siv0 Headlines Watch
Here are some links and snippets from recent articles on the current derivatives collapse:
We need to dump AIG! This is pure insanity. The federal government support gambling contracts?
AIG hopes to cover all derivatives with plan
December 10th, 2008
American International Group Inc (AIG.N: Quote, Profile, Research, Stock Buzz), the giant insurer bailed out by the U.S. government, is trying to figure out how it can unwind contracts that cover $9.7 billion in trades, without asking taxpayers for more money.
The problem underscores the minefield that AIG has to navigate in trying to stop the heavy financial bleeding it has sustained from bets on mortgage debt before the U.S. housing market collapsed. The company's shares dropped 17 cents, or 8.8 percent, to $1.76 in Wednesday morning trade.
AIG spokesman Nicholas Ashooh said unwinding the $9.7 billion in derivatives trades in question is not as straightforward as unwinding others.
AIG, using derivatives, agreed to protect debt for banks and other parties, in deals that forced the insurer to post large amounts of collateral and ultimately seek government help.
Under the government rescue package that swelled to more than $150 billion last month, many of those derivatives transactions can be ended, because a government fund is buying the debt that AIG had guaranteed for banks and other parties.
But for the $9.7 portfolio in question, the parties that bought credit protection do not own the actual debt obligations, making the deals harder to unwind than other transactions.
BofA shareholders OK Merrill deal(Charlotte Observer)
December 5th, 2008
...“History tells us this: Commercial banking and investment banking do not mix,” said John Moore, a Charlotte shareholder who was one of about ten to take to the microphone. “Exotic derivatives and structured security investment vehicles must never again be allowed anywhere near the mortgage on your daughter's house or your grandfather's certificate of deposit.”...
FDIC: Government idea won't help people in need(Marketwatch)
Ronald D. Orol
Decemmber 4th, 2008
Community Reinvestment Act is not cause of financial crisis, FDIC's Bair said
...Bair criticized the Commodities Futures Modernization Act, passed in 2000, which she argued took the government out of oversight of derivatives market, which she argued was a key contributor to the financial crisis. She contended that Congress should put restraints on leverage used by investors in derivatives investments.
"That [CFMA] was unfortunate because a lot of the leverage occurred through derivatives being priced on mortgages and mortgage default rates," Bair said. "Reinstating some common sense regulation on derivatives trading and more aggressive margin requirements would be a tremendous help," ...
Mexican firms asked to reveal derivatives exposure(Reuters)
Dec 4, 2008
Mexican companies have been asked by regulators to disclose their exposure to derivatives instruments after a number of firms lost billions of dollars in bad currency bets following a steep devaluation of the peso.
Companies listed on the country's stock exchange will have to clarify their derivatives positions in publicly available filings to the stock exchange by Dec. 15, said a spokesman for the National Banking and Securities Commission, or CNBV...
...The government said in October that it would probe whether companies with large losses in derivatives had broken rules by not keeping investors informed.
Getting around tax laws...
Citi's General Growth stake tied to Pershing Square(Reuters)
Dec 4, 2008
Both Citigroup and Morgan Stanley primarily bought shares to reduce their risk in trades they entered with Pershing Square Capital Management, said William Ackman, the fund's founder.
The derivatives trades gave Pershing Square exposure to shares without owning them outright, so the banks essentially bought the stock on behalf of Pershing Square. In a November filing, the fund said it owned about 7.5 percent of General Growth's shares outright.
The derivatives transactions with Morgan Stanley and Citigroup, and a similar deal with UBS AG (UBSN.VX: Quote, Profile, Research, Stock Buzz), use a derivative known as a "total return swap" that give the fund exposure to another 12.5 percent of General Growth's shares.
In the total return swap, Pershing Square pays financing fees to the banks. If the shares go up, the fund receives the gains, but if shares go down, it assumes the loss.
Spokesmen for Citigroup and Morgan Stanley declined to comment, while a UBS spokesman was not immediately available.
Pershing Square could not buy more than 9.9 percent of General Growth's shares outright without falling afoul of special share ownership rules that REITS typically follow to maintain their special tax-advantaged status.
Lawmaker Looks to Regulate Derivatives(NEWSInferno)
November 21st, 2008
prominent lawmaker says financial derivatives like credit default swaps need to be regulated. Sen. Tom Harkin (D-Iowa) said yesterday that he plans on introducing new legislation that would force such derivatives onto futures exchanges.
The unregulated derivatives market has shouldered much of the blame for the current global financial crisis. Derivatives are financial instruments whose value is based on an underlying assets, such as commodities, stocks, residential mortgages, commercial real estate loans, bonds, interest rates, exchange rates, or indices (such as a stock market index or the consumer price index ).
Chasing Value: GE -- the water & power company (Blogging Stocks)
Nov 25th 2008
Much has been written about the trouble General Electric's (NYSE: GE) Financial Services division is having in the current global crises centered on high-risk leveraged loans and multi-leveled derivatives. It is true the company is seeing its share of the pain, and truth be told, I do not think anyone actually knows how deep the total pain will be. Today, GE announced a December 2, 2008 conference call to enlighten investors.
Is The Financial Crisis Getting the Best of Warren Buffett?(iStock Analyst)
November 22, 2008
Through November 21, 2008, Berkshire Hathaway's (BRK.A) year-to-date return was -36.4%. Since last December 11th when Class A shares hit its record high of $151,650, it has lost nearly half its value closing at $77,500 on Thursday; its lowest level since August 2003. This has not gone unnoticed by shareholders. Some investors have lost confidence in the ability of BRK to pay its debts.
