The credit bubble is just starting to unwind, a credit-derivative insider says. And while U.S. borrowers are being blamed for the mess, they were really just pawns in a global game.
By Jon Markman
Satyajit Das is laughing. It appears I have said something very funny, but I have no idea what it was. My only clue is that the laugh sounds somewhat pitying.
One of the world's leading experts on credit derivatives, Das is the author of a 4,200-page reference work on the subject, among a half-dozen other tomes. As a developer and marketer of the exotic instruments himself over the past 30 years, he seemed like the ideal industry insider to help us get to the bottom of the recent debt crunch -- and I expected him to defend and explain the practice.
I started by asking the Calcutta-born Australian whether the credit crisis was in what Americans would call the "third inning." This was pretty amusing, it seemed, judging from the
laughter. So I tried again. "Second inning?" More laughter. "First?"
Still too optimistic. Das, who knows as much about global money flows as anyone in the world, stopped chuckling long enough to suggest that we're actually still in the middle of the national anthem before a game destined to go into extra innings. And it won't end well for the global economy. MSN Money
Tuesday, September 25, 2007
The Derivatives Market Has No Clothes
When it comes to derivatives, there haven't been many truly knowledgeable experts who've been willing to lift the veil on a world where rocket scientists often compete to see who can fleece the most investors for the largest amount of money using a kind of incomprehensible, three-card Monte mathematics.
Fortunately, I came across this eye-opening article from MSN Money's Jon Markman, "Are We Headed for an Epic Bear Market?" which reveals more than a few ugly truths about new age finance and what it all means for financial markets and the economy going forward.
The credit bubble is just starting to unwind, a credit-derivative insider says. And while U.S. borrowers are being blamed for the mess, they were really just pawns in a global game. FINANCIAL ARMAGEDDON.
Fortunately, I came across this eye-opening article from MSN Money's Jon Markman, "Are We Headed for an Epic Bear Market?" which reveals more than a few ugly truths about new age finance and what it all means for financial markets and the economy going forward.
The credit bubble is just starting to unwind, a credit-derivative insider says. And while U.S. borrowers are being blamed for the mess, they were really just pawns in a global game. FINANCIAL ARMAGEDDON.
Private Equity Isn't Wearing Any Clothes, Either
A few days ago, in "The Derivatives Market Has No Clothes," I noted a report by MSN Money's Jon Markman featuring insights from Satyajit Das, one of the world's leading experts on credit derivatives. The article more-or-less confirmed what I and a few others already knew: in many respects, the multi-trillion-dollar over-the-counter derivatives market is little more than houses of cards.
Well, maybe it's in the stars, or may it's just coincidence, but a post today by one of my favorite bloggers, Yves Smith, who publishes the Naked Capitalism blog, has helped to illuminate the dubious underpinnings of another dangerous smoke-and-mirrors operation that has captivated stock traders and the financial press in recent years: the private equity industry. As Smith surmises in "Nursing Home Cost Cuts: A Private Equity Microcosm?" much of this talk about creating value out of dollops of debt and large helpings of hubris seems to have been just that: talk. Unfortunately, it has also had some potentially deadly consequences. Financial Armageddon.
Well, maybe it's in the stars, or may it's just coincidence, but a post today by one of my favorite bloggers, Yves Smith, who publishes the Naked Capitalism blog, has helped to illuminate the dubious underpinnings of another dangerous smoke-and-mirrors operation that has captivated stock traders and the financial press in recent years: the private equity industry. As Smith surmises in "Nursing Home Cost Cuts: A Private Equity Microcosm?" much of this talk about creating value out of dollops of debt and large helpings of hubris seems to have been just that: talk. Unfortunately, it has also had some potentially deadly consequences. Financial Armageddon.
Class is in session: Death spiral financing
Death spiral financing is a process where convertible financing used to fund primarily small cap companies can be used against it in the marketplace to cause the company’s stock to fall dramatically and can lead to the company’s ultimate downfall.
Many small companies rely on selling convertible debt to large private investors (see Private investment in public equity) to fund their operations and growth. This convertible debt, often convertible preferred stock or convertible debentures, can be converted to the common stock of the issuing company often at steep discounts to the market value of the common stock. Under the typical “death spiral” scenario the holder of the convertible debt initially shorts the issuer’s common stock which often causes the stock price to decline at which time the debt holder converts some of the convertible debt to common shares with which he then covers his short position. The debt holder continues to sell short and cover with converted stock which along with selling by other shareholders alarmed by the falling price continually weakens the share price making the shares unattractive to new investors and can severely limit the company’s ability to obtain new financing if the need arises.
