Global Financial Crisis (Was: Subprime Meltdown)

[R.D. Silverman]

Originally Posted by ewmayer

The SEC`s list of short-sale-banned "financial companies" keeps expanding - a couple days ago they added the likes of Ford, GE and GM to the list. Today they added IBM and a bunch of REITs:

NYSE-Listed Companies Added to the Short Sale List as of Wednesday Morning, Sept. 24, 2008

Some interesting members of the latest list that caught my eye, along with my speculation as to the possible explanation for each:

kind, hence it is a 'financial firm'" decree? The desperation is palpable...

Does anyone foresee the future lawsuits? Does the "equal protection"
clause apply? Can Mom&Pop local store that went belly up sue the
government because it too isn't getting a bailout? How can the U.S.
govt. "selectively" bail out some companies but not others??? Does
the 14th amendment apply?

[ewmayer]

Great post this morning on Barry Ritholz` blog:

The Big Picture | Alternative Ideas for Rescue Plans: "How is it that Warren Buffett can cut a better deal with the best-run financial company in America than the U.S. Treasury can ask from the worst-run financial companies in America?"


New home sales fall to 17-year low: Sales pace of new homes lowest since January 1991 as prices hit a four-year low and inventory remains high.

The rate of sales was down 34.5% from a year earlier. Sales were at their lowest pace since January 1991, when the first Gulf War started, and the economy was near the bottom of a recession and undergoing an oil price shock. Excluding that month, you'd have to go all the way back to August 1982 to find a rate of sales so low.

"It's a stunning decline, but we're still going to be dealing with a tough market well into 2009 and maybe even 2010," said Mike Larson, an analyst with Weiss Research. "All indicators say we're heading into a recession, if we're not already in one."

On a non-seasonally adjusted basis, the report showed only 39,000 new homes were sold in July, which marks the lowest level for that measure since December 1991.

"It looks like we're in an absolute cliff dive, but we're coming down sharply from a very high level," Larson said.

The sale pace has fallen 66.9% from its peak of 1.39 million homes set in July 2005.

My Comment: If you adjust for the change in U.S. population since 1991 [roughly a 20% increase], you get a sense of just how bad the numbers are in per-capita terms.


Durable goods orders fall 4.5%: Greatest decline in orders of manufactured goods since January signals continued economic weakness.

My Comment: Not even the gubbermint`s mystical numerologists [sometimes, and incorrectly, referred to as "statisticians"] could put lipstick on this ... oh wait, musn`t use that horrifically misogynist expression.


GE Cuts Earnings Forecast, Suspends Buyback on Financial-Services Weakness: General Electric Co. reduced its annual profit forecast for the second time this year and suspended its stock buyback as ``unprecedented weakness and volatility'' in credit markets hurt the company's finance arm.

My Comment: We pray this won`t lead to staff reductions amongst the army of paid stock pumpers at their wholly-owned subsidiary, CNBC.


Credit Stress Evident In TAF, Ted Spread, Everywhere: Credit dislocations continue to fester. Evidence can be found in corporate bonds, preferred shares, hybrids, the Ted Spread, and even in the most recent Term Auction Facility (TAF) auctions.

The TED spread can be used as an indicator of credit risk. This is because U.S. T-bills are considered risk free while the LIBOR rate reflects the credit risk of lending to commercial banks. As the TED spread increases, the risk of default (also known as counterparty risk) is considered to be increasing, and investors will have a preference for safe investments.

Professor Bennet Sedacca ha a few comments on Minyanville today in Credit Market Misery.

The credit market is getting eviscerated. Period. Whether it is corporates, preferreds or hybrids, spreads continue to blow out. The Goldman (GS) preferred I bought the other day at 11.5%? Gonzo. Thank you Warren.

Don't let the stock market fool you. The credit market is imploding.

The credit market has been a great leading indicator for stocks lately.

Nice post by reader Bam_Man in the commentary section to Mish`s latest article:

Most still seem totally baffled as to why this "bailout" is being rammed down the throat of the American people.

As far as the US Treasury and Federal Reserve is concerned, there are 16 VERY good reasons why this "bailout" MUST go through ASAP. They are:

BNP Paribas Securities Corp.
Bank of America Securities LLC
Barclays Capital Inc.
Cantor Fitzgerald & Co.
Citigroup Global Markets Inc.
Credit Suisse Securities (USA) LLC
Daiwa Securities America Inc.
Deutsche Bank Securities Inc.
Goldman, Sachs & Co.
RBS Greenwich Capital
HSBC Securities (USA) Inc.
J. P. Morgan Securities Inc.
Merrill Lynch Government Securities Inc.
Mizuho Securities USA Inc.
Morgan Stanley & Co. Incorporated
UBS Securities LLC.

