Asking For More, And Hoping To Pay Less
Some housing bubble news from Wall Street and Washington. Bloomberg, “HSBC Holdings Plc, Europe’s largest bank, will bail out its two structured investment vehicles, taking on $45 billion of assets to avoid a fire sale of bonds. SIV holdings have declined $75 billion since July, and net asset values have fallen to 70 percent from 100 percent in July, according to data compiled by Fitch Ratings. ‘HSBC believes there is not likely to be a near-term resolution of the funding problems faced by the SIV sector,’ the bank said.”
“HSBC’s rescue shows the world’s second-largest bank manager of SIVs, companies that borrow short-term to invest in higher- yielding securities, isn’t prepared to wait for the $80 billion ‘SuperSIV’ to start buying assets. Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co. have been working for more than two months to set up the fund initiated by U.S. Treasury Secretary Henry Paulson.”
“The SuperSIV is ‘is all good and well, but it’s not big enough,’ said Tom Jenkins, a credit analyst at Royal Bank of Scotland Group Plc in London. ‘If you have a large SIV, you’re going to need to find another solution.’”
“Former Federal Reserve Chairman Alan Greenspan is among those who say the ‘SuperSIV’ may do more harm than good by delaying the need for investors and SIVs to absorb subprime losses.”
The Associated Press. “The viability of an SIV relies on its ability to continue borrowing money. Amid this year’s flight from risk, lenders in the commercial paper market have frequently balked at letting borrowers ‘roll over,’ or extend, their debt. This is what is happening to most of the world’s roughly 30 SIVs, which collectively manage about $320 billion.”
“An SIV that cannot continue borrowing money would need to find cash elsewhere or sell its investments. Since mortgage debt has lost so much value, some types of mortgage debt are selling at less than 20 cents on the dollar, this would likely lead to losses for investors in SIVs.”
“Earlier this month, bankers from Citigroup Inc., JPMorgan Chase & Co. and Bank of America Corp. announced an agreement on a multibillion-dollar fund to buy distressed debt securities. HSBC, whose SIVs are among the largest in the market, said it would not be participating in that fund.”
“‘As existing investors will continue to bear all economic risk from actual losses up to the full amount of their investment, HSBC expects no material impact to its earnings,’ the company said.”
“Loomis Sayles & Co. declined to invest after receiving one of 16 invitations for a personal meeting last week with current Fed Chairman Ben Bernanke, said Daniel Fuss, who oversees $22 billion as chief investment officer at the firm. The Securities Industries Financial Markets Association trade group extended the invitations, Fuss said.”
“‘It’s so nice to get a personal invitation to go to Washington and have a one-hour visit with Ben Bernanke,’ said Fuss, who decided participating wasn’t worth the risk to his firm. ‘Oh, boy, did I feel important for about 27 seconds, and then you smell a rat.’”
“Treasury spokeswoman Jennifer Zuccarelli said the department ‘is pleased with the work the private sector is doing on a structure that is meant to improve liquidity’ for all participants.”
“Analysts including Richard Bove of Punk Ziegel & Co. have criticized the proposal because it may saddle new participants with losses created by their bigger rivals.”
“‘Why should we put something on our balance sheet that is going to result in further writedowns?’ is how most contributors will respond, Bove said in an interview. ‘The job of the Treasury isn’t to go out and defraud investors.’”
“Boston- based State Street Corp. CEO Ronald Logue said Oct. 16 ‘you won’t see us participating in any way.’ Deutsche Bank AG, Germany’s biggest, was awaiting more details, CEO Josef Ackermann said last month. Terms for participants haven’t been publicly released.”
“The fund’s lack of disclosure makes it ‘a necessary failure,’ Bill Gross, manager of the world’s biggest bond fund at Pacific Investment Management Co., said in an Oct. 31 interview. ‘Transparency is what the Treasury and Fed are supposedly all about.’”
“JPMorgan’s involvement in the fund is meant to help SIVs ‘properly liquidate,’ CEO Jamie Dimon said on Nov. 13. ‘SIVs don’t have a business purpose’ and will ‘go the way of the dinosaur,’ he said.”
“Bank of America ‘has far more to gain down the road’ with regulators by backing SuperSIV, said Tony Plath, a financial professor at the University of North Carolina at Charlotte, who expects the plan to fail. ‘They are setting themselves up so they aren’t criticized when this thing falls apart.’”
“Royal Bank of Scotland Group Plc CEO Fred Goodwin is proving that making acquisitions doesn’t always improve profitability. Goodwin’s bet that America’s housing boom would supplement slower growth in the U.K. backfired this year as U.S. foreclosures rose to a record and the world’s biggest financial institutions wrote down more than $65 billion for debt-related losses.”
“‘It seems to be a confluence of calamities,’ said Neil Wesley, who helps oversee about 165 billion pounds ($340 billion) at London-based Morley Fund Management Ltd., which owns Royal Bank shares. Royal Bank dropped 37 percent in London trading this year.”
“Goodwin said as recently as March when Royal Bank reported 2006 results that ‘the U.S. is our single biggest opportunity.’”
