October 15, 2007

RTC2? Banks in desperate $80 billion scramble to avoid "mark to market" meltdown. Just delaying the inevitable

I love how everyone (especially Wall Street and CNBC) thinks the credit crunch is over, and all will be just fine. The banks reporting of billions in write-downs last week was greeted as good news. Too bad those write-downs were just a fraction of the truth.

The news this morning will also be spun as good news. Hopefully some in the MSM will do their jobs and dig a bit deeper. This is the banks trying to save themselves, but the problem still remains - trillions are being lost on the housing crash and someone is holding the bag.

We've only just begun HP'ers. This isn't a $80 billion problem. No, it's in the trillions. Many trillions. And the worst is yet to come. And when the truth finally comes out, it will shock you.

Banks to set up $80 bln fund to limit credit crunch

NEW YORK/WASHINGTON (Reuters) - Major banks including Citigroup Inc are looking at setting up a roughly $80 billion fund to buy ailing mortgage securities and other assets, in a bid to prevent the credit crunch from further hurting the global economy, sources familiar with the matter said.

Representatives from the U.S. Treasury have organized conversations among top global banks, sources said, as financial institutions grow increasingly concerned that a certain type of investment fund linked to banks may have to dump billions of dollars of repackaged loans onto financial markets.

A fire-sale of assets could lift borrowing costs globally, trigger big losses from investors and force banks to further write down some holdings on their balance sheets. Such sales could trigger huge losses for banks, and in the worst-case scenario tip the U.S. or Europe into recession.

"We are coming off the greatest lending bubble ... in U.S. history. We will feel its impact for a very long time," said Robert Arnott, Chairman of Research Affiliates LLC in Pasadena, California, earlier this month.

More here...

“For me, this is more of a P.R. blitz,” he said. The banks are “saying, it’s not just that we are doing this on an ad hoc, individual basis. Rather, we have a plan and consortium in cooperation with Treasury, which gives it a veneer of respectability.”

Mr. Stracke said that by serving as another buyer of the highest-rated securities, the banks are hoping to ease the immediate strain on SIVs, which could be forced to sell billions of dollars worth of assets in a fire sale if they are not able to raise new financing and when their capital falls below certain thresholds. The effort, however, will not resolve the longer-term problem many SIVs face with more risky mortgage bonds, he said.


Anonymous said...


Wouldn't it be ironic if Fox Business Channel lauched the same week as a crash?

Anonymous said...

Wouldn't it be ironic if Fox Business Channel lauched the same week as a crash?

Top 10 FoxBusNewz Reasons for the "market volatility"

10) hot weather
9) cold weather
8) NFL upsets
7) halloween shopping
6) al-Qaeda's #2
5) Nancy Pelosi
4) Jim Cramer
3) Democrat housing bubble blogs
2) Blame Canada!
1) It's all Hillary's fault anyway

somebody that noticed a difference said...

What's the deal with the new ARM reset chart?

It's different than the original Credit Suisse one in that it doesn't seem to have that ominous second wave.

any ideas?

keith said...


Here's the Credit Suisse that goes out 5 years 2007 - 2012, with the second wave hitting in 2011

The chart on this thread only shows through 2009 - a shorter view

Anonymous said...

These guys are trying to stop a tsunami with a sheet of cardboard. What they don't realise is that they will only end up throwing money down the financial equivalent of the Grand Canyon. The game is over and all the money in the world is not going to save them from their wanton greed and unethical behavior.

Regarding the charts said...

Thanks for pointing that out...my bad Keith...I'm a bit of a night owl so I didn't look closely enough.

This chart actually is kind of like "reality lite".

I think that that the Credit Suisse chart shows how f'd we really are as future resets (2010-12) were the people that bought at the top (2005-06) with the 5 & 7 year ARMs when lending was at it's loosest.

Anonymous said...

keith said...


Here's the Credit Suisse that goes out 5 years 2007 - 2012, with the second wave hitting in 2011

The chart on this thread only shows through 2009 - a shorter view

October 15, 2007 10:31 AM
Thanks Keith. Looks like the earlier peak's composition of ARM resets is mostly sub-prime. The later/second peak has no single major component. I do see that Option ARM resets spike in the 2nd peak.

But remember at least in regards to option ARM resets is that if the borrower hits their debt ceiling by always going for the lowest payment where interest is added to principal then they will go to higher payments W/O a reset in interest sooner that the ARM interest rate reset date. So some of that option are toxicity can default much sooner, and those that survive to reset my then go under.