These are the primary dealers in US Treasury securities. Between them, THEY PURCHASE THE VAST MAJORITY OF US GOVERNMENT SECURITIES SOLD AT AUCTION and then re-sell them to their foreign and domestic customers.

When they have a problem (like hopelessly impaired balance sheets), the US Treasury has a problem. The impaired balance sheets of many of the primary dealers is starting to hinder their ability to participate in Treasury auctions. This could lead to failed Treasury auctions in the very near future.

Anyone who is still puzzled as to the nature of the Wall St/Washington relationship needs look no further than this. This is the crux of the problem and the reason why the Treasury Department is forcing this bailout on the American people.

[ewmayer]

So I just happened to be watching the Fannie Mae ticker [FNM] in the past 10 minutes, to see how the "bailout bill imminent" news would affect it. Apparently some major holder got cold feet [or perhaps a hedge fund wanted to manipulate this thing down in order to pick up a bunch of shares on the cheap], because in A SPAN OF ROUGHLY 5 MINUTES, FNM plunged from ~$2.30 to under $1.20, and went right back up to $2.30 again. I guess a 35M share block sell will do that. What likely happened is that as soon as that big sell hit the wire, the price dropped enough to start taking out all the trailing stops set by the legion of hedgies and day traders that are speculating in this issue these days. That caused a flood of secondary sell orders, the so-called "stop loss cascade".

I couldn't believe my eyes watching the live ticker, but just as a pure day-trading "I want a piece of this action, too" gambling play I tried to scoop up a decent-sized chunk of shares at 1.20 or better. During the 30 seconds or so that I was putting in my limit buy order, the thing rocketed up 50 cents per share. Damn - that would've nicely covered the money the government is going to take from me [one way or another] to bail out the Wall Street gamblers.

Here's a Yahoo chart [these are 15 mins delayed, so I had to wait for it to capture the stop-loss event] showing the event:

[Wacky]

Who got us into this mess with Freddie and Fanny?

http://www.ibdeditorials.com/IBDArti...07149667289804

[ewmayer]

Originally Posted by Wacky

Who got us into this mess with Freddie and Fanny?

http://www.ibdeditorials.com/IBDArti...07149667289804

Clinton also signed the Gramm-Leach-Bliley bill, which repealed the Depression-era Glass-Steagal Act. He is certainly not blameless in this matter - the reckless Fed interest-rate policies which helped inflate the first of the two Greenspanian asset bubbles [dotcom, followed by housing] also were on Clinton's watch.

Plenty of blame to go around - but after dotcom imploded, people should certainly have known better. But Bush and Greenspan were so desperate to mitigate the aftereffects of the dotcom fiasco by any means necessary, they went stark raving nuts. Greenspan lowered interest rates to ~1% and kept them there for 5 YEARS, encouraged the explosion in "exotic" mortgages, and Bush irresponsibly cut taxes [especially on the wealthy] at the same time government spending on things like the Iraq war were shooting into the stratosphere. Whatever Clinton may have done, he didn't leave us with a trillion-dollar yearly account deficit.

[cheesehead]

Originally Posted by Wacky

Who got us into this mess with Freddie and Fanny?

http://www.ibdeditorials.com/IBDArti...07149667289804

... and for six years the combination of Republican president and Republican-controlled Congress, which could have ordered a change in Treasury rules, or passed legislation to overturn this supposed mistake by Clinton, did nothing.

It was within Republicans' power for six years to rectify what Clinton did. We saw that they weren't shy about attacking Clinton. So why, oh, why didn't Republicans do something to prevent this disaster when it was completely within their power to do so?

Obviously, it just wasn't important to them, like tax cuts were. So, spare us the GOP cries of "It's Clinton's fault!"

If it was such a big mistake by Clinton, why didn't we hear Republicans at least complaining about it long before now, even if they didn't want to take action?

(One may as well ask why George W. Bush -- after taking office from a president who had made it his administration's top priority to stop terrorist threats to the U.S. and had called FBI, CIA, and other department heads to the White House to "knock heads" together to find ways to coordinate their terrorism intelligence -- for seven-and-a-half months lowered the priority of terrorism intelligence while he made tax cuts for the wealthy his top priority.)

