Here's a great article by Micheal Sivy over at CNNMoney that so far for me, explains the subprime debacle at it's "best" and simplest. It's not as long a read as you thnk, and the insight is quite sublime.
From the article:
"News this week that major banks are planning a massive fund to prop up the hardest-hit victims of the subprime mortgage crisis got investors worrying again. Specifically, they're concerned that potential losses from bad subprime bets could be much bigger than previously feared.
In fact, the bailout fund is good news. And you actually have a chance to profit personally over the long term from today's turmoil, as long as you make your investment decisions cautiously.
Shares of banks and financial services companies may not have hit bottom yet - but there will soon be bargains to be had. And some companies with exceptionally strong balance sheets are already good deals.
Understanding the problems
The credit crisis itself is very complicated, but here's pretty much what you need to know. As home prices kept rising over the past few years, more and more people wanted to buy houses. Lenders accommodated them by devising mortgages that required less money down and lower monthly payments.
Often the interest rates on these mortgages could increase sharply from initial low levels. That created the risk that buyers who had stretched to the utmost to buy a house could be forced to default.
The risks were greatly multiplied as the original mortgages were bundled into separate investments and sold off. This kind of packaging has been done for decades by institutions, and the resulting securities have long been part of a stable credit market.
But the new packages, a type of collateralized debt obligation (CDO) known as structured-investment vehicles (SIVs) are far more complicated - too complicated, in fact. The packagers sliced and diced underlying pools of mortgages, mixing lousy loans with solid ones, until nobody could tell what was what. Even the resulting investments that had great credit ratings could ultimately be backed in part by shaky mortgages.
In addition, long-term assets in the portfolios were financed with short-term borrowed money. That means that rising interest rates or tight credit could force banks to take losses as they scrambled for cash.
The great risk is that the overall credit market freezes because lenders are afraid to lend."
CNNMoney
There's more to this article, but I wouldn't do it justice by editorializing on it. Do yourself a favor...read. ;-)
Thursday, October 18, 2007
Tuesday, October 16, 2007
You know how when the doctor says "This is gonna hurt...
...it's gonna hurt.? Well this is gonna hoit.
Paulson Urges Action on Housing Crisis
By MARTIN CRUTSINGER AP Economics Writer
WASHINGTON (AP) -- Treasury Secretary Henry Paulson called Tuesday for an aggressive response to deal with an unfolding housing crisis that he said presents a significant risk to the economy.
In the administration's most detailed reaction to the steepest housing slump in 16 years, Paulson said that government and the financial industry should provide immediate help for homeowners trying to refinance current mortgages before they reset at much higher rates.
He also called for an overhaul of laws and regulations governing mortgage lending to halt abusive practices that contributed to the current crisis.
"Let me be clear, despite strong economic fundamentals, the housing decline is still unfolding and I view it as the most significant current risk to our economy," Paulson said in a speech delivered at Georgetown University's law school. "The longer housing prices remain stagnant or fall, the greater the penalty to our future economic growth."
"The greater the penalty..." We're not talking a five minute major for slashing. We're talking a possible terminal velocity downturn in the economy BECAUSE the "house as ATM" act has dried up and in the future no one will have those cash "reserves" to go out and buy stuff which is what really drives this economy (we stopped being a manufacturing based economy a long time ago, during the Paleolithic era).
Let's see what the suits will do next to "bail" each other out. After all, just because they create a fund to offset the housing crisis doesn't mean no one's getting paid.
Paulson Urges Action on Housing Crisis
By MARTIN CRUTSINGER AP Economics Writer
WASHINGTON (AP) -- Treasury Secretary Henry Paulson called Tuesday for an aggressive response to deal with an unfolding housing crisis that he said presents a significant risk to the economy.
In the administration's most detailed reaction to the steepest housing slump in 16 years, Paulson said that government and the financial industry should provide immediate help for homeowners trying to refinance current mortgages before they reset at much higher rates.
He also called for an overhaul of laws and regulations governing mortgage lending to halt abusive practices that contributed to the current crisis.
"Let me be clear, despite strong economic fundamentals, the housing decline is still unfolding and I view it as the most significant current risk to our economy," Paulson said in a speech delivered at Georgetown University's law school. "The longer housing prices remain stagnant or fall, the greater the penalty to our future economic growth."