FlyingMonkeyWarrior said...

More like "Mark to Make Believe."

Anonymous said...

Banks are only doing this to save their own skin and insulate themselves from liability and responsibility. But even they are woefully underestimating the magnitude and gravity of the problem. This fund will be a mere speed bump when all the financial alchemy and eyewash fails and the unleashed market forces cut through the global economy like a hot knife through butter.

Good luck.

Anonymous said...

Didn't we just see this play out in Japan? Oh 2 minor details.

1)Japan has a manufacturing industry.

2)The Japanese are savers not spenders.


Anonymous said...

I'm wondering if the plan is to move the off-balance sheet debt (SIVs) into this new fund, so that when it goes bad the banks can get the government to bail out the fund and claim that "everyone is affected by this" (rather than a single bank). It annoys be because I bought put options on Citigroup knowing that they have/had $100 billion in SIVs.

Anonymous said...

We are not staring at the seeds of the next "Great Depression." I'm not of the view that the current credit crisis is "the big one." "The big one" is a subject for another day and I believe it will come when peak oil serves what amounts to a margin call on the credit system as resources contract. Energy and money are both, in a manner of speaking, the "ability to do work" and when the peak oil crisis goes global, that will smack the financial system into what will eventually turn into massive deflation and credit contraction (but it's not clear just now much inflation we'll get before that deflation spiral happens).

Nope, the current credit crisis isn't "the big one." The main reason is that the powers that be have an identified target to go after. Granted, the target is titanic in size, but it is identifiable and it can be set in the cross-hairs of the PTB. The problem is indeed "fixable" (I'll get to the mess the "fix" causes after we address what the "fix" is).

The challenge facing the PTB is two-fold:

1) monetizing the $100 billion to $1 trillion in mortgage-backed paper that is beyond repair and worth much less than nominal face value - and indeed, the fact that no value can be set is indeed part of the problem; note also that I think the ultimate value in question is going to be bigger than what is suggested in the Wall Street Journal article;

2) halt at all cost the killing of the global financial system "confidence game;" our entire fiat credit system is essentially a confidence game, and so long as the powers that be can contain #1, the confidence game can continue for a while.

I argue that we have already seen the product of the decisions on how to address #1. The cat is out of the bag. The PTB has ALREADY taken the decision to create additional liquidity to absorb and retire these CDOs, CLOs, etc. The only question is what is the organizing vehicle that will coordinate all this laundry work (the reason for the "leak" timing WSJ article, and the fact that Citigroup is going to come to the markets with a confessional on Monday, speaking to how bad their balance sheet holes are).

Folks, it's not DEFLATION and the Great Depression that you have to be worried about right now (again, that may very well come once peak oil starts to bite the global system in the butt beyond the problems already seen in less developed nations). It's INCIPIENT HYPERINFLATION that you have to worry about (above 10% but below 20%). This is why gold went bonkers after the double 50 basis point cuts to the Fed Funds rate and the Discount Rate and gold isn't finished, believe me. This is one of the reasons why the stock market has performed well since August 16th - because it's reflecting coming asset-based inflation from the credit infusions that will be a part of addressing #1 above! Sure, more goes into stock market values than just liquidity, but liquidity is a massive driver of stock prices. This weekend's announcements about this new fund was known to be in the works. People haven't known what would be the "ultimate" solution put into place - and we still don't. But the rough outlines? Heck yes. It's been clear for weeks that some sort of bailout was coming for the bad paper, and it's been known for weeks that that would, by definition, involve some level of monetization of this bad debt. That's part of the reason why gold and stocks have been both going up, and the US Dollar has been diving. And guess what? It isn't over. We're going to have other bailouts targeting other problems, the other "big one" being what to do with all the hundreds of billions of dollars in mortgage refinancing that will not be able to be met by over-extended borrowers. That bailout will mostly be executed via the wonderful sausage making factory known as the United States Congress. We don't know what all the final "programs" will be, but we do know that it will inflate the national debt and kick the taxpayer in the butt. That added debt, at least for now, is also supportable by the system, so we will once again be faced with the inflationary story, not deflation crash. But I digress. The subject for today is this bailout for the money center banks, not the rank speculators that bought more house than they could afford.