“Santander SA is considering making an over 1 bln eur provision in the fourth quarter to cover the decline in the value of its stake in Sovereign Bancorp, Bolsacinco reported.”
“The US subprime loans crisis and the dollar’s depreciation against the euro have had a combined impact on Sovereign, the website said, adding that Santander now has accumulated capital losses on its just under 25 pct stake in the US bank of some 1.44 bln eur.”
“Allianz SE shareholders have a new reason to rue the almost $21 billion purchase of Dresdner Bank six years ago: the collapse of the U.S. subprime mortgage market.”
“Europe’s largest insurer is trading at the lowest valuation in four years on concern subprime losses at Dresdner will erode profit. Dresdner had 575 million euros ($852 million) of writedowns in the third quarter when the bank accounted for just 6 percent of Allianz’s total revenue, the Munich-based company’s reports show.”
“Swiss Re, the world’s largest reinsurer, surprised investors last week by announcing a 1.2 billion-Swiss franc ($1.1 billion) loss on derivatives in October.”
“‘Swiss Re has dealt a heavy blow to the entire industry,’ said Markus Engels, who helps oversee about $90 billion, including Allianz, at Cominvest Asset Management in Frankfurt. ‘Currently nobody looks at valuations or fundamentals: the market panic doesn’t allow it.’”
From FIN Alternatives. “Hedge funds sometimes get a bad rap in the U.S., but in Norway they are taking an epic beating following reports that four public municipalities have suffered huge losses because of hedge fund investments. The scandal involves a credit-focused Citigroup hedge fund marketed by Terra Gruppen and sold to local townships in the Scandinavian country.”
“The subprime credit crisis in the U.S. hit the fund hard, and the municipalities, four of which invested a total of $739 million, were forced to place more money into the funds or face losing their investments.”
“According to reports, one small town couldn’t even make payroll for December and was forced to cut child care and elder care programs.”
From Reuters. “JPMorgan Chase & Co Inc plans to cut about 100 subprime mortgage jobs in California amid falling U.S. housing prices and tighter lending standards.”
“JPMorgan said it has reduced subprime originations and operations staff because of home price weakness and tighter credit standards. About 40 percent of JPMorgan’s 2006 subprime originations would not be approved under today’s standards, the bank said in a statement.”
“The bank has discontinued, for example, all subprime home equity loans.”
“Citigroup Inc., bracing for big credit-related losses in the fourth quarter, is looking to lower costs, which could mean another round of job cuts at the nation’s largest bank.”
“‘We are engaged in a planning process in anticipation of our new CEO, and our business heads are planning ways in which we can be more efficient and cost-effective to position our businesses in line with economic realities,’ said Citi spokeswoman Shannon Bell.”
“Citigroup, which has about 320,000 employees, earlier this year reduced its workforce by 17,000 before the credit crisis.”
From Marketplace. “When business is down, morale usually sinks with it. That’s when it’s time to hire someone with a shinier outlook.”
“Doug Krizner: Morale in the mortgage industry has been in the pits. The Labor Department estimates nearly 100,000 jobs related to credit and lending have been lost. So how can managers pump up the workforce? Hire business cheerleaders. Marketplace’s Jeff Tyler reports.”
“Frank Candy, president of the American Speakers Bureau…says business with the mortgage industry is up about 20 percent. Frank Candy: ‘The one thing that’s gotten myself and a lot of my friends who are in this business through is believing in yourself and hope for a better tomorrow.’”
“Motivational speaker Chuck Carmen makes between $5,000 for a keynote and up to 25 grand for a two-day intensive workshop. In the past, he’s done presentations for Countrywide and others in the industry.”
“Even if they’d like a cheerleader, some companies can’t afford it. Candy says companies want to hire motivational speakers — but on the cheap.”
“Candy: ‘They’re calling us and saying, ‘We’d like to bring in a good speaker, but we don’t have the budget that we used to have.’ And so they’re asking for more, and hoping to pay less.’”
“Carmen says there’s life after subprime for mortgage brokers. If nothing else, they can earn commissions off the speculators buying homes in foreclosure.”
“The SuperSIV is ‘is all good and well, but it’s not big enough,’ said Tom Jenkins, a credit analyst at Royal Bank of Scotland Group Plc in London. ‘If you have a large SIV, you’re going to need to find another solution.’”
There’s the rub: SIVs are too big to bail.
Again, I guess I have to point out, that at 69% book value, they already have failed. And there is no bail-out. Just copy and paste that a couple of times if it isn’t sinking in.
Again, I guess I have to point out, that at 69% book value, they already have failed.
But the cheerleaders they hired said that 69% book value still leaves substantial room for success! Their version of failure is when the book values drop to zero percent of book value.
But the facts are:
‘As existing investors will continue to bear all economic risk from actual losses up to the full amount of their investment, HSBC expects no material impact to its earnings,’ the company said.’
I don’t expect the fact that a bailout is impractical to prevent the attempt, and I guess this is where our viewpoints differ. Let’s first wait until the panic has sunk into the popular consciousness before deciding who was right.
When this really gets down to street level, nobodys gonna care about house prices, and it wouldn’t matter if they did, IMO. It will be jobs, jobs, jobs. Save my job.
