July 05, 2007

I will say this - as a social psychology experiment, it will be interesting when the banks, pension funds and hedge funds begin to fail

Here's an article today in the Financial Times that pretty much puts a dagger in the heart of any "analyst" who is stupid enough to think the housing crash and Great Credit Unwinding were going to end after only a few days.

We're just
getting started. Here come the hedge fund, pension fund and bank failures, whether they know it or not.

Liquidity underthreat as banks' capital is about to be slashed

The bright, liquidity-driven prospects for the stock market, versus the hard landing for the US economy, have been a puzzle all year. Prolonged weakness in the economy without some stock market weakness would be odd. Yet the implication of a hard landing, lower interest rates, has even boosted stock prices, given the predominance of debt-driven private buy-outs in setting prices.

The Bear Stearns hedge fund fiasco removes the paradox. Banks' capital is about to be slashed, and with it excess liquidity in the global system.

Look at mortgage-backed collateralised debt obligations -- pools of debt assets, in which investors take stakes with different levels of risk. Suppose those held by banks were valued at "market" rather than "model" levels (a fancy new euphemism for illusionary historic book values). Their capital would turn out to be lower. Preservation of capital ratios against loans would require fewer loans: liquidity would have imploded.

A bunch of hedge funds may have problems, but that is the tip of the iceberg for "Titanic" Wall Street. Who holds the toxic tranches? Answer: the originating banks and syndicating investment banks for the most part.

With this mortgage-backed crisis we could simultaneously see market-price liquidity implode just as banks are forced to shrink their books by capital losses. It was always likely that the chief source of problems (as in any downswing) would be the chief area of excess in the previous boom - in this case the mortgage market and mortgage-backed securities.


RJ said...

Absolutely! The stock indexes are perched on a precarious mountain of debt, although it's more like an inverted pyramid. At the bottom are CDOs and LBOs and whatever other leveraged instruments investment banks can dream up. Atop these are a mushroom cloud of leveraged derivatives ballooning out to 10 or 12 times the value of global GDP. In the words of Frank Barone,"Holy crap!" How much are we the taxpayers going to be held liable in bailing out this mess here in the U.S? Because you know that these Wall St. casinos are too big to be allowed to fail. A healthy dose of inflation should stave off complete disaster but could finally sink the dollar. I wonder what would happen of all the plebes just up and sold off their stocks, closed their mutual funds, stopped e-trading and moved into cash, gold, or silver while paying off their debts. What kind of panic would that create in our government and financial elite? It would be an interesting financial revolution.

Anonymous said...

Already happening

Anonymous said...

I say in a week or less, there will be running for the doors, as things cannot be hidden much longer.

bickerer said...

Wonder if they'll hand out obscene new year's bonuses on Wall Street again this year.


Anonymous said...

Get a tin foil hat for the troll!

Anonymous said...

Definitely makes one wonder. I called my capital one money market account day before yesterday, and they said they were updating their records and that she could not access my account info, nor could I make any kind of a transaction.

Maybe I am reading too much into it, but then again maybe not. Going to call again this morning and see if they are done "updating their information" yet.

Anonymous said...

The people I run into on a daily basis seem to have no idea whats going on, and neither do they care. So, my question is, are we just kooks reading way too much into the skyrocketing price of gold, energy, food and now the housing "slump", plus now this CDO debacle, plus the fact that I heard that some people were borrowing money on their stock equity(I don`t know if that is true or not). What gives? Can this really turn into a finacial catastrophe of biblical proportions?

Anonymous said...

Imagine what the seniors in Florida are up to after hearing about the investment disasters some of their colleagues have just suffered? They're burning up the phone lines trying to sell, but their brokers, aka Tony Soprano & family, is saying "NO ONE SELLS!"

Anonymous said...

I read that Japan and China hold most of the toxic paper.
Better think twice before using that toothpaste, as they are going to be some p*ssed off mofo's.

shakster said...

Well before they do that I will be having some fun with Mozillo,and his band pied pipers.ARMs are adjusting to 12%-yeah ,I know ,the MSM didn't say that so it must not be true.So I make some phone calls to set them up.
Countrywide has a responsibility to their investors for the financial health of their investments which means they have a Fiduciary responsibility to everyone with any interest in the company including homebuyers.
Countrywide is the cause of their demise.To double interest rates on the buyers is completely their call.Why would they do this knowing full well that it will destroy the company?IMO-Ponzi scheme from the outset.
The homebuyer needs to make his origanal payments (do not pay the adjusted total),and stay current.
Pay by registered letter from now on with big bold letters on the envelope"Mortgage Payment".With the Payment,send the instructions to apply to your bill,express that you are up to date ,current ,and have not missed any payment,and are not short funds(full monthly Payment).They will send notices of deficiency.You then may CHALLENGE them on the deficiency.
Now stay current on only the original payment through registered mail for now on.You must challenged every notice they send for deficiency(rebutt everyone,point for point)You are holding up your end of the contract.The adjusted rate falls short of the law,and equity(contracts)due to countrywides failure to prove that a rate hike is needed.They can prove that one may or may not be needed,but cannot apply it until you agree.Arbitrarily rewriting a contract is illegal,and not binding until you agree.The Rate hike is negotiable by you,and also must fall within the guidelines of equity,and the fiduciary responsibility of Countrwide to maintain the company for their investors.
This is where Countrywide falls on their own sword.Their intentions seem to be to destroy the company ,abandon ship with their riches to let the taxpayer,and investors hang with the bill.It can be proven ahead of time that Countrywide is not maintaining the health of their company.They have refused to negotiate with buyers(big No No)
Amazingly,hundreds of thousands of homebuyers are completely ignorant about the contracts they signed.
Don't walk away from your home.Even if you fail,and are forced out,you will have learned that you have only part of the blame.Countrywide will get away with all of it in the end just like Enron,but you can take a peice of their asses before they do.

RJ said...

Correction to previous post. Mortgage Backed Securities (MBS) are at the bottom and Collateralized Debt Obligations (CD0) are the derivatives.

Anonymous said...

Depression coming 2010

Anonymous said...

Depression in 2010? I was hoping somebody would grow a pair and just say it. Now, should I stay in gold or go for the T-bills?

Anonymous said...

...i'm depressed now!

DrNo said...

Here's a good one


Anonymous said...

My opinion:

People's homes provide them with feelings of safety and stability.

When house prices collapse, their internal feelings of safety and stability will also collapse.

When people feel fearful they will be very open to someone who promises to care for them. ie. Socialism.

Conclusion: no more Constitution.

My opinion? This was by design. I've been saying this was going to happen for a couple of years now.