"The greater the penalty..." We're not talking a five minute major for slashing. We're talking a possible terminal velocity downturn in the economy BECAUSE the "house as ATM" act has dried up and in the future no one will have those cash "reserves" to go out and buy stuff which is what really drives this economy (we stopped being a manufacturing based economy a long time ago, during the Paleolithic era).
Let's see what the suits will do next to "bail" each other out. After all, just because they create a fund to offset the housing crisis doesn't mean no one's getting paid.
Sunday, October 14, 2007
Oh, yeah, this'll work...
File this under: Everybody in the pool!!!
But wait...is there water in the pool? And is the pool sound? And will the water get all slimey in a few days? And who's gonna guarantee me that no one's gonna gravitate next to me just to piss on me? And how come all these guys seem to know each other? Hmmm...
via Bloomberg
Citigroup, Bank of America Lead Banks Creating Fund
By Mark Pittman and Elizabeth Hester
Oct. 14 (Bloomberg) -- Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. will announce as soon as tomorrow that they are establishing a fund of about $80 billion aimed at reviving the asset-backed commercial paper market, said people familiar with the plan.
The fund, to which other firms will probably contribute, will buy some assets from structured investment vehicles, or SIVs, the people said. SIVs are units set up by banks, hedge funds and other investors to finance purchases of securities, including corporate bonds and mortgage debt.
The Treasury Department encouraged the banks to work together, and it jump-started the talks with a meeting of Wall Street executives in Washington on Sept. 16, said a person with knowledge of the deliberations. Robert Steel, the Treasury's top domestic finance official, brought the lenders together and prodded the competitors to keep working through the following weeks. Treasury Secretary Henry Paulson, a former chief executive officer of Goldman Sachs Group Inc., also made calls.
``Paulson definitely has the cachet to bring everyone to the table, because of his long experience on Wall Street,'' said Joe Mason, associate professor of business at Drexel University in Philadelphia and a former financial economist at the Treasury's Office of the Comptroller of the Currency.
But wait...is there water in the pool? And is the pool sound? And will the water get all slimey in a few days? And who's gonna guarantee me that no one's gonna gravitate next to me just to piss on me? And how come all these guys seem to know each other? Hmmm...
via Bloomberg
Citigroup, Bank of America Lead Banks Creating Fund
By Mark Pittman and Elizabeth Hester
Oct. 14 (Bloomberg) -- Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. will announce as soon as tomorrow that they are establishing a fund of about $80 billion aimed at reviving the asset-backed commercial paper market, said people familiar with the plan.
The fund, to which other firms will probably contribute, will buy some assets from structured investment vehicles, or SIVs, the people said. SIVs are units set up by banks, hedge funds and other investors to finance purchases of securities, including corporate bonds and mortgage debt.
The Treasury Department encouraged the banks to work together, and it jump-started the talks with a meeting of Wall Street executives in Washington on Sept. 16, said a person with knowledge of the deliberations. Robert Steel, the Treasury's top domestic finance official, brought the lenders together and prodded the competitors to keep working through the following weeks. Treasury Secretary Henry Paulson, a former chief executive officer of Goldman Sachs Group Inc., also made calls.
``Paulson definitely has the cachet to bring everyone to the table, because of his long experience on Wall Street,'' said Joe Mason, associate professor of business at Drexel University in Philadelphia and a former financial economist at the Treasury's Office of the Comptroller of the Currency.
And now for something completely different...
The two posts below shine a bright light into a dark corner of my mind. I'm sorry, but I just couldn't resist.
Thursday, October 11, 2007
File this under...
a) hmmm, don't smell right
b) uh, I wouldn't do that if I was you
c) my name is Ken Lay and I'm back from the dead
d) crap, I have my mortgage with them. I'M NOT JOKING!
Stock Sales by Chief of Lender Questioned
By GRETCHEN MORGENSON
Published: October 11, 2007
The Securities and Exchange Commission has been asked to investigate stock sales made by Angelo R. Mozilo, chief executive of the mortgage lender Countrywide Financial, in the months before its shares plummeted amid the deepening mortgage crisis.
In an Oct. 8 letter to the S.E.C. chairman, Christopher Cox, the state treasurer of North Carolina, Richard H. Moore, questioned changes Mr. Mozilo made to his arranged stock selling program, adjustments that allowed him to increase significantly his sales of Countrywide shares.