Anyway, the USG hasn’t even paid off what they borrowed for WWII. This debt will never be paid back, IMO.
I thought they had inflated that down to nothing at this point.
“USG hasn’t even paid off what they borrowed for WWII.”
1970s inflation = debt shrinkage
Save my job . . .
precisesly why I will live on 5% of my income if I have to to avoid ever being in that position.
“When this really gets down to street level, nobodys gonna care about house prices,…”
How about all the folks who used home equity ATM financing in recent years to fund consumption expenditures? Don’t you think they care about house prices at least a little, especially if their lenders are no longer willing to make home equity wealth extraction loans for fear the ATM is empty or worse?
To add perspective to my point, consider that the primary income source for many CA households from 1998-2005 was none other than the house itself (or for some extremely successful investors, many houses). It has to hurt to discover that home equity losses can easily wipe out over a year’s worth of labor income due to the reverse wealth effect.
Anyway, the USG hasn’t even paid off what they borrowed for WWII. This debt will never be paid back, IMO.
Hey, if Uncle Sam can get away with making minimum monthly payments on his credit card, why can’t J6P?
I’m worried about my job, sure, but I think I’m more worried about money I’ve saved up. I have it split between some credit unions, but if I can’t get it out, it will be no different than if I didn’t have any money. Should I take that money and pay off my house (long time owner, low fixed rate, in good shape)? I figure I’m better off saving the cash for when cash is king, and if I lose my job, I have plenty to live on - IF I can get it out of the bank. What are people’s thoughts? If I pay off the house, then I won’t have much cash when cash is king.
Should I take that money and pay off my house (long time owner, low fixed rate, in good shape)?
I’d hold on to your cash, never know if banks go under that you might get lucky and not have to pay it off. A lot of people seem to be getting lucky that way right now.
if I can’t get it out, it will be no different than if I didn’t have any money
that there is a problem that is not easily solved. A modest amount of gold can be hidden and even in a fire might survive. Cash bills…. fire risk. Either one has theft risk.
I’ve gone several credit union route; ultimately what I try to be prepared for is disruption, not total meltdown. Be prepared to go days, weeks, maybe even a year or two - without access, but not entire shutdown.
Entire shutdown will be back to a barter society, got skills?
Im to the point that, I am now betting on the collapse of the dollar.
Without total destruction, it can not be made anew. This isnt about whats screwed up. Its about what are we doing to help ourselves in the face of a the world crisis that is unfolding in terms of sustainability, not survival. Survival is beyond the land for the masses of Sheeple in the US.
Why are the sheeple pissed? They are broke, living paycheck to paycheck…..staving off the meltdown. Sounding the loudest alarms are the rational elite. The mere notion of the Sovereign funds, bailing ou the US.
Or is that it? the Sovereign Bailout? Somebody has to be bailed out. Whats it gonna be? Us or Them.
Professor Bear,
There have already been bailouts: rewriting loan terms for FBs, excluding short sales from taxable income, etc. and MANY more are in the pipeline.
There will be bailouts, pushed on the responsibile people by the irresponsible, make no mistake. Will it keep the sky from falling? No. But it will prolong this much longer and it will allow many of the greedy FBs to escape much better than had the free market allowed to correct itself.
Just because it’s too big to bail out doesn’t mean the goobermint won’t throw a few hundred billion at it anyway.
“An SIV that cannot continue borrowing money would need to find cash elsewhere or sell its investments. Since mortgage debt has lost so much value, some types of mortgage debt are selling at less than 20 cents on the dollar, this would likely lead to losses for investors in SIVs.”
I don’t get it. What’s the strategy, keep borrowing money until the market (every market) comes back to 2005 levels?? Ain’t gonna happen! If the bottom is 2012, when do we get back to 2005 prices? 2020? 2050?
I don’t get it either? Is that what these people hare hoping for? ‘05 to make a comeback? As I’ve said in other posts/threads, it really seems (to me) that be it CFC or WaMu or whoever that they’re really just squirming to get another day? If we can make it until tomorrow then hopefully the situation will have changed “somewhat” and we won’t look as bad as others. Then we’ll re-assess again tomorrow.
It just strikes me that there IS NO long term “plan”. (Only short-term survival). Ahh… the finest minds in finance!
When the ship is sinking, why would anyone think about the long term?
The plan is simple - dump the crap onto small fish investors.
Small fish seem to suspect something funny is up:
‘Oh, boy, did I feel important for about 27 seconds, and then you smell a rat.’
Fuss, chief investment officer for Loomis Sayles, who oversees 22 billion, ain’t no small fish.
FWIW, I have the same fears PB does. NOT that any bailout would work — no chance in he!! — but that taxpayers’/savers’ money will be sucked into the black hole before “they” figure that out.
“‘Why should we put something on our balance sheet that is going to result in further writedowns?’ is how most contributors will respond, Bove said in an interview. ‘The job of the Treasury isn’t to go out and defraud investors.’”
BWAHAHAHAHA! That’s telling it like it is! Gotta love it.