Remember how Republicans were quick to give Reagan credit for stopping inflation, even though it was Carter who made the key change, while Reagan made no inflation-stopping move? Note that they were quick, there, to give an incoming president credit for something actually done by his successor. Now, why don't Republicans apply the same logic to responsibility for this subprime meltdown?

The Republican Party no longer has the moral integrity it had, in part, in the Goldwater days, the integrity that I was taught it had when I was growing up. It has changed its core philosphy, to do anything for the sake of _power_ -- it will lie, cheat, steal from future generations, imperil our national security, contradict its claimed principles with its actions ... _anything_ to get the power to impose the conservative and fundamentalist worldviews on those who don't share them.

Nixon's Watergate opened my eyes. Reagan puzzled me. Bush the Younger has educated me. The Republican turnaround that spans them disgusts me.

[ewmayer]

J.P. Morgan to Take Over Faltering WaMu: U.S. Government Helps Broker a Deal to Dispose of Huge Thrift; Banking Giant Expected to Get Deposits, Branches

[only_human]

Troubled Asset Relief Act and insolvencies September 25th, 2008

Finally, it seems worth emphasizing again a key point from yesterday’s testimony — that the financial markets face two distinct, but related, problems. One problem is that the markets for some types of assets and transactions have essentially stopped functioning. To address that problem, the government could conceivably intervene as a “market maker,” by offering to purchase assets through a competitive process and thereby provide a price signal to other market participants. That type of intervention, if designed carefully to keep the government from overpaying, might not involve any significant subsidy from the government to financial institutions. The second problem involves the potential insolvency of specific financial institutions. Restoring solvency to insolvent institutions requires additional capital injections, and one possible source of such capital is the federal government. Although the problems of illiquidity and insolvency are interrelated, they are at least conceptually distinct. Indeed, some policy proposals appear to be aimed primarily at the illiquidity of particular asset markets, and others appear to be aimed primarily at the potential insolvency of specific financial institutions. The Treasury proposal appears to be motivated primarily by concerns about illiquid markets. The more the government overpays for assets purchased under that act, however, the more the proposed program would instead provide a subsidy to specific financial institutions, in a manner that seems unlikely to be an efficient approach to addressing concerns about insolvency.

[Zeta-Flux]

Originally Posted by masser

In the last three days, I have noticed that the rhetoric about the severity of this crisis has been ratcheted up - I have heard commentators say that if the bailout does not occur by the end of the week, we are going to have a Great Depression ("we're all screwed" - one local conservative AM radio commentator claimed). Is this just an attempt to sell the bailout plan?

Can anyone connect the dots for me? Things are bad on Wall Street and for any banks dealing with mortgages, but how does that lead to a Depression? And aren't we bypassing the "recession" stage? I am trying to stay informed (thanks Ernst, for all the links, commentary), but lately I feel like Dorothy in the Wizard of Oz. I can hear the Wizard's booming voice, but can't see behind the curtain...

masser,

As it has been explained to me, people overseas are afraid of the situation, and will start withdrawing their money. If enough of their money withdraws, more banks/businesses collapse, and the global economy goes into recession. The recent speech by the President is actually pretty good on that front (i.e. explaining the cuurent thinking [on both sides of the isle] on the situation).

[R.D. Silverman]

Originally Posted by cheesehead

.

<snip><snip>

.. Nixon's Watergate opened my eyes. Reagan puzzled me. Bush the Younger has educated me. The Republican turnaround that spans them disgusts me.

This discussion has turned silly. While it might make people feel good
to point the finger of blame at the party they dislike the most: i.e.
republitards or demotwits , it does nothing to solve the problem.

There is plenty of blame for everyone: both parties, several presidents,
greedy banks, fed chairmen, homeowners who took loans they could
not pay, the SEC, policies that allowed one company to take an
unreasonable risk, then sell it off to another, banks that were forced
by law to sell to bad risk customers, (i.e. no redlining), laws that
allowed UNEMPLOYMENT COMPENSATION to count as "income" for
loan purposes, etc. etc. etc.

The blame game does not solve the problem. I don't like what has
happened to the value of my IRA.... Let's fix the problem instead
of trying to afix blame.

[Fusion_power]

Washington Mutual bit the dust tonight and J.P. Morgan just got bigger by swallowing the debris. Politicians are doing what politicians do best, arguing.

Get ready for the big one folks, this looks really BAD.

DarJones