole of federal debt is What Made America Great or something, isn't it?

Do you find it odd that the US lectures much of the rest of the world, most recently China and India, about the inefficiencies of governments curtailing the free market?

It warms my heart to know that both socialism and hypocrisy are alive and well in the USA.


Paul

[R.D. Silverman]

Originally Posted by ewmayer;138793[url=http://www.financialsense.com/Market/pretti/2008/0801.html

Financialsense.com | A Rare Kind of Bear?[/url]

<snip>

?

There was an article in the May issue of Forbes which outlined the
ridiculous compensation given to the current crop of incompetent
executives........

[Fusion_power]

Shoes are dropping left and right. Freddy earnings not at all a surprise, in the pits. Links are all over the news this morning. Oh what would we do without a government bailout?

DarJones