And this one:
“‘It’s so nice to get a personal invitation to go to Washington and have a one-hour visit with Ben Bernanke,’ said Fuss, who decided participating wasn’t worth the risk to his firm. ‘Oh, boy, did I feel important for about 27 seconds, and then you smell a rat.’”
BWAHAHAHAHA! I love seeing this in print, with the second tier Wall Street playuhs calling Bernanke out for what he is. BWAHAHAHAHA!
Maybe he would’ve signed up if they’d added a book signing by Old Blubber Lips Al to the program. Oh, gawd, this stuff is great, maybe some of the best quotes I’ve seen to date on the Washington and Wall Street thread.
‘one-hour visit with Ben Bernanke,’ said Fuss, who decided participating wasn’t worth the risk to his firm. ‘Oh, boy, did I feel important for about 27 seconds, and then you smell a rat.’
Imagine having to hold ones nose for 58 minutes and 33 seconds!
Like I said, Ben, the BEST. WASHINGTON & WALL STREET REPORT. EVER. This is the stuff I’ve been waiting for. Sneering contempt from within the ranks. Priceless.
This line by Fuss is one of the best I’ve seen so far.
Imagine having to hold ones nose for 58 minutes and 33 seconds!
One would also need a tall pair of boots in addition to holding their nose in that meeting!
The best part is how Fuss thinks that meeting with Bernanke might be a bad risk for the firm, but that refusing Bernanke so publicly wouldn’t be a bad risk for the firm (in a PR sense).
He wouldn’t dis Bernanke so candidly if he didn’t think there was some silent majority on Wall Street that agrees with him.
Or if he didn’t think that Bernanke was so chimpotent he’s shooting blanks. If Bernanke was holding any cards at all, no one would be speaking quite so candidly. It’s official. Bernanke has about as much credibility as Alberto Gonzales. Stick a fork in him, he’s done.
Bernanke/Greenspan reign seems a lot the like George Bush (the first one)/Ronald Reagan reign. Everyone wants more of the same but the less charismatic follower ends up with the blame for the failures of the other.
Excellent analogy.
Very nice, Vermonter!
Treasury is diversifying; they used to focus on ripping off the Chinese and Japanese but they are catching on so now Paulson is shaking down the locals for loose change.
we need a running tally
wake me up when it’s over 500 billion
navel gazing
“‘It’s so nice to get a personal invitation to go to Washington and have a one-hour visit with Ben Bernanke,’ said Fuss, who decided participating wasn’t worth the risk to his firm. ‘Oh, boy, did I feel important for about 27 seconds, and then you smell a rat.’”
I love it. I have some money in this guy’s fund and he’s kind of like a lesser known Buffett.
Kudos to Fuss. He said “No, thanks, not in the mood for a game of drop-the-soap today, thank you”.
Seems like people are beginning to wake up to the fact that Washington and Wall Street have been laying more pipe than Standard Oil, when it comes to the financial health of the country and its citizens.
sleepless, good thing he declined. The danger of participating in these “conferences” is that they’re like getting invitations from a Mafia don, who will make you an offer you can’t refuse if your curiosity gets the best of you and you do show up. Too late then to say no. Best to send a polite decline, along with a wedding present for the Don’s daughter. Profess undying loyalty and keep your distance. But in this case, the Don must be slippin’, because Russ dissed him in public.
Wonder what those meetings were like when Blubberlips ran them?
Not only laying the pipe but also smoking what’s in the pipe.
I’ve had money in two Fuss bond funds (Loomis-Sayles and Manager’s) for over a year. He’s had nothing in mortgages all this time so he clearly saw the oncoming train. Despite the market turmoil I’ve made 8%-10% in those funds.
[If not for the mortgage mess I'd probably be in bond index funds.]
I’m so pleased with Dan Fuss’ comment that I am going to pitch his fund. His bond fund is “Loomis Sayles Bond Return” and trades under LSBRX.
Nice to see that he turned Bernanke et al down flat. In times like these you need to be able to trust the managers of your moeny. I trust Mr. Fuss now more than ever. Good for him, it’s hard to turn down the big boys when they call for help.
I’ve been thinking for months about how the banks can get out from under the squeeze of liquidity. Other than the Fed going into hyperinflation mode (likely, especially if other Central Banks will follow, destroying all currencies together), there’s not much they can do.
Banks need the commission off of mortgage payments made to the CDO investors, but I’m assuming the commission is small. They need capital (i.e., long term savings) to loan out for new mortgages. Once they take that capital (savings) to loan out, they need new capital to pay out any future withdrawals of the previous savings accounts. In order to make money on the new capital, they need other avenues to loan with short term returns.
As I’ve said for years, fractional reserve banking is the worst creation of government, worse than warfare, welfare, or taxes. It’s a pyramid scheme bigger than any other, bigger than social security even. Taking in 10% to cover 90% will never work out in the long run, even with access to new liquidity from a inflation-happy Fed.
We have Gresham’s Law regarding good money versus bad money. What law do we have regarding the pyramid scheme we call fractional reserve banking?