After the collapse of AIG driven by derivatives, many investors fear the same could happen to other insurance companies including BRK.A. Berkshire could have to pay as much as $37 billion between 2019 and 2027 under some derivative contracts if the S&P 500 index and three other stock indexes are lower than when Berkshire entered the contracts...
...Derivative exposure is not the only problem facing BRK.A. The stock price of General Electric Co. (GE) and Goldman Sachs Group Inc. (GS), have fallen, rendering Mr. Buffett’s warrants to buy common shares worthless for the time being.
The time has come for the United States to control its own destiny
We are up and running again as www.DerivativesCollapse.com
Congressman Ron Paul on the Federal Reserve
Ron Paul has proposed HR 2755, 'Federal Reserve Board Abolition Act'
"...Worst of all, the Treasury Department has recently proposed that the Federal Reserve, which was responsible for the housing bubble and subprime crisis in the first place, be rewarded for all its intervention by being turned into a super-regulator. The Treasury foresees the Fed as the guarantor of market stability, with oversight over any financial institution that could pose a threat to the financial system. Rewarding poor performing financial institutions is bad enough, but rewarding the institution that enabled the current economic crisis is unconscionable."
The US Banks are using borrowed Fed money to create its reserves!UPDATED FOR OCTOBER
This graph show US banks non-borrowed reserves updated through through May 1st 2008. Negative non-borrowed reserves indicates that they had to borrow money to cover their reserve requirements. They went from $40-45 billion in reserves in April to about -$320 billion in October, or they have borrowed at least $320 billion (up to $360 billion) to meet reserve requirements. For the record, since the Fed started reporting this figure in the 1950's, until now, the non-borrowed reserves were always positive.
Ex Fed Chairman transcript from Vancouver speech
Alan Greenspan 25Jan08
"...The demand for them, the hedge funds, pension funds, and everybody else looked to be an exceptionally high return, exceptionally low risk, became extraordinarily large the say hedge funds puts pressure on the ... basically the investment bankers in the United States, and the security returns to the lenders say ‘we need more paper' and what they basically did, they said to the lenders effectively - although I'm sure contracts are involved - is whatever you can get we will take to securitize and the underwriting standards collapsed. I mean, the amount of egregious action was quite extraordinary..."
The black box economy
Behind the recent bad news lurks a much deeper concern: The world economy is now being driven by a vast, secretive web of investments that might be out of anyone's control.
Stephen Mihm Boston Globe, January 27, 2008
...The drumbeat of bad news over the past year...is only a symptom of something new and unsettling - a deeper change in the financial system that may leave regulators, and even Congress, powerless when they try to wield their usual tools.
The Current Situation
I believe the financial system has collapsed. Many people talk about rescuing it, reviving it, bottoming out, etc., but I think that the system is broken, and will need to be replaced. What we are experiencing now are the death throes of the system. Even if the dollar is not explicitly changed or replaced, when all is said and done, we will be in a new system. As it stands now, the federal government owns equity stakes in major banks. The Federal government has basically nationalized a large part of the mortgages in the US (through Fannie and Freddie mae). There no longer exist any US investment banks of note- they have all morphed into bank holding companies so they can feed on the federal teet. Major bank failures have ocured. Most recently, Citibank has faltered, and many are wondering if Bank of America will pull through.
The cause of the problem is laid at the feet of mortgage holders in a roughly $15 trillion real estate market. While it is true many people did over-extend themselves, got into foolish loans, etc. As well, outright corruption was practiced from the buyer through the brokers all the way to the central bank and the president. But ultimately it is the derivatives which are the likely cause of the current collapse. Certainly the derivatives were used to create a shadow banking system that allowed more mortgages to be written, but the derivatives went beyond just mortgages. The best estimate that I can come up with is that known derivatives notional value is between $1/2-1 QUADRILLION dollars. A quadrillion is 1,000,000,000,000,000. That is 1000 trillion or 1,000,000 billion. This is an unimaginable amount of money that is tied up in a giant gambling casino. The derivatives bubble is also highly leveraged, so as it collapses it sucks the life out of the "real" economy. This is what we are curently experiencing- a commodities crash as funds deleverage, and clients pull out forcing the managers to liquidate all assets to meet the demands.
The dollar, being the current reserve currency of the world (and this could change) has increased in strength as the world scrambles to obtain dollars to deleverage, pay dollar denominated debts, hoard safe-haven cash, etc. This has remained the case even as trillions of dollars are being pumped into the collapsing economy. The possibility of future hyper-inflation is ominous. In the mean time precious metals, especially gold, is being bought at the retail level at a record rate. The price of gold; though diminished by the commodities crash, is holding up reasonably well, and its future prognosis appears good to many analysts.
Original "The Current Situation"
1. The banks create exotic investment "vehicles" (or conduits), basically ways to take advantage of every conceivable glitch to make money.
