Global Financial Crisis (Was: Subprime Meltdown)

[ewmayer]

Fannie’s borrowing costs plunge

Bond investors can’t get enough of debt issued by the new and improved Fannie Mae (FNM). In its first issue of new notes since the government took the company into conservatorship over the weekend, Fannie issued $7 billion of two-year benchmark notes at a spread of 70 basis points, or 0.07%, over the comparable Treasury security.

That’s down sharply from the spread Fannie was paying only last week, reflecting reduced fears about the company’s capital position and increased demand for the mortgage-backed securities Fannie and its sibling Freddie Mac (FRE) deal in. On Aug. 13, for instance, as shares in Fannie tumbled amid worries about the company’s capital position, Fannie priced an offering of three-year benchmark notes at a spread of 122 basis points (or 0.122%) above Treasurys.

The reduced spread is good news for the housing market, because narrower spreads translate into lower mortgage rates, which make houses more affordable. With the share prices of banks such as Washington Mutual (WM) and Wachovia (WB) tumbling again Wednesday, the financial sector will take any good news it can get.

Uh, houses were already becoming more affordable by the week, without the latest heavy-handed intervention by our Socialism-for-the-rich government, and without putting huge amiunts of taxpayer money at risk. I saw an estimate earlier today to the effect that above-mentioned artificial reduction in the GSE's credit spreads amounts to a taxpayer-funded subsidy of roughly $50 Billion per year. And as we've seen throughout the past decade [and in fact since the creation of the first GSE during the Great Depression], artificially reduced borrowing costs inevitably translate into *inflated* housing costs, not the opposite. The key to more affordable housing without distortive price inflation is *not* lowerr mortgage rates - it's mortgage rates which ACCURATELY REFLECT THE RISK OF THE BORROWER DEFAULTING, and which thus result in lower HOUSING PRICES, and prevent speculative asset bubbles driven by irresponsible lenders and borrowers engaging in excessive debt-leveraging.

But what do you expect from the mainstream financial media? They have for the most part been turned into shills for Wall Street and its wholly owned subsidiary, the government of the USSRA (United Socialist State Republic of America) - at least that's Nouriel Roubini's term for it:

So now Comrades Bush, Paulson and Bernanke (as originally nicknamed by Willem Buiter) have now turned the USA into the USSRA (the United Socialist State Republic of America). Socialism is indeed alive and well in America; but this is socialism for the rich, the well connected and Wall Street. A socialism where profits are privatized and losses are socialized with the US tax-payer being charged the bill of $300 billion.

This biggest bailout and nationalization in human history comes from the most fanatically and ideologically zealot free-market laissez-faire administration in US history. These are the folks who for years spewed the rhetoric of free markets and cutting down government intervention in economic affairs. But they were so fanatically ideological about free markets that they did not realize that financial and other markets without proper rules, supervision and regulation are like a jungle where greed – untempered by fear of loss or of punishment – leads to credit bubbles and asset bubbles and manias and eventual bust and panics.

The ideologue “regulators” who literally held a chain saw at a public event to smash “unnecessary regulations” are now communists nationalizing private firms and socializing their losses: the bailout of the Bear Stearns creditors, the bailout of Fannie and Freddie, the use of the Fed balance sheet (hundreds of billions of safe US Treasuries swapped for junk toxic illiquid private securities), the use of the other GSEs (the Federal Home Loan Bank system) to provide hundreds of billions of dollars of “liquidity” to distressed, illiquid and insolvent mortgage lenders, the use of the SEC to manipulate the stock market (restrictions on short sales), the use of the US Treasury to manipulate the mortgage market (Treasury will now for the first time outright buy agency MBS to manipulate and prop up this market), the creation of a whole host of new bailout facilities (TAF, TSLF, PDCF) to prop and rescue banks and, for the first time since the Great Depression,to bail out non-bank financial institutions, and a whole range of other executive and legislative actions (including the recent bill to provide a public guarantee to mortgage for banks willing to reduce their face value).

This is the biggest and most socialist government intervention in economic affairs since the formation of the Soviet Union and Communist China. So foreign investors are now welcome to the USSRA (the United Socialist State Republic of America) where they can earn fat spreads relative to Treasuries on agency debt and never face any credit risks (not even the subordinated debt holders who made a fortune yesterday as those claims were also made whole).

