Archive for the 'Credit Backlash' Category
(Chronologically Listed)
Worldwide Banking System Leverage
For those of you who missed it, in this downward spiral we are now enduring, the amount of leverage (read, debt) is directly related to how fast your bank is going to go under.
Now from a blog named Infectious Greed, comes this chart extracted from a Bank of Canada report:
So according to the Bank of Canada, the banks in the EU have the highest ratio of debt to assets, with the US investment banks (like Goldman) coming up behind but shedding debt as fast as they can. Troublesome for the UK is that they continue to ramp up, and will soon overtake the Wall Street zombies in the amount of debt.
This charts, while informative, does not show the real danger zones: the banks in China, India, Brazil and Russia. My prognosis is the next big leg down will come to public light as a handful of countries, possibly including a big one, will follow Iceland into financial doom.
The financial crisis illustrated
“Because Secretary Paulson had struggled in previous attempts to explain what the big banks and brokerage houses had done to the U.S. economy, his staff prepared a visual aid that told the story in clear and graphic terms.”
Winner of Dave Barry’s caption contest for the above photo. ..bruce w..
CDOs explained (or, “Holy crap!”)
Alan Kohler at the Business Spectator down in Australia does his best to explain CDOs, CDSs, and SPVs, then gets down to brass tacks:
It is now getting very interesting. The three Icelandic banks have defaulted, as has Countrywide, Lehman and Bear Stearns. AIG has been taken over by the US Government, which is counted as a part-default, and Freddie Mac and Fannie Mae are in “conservatorship”, which is also a part default – a ‘part default’ does not count as a ‘full default’ in calculating the nine that would trigger the CDS liabilities.
Ambac, MBIA, PMI, General Motors, Ford and a lot of US home builders are teetering.
If the list of defaults – full and partial – gets to nine, then a mass transfer of money will take place from unsuspecting investors around the world into the banking system. How much? Nobody knows, but it’s many trillions.
It will be the most colossal rights issue in the history of the world, all at once and non-renounceable. Actually, make that mandatory.
The distress among those who lose their money will be immense. It will be a real loss, not a theoretical paper loss. Cash will be transferred from their own bank accounts into the issuing bank, via these Cayman Islands special purpose vehicles.
The repercussions on the losers and the economies in which they live, will be unpredictable but definitely huge. Councils will have to put up rates to continue operating. Charities will go to the wall and be unable to continue helping those in need. Individual investors will lose everything.
There will also be a tsunami of litigation, as dumbfounded investors try to get their money back, claiming to have been deceived by the sales people who sold them the products. In Australia, some councils are already suing the now-defunct Lehman Brothers, and litigation funder, IMF Australia, has been studying synthetic CDOs for nine months preparing for the storm.
But for the banks, it’s happy days. Suddenly, when the ninth reference entity tips over, they will be flooded with capital. It’s possible they will have so much new capital, they won’t know what to do with it.
This is entirely uncharted territory so it’s impossible to know what will happen, but it is possible that the credit crunch will come to sudden and complete end, like the passing of a tornado that has left devastation in its wake, along with an eerie silence.
Read the whole thing, a few times preferably. And for those of you keeping score as to how we got into this mess in the first place:
CDOs were invented by Michael Milken’s Drexel Burnham Lambert in the late 1980s as a way to bundle asset backed securities into tranches with the same rating, so that investors could focus simply on the rating rather than the issuer of the bond.
About a decade later, a team working within JP Morgan Chase invented credit default swaps, which are contractual bets between two parties about whether a third party will default on its debt. In 2000 these were made legal, and at the same time were prevented from being regulated, by the Commodity Futures Modernization Act, which specifies that products offered by banking institutions could not be regulated as futures contracts.
This bill, by the way, was 11,000 pages long, was never debated by Congress and was signed into law by President Clinton a week after it was passed. It lies at the root of America’s failure to regulate the debt derivatives that are now threatening the global economy.
Interesting times, folks, interesting times. ..bruce w..
What goes up must come down
Here’s a graph of US housing prices since 1975, both the stated prices and the same prices adjusted for inflation:
As you can see, once you adjust for inflation, housing prices have peaked and then fallen three times in the last 30 years.