An important characteristic of this kind of convertible debt is that it often carries conditions like a quarterly or semi-annual reset of the conversion price to keep the conversion price more or less close to the actual stock price. But a lower conversion price also increases the number of shares that a bond holder gets in exchange for one bond, increasing the dilution of existing shareholders. A lower price reset can also force investors that have set up a long CB/short stock position to sell more stock ("adjust the delta"), creating a vicious circle, hence the nickname death spiral.
From Wikipedia, the free encyclopedia
Many small companies rely on selling convertible debt to large private investors (see Private investment in public equity) to fund their operations and growth. This convertible debt, often convertible preferred stock or convertible debentures, can be converted to the common stock of the issuing company often at steep discounts to the market value of the common stock. Under the typical “death spiral” scenario the holder of the convertible debt initially shorts the issuer’s common stock which often causes the stock price to decline at which time the debt holder converts some of the convertible debt to common shares with which he then covers his short position. The debt holder continues to sell short and cover with converted stock which along with selling by other shareholders alarmed by the falling price continually weakens the share price making the shares unattractive to new investors and can severely limit the company’s ability to obtain new financing if the need arises.
An important characteristic of this kind of convertible debt is that it often carries conditions like a quarterly or semi-annual reset of the conversion price to keep the conversion price more or less close to the actual stock price. But a lower conversion price also increases the number of shares that a bond holder gets in exchange for one bond, increasing the dilution of existing shareholders. A lower price reset can also force investors that have set up a long CB/short stock position to sell more stock ("adjust the delta"), creating a vicious circle, hence the nickname death spiral.
From Wikipedia, the free encyclopedia
If you want a Subprime Bailout, do it Properly!
Axel Merk, September 5, 2007
The administration’s plan to bail out homeowners with adjustable rate mortgages (ARMs) may make them slaves of their homes. We propose an alternative that we believe better serves both homeowners and the marketplace. MERK
The administration’s plan to bail out homeowners with adjustable rate mortgages (ARMs) may make them slaves of their homes. We propose an alternative that we believe better serves both homeowners and the marketplace. MERK
The Federal Reserve’s interest rate cut does not help Americans
Axel Merk, September 25, 2007
In our assessment, the Federal Reserve’s (Fed’s) interest rate cut was wrong. Forget about the “moral hazard” of whether the cut would plant the seeds for further bubbles. Lowering interest rates is wrong because it will do few any good, but cause many a lot of harm.
As the most imminent result, the U.S. dollar has accelerated its decline versus hard currencies. When a country’s central bank cuts interest rates, it is rare that the currency reacts in textbook fashion and declines more than a token amount versus other currencies; that’s because, amongst others, lower interest rates may boost growth and make the currency more attractive for investments. Not so this time with the Fed’s cut: lower interest rates are unlikely to boost economic growth. The reason? The markets are facing a valuation problem, not a liquidity problem. MERK
In our assessment, the Federal Reserve’s (Fed’s) interest rate cut was wrong. Forget about the “moral hazard” of whether the cut would plant the seeds for further bubbles. Lowering interest rates is wrong because it will do few any good, but cause many a lot of harm.
As the most imminent result, the U.S. dollar has accelerated its decline versus hard currencies. When a country’s central bank cuts interest rates, it is rare that the currency reacts in textbook fashion and declines more than a token amount versus other currencies; that’s because, amongst others, lower interest rates may boost growth and make the currency more attractive for investments. Not so this time with the Fed’s cut: lower interest rates are unlikely to boost economic growth. The reason? The markets are facing a valuation problem, not a liquidity problem. MERK
The days of no verification, no downpayment and low credit scores are past
Sept. 25 (Bloomberg) -- Lennar Corp., the largest U.S. homebuilder, reported the biggest quarterly loss in its 53-year history after $848 million of costs to write down the value of real estate.
The third-quarter net loss was $513.9 million, or $3.25 a share, exceeding the most pessimistic estimates from analysts and suggesting the worst housing market in 16 years shows no signs of stabilizing. Revenue at Miami-based Lennar fell 44 percent to $2.34 billion, the lowest in more than three years. BLOOMBERG
The third-quarter net loss was $513.9 million, or $3.25 a share, exceeding the most pessimistic estimates from analysts and suggesting the worst housing market in 16 years shows no signs of stabilizing. Revenue at Miami-based Lennar fell 44 percent to $2.34 billion, the lowest in more than three years. BLOOMBERG
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