Like scores of evangelists and hypocrites and moralists who spew and praise family values and pretend to be holier than thou and are then regularly caught cheating or cross dressing or found to be perverts these Bush hypocrites who spewed for years the glory of unfettered wild west laissez faire jungle capitalism (and never believed in any sensible and appropriate regulation and supervision of financial markets) allowed the biggest debt bubble ever to fester without any control, have caused the biggest financial crisis since the Great Depression and are now forced to perform the biggest government intervention and nationalizations in the recent history of humanity, all for the benefit of the rich and the well connected. So Comrades Bush and Paulson and Bernanke will rightly pass to the history books as a troika of Bolsheviks who turned the USA into the USSRA. Fanatic zealots of any religion are always pests that cause havoc and destruction with their inflexible fanaticism; but they usually don’t run the biggest economy in the world. But these laissez faire voodoo-economics zealots in charge of the USA have now caused the biggest financial crisis since the Great Depression and the nastiest economic crisis in decades. So let them be shamed in public for their hypocrisy and zealotry that has caused so much financial and economic damage.

[ewmayer]

Buffett votes "no confidence" in U.S. banks

Warren Buffett's Berkshire Hathaway Inc. has told one of its subsidiaries to stop insuring bank deposits above the amount guaranteed by the federal government, dealing a fresh blow to the financial-services industry as it tries to assuage anxious customers.

The subsidiary, Kansas Bankers Surety Co., is notifying about 1,500 banks in more than 30 states that it will no longer offer a program called "bank deposit guaranty bonds." KBS is an 18-employee subsidiary of Berkshire Hathaway, according to the parent firm's 2007 annual report. It is one of a handful of firms that offer such insurance, a big selling point for banks trying to attract wealthy customers.

[ewmayer]

Senators Ask Fannie, Freddie to Freeze Foreclosures

Sept. 11 (Bloomberg) -- U.S. Senate Banking Committee members urged Fannie Mae and Freddie Mac, the mortgage companies placed under federal control this week, to freeze foreclosures on loans in their portfolios for at least 90 days.

``This action would provide immediate relief to many homeowners'' and let the companies ``turn these non-performing loans into performing assets to minimize losses,'' Senators Charles Schumer, Robert Menendez and other panel Democrats said today in a letter to the companies and the Federal Housing Finance Agency, which is overseeing them under the government conservatorship. The companies also should ease their policies on modifying mortgages, the senators wrote.

Lawmakers and bank regulators, including Federal Reserve Chairman Ben S. Bernanke, have pressed mortgage companies to help keep borrowers in their homes and out of foreclosure by reducing balances and changing loan terms.

Treasury Secretary Henry Paulson and FHFA Director James Lockhart on Sept. 7 announced the federal takeover of Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac, replacing their chief executive officers and eliminating dividends. The move came after the companies' combined $14.9 billion in net losses over four quarters threatened to further disrupt the housing market.

Fannie and Freddie can foreclose on loans they either own or guarantee, which is nearly half of the $12 trillion U.S. residential mortgage market. While they can direct servicers to stop foreclosure proceedings, other stakeholders, including private mortgage insurers, have some say in the process.

``Schumer really has to start thinking about what's in the best interest of the majority of taxpayers and I'm not sure that freezing foreclosures is in the best interest of the majority of taxpayers,'' said Joshua Rosner, an analyst with independent research firm Graham Fisher & Co. in New York. ``It would just prolong the agony.''

Other non-government market observers agree with the inherent stupidity of the above proposal [think of it as a "gas tax holiday" for mortgage payments], many in rather stronger:

Senators Schumer and Menendez Unqualified for Office

Inevitably, just when you think that it is impossible for anyone come up with anything more preposterous that what has already been proposed, someone proves you wrong. Disgustedly I am reading Senators Ask Fannie, Freddie to Freeze Foreclosures.

I may be proven wrong but the economic asininity of those statements is unlikely to be topped, ever.

If one could turn non-performing loans into performing assets by halting payments, why not just stop collecting mortgage payments everyone in the county? Every loan would be current and think of all the money consumers would have to buy things. Of course taxpayers would be immediately on the hook for a mere $5 trillion, but who cares about small details like that?

Senators Charles Schumer, Robert Menendez, and any other fool who signed that letter is unqualified to be in Congress. It is as simple as that. I urge everyone to vote against Senators Charles Schumer and Robert Menendez the next time they are up for reelection. They are an economic disgrace to the country and unqualified for public office.

[ewmayer]

Lehman Prepares Bankruptcy Filing as Bank of America, Barclays Quit Talks

Lehman Brothers Holdings Inc. prepared to file for bankruptcy after Barclays Plc and Bank of America Corp. abandoned talks to buy the U.S. securities firm and Wall Street prepared for its possible liquidation.