These vehicles include structured investment vehicles (siv), collaterized debt obligations (cdo), credit default swaps (cds), financial derivatives,
hedge funds etc. To take the siv as an example (since it is the "vehicle" which triggered the current crash):
a. Investors (usually a bank) set-up a siv: off the balance sheet (lack of transparency).
b. The managers take the investors money and buy long term bonds, mortgage backed securites, etc., usually leveraging the funds (much like a bank they buy more than they have money for). Let's say the securities pay 6.0% interest to the siv.
c. They sell commercial paper (short and medium term notes or bonds). Let's say they give 5% interest to the commercial paper holder;
d. In order to add credibility, they "insured" the mortgage backed securities and other securities using the services of monoline bond insurers (like MBIA and Ambac).
e. The siv makes money on the difference between the long term securities and the commercial paper; Say 6.0% - 5.0% = 1.0%. This is simplified, but gets the idea across.
2. The banks were making tons of money on sivs. Investors in commercial paper (like Orange County California) bought it because they were getting 5+% interest in a market where most safe investments were paying say 2-3%.
3 . The SIVs and banks basically took anything they could get in terms of mortgage backed securities (i.e., my, your, your neighbor's mortgages repackaged as securities). They basically told the morgage creators, give us anything we will take it. As Alan Greenspan, said, underwriting standards collapsed.
4. This caused a flood of easy money, which led to exploding home prices.
5. In the summer of 2007, things started going bad. Mortgages started to default. Foreclosures started exploding. People started to look askance at mortgage backed securities.
6. Commercial paper investors realized that the sivs held tons of mortgage backed securities, so stopped buying the paper.
7. The sivs were holding hundreds of billions in leveraged long term debt, but needed short term paper to keep the game going. They could not get paper. So they started defaulting.
8. The banks had to step in to stop the hemorrhaging. This caused them to suffer major damage. In qtr 4 of 2007, Bank of America lost 95% of its net income. Sun Trust lost 99%! The worst quarter (according to Moody's) is right now (Q1 2008).
9. The monoline bond insurers were then on hook to cover the losses. They are currently going under. The rating agencies (Moody's, Standard & Poors) are also in trouble as they are forced to downgrade the bond insurers.
10. All kinds of derivatives and hedge funds are going crazy, because they also have bets placed on mortgage backed securities, etc. Derivatives contracts (bets) are estimated at a notional value of 8X the worlds GDP!
11. Everything in the financial world is connected in a macabre financial web of Orwellian proportions due to derivatives bets, hedge funds, and securitization schemes in general.
In a nutshell we are sitting at the beginning of potentially one of the worlds most dramatic financial blow-outs. Stay tuned (to www.siv0.com) for details as it happens.
December 2nd, 2008
Hello dear readers. I must apologize for having abandoned siv0 for 3 months. I am returning as www.DerivativesCollapse.com . I did not want to abandon siv0, I just felt I had to change hats for a while. I used the time trying to get the word out on what was going on. As you may know, I created www.TakeBackTheFed.com as well as a number of related sites. During this period specifically, I created www.FinancialBlackmail.US (and .com). I also created www.JoeSixPack.me . In these sites I have tried to communicate a more direct message about the collapse of the derivatives bubble currently ongoing. I have also been contacting my representative and senators to try and warn them about the "rescue" package. This is what www.FinancialBlackmail.US is about. I have also spent a lot of time on forums spreading the word and linking back to the new sites.
I am going to restart DerivatiesCollapse.com, and try and keep up with the happenings as we go forward in to the catastrophe we find ourselves. I have writen a new version of "The Current Situation" in the left column.
August 25th, 2008
Now the "establishment" itself is acknowledging that the problems are bad and getting worse. From the two articles linked for August 23rd (NY Times and Telegraph UK), it appears that the problem is no longer just an American problem (as SIV0 has been saying all along). True, the mountains of US based MBS and other real estate based derivatives aren't helping. Things are breaking up BEFORE the US election. This was not supposed to happen, but unfortunately, the "establishment" does not have total control as many conspiracy theorists like to imagine. This is good for us, "We the People", because it goes to show that we have a chance of stepping in and solving the problem. Two things we can do:
1. Read the Proclamation at Take Back the Fed. and send it to your congressmen.
2. Support the upcoming parallel Ron Paul Republican convention in Minneapolis. Ron Paul is the only candidate ("serious" or not), that seems to understand or at least be willing to communicate the nature of the problem. And it seems unwise trust any candidate who is not communicating it, because if they know and are not sharing this knowledge, then the presumption is that they are going to stab the people and republic in the back after getting elected.
August 5th, 2008
It appears that we are entering a new phase of the collapse. We have had three banks collapse, including a big one- IndyMac of Pasadena, California. Collateralized debt obligations are failing, some of the paper going for 22 cents on the dollar. Structured investment vehicles are selling off. In one case the senior note holders are expected to get 55 cents on the dollar. Everyone else gets zilch. The Federal Reserve is opening windows [of credit] left and right, extending already open windows, and being joined by other central banks including the European Central bank (ECB). Commodities are starting to collapse includng oil and gold. This may be seen as a good thing, but it means the latest bubble is going, and it was a very short lived one. Credit default swaps look about to collapse. The bankers released a report which did not say, 'let's regulate and decrease derivatives', but rather said 'let's use them more efficiently'. Right now the Federal Reserve and the federal government appear to be trying to keep things looking good until the election, at least. I do not know if they can succeed. You know what I am going to say: Let's www.TakeBackTheFed.com .