On the same note, does ANYONE know of a full-reserve bank? One that charges for deposits (securing the money), loans out only against time deposits, and doesn’t loan more than it is allowed to by depositors? I know that e-gold exists, but it isn’t for me. I’d love a bank that does the following:
1. Takes in deposits in any currency (USD, Euro, Yen, whatever), converts it to a certain amount of gold or silver or other commodity. Say, deposit US$850, minus 3% commission, end up with 1 ounce of gold in your account.
2. Issues a debit card that allows the depositor to make payments in the currency of their choice, with the payment issued out of their commodity deposit based on the current market value of the currency. Say, spend US$82.50, commission paid by retailer, end up with 0.9 ounces of gold in the bank.
3. Transfer 0.5 ounces of gold into a time-deposit account (2 year before withdrawal). Bank loans out the 0.5 ounces of gold at 5% interest, with the borrower having to pay back 0.525 ounces of gold after 1 year at the current market price in whatever currency they pay back in. Significant penalty for withdrawing from the time-deposit account ahead of the time frame.
For me, this would be an amazing bank to save in. I would feel safe that my deposit wouldn’t be inflated away. I would be protected against a bank run because of the bank’s full reserve status. I would know that money I set to loan out would be paid back without a concern for inflation destroying my interest rate.
Anyone else see this as a great idea?
Other than the Fed going into hyperinflation mode (likely, especially if other Central Banks will follow, destroying all currencies together), there’s not much they can do.
Agreed…Then add all the other government obligations that are coming due and soon the bogus inflation numbers will be too big to hide(from the public)….Got gold?
i don’t see where it’s a protection against inflation.
If i buy a tree for $500, cut it up and build 5 pianos worth roughly $25000, someone is going to need to print some new money.. But, print exactly how much new money to account for the new assets?
Someone will have to decide… the govt? A central bank? Will they get close? Will they have incentive to print too much or too little?
Islamic banks come very close to full reserve banking.. but putting your money in them these days could be problematic..
Full reserve banking doesn’t require a government or central bank. It requires that the resources available to the banks issuing credit money and demand deposits would be sufficient to convert all currency at once if so required.
http://en.wikipedia.org/wiki/Full-reserve_banking
i don’t see where it’s a protection against inflation.
It’s a protection against monetary inflation, since a Central Bank can’t print commodities. It’s a protection against price increases since the currencies that were managed by the central bank would be subject to monetary inflation, but they’d be rendered useless by competitive currencies with reserves.
If i buy a tree for $500, cut it up and build 5 pianos worth roughly $25000, someone is going to need to print some new money.. But, print exactly how much new money to account for the new assets?
There would be no need. The market’s supply of pianos, versus the market’s demand for pianos, combined with the market’s supply of currency to buy pianos, would offer you the final price. In a relatively fixed currency economy, prices would tend to fall over time for products that were not in high demand, or are in high supply. This is a fact of life, though, and we see its evidence all the time (falling computer prices, falling clothing prices, etc).
Someone will have to decide… the govt? A central bank? Will they get close? Will they have incentive to print too much or too little?
There is always an incentive to print too much, which is why competitive currencies should be legalized. I currently barter with a few local restaurants, fruit markets, and stores who accept payment in silver bullion (notably 1ounce .999 coins). Over the past 8 years of my relationship with said people, my price has fallen in both silver and USD value, especially for services. So there are bartering opportunities in gold and silver — especially if more people would open their eyes to it. There is no simple digital or check form of providing for this barter, though.
Islamic banks come very close to full reserve banking.. but putting your money in them these days could be problematic..
The Islamic “no usury” ideology is an eyewash. I travel to Muslim countries often enough (we’ll be in Dubai for Christmas this year), and their “no usury” system is actually a play on words, most of the time.
The biggest problem with moving to a full reserve banking system is that only the USD is legally legal tender, even though Federal and State Constitutions require a commodity backing.
There would be no need.
What do you mean by that? There would be no need for what? For new pianos? For new money?
New stuff is created all the time.. new assets.. New wealth.
If the money supply does not grow in concert with the creation of new assets, you get deflation.
So, who will regulate the money supply? Some authority will have to be trusted with the task..
The particular percentage-reserve system has nothing to do with inflation/deflation.
What do you mean by that? There would be no need for what? For new pianos? For new money?
I meant no need to create additional money, even with new things being created. We also have old things becoming obsolete.
New stuff is created all the time.. new assets.. New wealth.
And new people are born each day, too (growth of population).
If the money supply does not grow in concert with the creation of new assets, you get deflation.
Actually, inflation/deflation is a term that specifies if money is added or subtracted from an economy. You mean prices go up or down. Yes, it is true that if we have a relatively fixed currency base, prices will generally fall over time. This is a good thing, as it means that savers will actually be compensated for not wasting their money fruitlessly. You could stash your money in your mattress, and years later it buys more.
So, who will regulate the money supply? Some authority will have to be trusted with the task..
The full reserve system regulates itself. Banks who lie would go bankrupt as there would be runs on those banks. Private insurance companies can replace the FDIC for a percentage based on risk (and open audits allowed by the banks in their reserves).
The particular percentage-reserve system has nothing to do with inflation/deflation.