Interestingly, while the attempt by the Fed and Treasury to ram an acquisition of LEH down the throats of the players was falling apart, an interesting side game was developing for the widely-considered-to-be-next-in-line-to-fail U.S. brokerage, Merrill Lynch. Apparently Bank of America, whose appetite for risky assets apppears not to have been sated by its earlier acquisition of Countrywide mortgage [but which was not so gluttonous as to want to swallow clearly-toxic Lehman], found the prospect of getting giant Merrill on the cheap [if you consder 70% above Friday's close "cheap"] irresisitible:


Bank of America Said to Reach $44 Billion Deal to Buy Merrill

Sept. 14 (Bloomberg) -- Bank of America Corp. agreed to buy Merrill Lynch & Co. for about $44 billion, a person with knowledge of the deal said, after shares of the third-biggest U.S. securities firm fell by more than 35 percent last week and smaller rival Lehman Brothers Holdings Inc. neared bankruptcy.

Bank of America and Merrill reached a deal in principle, according to the person, who declined to be identified because the deliberations were private. A final merger agreement hasn't been signed yet, the person said. The boards of Merrill and Bank of America approved the transaction this evening, the Wall Street Journal reported, citing unidentified people familiar with the matter.

Discussions about a transaction unfolded after Bank of America, the biggest U.S. consumer bank, and Barclays Plc, the U.K.'s third-largest lender, abandoned talks to buy Lehman earlier today.

The $29 a share purchase price would be 70 percent more than Merrill's closing price of $17.05 in New York trading on Sept. 12. Such a deal would value the firm at more than $40 billion. Merrill employs the largest U.S. brokerage force.

Bank of America, based in Charlotte, North Carolina, has maintained its AA credit rating as other U.S. financial institutions, including Merrill, faced downgrades. Merrill's stock plunged last week after Oppenheimer & Co. analyst Meredith Whitney predicted a $6.87 billion third-quarter loss and investors speculated that New York-based Merrill may sink along with Lehman.

``A merger between Merrill and Bank of America is a good idea,'' said Richard Bove, an analyst at Ladenberg Thalmann & Co. in Lutz, Florida. ``If Lehman fails, the next bank to be attacked would be Merrill. They are attempting to forestall that attack by linking with Bank of America.''

[cheesehead]

As I just heard on radio: if John McCain were to be elected president, Cindy McCain could bail out Lehman Brothers herself, thus avoiding federal involvement.

[R.D. Silverman]

Originally Posted by cheesehead

As I just heard on radio: if John McCain were to be elected president, Cindy McCain could bail out Lehman Brothers herself, thus avoiding federal involvement.

And its official!!!! Lehman just declared bankruptcy.

[ewmayer]

Originally Posted by R.D. Silverman

And its official!!!! Lehman just declared bankruptcy.

Yep - here's Bloomberg with the particulars:

Lehman Files for Record Bankruptcy, Victim of Meltdown Firm Helped Create

Sept. 15 (Bloomberg) -- Lehman Brothers Holdings Inc., the fourth-largest U.S. investment bank, succumbed to the subprime mortgage crisis it helped create in the biggest bankruptcy filing in history.

The 158-year-old firm, which survived railroad bankruptcies of the 1800s, the Great Depression in the 1930s and the collapse of Long-Term Capital Management a decade ago, filed a Chapter 11 petition with U.S. Bankruptcy Court in Manhattan today. The collapse of Lehman, which employs about 25,000 people and listed more than $613 billion of debt, dwarfs WorldCom Inc.'s insolvency in 2002 and Drexel Burnham Lambert's failure in 1990.

Lehman was forced into bankruptcy after Barclays Plc and Bank of America Corp. abandoned takeover talks yesterday and the company lost 94 percent of its market value this year. Chief Executive Officer Richard Fuld, who turned the New York-based firm into the biggest underwriter of mortgage-backed securities at the top of the U.S. real estate market, joins his counterparts at Bear Stearns Cos., Merrill Lynch & Co. and more than 10 banks that couldn't survive this year's credit crunch.

``There is likely to be a domino effect as other firms and individuals who relied on Lehman for financing feel the effects of its meltdown,'' said Charles ``Chuck'' Tatelbaum, a bankruptcy lawyer with Adorno & Yoss in Florida and former editor of the American Bankruptcy Institute Journal. ``The whole thing is frankly frightening for the U.S. economy.''

...

Founded in 1850 by three immigrants from Germany, Lehman has managed to avert previous potential disasters and was among the handful of U.S. financial firms that had endured for more than a century.

Note that Bear Stearns, while only half as old as Lehman, also survived the crash of 1929 - but apparently the new breed of folks running these and other Wall Street firms neither heeded the lessons of that crash, nor those of the demise of Long Term Capital Management a decade ago nearly to the day.

But, as Bush and McSame like to remind us, the economy is "fundamentally sound" - what surer sign of that does one need than financial giants imploding left and right?

AIG, the world's largest insurer [at least until last week's share price collapse, which is continuing today] could be next - that would dwarf the LEH bankruptcy.