July 11th, 2008: "all the chickens [are] com[ing] home to roost"
It was an unbelievable day. First Fannie Mae and Freddie Mac have their stock declared worthless by a past Fed board member. Then the DJIA drops more than 2%, followed by a meteoric rise after some comments from Ben Bernanke regarding the GSEs borrowing from the Fed window. Finally the DJIA closed down close to 1%. Then after the close, we find out that IndyMac, the Pasadena, California based mortgage lender was taken over by the Federal government. This is the second biggest bank failure in US history. Who knows what will happen Monday. Expect to hear some announcements from the Fed over the weekend. Possible topics include: Fannie Mae and Freddy Mac, plus Lehman Brothers, who are potentially near failure themselves.
I think it is becoming clearer that we need to immediately nationalize the Federal Reserve banking system, and likley abolish it. This was not supposed to happen until after the election. Everyone did what they could to stick their fingers in the dyke, but this is just too big. The $700 trillion+ derivatives bubble dictates our fate, not us. That is unless congress gets the courage to act. The Fed encouraged and allowed the bubble to be created, and for the good of our nation we need to abolish the Fed.
June 18th, 2008
It has been a fairly quiet couple of weeks, but a lot of signs have been leaking through- problems with the monoline insurers, problems with Lehman Brothers, etc. But today, the Royal Bank of Scotland has come out and warned that "A very nasty period is soon to be upon us - be prepared"..." as "all the chickens come home to roost". They are basically predicting a global stock market crash over the next three months. As this is going out, it is coming to light that oil speculators may be succeeding in driving up oil prices, because of the "Enron Loophole", a regulatory malfeasence put in place for the sake of Enron. This allows energy speculators to speculate in the "dark market" (i.e., unregulated since December 2000). According to Michael Greenberger (Division of Trading and Markets for the Commodities Futures Trading Commission. He now teaches law at the University of Maryland), "if the Bush Administration were serious about its regulation, we could begin seeing prices drop within a month". Let's see how serious the Bush Administration is. Finally, I want to mention that the structured investment vehicles (sivs) are finally preparing to go to market with their "assets". Once a market price is set, this could make or break a lot of financial institutions and funds. If the prices are too low, this could lead to more failures, even possibly precipitate a major crash.
May 29th, 2008
A lot of new indications are that the financial collapse is starting a new phase of disintegration. As many analysts have been warning, the credit default swap (CDS) situation is becoming a big issue. A CDS is basically a derivitaive instrument. The insurer (usually called a monoline insurer) guarantees the value of a security- a Municipal bond, a Mortgage backed security, etc.
Recent reports shows that CDS contracts grew very rapidly through the second half of 2007. Many of the major players are reporting huge losses (MBIA reported $2.4 billion in Q1 2008). Some analysts are predicting that the ultimate lossed in CDS may be greater than losses in the (specifically) subprime arena.
Now, the CDS are tied in to the collateralized debt obligations, which are [in may cases] sitting full of mortgage backed securites that cannot be sold. As reported by Naked Capitalism, the rating agencies such as Moodys require the CDS issuer to have control rights over selling/liquidating tranches of the CDO in order to grant the CDS issuer a AAA rating. Right now there are fights between some monolines and CDOs over exercising the control. If the CDOs liquidate, they may further damage the monolines, causing their ratings to be cut even further (making it harder to get new business to raise more capital to meet their obligations as insurer). On the other hand, some of the CDOs are in a default event situation, in which senior tranche holders decide what actions need to be taken- such as liquidating. Interestingly, Moodys has recently admitted that a computer glitch has caused a certain type of "complex debt product " to be erroneously rated AAA. They knew about this in early 2007, but have not changed the ratings. it is not clear if this relates directly to the CDS/CDO issue, but further undermines the low confidence in the rating agencies.
In addition, new accounting rules have been set for CDS issuers requiring them to cover potential losses indicated by a ratings decrease, rather than just covering estimated defaults near the time of the default. Additionally, there is some indication that mortgage backed securites (MBS) are starting to be unloaded at a good discount (i.e., "Bank Hapoalim, the second largest bank in Israel, sold its entire portfolio of MBS to Pimco for 75 cents on an already-written-dollar", Naked Capitalism). Mark to market accounting rules would indicate that if this becomes common, huge writedowns are imminent, and the new accounting rules may require the CDS issuer to cover these potential losses sooner rather than later.
A number of analysts and even central bankers (Trichet of the ECB recently said the worst lies ahead) have indicated that the worst is not over yet. Warren Buffet believes that we are less than halfway through the credit crisis (possibly not a quarter).
As siv0 believes that derivatives are a big part of the problem, it is worth noting that the BIS reprted that the notional value of OTC derivtives was $596 trillion in December 2007 (vs. $516 trillion in January 2007). Note that this is over 9x the worlds GDP. Satyajit Das, a famous text book writer for derivatives, warned about the consequences of the massive derivatives de-leveraging that is underway.
A couple of other interesting events include the announcement of a substitute for the LIBOR index. The LIBOR (London InterBank Offered Rate), has been deemed unreliable of late, even a "lie". This rate is a critical index for a lot of investment activity, especially in the derivatives area. Another event is a new report about the Federal Reserve Bank sitting in the offices of investment banks- a highly unprecedented move. It was reported at the beginning of April, but the story did not seem to get much attention.
The question is still how the financial crisis will translate into the economy, which is already hit with huge increases in commodity prices , especially oil. These price increases could be the result of the financial crisis itself, as investors flee to commodities. George Soros (and others) believe the stratospheric oil prices are a bubble in themselves.