It absolutely does! If a bank is required to have a 10% reserve, and people want to withdraw MORE than the 10% reserve, the bank must borrow from the Federal Reserve. This borrowing is the act of creating money. Of course the bank must pay the Fed back, but over time, that “overnight” pay period has been extended. If I deposit $1m into an account, and the bank has to reserve 10% of it ($100k), and loans the other 90% out ($900k), and then I come to withdraw my $1m a week later, the bank has loaned out $900k, but then borrows $900k to give to me, so now there is $1.9m in the economy versus $1m before. Yes, the bank has a debt of $900k to the Federal Reserve, but the $1.9m still exists in the economy. It is not like someone GAVE the FedRes $900k to loan to the bank, they just created it.
This is the scam and fraudulent aspect of central banking. With reserve backed currencies, you have little fear of price increases, your give benefit to savers and investors versus spenders and wasters, and there is no middle man to profit from the theft of monetary creation (inflation).
I like the idea of my money being worth more over time. It would be a real kick to the REALLY wealthy, though, who would not be able to rob the lower and middle class through monetary creation.
Deflation is the way the system should work. Inflation is a result of a scam Fed system.
You don’t need a central system to regulate banks. We have one now, and how is it working? Are banks stable, honest and prudent? If we had redeemable currency we wouldn’t need any regulation.
whew.. Although i wasn’t absolutely sure before, i now know what i’m talking to.
You guys keep up the conversation.. don’t mind me as i slip out the back.
This is not crazy talk. We live with a creaking financial system that is a hand-me-down from the dark ages and rewards some unfairly at the expense of others. Not many people, even economists, understand the nuts and bolts of how our money and banking system works, or the implications, so it hasn’t been questioned seriously since… well…the Great Depression. But even highbrow academic economists– notoriously conservative and, as Keynes said “most economical in their ideas”– are starting to talk about these issues. The fact that it’s the system we have now (and that apparently you’ve never questioned before) doesn’t necessarily mean it’s the best we can do.
That said, I have to say I disagree with Dada on the emphasis on gold. Seems to me like gold is fiat money, too. It has value because people decide it does. No other reason. There are few practical uses of gold, and it will cease to have value when people so decide. I think it’s value will crash with the overall debt deflation. (I’m with Jas on a deflation recession.)
Skills are the new money.
Historically the ‘no usury’ law may have helped prevent people from cutting down e.g. scarce trees for momentary profit from a limited resource environment. Keeps growth from being built into the economy unsustainably.
trees aint fallin in oregon. rail is gonna shut down.
Don’t make the mistake of assuming what passes for interest free banking in muslim countries is what’s prescribed by Islam.
For those who are intersted in Islamic finance this book would serve as a good introduction. There’s precious little material in English:
http://www.albalagh.net/bookstore/?action=view&item=0013
Dada,
A bank with 100% reserves is a storage vault. With 100% reserves, a bank cannot lend anything against deposits.
What gives you the impression our banks have a “10% reserve” requirement?
Blue Skye: Maybe in a very limited view, a full reserve bank would be considered a storage vault, yet what I envision is not just that.
To me, a bank has a few purposes:
(1) safely store valuables and currency against theft, fire, or other acts.
(2) Aid in transactions between two parties (i.e., barter or payment tendering)
(3) Aid in investment actions for capital owned (i.e., find borrowers, collect from borrowers, verify borrower’s creditworthiness).
I could, theoretically, use my physical gold and lend it out to people I know, and tell them I expect that amount of gold in return in a certain period of time, plus a certain amount more in interest for the loss of the use of my gold during that time period. The difficulty here is that it limits my market. A bank would have a much larger base of borrowers (those who need capital) and lenders (those who have capital). The bank would make its money on the initial commission, as well as a cut of the interest paid from borrower to lender. Also, a bank can find multiple lenders for one borrower, or multiple borrowers for one lender.
So in the case of a full reserve bank, the bank’s primary purpose is to store capital (let’s say they offer someone the chance to save in gold, USD, and silver, or any combintion in different accounts) against theft or the elements, and also allow the saver to transact that capital with others (merchant account or credit/debit card processor), or loan that capital out to others with the express knowledge that the loaned capital is NOT available for withdrawal during the loan period. They would not loan out non time-deposits (i.e., stuff you wish to have available to spend always), but they would charge you to use time-deposits (say, commission on deposit, commission for a time period of securing the deposit, and commission on transaction of transfer of the capital on deposit to another).
That would be my dream bank. I’d open 6 accounts, maybe: 1 “on demand” account in gold, silver and USD each (and the bank can transact a gold->dollar or silver->euro transaction depending on which account debit card I used and where), and 1 “for loan” account each in gold, silver and USD. When the bank loans my gold to you, you understand that the payment due is in gold (or your dollars converted to gold at that day’s spot price), and you’d also owe interest in gold.
A gold-bear could borrow 100 ounces today from me to borrow a house at 6% interest, if he feels that gold would fall against the dollar over the loan term. A gold-bull would likely put some gold up to loan, knowing the value would grow and they’d earn additional interest on the loan.