The powers that be have already decided that in the end game, if they have to monetize the whole damn mortgaged-backed asset paper mess, they're willing to do it. In fact, the Fed has already bought at least $30 billion worth of this stuff that I know about from a few Bloomberg articles, via their normal "coupon passes," accepting for the very first time as collateral mortgage backed paper. This happened in August. At the time, Bloomberg reporters made the generic presumption that the liquidity injection would be like most others - ultimately reversed at a later date. I'd argue that was known to be all along anything but a temporary credit infusion. I'd argue that those early injections will never be paid back, and the collateral that was presented to the Fed for those borrowings at the Discount window will be worth pennies on the dollar - and the Fed will conveniently ignore the paper and never bring it up again. It will be direct monetization of the bad debt, and all you economics and financial analysts out here that might be inclined to have a fit when I say this, just remember, the rules of the game have changed. This time, the financial institutions will not be on the hook to pay back (all of) those liquidity injections. I don't care what our finance and economics textbooks taught us. It really is different this time.

This organization they're creating [to be called Single-Master Liquidity Enhancement Conduit (SMLEC) or Master Liquidity Enhancement Conduit (M-LEC)] will serve as the dumping ground for the particular batch of bad financial assets bundled in what are called "structured investment vehicles" (SIVs). Generally speaking, the money center banks like Citigroup sponsored the creation of the SIVs with short-term based funding, and the SIVs went out and bought medium- and long-term paper like the CDOs and CLOs - mortgage-backed asset sausages with a certain percentage of crap rolled-up with "good" mortgages. The SIV part of the credit crunch story came into play when none of the money center banks wanted to further fund the SIVs with more short-term credit (to roll over the short-term credit the SIVs already had) because the money center banks were rightly scared that the stuff the SIVs bought had too high a percentage of sausage crap. Presto, the cost of borrowing started to shoot up in July and August because there wasn't enough available funds (cost of borrowing = interest rate, the price of money).

The money center banks can't hide this crap indefinitely, so this SMLEC thing is the proposed solution. But unlike the Resolution Trust Corporation of the 1990s Savings and Loan crisis, the US Taxpayer isn't going to directly fund the beast. No, this time around, the money center banks are going to fund into existence SMLEC through loan guarantees. But we already know that the assets to be placed within the SMLEC have a high garbage ratio and that on average, what goes into the SMLEC will likely be worth something like $0.50 on the dollar of the original principle of the paper. In order for the money center banks to be able to do this dump, they in turn have to be backed up by the Federal Reserve, and quietly, in the months ahead and likely beyond public view, the Fed will inject credit into the money center banks to support the latter's SMLEC effort. I believe this ultimate credit injection will be conveniently ignored. It will ultimately prove to be monetization of the credit crisis.

Can I prove this? Hell no. Ask me in one year. Maybe it will be possible to prove whatever happened - and all the shades of gray and twists and turns that will ultimately come out of this SMLEC-creation process. But the above sequence of events is what makes the most sense. The PTB see the crisis. They have defined the crisis in terms of #1 above. They will do everything and then some to make sure that #2 does not enter into the picture. And there will be no "liquidity trap" because the Fed will not be "offering" credit and waiting for some institution to "take" the offer. No, they will be injecting credit by directly buying (in a roundabout way) the crap mortgage paper. This is exactly what was meant by that famous Ben Bernanke speech that gave him the nickname Helicopter Ben. We're talking Helicopter money, and the Fed can inject it even if the system isn't looking to take it. So, stop looking at this as the trigger that will create the next Great Depression. It could do that if confidence (#2 above) blows and we have a credit system crash. But I think the PTB have this situation well defined and they're going to flood the system with money (in a roundabout way). For now, you need to worry about inflation, not deflation and depression.

There's a near religious debate among the most strident proponents of deflation vs. inflation. I'm not going to get into a deep debate where ideology governs arguments. Ideology is most thick among adherents to thinkers like Robert Prechter or blogger energizer-bunnies like Michael "Mish" Shedlock that can talk an argument to death by sheer repetition without seeing the forest for the trees. The ability of the Fed to inject credit into the system even if no one wants to take the credit (by roundabout asset purchases) is something that these dogmatists have difficulty wrapping their heads around.

And as to what the man/woman on the street can do - well, buying gold and silver and doing the preparation work you may already be doing in the context of preparing for Peak Oil is a good route to be on.