Europe Shuns Activist Role in Financial Markets

European finance ministers seem averse to the kind of active intervention the U.S. Fed and Treasury have been doing in an attempt to shore up the markets, but rather than being an encouraging sign of "let the markets work" thinking, there is a worrisome "lack of any kind of plan" there:

Europe Shuns U.S.-Style `Active Role' in Boosting Economy, Bank Bailouts: European finance ministers and central bankers said they had no plans to follow the U.S. in stimulating their economy and failed to agree on ways of rescuing any foundering financial institution.


The Age of Greenspan Bubbles is Over:

Greenspan Bubble nemesis Bill Fleckenstein has Some thoughts on last week's market action, a.k.a. "One-Hit Wonder Bazooka Bailout Monday":

I found last Tuesday's market slide, as well as the subsequent action, to be rather ominous. And I wasn't alone in that view. A couple of friends who are astute market observers, with more than 30 years in the business, said Tuesday felt like the Friday before the crash of 1987, as it did for me.

On that score, it's worth passing along a point made Wednesday by well-known market watcher and author Justin Mamis: Every time the Fed or Treasury has taken some action since the August 2007 rate cut, it has produced a substantial rally that's run for months or weeks. But Monday's Franron-bailout rally was just a one-day wonder, and the market was walloped the next day. Mamis thinks that was very important. Quoting him directly:

"It makes yesterday's disaster all the more dangerous. They should have followed through, as they had on each of the previous news-related rebounds, but collapsed instead . . . and collapsed not just because of Lehman (LEH, news, msgs); the commodities were even weaker. If there is further follow-through downward today, the selling is likely to accelerate. . . . Of course, they don't have to do it all at once; they don't have to do it this morning or today. But when they do! . . . "

In summing up, Mamis said: "That's a precursor message . . . that there is more selling yet to come."

I believe we still see so much denial because of the following: The folks whose careers have spanned only the Greenspan era have developed the financial muscle memory that tells them that all crises are to be bought -- because that worked in the past as we built up to the housing bubble. These folks don't know how markets really work or how dire the current situation is.

Mr. Market, I believe, is about to demonstrate that the two decades when Greenspan ran the show taught too many people the wrong lesson. The country is going to spend a long time paying a big price for his (and their) mistakes.

[masser]

I am sure there will be a lot of candidates for the cherished motwee this week (perhaps BofA, or Lehman Bros' Fuld), but the story (http://biz.yahoo.com/ap/080915/lehman_fitch.html?.v=2) of a rating agency making a downgrade AFTER Elvis leaves the building always amuses me.

[garo]

I think that pretty much every Anal-yst who covers financials with the exception of Meredith Whitney will qualify for Motwee. The problem is that we will run out of weeks long before we are done with them. How about a Anal-yst MOTD award?

[akruppa]

AIG lost 60% yesterday and is down another 50% in pre-market trading today. MOTD sounds right.

Alex

[ewmayer]

Originally Posted by masser

I am sure there will be a lot of candidates for the cherished motwee this week (perhaps BofA, or Lehman Bros' Fuld), but the story (http://biz.yahoo.com/ap/080915/lehman_fitch.html?.v=2) of a rating agency making a downgrade AFTER Elvis leaves the building always amuses me.

S&P pulled the same stunt yesterday ... it would be hilarious if it weren't so pathetic, and if the criminal racketeering enterprises that are the SEC-blessed "special" ratings agencies didn't bear such a large part of the blame for the ongoing financial meltdown and the Trillions of dollars lost by investors - I'm not thinking of the degenerate gamblers who run Wall street and the hedge funds, but the moms & pops and the various pension funds and municipalities who bought this AAA-blessed toxic paper, thinking it was "almost as safe as U.S. Treasuries."

Originally Posted by garo

I think that pretty much every Anal-yst who covers financials with the exception of Meredith Whitney will qualify for Motwee. The problem is that we will run out of weeks long before we are done with them. How about a Anal-yst MOTD award?

I would add the likes of Nouriel Roubini and the various not-whores-of-Wall-Street independent financial bloggers who have done just about the only semi-objective reporting of this whole mess to that list. [But none of them are as hot as Meredith. :)]

Anyway, if you watch CNBC, you'd be giving out a MOTM ...

Worthy candidates all, but I just gotta go with my ol' buddy Alan Greenspan ... the doddering old fool seems to have now "got religion" and conveniently forgotten that he was chief architect of not just the latest, but in fact the two largest speculative asset bubbles in history. He architected the second [housing] in a misguided attempt to paper over the effects of the implosion of the first [dotcom], and now the whole world economy is gonna be fucked for years as a consequence. I swear, what he did should be a treasonable offense - I'm serious, this is way worse than giving military secrets to the Russians.