After starting a plan in October 2006, Mr. Mozilo twice raised the number of shares that could be sold: once in December 2006, when Countrywide stock was $40.50, and again in February, when it hit a high of $45.03. He has had gains of $132 million since starting the October 2006 plan and expects to sell his remaining shares by the end of the week, a move that will generate millions more.
“As an investor and a Countrywide shareholder, I was shocked to learn that C.E.O. Angelo Mozilo apparently manipulated his trading plans to cash in, just as the subprime crisis was heating up and Countrywide’s fortunes were cooling off,” Mr. Moore wrote. “The timing of these sales and the changes to the trading plans raise serious questions about whether this is a mere coincidence.”
Letter from Richard H. Moore, North Carolina Treasurer (pdf)
NEW YORK TIMES
b) uh, I wouldn't do that if I was you
c) my name is Ken Lay and I'm back from the dead
d) crap, I have my mortgage with them. I'M NOT JOKING!
Stock Sales by Chief of Lender Questioned
By GRETCHEN MORGENSON
Published: October 11, 2007
The Securities and Exchange Commission has been asked to investigate stock sales made by Angelo R. Mozilo, chief executive of the mortgage lender Countrywide Financial, in the months before its shares plummeted amid the deepening mortgage crisis.
In an Oct. 8 letter to the S.E.C. chairman, Christopher Cox, the state treasurer of North Carolina, Richard H. Moore, questioned changes Mr. Mozilo made to his arranged stock selling program, adjustments that allowed him to increase significantly his sales of Countrywide shares.
After starting a plan in October 2006, Mr. Mozilo twice raised the number of shares that could be sold: once in December 2006, when Countrywide stock was $40.50, and again in February, when it hit a high of $45.03. He has had gains of $132 million since starting the October 2006 plan and expects to sell his remaining shares by the end of the week, a move that will generate millions more.
“As an investor and a Countrywide shareholder, I was shocked to learn that C.E.O. Angelo Mozilo apparently manipulated his trading plans to cash in, just as the subprime crisis was heating up and Countrywide’s fortunes were cooling off,” Mr. Moore wrote. “The timing of these sales and the changes to the trading plans raise serious questions about whether this is a mere coincidence.”
Letter from Richard H. Moore, North Carolina Treasurer (pdf)
NEW YORK TIMES
Tuesday, October 9, 2007
A Bank Bet on Condos, but Buyers Want Out
By CHRISTINE HAUGHNEY
Published: October 9, 2007
Javier Miglin may walk away from an $80,000 down payment on a condominium with water views in Miami. Randal Mills may give up a $130,000 deposit on a 15th floor condo on the Strip in Las Vegas. And in San Diego, Jeanette Graham would just like to meet the neighbors.
Jack McCabe, a real estate consultant in Deerfield Beach, Fla., says the market downturn will hurt even successful developers. The three seemingly unrelated predicaments have a common thread that leads to Chicago, and Corus Bankshares, which financed the construction of each condominium development involved.
Whether buyers like Mr. Miglin and Mr. Mills close on their condos will be a crucial indicator for Corus. Many condo projects that started during the real estate boom are just being completed, and developers must begin repaying construction loans taken out before the market turned sour. If buyers do not close, and developers struggle, lenders like Corus may be left holding the bag. NEW YORK TIMES
Published: October 9, 2007
Javier Miglin may walk away from an $80,000 down payment on a condominium with water views in Miami. Randal Mills may give up a $130,000 deposit on a 15th floor condo on the Strip in Las Vegas. And in San Diego, Jeanette Graham would just like to meet the neighbors.
Jack McCabe, a real estate consultant in Deerfield Beach, Fla., says the market downturn will hurt even successful developers. The three seemingly unrelated predicaments have a common thread that leads to Chicago, and Corus Bankshares, which financed the construction of each condominium development involved.
Whether buyers like Mr. Miglin and Mr. Mills close on their condos will be a crucial indicator for Corus. Many condo projects that started during the real estate boom are just being completed, and developers must begin repaying construction loans taken out before the market turned sour. If buyers do not close, and developers struggle, lenders like Corus may be left holding the bag. NEW YORK TIMES
City's Boom May Falter Over Costs
By JULIE SATOW
Staff Reporter of the Sun
October 9, 2007
New York City's building boom may be brought to a halt by something more mundane than monetary policy or global financial disruptions — it could be as simple as copper, diesel, and steel.