Finally, as to the questions about what the financial markets are going to do Monday I will say the following: perhaps not much. Gold will likely see the continuation of its move higher (as well as silver and oil). Keep in mind that this weekend's "news" isn't 100% new news, and that the bailout itself is highly inflationary, which means that at least in the intermediate-term (less than one year), it will likely support inflation in financial assets (i.e., stocks). The news from Citigroup (where the largest number of dead bodies are found) and this program overall could very well serve as a catalyst for a generic stock market correction. But it will NOT be something that signals the next "Black Monday" or whatever. We could have a correction in the stock market regardless just because it has moved so much since August 16th. But if it evolves out of this coming week's news, it will be a correction, not the start of the Great Depression nor even the start of a bear market in stocks. There's just way too much credit expansion coming to the world in the months ahead to see financial asset deflation. Come 2010 or whatever when peak oil stars to bite beyond belief, we'll have an entirely different story. But today, it's inflation that you need to deal with.


Anonymous said...

just another off balance sheet ponzi the SEC should not tolerate!

russ said...

collaboration among competitors to avoid mark to market...


Antitrust implications anyone?

Anonymous said...

you know it must be serious if the stingy banks are willing to put up their own money into an 80Billion rescue fund.

Anonymous said...

The size of the fund was not disclosed, although various estimates have pegged it at $75 billion to $100 billion. The banks said it could be operational within 90 days

Anonymous said...

>> The banks reporting of billions in write-downs last week was greeted as good news. Too bad those write-downs were just a fraction of the truth.

Here's hoping that all the financial talking heads (tv, radio, print) lose their f'ing jobs for being (1) liars or (2) ignorant.

Anonymous said...

FDIC has only $50 billion in reserve. One decent size regional bank failure plus a few smaller banks and then what? Kiss your deposits goodbye.

CNBC = Titanic band


russ said...

Along that same line some other tricks are being used to try and stop the sell-off or at least stop that sale at market-determined prices. This one is a play straight from ENRON where loans were sold with a repurchase agreement just to get them off of the books. It is also from naked capitalism:

“”Some financial firms have sought in recent weeks to avoid write-downs by selling mortgage positions to hedge funds, with an agreement that allows the hedge fund to sell them back after a set period. A hedge-fund trader says his firm recently bought $1 billion of risky subprime mortgage loans from Bear Stearns with a one-year pact, known as a “mandatory auction call,” under which Bear agrees to participate in an auction for the loans that will provide the hedge fund with a minimum rate of return, according to a person familiar with the situation. “They didn’t want the mortgages on their books,” the hedge-fund manager says.

Such financial arrangements typically are considered proper if there’s an economic purpose to the trade and if risk is taken on by both parties. Legal problems could arise if such trades are part of an attempt to conceal a company’s financial picture, regulators say.”"

(down teh page)

This looks crooked as hell and I wouldn’t be surprised if the Bush administration lets this happen again.

Anonymous said...

Talk about an artificial market! Is this not the same thing that Boesky & Co were jailed for in the 1980s? Wow, I never thought I would live to see officially sanctioned insider trading. These crooks just keep plumbing new depths of market manipulation.

Anonymous said...

Anonymous said...

The size of the fund was not disclosed, although various estimates have pegged it at $75 billion to $100 billion. The banks said it could be operational within 90 days

October 15, 2007 3:55 PM
So for the next 90 days we do not even have a speed bump in place if there is a market run on this toxic sludge!!

SeattleMoose said...

A few hundred billion is not enough to "make everthing right".....not by a long shot.

The amount of "paper wealth" that is going to be destroyed in the next few years is tens of trillions.

There is no way to hide the 800 lb gorilla parked in the collective living room of the financial/mortgage industry.

Time to pay the piper.......

Anonymous said...

Tobby Says:

OK MuffinHeads. Listen up. The $80 billion has nothing to do with buying subprime mortgages. It is a small liquidity vehicle that buys commercial paper. It will maybe save them 25 basis points on overnight loans. Period!

Banks, and by banks I mean federally insured institutions, are not in trouble. They do not directly own this toxic debt (although a few foreign banks do own a lot). There seems to be a misunderstanding on this and other blogs with respect to banks, investment banks and mortgage lenders. They are all different. It is the big investments banks and whats left of the mortgage lenders that are in trouble, not your local depository. Sure there are always a few, NetBank comes to mind, but these are isolated cases and it looks like no depositors over the $100k FDIC limit will lose money on the NetBank deal. Stock holders of NetBank are broke though.

Anonymous said...

The banks are trying to do what Enron hiding the reality off the books. Only the banks are trying to do it while everyone sits by and does nothing.

The banks need to just take the losses and move on! The borrowing binge is over and noone wants anymore debt!!! They need to do themselves a favor by being honest and reporting the facts. No smoke and mirrors!!! We can handle it!