With foreclosures accelerating, more pressure is being put on CDOs, CDS, etc., which likely will lead to further devaluing of MBS, and thus lowering the ratings on monoline insureres who may not be able to raise sufficient funds to meet their obligations, etc. All in all, we seem to be entering a dangerous spiral.
Again, I must indicate that our best option at this point is to Take Back the Federal Reserve, and start over again. We are leaving it to those that caused the problem to solve the problem, but it has become all our problem at this point, and if we do not act soon, it may be even more so.
May 8th, 2008
I am travelling right now, and while flying I just read After the Crash, An Essay-Novel of the Post-Hydrocarbon Age, by Caryl Johnston. This novel deals with a group of people in the Philadelphia area trying to make sense of who they are, and what they were before the collapse porion of the [real or imagined] peak oil scenario. It deals more with values- values that we currently have, and how those values are influenced by cheap and abundant energy. I personally was somewhat disturbed by the novel because it forced me to look at peak oil from a different perspective- a more human perspective. The novel did not deal with the deaths and dislocations, the tragedies, etc., so much, nor the way the new civilization produced energy, etc. It did deal with stark images of people surrouned with monumental legacies from the past- huge buildings, automobiles, machines, etc., all useless. The only purpose they served was as salvageable materials for current survival.
The point of the novel was to get the reader to think about the values we currently do live with, and it was succesful in that regards for me. It is a stark contrast to the image we have grown up with: a future of man exploring space with ultra-futuristic unlimited energy sources, ultra-powerful weapons, etc. It raised in my mind the question of whether there is enough easily extractable energy to allow man to develop to the next step in industrial development. If the easy energy sources run out before we have gotten far enough along, we are doomed. It is a subtle reminder that there is a Creator. Our destiny lies more with Him, then with our grandiose visions.
That being said, I am not proposing a doomsday scenario be adopted (nor do I believe did Caryl Johnstion, she just used such a scenario to explore some metaphysical ideas). I do believe that the peak oil scenario could be viewed as a worst case scenario, IF we do not take the future into our hands to some degree. We need to develop our domestic energy sources, now. We need to develop petroleum resources, coal, nuclear, solar, wind, etc. With oil at $120 a barrel and increasing, these alternatives have an economic chance. But we need to do more than just let "the market" guide us. We should create tax incentives to develop alternative energy sources. We need to take our financial system back.
We also need to keep from getting bogged down with "global warming", and other highly speculative theories. I am hearing children talk about the polar bears floating away on renegade sheets of ice in Anarctica, purportedly because of CO2 emmisions by man. There is a lot of evidence that significant and dangerous human induced global warming is not real, and in fact we may be headed for a little ice age. At this juncture in history, we need to remain rational. If the evidence does not support the theory, then we should not factor global warming into our plans for survival. I have added a four part series on global warming by Professor Bob Carter, an Australian scientist to the Media page. Professor Carter presents a convincing case that any "warming" we do see is not unusual, and in fact consistent with observed weather patterns over several thousands of years.
May 5th, 2008, 'Sinko de EconiMaio'
Though nothing as dramatic as some of the recent events has occured in the last couple of weeks, there has been a lot of concerning news. As the "real" economy attempts to stay on track, in addition to the failing financial system, it is dealing with further increases in the price of petroleum, plus news that Iran is switching out of the dollar for petroleum. Other Arab countries may follow suit, but Venezuala has stated that it does not have plans to do so (at this point). Siv0 does see a silver lining in the high fuel prices- namely that alternative enrgy forms have an economically competitive chance. Coal based liquid fuels need to be developed, as well as any form of US petroleum reserves (including shale oil). At $120+ per barrel , it's much easier to be competitive with alternative technologies. Let's get nuclear, including breeder technology going again in this country, coupled with the development of electric cars and distribution systems.Solar and wind also have potential to help us (the US) become more energy independent.
On the financial front, the take-over of Countrywide by Bank of America is hitting more snags. It is becoming clear that B of A may not intend to guarantee the existing Countrywide loans. This is leading to some analysts calling for B of A to drop the whole buyout
The Fed marches on, adding more money to the TAF, and accepting a wider assortment of paper as collateral for the TSLF- including auto loan and credit card based paper. This as auto loans are undergoing the same type of bubble as home mortgages are. In addition, the ECB and the Swiss National Bank are upping the amount available under similar programs
While some are claiming the problem is declining, Naked Capitalism wonders,
...the overwhelming counterevidence in the form of the increase in the Term Auction Facility by $50 billion and expanding the types of assets that can be pledged for the TSLF to include asset backed securities consisting of auto loans and credit card receivables. This may be a direct effort to stand in for the moribund asset backed commercial paper market. Oh, and in case you somehow missed it, the ECB joined in with a $20 billion addition, bringing the size of its program to $50 billion and Swiss National Bank increased its facilities by $6 billion to a new total of $12 billion. If things are so hunky dory, why is the officialdom throwing large amounts of money at a problem that is over?
In addition, the feds are getting more involved in investigation of subprime and related iisues. This includes a new investigation in New York, with similar investigations around the country focusing on the collapse of subprime loans. In addition Citigroup is being sued in Florida over hedge fund losses, and Wachovia is implicated in a Colombian and Mexican drug money laundering investigation.