By the end of next year, the Producer Price Index for construction inputs — the price of materials that are used in a construction project plus the cost of diesel fuel — will rise by as much as 8% and continue to do so indefinitely, according to a report released yesterday by the Associated General Contractors of America. This is a drastic change from the previous 12 months, which saw construction inputs inch up just 1.6% for the year ending in August.
"This is a warning note," the chief economist at AGC, Ken Simonson, the author of the report, said. "Even a small percentage change can mean the difference of hundreds of millions of dollars in large projects in New York." THE NEW YORK SUN
Staff Reporter of the Sun
October 9, 2007
New York City's building boom may be brought to a halt by something more mundane than monetary policy or global financial disruptions — it could be as simple as copper, diesel, and steel.
By the end of next year, the Producer Price Index for construction inputs — the price of materials that are used in a construction project plus the cost of diesel fuel — will rise by as much as 8% and continue to do so indefinitely, according to a report released yesterday by the Associated General Contractors of America. This is a drastic change from the previous 12 months, which saw construction inputs inch up just 1.6% for the year ending in August.
"This is a warning note," the chief economist at AGC, Ken Simonson, the author of the report, said. "Even a small percentage change can mean the difference of hundreds of millions of dollars in large projects in New York." THE NEW YORK SUN
Big banks dump the risk on investors
By David Weidner, MarketWatch
NEW YORK (MarketWatch) -- Wall Street finally found a buyer for all of that bad debt on its books: the regular investor.
After the single biggest wave of credit-related write-downs in Wall Street history, more than $20 billion and growing, it's investors who are holding the risk. For example, Merrill Lynch & Co. on Friday announced a $5.5 billion charge, the Street's biggest, and immediately investors sent the stock up 2.5%. See full story
Merrill simply followed the path laid down by Citigroup Inc. , which wrote off $3.3 billion and Deutsche Bank AG, which wrote off $3.1 billion and Morgan Stanley, $940 million. All saw their stock rise after dropping the write-down bomb.
The bet is that the bigger the write-down now, the less these institutions will have to write down in the future. This is like a baseball team that celebrates after losing by nine runs, because the odds seem somehow greater that it will lose the next game by a big margin. This logic has Richard Bove, an analyst at Punk Ziegal & Co., flabbergasted.
"These companies are not going to see their markets jump back immediately," he wrote in a note to clients. "Their earnings power has been lowered. This is a reason to sell not buy. The theory that if the company writes off $2 billion it should see its stock price up $1 and if it writes off $6 billion the stock should jump $3 is not one I can embrace."
MARKET WATCH
NEW YORK (MarketWatch) -- Wall Street finally found a buyer for all of that bad debt on its books: the regular investor.
After the single biggest wave of credit-related write-downs in Wall Street history, more than $20 billion and growing, it's investors who are holding the risk. For example, Merrill Lynch & Co. on Friday announced a $5.5 billion charge, the Street's biggest, and immediately investors sent the stock up 2.5%. See full story
Merrill simply followed the path laid down by Citigroup Inc. , which wrote off $3.3 billion and Deutsche Bank AG, which wrote off $3.1 billion and Morgan Stanley, $940 million. All saw their stock rise after dropping the write-down bomb.
The bet is that the bigger the write-down now, the less these institutions will have to write down in the future. This is like a baseball team that celebrates after losing by nine runs, because the odds seem somehow greater that it will lose the next game by a big margin. This logic has Richard Bove, an analyst at Punk Ziegal & Co., flabbergasted.
"These companies are not going to see their markets jump back immediately," he wrote in a note to clients. "Their earnings power has been lowered. This is a reason to sell not buy. The theory that if the company writes off $2 billion it should see its stock price up $1 and if it writes off $6 billion the stock should jump $3 is not one I can embrace."
MARKET WATCH
Monday, October 8, 2007
Ryder Blames "Freight Recession" on Housing Spillover
Trucking company Ryder cites weak market for profit.
Ryder System Inc (R) cut its profit forecast on Monday saying that softness in the U.S. economy has spread beyond the housing sector, sending the truck leasing and logistics company's shares down more than 6 percent. "Economic conditions have softened considerably in more industries beyond those related to housing and construction," Ryder said in a statement.