Anonymous said...

>A fire-sale of assets could lift borrowing costs globally, trigger big losses from investors and force banks to further write down some holdings on their balance sheets.

Big investor losses, yes, and write downs for banks, also true, but lifting borrowing costs? Losses look into the past, but borrowing looks into the future and due to the (justified) fear, borrowing costs are already higher. Clearing out bad loans should increase transparency and reduce borrowing costs.

Peter T

brokersleaveyoubroke said...

I think everybody is reading too much into this deal. It's not really a bailout of bad paper. They're not going to touch any subprime paper or anything else below AA rated. They're really just trying to insure that stable companies that need short term loans can get them at a reasonable rate. The banks involved in this are being very careful and they'll probably make money on it. The subprime paper is going up in smoke and I don't think anybody's going to throw away money trying to save it. Well OK, the government is dumb enough to do it but I think the voters know too much about the truth of the reasons behind the subprime meltdown to allow that. Or maybe I'm giving the voters too much credit.

Anonymous said...

I'm a fan but your graph is old and does not include significant refinancing and better data. Resets peak at about $50 bil this quarter and stay roughly at that level thru 3q 08. In other words reset shock will not have a dramatic peak next year.

Anonymous said...

Nope, the current credit crisis isn't "the big one." The main reason is that the powers that be have an identified target to go after. Granted, the target is titanic in size, but it is identifiable and it can be set in the cross-hairs of the PTB. The problem is indeed "fixable"....

There's one little problem with your analysis. You keep assuming that TPTB control everything. Well, they don't. America isn't the only game in town. The rest of the world may have something to say and do about our developing insolvency/hyperinflation. Maybe they'll refuse to buy our bonds and the rest of our derivative garbage and hang us out to dry....

Anonymous said...

Ziggy, that sounds plausible. But does this mean RE stays sky-high, or it comes down without taking the banks down with it? In other words, please don't tell us this means the flippers and panic buyers win. Say it ain't so!

Anonymous said...

$80 billion? So that'll last what a week?

Hey didn't Rockefeller and his banker buddies try to keep the market from crashing back in 1929?

How long did that work?

Anonymous said...

There are only a few items that I will invest in today.

1. Storable Food/Provisions.
2. Arable land with potable ground water in a defensable rural area.
3. A draft horse and implements.
4. Gold, medical suplies and guns.

When the currency drops to zero, things get straight back to the basics.

Anonymous said...

Don’t believe one optimistic word from any public figure about the economy. They are all part of the problem. Its like a game of Monopoly. The richest 1% of Americans now hold more than 1/2 OF ALL UNITED STATES WEALTH. That is more than the upper, middle, and lower classes combined. This is EVEN AFTER you account for all of this ‘good will’ ‘humanitarian’ BS from celebrities and executives. As they get richer and richer, less wealth is left circulating beneath them. This is the single greatest underlying cause for the state of our economy. Now, a recession is inevitable. The middle class can no longer afford to sustain their share of the economy. Their wealth has been gradually transfered to the richest 1%. But the rich won’t stop. They will do whatever it takes to get even richer. Leaving even less of the pie for the other 99% of us to share. This is going to end just like a game of Monopoly. A total collapse of the US economy. Probably within a decade. The richest 1% will live like royalty while the rest of us fight over jobs, food, and gasoline. So Don’t fall for all of this PR CRAP from Hollywood, Pro Sports, and Wall Street. Remember: They are filthy rich EVEN AFTER their tax deductable contributions. Greedy pigs. Now, we are headed for the worst economic and cultural crisis of all time. Crime, poverty, and suicide will skyrocket. SEND A “THANK YOU” NOTE TO YOUR FAVORITE MILLIONAIRE. ITS THEIR FAULT. I’m not discounting other factors like China, sub-prime, or gas prices. But all of those factors combined still pale in comparison to that simple equation at the top of this entry. Anyway, they are all related. If it weren’t for the OBSCENE distribution of wealth within our country, then the middle class would have had a much better bottom line over recent years. There never would have been such a market for sub-prime. Which by the way, was another trick whipped up by greedy bankers and executives. IT MAKES THEM RICHER. Anyway, the credit industry has been endorsed by people like Oprah, Ellen, Dr Phil, and many other celebrities. So don’t fall for their ‘humanitarian’ BS. ITS A SHAM. Bottom line: The richest 1% will soon tank the largest economy in the world. It will be like nothing we’ve ever seen before. God help us.