April 23rd, 2008, second time
Please read the Market Oracle article: Commercial Banks Heading for Huge Derivatives Losses- Credit Crisis Turning into Credit Armageddon . This plus a couple of other news items posted today indicates that the derivative blow-out is no longer hidden from view.
April 23rd, 2008
We are seeing a lot of mixed news in quarterly reporting. The financial sector is reporting a lot of bad news, as would be expected. To the stock market this appears in some cases to be good news. A bank reports $5 billion in write downs and its stock goes up! This is because the stock investors see it as 'the problem is now behind us, and the stock is cheap- i.e., a good value'. The real economy is still somewhat functioning. It is being impacted by high fuel prices and commodities. People still go to work, give birth, eat food, live in [lower valued] houses, etc. Life goes on.
The problem is still the $500+trillion derivatives bubble that may pop at any time. This will impact the real economy if farmers cannot get loans to keep running their farms, if people cannot get loans to finance their homes, if producers of stuff that people need cannot finance the machines and supplies they need to make the stuff.
This is all the fault of the Fed and its policies of the last 20 years (at least). As the derivative bubble was inflated the Fed stood by, even encouraged it with glee. In fact it is the fault of congress who have the constitutional responsibility to administer and maintain a currency and system of credits. Therefor, we need to
We need to do it NOW. Let's not sit around and wait for the crash, open our wallets, and pay for it (not that what is in our wallets will necassarily be worth much). Let's take action now, and save our nation!
April 15, 2008
Ron Paul in his April 14 article "Bailing Out Banks finished with, "Rewarding poor performing financial institutions is bad enough [i.e., the investment banks], but rewarding the institution that enabled the current economic crisis is unconscionable [i.e., the Fed]. Siv0 agrees on this point. Please visit www.TakeBackTheFed.com. Note that what Ron paul did not mention in his article was his House bill HR2755 titled "Federal Reserve Board Abolition Act". You can read this at www.TakeBackTheFed.com.
Note that quarterly reportnig is just starting for many big corporations. We have started with "shocking" news from GE, followed by a wammy for Wamu. Now we are hearing of several dozen retailers filing bankruptcy. Be prepared for a deluge of bad news in the coming weeks.
April 8, 2008
I just wanted to point out the interesting fact that the Federal Reserve has sent employess to monitor activities at several investment banks (which are not technically under its jurisdiction). These banks include: Goldman Sachs, Morgan Stanley, Lehman Brothers, Merrill Lynch, and Bear Stearns. It is clear that this is not a social call. Bear Stearns is fully understandable, as the Fed arranged the sale to JP Morgan. The rest of them are in difficult times right now, and I suppose the Fed wants to be ready for the next emergency before it becomes a crisis. As the Fed has opened credit windows to these banks (a very unusual move in itself), The Fed certainly needs to monitor what is happening. One wonders how much information about conditions in these investment banks will actually get passed to the Congress and the public (I suspect very little).
Too bad the Fed did not use this type of discretion while the $516 trillion derivatives bubble was being inflated.
March 18, 2008
Well, the drastic Fed actions (arranging a buyout for Bear Stearns and cutting the discount rate) did avert disaster today. Not only did it restore some order, but we saw increases in a number of US stock indexes. The real question is what is the status of the derivative holdings of Bear, JP Morgan, Citigroup, and many others. There is a recognition occuring that this is a much bigger problem, and quite likely the actual reason why the Fed acted in such a drastic manner. Estimates for OTC derivatives are as high as $560 trillion (notional value). This is 8x the world's GDP. In the wind-up of this potential time bomb, the US Federal Reserve was not only complicit, but even somewhat positive (especially under Alan Greenspan). This 2003 article from Forbes is an example of Greenspan's attitude (and thus the Fed's) towards derivatives. The article compares Greenspan's attitudes to Warren Buffet's.
Greenspan's overall view:
"Although the benefits and costs of derivatives remain the subject of spirited debate, the performance of the economy and the financial system in recent years suggests that those benefits have materially exceeded the costs."
"We view them as time bombs, both for the parties that deal in them and the economic system."
On regulation, Greenspan:
"Except where market discipline is undermined by moral hazard, owing, for example, to federal guarantees of private debt, private regulation generally is far better at constraining excessive risk-taking than is government regulation."
Oops, got that one wrong. Sounds like a bit of "irrational exuberance".
Warren Buffet on regulation:
"There is no central bank assigned to the job of preventing the dominoes toppling in insurance or derivatives.... [Total return swaps and] other types of derivatives severely curtail the ability of regulators to curb leverage and generally get their arms around the risk profiles of banks, insurers and other financial institutions."
Sounds a bit more rational, and more or less what we are seeing today.
Alan Greenspan on risk concentration:
"One development that gives me and others some pause is the decline in the number of major derivatives dealers and its potential implications for market liquidity and for concentration of counterparty credit risk."
Got it right on that one! unfortunately the "private regulation generally is far better ...than is government regulation" policy kind of nullified the correct observation.
Warren Buffet on risk concentration:
"Large amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers, who in addition trade extensively with one another."
Bingo! Like Bear Strearns and JP Morgan, perhaps?
Alan Greenspan on recent [derivative related events from 2003 perspective]:
"Even the largest corporate defaults in history (WorldCom and Enron) and the largest sovereign default in history (Argentina) have not significantly impaired the capital of any major financial intermediary."