Ryder cited less-than-expected demand in its commercial rental product lines and lower prices for used vehicles. Ryder's commercial rental business fluctuates with market demand and is more directly affected by a soft market than Ryder's long-term rental operations.
The U.S. trucking sector has been hit by weak volumes since the third quarter of 2006, with some analysts describing this slowdown as a "freight recession."The Ryder announcement affected other trucking companies as well. J.B. Hunt (JBHT), YRC Worldwide (YRCW), Con-Way (CNW), and iShares Dow Jones Transportation Average (IYT) all look vulnerable.The housing recession has now spawned off a "freight recession".
It can't be too much longer before prefixes like "freight" and "housing" are removed from the R word to be replaced by the dreaded "consumer-led" prefix.
MISH'S TREND ANALYSIS
Ryder System Inc (R) cut its profit forecast on Monday saying that softness in the U.S. economy has spread beyond the housing sector, sending the truck leasing and logistics company's shares down more than 6 percent. "Economic conditions have softened considerably in more industries beyond those related to housing and construction," Ryder said in a statement.
Ryder cited less-than-expected demand in its commercial rental product lines and lower prices for used vehicles. Ryder's commercial rental business fluctuates with market demand and is more directly affected by a soft market than Ryder's long-term rental operations.
The U.S. trucking sector has been hit by weak volumes since the third quarter of 2006, with some analysts describing this slowdown as a "freight recession."The Ryder announcement affected other trucking companies as well. J.B. Hunt (JBHT), YRC Worldwide (YRCW), Con-Way (CNW), and iShares Dow Jones Transportation Average (IYT) all look vulnerable.The housing recession has now spawned off a "freight recession".
It can't be too much longer before prefixes like "freight" and "housing" are removed from the R word to be replaced by the dreaded "consumer-led" prefix.
MISH'S TREND ANALYSIS
U.S. Stock Market Stumble Presaged by S&P 500 Options
By Jeff Kearns and Michael Tsang
Oct. 8 (Bloomberg) -- Skittishness over the U.S. stock market's record-setting rally is reaching a crescendo among options traders who are preparing for a crash.
Investors are paying the most ever to protect against a drop in the Standard & Poor's 500 Index, data compiled by Morgan Stanley show. The gap between the price of so-called put options on the benchmark for U.S. equity and the cost to wager on further gains has averaged about 8 percentage points since August. That's more than the previous high in July 2001, before the index dropped 34 percent and fell to the lowest this decade.
The widening spread is a warning for OppenheimerFunds Inc. and Harris Private Bank, which oversee more than $300 billion and say the bearish bets indicate stocks may fall. The S&P 500 rebounded 10 percent since Aug. 15 on speculation the worst is over for banks and homebuilders hurt by the collapse of subprime mortgages. Shares in developed markets outside the U.S. have done even better, climbing 14 percent from their trough.
``Battle-scarred investors are buying some insurance this time around, having the benefit of hindsight,'' said Jack Ablin, who oversees about $50 billion as chief investment officer at Harris Private Bank in Chicago. Ablin said he bought put options for clients during the rally. BLOOMBERG
Oct. 8 (Bloomberg) -- Skittishness over the U.S. stock market's record-setting rally is reaching a crescendo among options traders who are preparing for a crash.
Investors are paying the most ever to protect against a drop in the Standard & Poor's 500 Index, data compiled by Morgan Stanley show. The gap between the price of so-called put options on the benchmark for U.S. equity and the cost to wager on further gains has averaged about 8 percentage points since August. That's more than the previous high in July 2001, before the index dropped 34 percent and fell to the lowest this decade.
The widening spread is a warning for OppenheimerFunds Inc. and Harris Private Bank, which oversee more than $300 billion and say the bearish bets indicate stocks may fall. The S&P 500 rebounded 10 percent since Aug. 15 on speculation the worst is over for banks and homebuilders hurt by the collapse of subprime mortgages. Shares in developed markets outside the U.S. have done even better, climbing 14 percent from their trough.
``Battle-scarred investors are buying some insurance this time around, having the benefit of hindsight,'' said Jack Ablin, who oversees about $50 billion as chief investment officer at Harris Private Bank in Chicago. Ablin said he bought put options for clients during the rally. BLOOMBERG
Bank of Japan Likely to Keep Rate at 0.5% This Week
By Mayumi Otsuma
Oct. 9 (Bloomberg) -- The Bank of Japan will probably refrain from raising interest rates this week after confidence at small companies deteriorated and as policy makers assess the effect of the U.S. housing recession on economic growth.