I remember looking at a $35,000 house in the semi-rural area near Cherry Hill, New Jersey — five bedrooms plus a freestanding garage/workshop — in 1979. I didn’t buy it (and didn’t accept the job at RCA) because winter heating oil costs were around $300/month at a time when I was only grossing $1300/month. Oh, and inflation was moving towards double-digit values, as were mortgage interest rates. I remember all that quite well, which is why I’m not panicking about the current financial mess just yet. ..bruce w..
Yet another bailout request
Hell, this makes more sense than a lot of what Congress and the US Treasury are doing right now:
True fact: I own a Pets.com sock puppet. I keep it in my office to remind me of the idiocies of the late 90s Tech Bubble. Problem is, I’m not the one who needs reminding.
Hat tip to National Review Online. ..bruce w..
Daily Financial Moment Of Clarity
From the pages of Wall Street Journal via Greg Mankiw’s Blog, word of a sharp drop in the demand for mistresses for the rich and powerful:
Financial Crash - Round 2 Warming Up
I am sad to report that some of the leading indicators show that the second wave of the ongoing financial crash is getting ready to start. In spite of the fact there was a huge rally back above 8000 on the Dow late Friday, the stock market is not what is driving this thing. The next big shock could be a few days to several weeks away. But first, some perspective on how far we have already come.
First, this graph from Doug Short:
Click on the graph for a larger / sharper image.
It shows that in percentage terms, the current market crash has exceeded the 1973 oil crisis, the tech crash of 2000 and the first leg down on the great depression.
A brilliant piece on Wall Street’s self-immolation
Michael Lewis — who wrote Liar’s Poker back in 1989 — gives a fascinating, detailed chronicle of just how Wall Street managed to cause the current financial maelstrom that’s hurting all of us these days. Much of the article focuses on Steve Eisman, who kept asking uncomfortable questions until he figured out just how screwed up the entire subprime financial market was. He kept trying to make people understand just how bad things were going to be come, but was largely ignored. He then started shorting the subprime market, that is, investing in such a way that he would get a return only if the market went bad:
And short Eisman did—then he tried to get his mind around what he’d just done so he could do it better. He’d call over to a big firm and ask for a list of mortgage bonds from all over the country. The juiciest shorts—the bonds ultimately backed by the mortgages most likely to default—had several characteristics. They’d be in what Wall Street people were now calling the sand states: Arizona, California, Florida, Nevada. The loans would have been made by one of the more dubious mortgage lenders; Long Beach Financial, wholly owned by Washington Mutual, was a great example. Long Beach Financial was moving money out the door as fast as it could, few questions asked, in loans built to self-destruct. It specialized in asking homeowners with bad credit and no proof of income to put no money down and defer interest payments for as long as possible. In Bakersfield, California, a Mexican strawberry picker with an income of $14,000 and no English was lent every penny he needed to buy a house for $720,000.
More generally, the subprime market tapped a tranche of the American public that did not typically have anything to do with Wall Street. Lenders were making loans to people who, based on their credit ratings, were less creditworthy than 71 percent of the population. Eisman knew some of these people. One day, his housekeeper, a South American woman, told him that she was planning to buy a townhouse in Queens. “The price was absurd, and they were giving her a low-down-payment option-ARM,” says Eisman, who talked her into taking out a conventional fixed-rate mortgage. Next, the baby nurse he’d hired back in 1997 to take care of his newborn twin daughters phoned him. “She was this lovely woman from Jamaica,” he says. “One day she calls me and says she and her sister own five townhouses in Queens. I said, ‘How did that happen?’?” It happened because after they bought the first one and its value rose, the lenders came and suggested they refinance and take out $250,000, which they used to buy another one. Then the price of that one rose too, and they repeated the experiment. “By the time they were done,” Eisman says, “they owned five of them, the market was falling, and they couldn’t make any of the payments.”
It’s a long article, but it is very much worth reading all the way through. However, if you don’t have the patience, though, I once again recommend this stick-figure presentation, whcih is a remarkable accurate and succinct, if somewhat…ah…pungent summary of just what went wrong. ..bruce w..