But [purportedly] a US housing bubble may change the historical record.
Warren Buffet on recent events:
"In the energy and utility sectors, companies used derivatives and trading activities to report great 'earnings' --until the roof fell in when they actually tried to convert the derivatives-related receivables on their balance sheets into cash. 'Mark-to-market' then turned out to truly be 'mark-to-myth.'"
History does repeat itself. Sometimes in larger proportions.
The takeaway, Greenspan:
"We have made great strides in expanding the volume of publicly disclosed information related to risk exposures and derivatives. A more complex question is whether this greater volume of information has led to comparable improvements in the transparency of firms."
Well, we may soon get the answer.
Warren Buffet's takeaway:
"Derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are p otentially lethal."
I wonder if Warren Buffet is interested in a position as head of the Federal Reserve System?
March 17, 2008, AM Europe
With the announcement of a $2/share Bear Stearns buyout by JP Morgan (at roughly $0.10 to the $1), suported by the Fed, Asian and European stocks have started the day by dropping significantly. I do not know how far the US stock market will drop at opening. Bear Stearns was a major derivatives player with trillions of dollars in notional value of contracts. No one can predict immediately how far this will spread. The Fed is basically continuing to inflate the financial system to avert a meltdown, and the immediacy of the problem just jumped from elevated to high (using the homeland security system as an analogy). Some would say it just became severe.
I do not intend this to be an advice website, but, depending on what the US stock market does this morning, now may be a good time to stock up on some basic household commodities: dried foods (rice, beans, powdered milk, etc.). Also, this is a good time to keep all your car's gas tanks full. I am not suggesting anyone panic, but certainly it would be wise to take a few precautions.
March 11, 2008
February 2008 was a busy month. The financial crisis has escalated on a number of fronts. Various solutions have been proposed, and some temporary stability in some sectors seems to be occuring, but overall, things appear to be getting worse. In a recent essay in John Maudlin's "Out of the Box" e-newsletter, Carolin Baum, who writes for Bloomberg had this to say:
"Let's face it: The Federal Reserve must be scared to death as it watches the financial system unravel.
Unravel would appear to be the operative word as leverage proves to be as toxic on the way down as it was intoxicating on the way up.
By late last week, events seemed to be spinning out of control. Credit spreads were blowing out, with tax-exempt municipal bonds out-yielding Treasuries by a record and the spread between Fannie Mae mortgage-backed securities and government bonds hitting a 22-year high. Treasury bill yields were collapsing (further). The U.S. dollar was sinking like a stone. And commodity prices, in their lofty ascent, had all the makings of a market unhinged from the fundamentals, which, after all, is the definition of a bubble.
Mortgage foreclosures hit an all-time high in the fourth quarter of last year while homeowners' equity, or the value of a home less the outstanding mortgage, sank to an all-time low of 47.9 percent.
This measure of owners' equity has been declining since the Fed started collecting data in 1945. (This isn't your father's housing market.) More unusual was the drop in the value of household real estate in the fourth quarter, one of a handful of declines in the half-century life of the series.
Margin calls are causing forced selling of assets (often what investors can sell, not what they'd like to sell), which makes them cheaper, which triggers additional margin calls and more forced selling. No wonder the Fed announced two initiatives early Friday before the New York Stock Exchange opened to address "heightened liquidity pressures." ...
This sums up what has happened this month, and actually since January pretty well. In February (and beginning of March) we saw Gold skim $1000/ounce. We saw oil hit $106/barrel. The Euro is trading at above $1.53. In fact I am in Europe, and the airports and hotels are trading the Euro at $1.71. Normally these sources are a bit higher, but normally not this much. Clearly they are hedging their bets. Add to this that February saw the highest forclosre rate on record plus saw home equities drop to the lowest level ever. The subprime crisis was one of the triggers of the current situation, and it is spreading into Alt-A and prime mortgages and home equities in general. On the other side of the pond, the UK had to nationalize Northern Rock, a UK based home lending institution- the bank with the honor of having the first public run in UK history.
As a result of this, there has been a lot of news regarding Fannie Mac and Fannie Mae. These funds are the bedrock of the US mortgage industry, and they are getting deepr into trouble. siv0 will continue to monitor them. In an attempt to get the government to help more on mortgages, the FHA has upped limits on conforming mortgages. In some cases, the limit is $729,000.
The US treasury and the Federal Reserve Bank have stepped in to try and impact the problem. The Treasury mainly through suggesting that lenders help out mortgage holders more, and the Fed by first injecting $50 billion through the TAF, then just last week making an additional $200 billion available! All this on top of recent slashing of the Fed funds rate. The Federal government (FBI and SEC) are also opening new investigations into wrongdoing at financial institutions, includng Bank of America, Countrywide, UBS, etc.
The auction rate market, a market for municipal bonds took serious hits in February due to the problems with the monoline insurers (i.e., Ambac and MBIA, especially). Some Municipal agencies (such as the NY Port Authority) had to pay up to 20% on bonds to raise cash! Many more took lesser, but substantial hits. The monoline bond insurer problems got worse as they tried to raise capital, but ended up substantially losing value, as the plans were not well received. The rating agencies (i.e., Moody's, S&P, Fitch, etc.) who rated the insurers garnered a further loss of confidence as the auction rate market froze up.