Governor Toshihiko Fukui and his colleagues will leave the benchmark overnight lending rate at 0.5 percent on Oct. 11, according to all 39 economists surveyed by Bloomberg News.
Companies with capital of 1 million yen ($850,000) or less account for almost half of Japan's corporate revenue. Waning investment and profit growth at small businesses and a U.S. slowdown were cited as risks by Deputy Governor Kazumasa Iwata last week. BLOOMBERG
Oct. 9 (Bloomberg) -- The Bank of Japan will probably refrain from raising interest rates this week after confidence at small companies deteriorated and as policy makers assess the effect of the U.S. housing recession on economic growth.
Governor Toshihiko Fukui and his colleagues will leave the benchmark overnight lending rate at 0.5 percent on Oct. 11, according to all 39 economists surveyed by Bloomberg News.
Companies with capital of 1 million yen ($850,000) or less account for almost half of Japan's corporate revenue. Waning investment and profit growth at small businesses and a U.S. slowdown were cited as risks by Deputy Governor Kazumasa Iwata last week. BLOOMBERG
Banks' new refrain: "We're not doing this anymore"
By Jen Benepe
Shifts in the New York real estate market aren't as drastic as in the rest of the country, but credit questions are getting tougher to answer. The Real Deal looked at the moving target of credit offerings and its effect on the residential market as part of an in-depth series of stories this month examining the shifting climate.Property buyers and real estate brokers in Manhattan, Brooklyn and Queens watched with increasing disbelief as mortgage lenders and bankers walked away from previous rate commitments, further tightened borrowing restrictions or suddenly eliminated previous mortgage programs."Every day is changing," said Barbara Ladesou, a mortgage broker for Manhattan Mortgage Company. "Every day we get a message from the banks, and the catch phrase is, 'We are not doing this anymore.'" REAL DEAL
Shifts in the New York real estate market aren't as drastic as in the rest of the country, but credit questions are getting tougher to answer. The Real Deal looked at the moving target of credit offerings and its effect on the residential market as part of an in-depth series of stories this month examining the shifting climate.Property buyers and real estate brokers in Manhattan, Brooklyn and Queens watched with increasing disbelief as mortgage lenders and bankers walked away from previous rate commitments, further tightened borrowing restrictions or suddenly eliminated previous mortgage programs."Every day is changing," said Barbara Ladesou, a mortgage broker for Manhattan Mortgage Company. "Every day we get a message from the banks, and the catch phrase is, 'We are not doing this anymore.'" REAL DEAL
Tuesday, October 2, 2007
Credit Markets: Unregulated and Pathologically Addicted to Lying
(September 26, 2007)
In keeping with this week's theme, The Rot Within (week II), we've examined the rot within our legal system, Homeowners, Defective Houses and Big Builders: Justice Is Not Blind, and the intellectual hypocrisy/rot within our ruling ideology which claims to support free markets but hurries to feed at the public trough at the first signs of potential loss: Privatizing Profits, Socializing Risk: Hypocrisy and Housing.
Today we look at the rot within our financial regulatory agencies. In the past, I have referred to "lightly regulated hedge funds," and frequent contributor Harun I. has observed that hedge funds are regulated, and that the problem lies elsewhere: what isn't regulated are the exotic financial instruments and derivatives which have been sold to unwary investors the world over.
CHARLES HUGH SMITH
In keeping with this week's theme, The Rot Within (week II), we've examined the rot within our legal system, Homeowners, Defective Houses and Big Builders: Justice Is Not Blind, and the intellectual hypocrisy/rot within our ruling ideology which claims to support free markets but hurries to feed at the public trough at the first signs of potential loss: Privatizing Profits, Socializing Risk: Hypocrisy and Housing.
Today we look at the rot within our financial regulatory agencies. In the past, I have referred to "lightly regulated hedge funds," and frequent contributor Harun I. has observed that hedge funds are regulated, and that the problem lies elsewhere: what isn't regulated are the exotic financial instruments and derivatives which have been sold to unwary investors the world over.
CHARLES HUGH SMITH
Tuesday, September 25, 2007
Are we headed for an epic bear market?
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
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
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
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