As for the reserve, Blue Skye, I always use the 10% figure, but I know it’s not valid any longer.
You might be interested in digital gold currency.
http://en.wikipedia.org/wiki/Digital_gold_currency
A problem I think I see is in this sentence: “Say, deposit US$850, minus 3% commission, end up with 1 ounce of gold in your account.”
When gold hits $1000, you’re going to think you’ve got $1000 and be excited. When gold hits $500, you’re going to think you have $850. But assuming I’m wrong in my thinking, it seems like a good idea. And if it’s a good idea, I’d expect there to be plenty of banks like this to choose from.
Michael Viking:
When gold hits $1000, you’re going to think you’ve got $1000 and be excited. When gold hits $500, you’re going to think you have $850. But assuming I’m wrong in my thinking, it seems like a good idea. And if it’s a good idea, I’d expect there to be plenty of banks like this to choose from.
That’s very true, but that is also where electronics helps. If you open a gold bullion-backed account, initially you’ll be more concerned with “How much can my X.XX ounces of gold buy me in USD?” But today, when I look at my bank account in dollars, I _always_ ask “What can this get me in Europe (Euro) or Asia (Yen)?” as I travel a lot. Most Americans don’t think about that, they just see US based goods going up in price or value. When the stock market went up recently by 100 points, if you priced it in Canadian Dollars, the value actually DROPPED in that same day by 100 points versus CDN. That means that prices in USD are just as irrelevant as prices in AU or CDN or EUR.
The problem with depositing in CDN or EUR or USD is that you don’t have anything backing up that deposit but the force of tax receipts in the future. For me, that’s not a very moral, nor safe, method of backing up my purchasing power and savings. I would feel MUCH safer knowing my purchasing power is backed by a commodity that historically has always gone up versus the status quo fiat currency. Yes, gold and silver have had bear years, but historically, even over periods of just a few decades, value has gone up (actually, fiat currency value has decreased).
Why aren’t banks providing this kind of access to gold-denominated accounts? Probably because they make far more money with fraudulent fractional reserve banking. I’d gather that few banks want to deal with securing gold, converting it to USD and back (via debit card purchases), and the redeeming it on demand, even though each transaction would net them a commission.
I look at it this way: I’d rather pay 3%, or even 5%, per AU->fiat conversion each way, than lose 10% or even 20% a year to monetary inflation devaluing my buying power.
I’d also prefer a more moral currency, once where I am not part of the theft that happens to the lower and middle classes.
Goldmoney is essentially what you are conjecturing. It already exists.
I detest when management brings in the motivational speakers. It’s always this Pollyanna crap to try and placate the staff and help them be more productive (work harder for the glory of it). The cost becomes part of the reason why they can’t afford a decent raise. While the workers worry about how to pay to heat their homes, management is worrying about how to invest their bonuses.
Especially when it’s this fellow: http://www.geocities.com/Hollywood/Boulevard/7384/mattnew.jpg
Can you sam SixSmegma? This motivational crap is a turd that bloomed in the early 1980’s and I’ve had to sit through hours upon hours of this BS. And you’re right…. The reason wages are falling and one has to work harder for less is because of shit like this, at least partially. I recall having to go to Charlotte, NC for a SixSmegma Charade with about 1000 others and there were actually people there who bought into it. I wonder what they have to say now…
No, the reason we have motivational speakers is BECAUSE of the falling wages, not the other way around. It is very easy to motivate people, just follow the golden rule and behave in a competent, professional manner. When employees are treated like crap and paid a slave wage, instead of changing anything upper management tries to just bring in someone to tell employees they really aren’t getting screwed.
It seems fewer and fewer are buying it…
At my last company, we had a “moral problem”.
It originated with the changes from SarbOx. The company had to stop the employee stock purchase plan that allowed us to buy stock at 80% market and immediatly flip it for extra cash. Oh, but that was a huge chunk of executive pay, so the executives all got 30+% raises…
Oh, but those raises for the execs cut in to corporate profitability, so we had to do a layoff and no cost of living salary increases for the little guys for one year.
Then they raised our share of medical coverage from 20% of cost to 25%. They used a chart that shows they already paid a much greater share than others in our “industry”. I’d seen that chart at my last two companies. Our “industry” was the service industry which includes delivery drivers, pet groomers, barbers, laundry workers, private sector garbage collectors, and even the guy working behind the counter at Kinkos.
Same amount of work for fewer employees = more work per person.
Loss in ability to buy stock at 80% market, no cost of living increase, and more out of pocket for benefits = less pay.
So, we had a big meeting that started with a motivational speaker. They say how our cost cutting efforts have inroved profitability…. Then the company gave the bad news. Despite increases to profitability, we still weren’t going to meet revenue plan so no bonuses (which were never that big… max was like 5-10% of gross pay but they never paid full so it usually came up more like 2-3%).
SO, when we reach the Q&A section, I stand up and ask a question about “the moral issue” as it had become known.
“We had lay offs so that we could be profitable so that you could pay full bonuses. We didn’t get a cost of living increase so that we could be profitable and you could pay full bonuses. Then we had to pay a larger share of our benefits so that we could be profitable so that you could pay full bonuses. NOW you tell us that bonuses are not based on profitability at all… it is based on revenue.