In February, the structured investment vehicle (SIV) was declared "dead", and Moody's said they do not see any imporvement on collateralized debt obligations (CDO) in 2008. These vehicles are at the core of the current credt crunch. In February Standard Chartered withdrew support for the Whistlejacket SIV, leaving Orange County California shorter of cash and wondering if there is any chance of recovering principal ($ 80 million). Dresdner did promise to support the K2 fund, and Sigma did succesfully mature a $50 million issue held by Orange County in February. The biggest worry for Orange County are future issues extending well into the third quarter of 2009. They still have $100's of millions of dollars on the line, and the problems are getting worse, not better.
Hedge funds and financial institutions were liquidating, defaulting, and otherwise going into default during February and this last week. The banks have been making margin calls on hedge funds due to uncertainty in valuations. This is causing massive deleveraging. In some cases funds that were leveraged 30:1 last year in March, after the margin calls are leveraged at 8.3:1. This means a lot of assets sold, likely at below book values. This could lead to a new lower valued market for various asset backed securites, causing yet more writedowns, deleveraging, defaults, etc. Recently we learned that Peloton partners is liquidating, Thornburg mortgage is at or near default, and the Carlyle Group and Bear Stearns are following suit. Some hedgefunds are claiming huge profits at the same time.
Many opinions abound about what to do. Some claim that it is natural for housing prices to fall. The market is overpriced, and this makes sense. But the problem is if there is no credit for people to buy the lower priced homes, and additionally, they do not have jobs to gain the credit (that is not available anyway), then it means very little that such an action is natural. The problem clearly goes beyond a normal cyclical "correction". Some voices are telling us that the government needs to get out of the way and allow the "market" to solve this problem. While I agree that the government has not done an astounding job managing the financial system as the problems occured under their noses, nor have they found a good solution, I am afraid that ultimately the governments of the world may be the only institutions capable of solving the problem. And unfortunately the solution may be more radical than Wall Street and London would like to see, or could even imagine today. I hope it does not come to this, but things seem to be accelerating, not stabilizing. I think by the time of the 2008 second quarter disclosures we should have a clearer picture of the situation. It is unfortunate, but the financial crisis appears to be impacting the broader economy. This is becoming much more than a credit crunch. Hang on, do not panic, but keep a watchful eye on the situation. I think that is the best any of us can do at this time.
I will end with this quip. On February 15th, Treasurey Secretary Paulson was asked "...is the worst over yet...?". His answer was (all hand waving removed) "...the worst is just beginning..."
This is turning out to be a powerful week for the financial collapse of the new millenium. As Mortimer Zuckreman was quoted February 1st, "Quite simply, this financial crisis is the worst since the panic that led to the Great Depression". Not only are banks coming under more pressure, but monoline insurers are seeing more dangers ahead, plus the ratings agencies themselves are coming under scrutiny, as investors lose confidence in them. Structured investment vehicles have been declared dead (due to the Basel II talks), and hedge funds are about to make some shocking announcements. As Reuters quoted a loan syndicator this morning:
"The great unknown secret is about to be revealed."
All this as the hedge funds look for opportunities amidst the chaos, and proclaim that they are "part of the solution".
Thre is some good news, though. The US federal government is finally showing interest in the activities of exotic financial instutions and the involvement of banks. First, a number of banks are being investingated by the FBI in connection with the sub-prime crisis. Next, the US as part of a group of ~40 other nations met in Cape Town, and all agreed to scrutinize the tax implications of structured investment activities. In addition, the US is investingating US implications of the Societe Generale fiasco (remember the "rogue trader" who bet Euro7 billion and lost?). On top of that the Justice department put forth an opinion that hedge funds were anti-competition by nature, causing a significant drop in value of some key funds.
It may be too litltle to late, but it is somewhat heartening to see some appropriate action being taken.
Be sure to scroll down the news stories (in the right-hand column) for the last week. A lot has happened.
It has been recently
in the news that an independent consultant (PFMAssets) has determined that Orange County,
California SIV holdings are secure. This may or may not actually be so, but one wonders why a
county that was already burned in 1994 on exotic holdings would turn to sturctured investment vehicles.
Of course, this is not the only county that got burned on SIVs. The sister Orange county in Florida is another victim.
For a summary of the holdings, see the siv0 article on the topic.
Quick Adder January 27th, 2008
The article in the Boston Globe signifies that the truth is coming out into the open. This thing has only just started as a political issue. One option we all need to consider is to re-nationalize the Federal Reserve banking system. Is the current political system up to the task? Doubtful. Are any of the candidates capable of even discussing it? Doubtful.
January 25, 2008
So, where are we now? The fourth quarter of 2007 has seen 90+% decreases in major banks net profits. Some of them for sure due to SIV and related losses (i.e., Sun Trust). Moody's predicts that the worst of the problems should be occuring this quarter!
Alan Greenspan basically believes that hedge funds and others basically pushed the mortgage industy to create and securatize loans, even at the expense of underwriting standards. So I am not so sure that the poor SIVs are victim, but rather possibly the cause of the sub-prime mess to start with.
Then we have derivative nominal values sitting at around 8X the world's GDP. These are basically financial bets (financial weapons of mass destruction, Mr. Buffet), all based on people being able to predict what is going to happen. Clearly things are not going the expected way.
The US government (and other governments) are waking up to the problems. The question is (an it is about a 600 trillion dollar question), 'is it too late'?