So, do you think this motivation speaker will help the moral problem? Do you think the turn over rate will slow or that we’ll be able to attract good people or retain our best people just because of a motivational speaker? A motivation speaker will fix things while you find new ways to make us do more work for less pay so that the executives can get huge pay increases without negativly impacting profitability?”
COO says, “The moral problem is not a compensation issue. Next question.”
There were a few minutes of stunned silence….
There were 3-4 more questions… All incorporated some aspect of “more work for less pay, and you don’t think the moral problem is a compensation issue?”
End of meeting….
Resumes started flying and turn over increased even more.
About a month later they announced they were giving us double sized cost of living raises and making them in Fed instead of May. Oh, and they’ve re-examined the bonus plan and think it would be better to tie it to profitability instead of revenue, so they would be paying retroactive bonuses.
Odd, but talk of the moral issue went away and turn over slowed.
Motiviation speaker = “lube in hopes you won’t notice the rectal shafting you are about to get.”
Darrell,
Somehow reading your posts makes me feel guilty for being disgruntled at my situation. Man have you been screwed every which way there is. But it sounds like things are already starting to improve with the COL raise and retro bonus.
DLTBGYD…
stop!!!!!!!!!! spray alert! LOL~
smegma? merkin? What Txchick.
“Hedge funds sometimes get a bad rap in the U.S., but in Norway they are taking an epic beating following reports that four public municipalities have suffered huge losses because of hedge fund investments. The scandal involves a credit-focused Citigroup hedge fund marketed by Terra Gruppen and sold to local townships in the Scandinavian country.”
“The subprime credit crisis in the U.S. hit the fund hard, and the municipalities, four of which invested a total of $739 million, were forced to place more money into the funds or face losing their investments.”
“According to reports, one small town couldn’t even make payroll for December and was forced to cut child care and elder care programs.”
Wow, that’s gotta hurt. I guess Norway didn’t get the same memo that the Pinellas County, Florida fund administrator got. $hitigroup crappin’ all over the planet.
“The subprime credit crisis in the U.S. hit the fund hard, and the municipalities, four of which invested a total of $739 million, were forced to place more money into the funds or face losing their investments.”
“According to reports, one small town couldn’t even make payroll for December and was forced to cut child care and elder care programs.”
This is Norway they are talking about!
WTF? All real estate is local according to Liar-eah and the new shill of NAR Sun-yat Sen Lawrence “Moon” Yun.
Folks, prepare for a financial Armageddon the likes of which mankind has not seen yet.
BTW, a flat in Mumbai was sold for the unheard price of over $2000 per square foot last week, according to an Indian newspaper! They are still drinking the Kool-Aid over there in India.
We have a great foriegn policy don’t we?
I have property in Mumbai myself, and the value of it is ridiculous. We’re in a very posh neighborhood, but I can’t understand the bubble there — it’s much scarier than what we face in the States.
The upside of owning in Mumbai is the relatively lax regulatory market. Oh, it exists, as do taxes, but no one pays and no one follows the laws. It’s very easy for a foreigner to do business in Mumbai — and I know quite a few non-Indian Americans who are doing VERY well in the Mumbai market.
My wife and I are going there in January for travel and business (as I do every year), and I’m always excited by the sheer amount of growth the city sustains — most of it in the unregulated, untaxed black market.
FWIW, I looked at property in Goa on the beach (3-4 years ago, before the bubble blossomed), and at the time the owner wanted me to pay in gold bullion, with 10% paid in rupees for tax purposes. I couldn’t believe his demand was met by another foreigner. I am a PIO, so I can legally own property in India. I wonder about the other guy.
We need to send some or our Orange County financial wizards to Norway to lend a hand.
Investment banks need to get this paper of their books to continue conducting business. If they don’t no new deals. The question is whether this is a temporary blip in the valuation of this paper, or whether price declines will continue. If it is temporary, fire sales now are not the answer, and this is a needed short term fix until the market comes back and they can unload. Let’s not forget, a lot of this paper is not secured solely by the mortgage pool, but instead by big credit enhancers. In such a case, I see it as more of credit enhancer ratings problem. Let’s not forget the difference between the value of debt secured by a mortgage, and the value of such debt secured by a highly related insurer. The mortgage crisis and the insurer downgradings are correlated but not identical issues.
Related = rated. We all want and expect housing prices to go down over the next few years. The collapse of major banking institutions, however, would make a Great Depression type result inevitable. I’m not talking soft landing, just the avoidance of nuclear annihilation.
“We all want and expect housing prices to go down over the next few years. The collapse of major banking institutions, however, would make a Great Depression type result inevitable. I’m not talking soft landing, just the avoidance of nuclear annihilation.”
10 years ago there was $5 trillion in mortgage debt against $11 trillion in residential real estate. Now there is $10.5 trillion in debt against $21 trillion in residential real estate.
The “expected and wanted” fall in real estate prices will create a situation where the total loans underwater will reach into the trillions. I think that if we look 2-3 years into the future, and take just the unside down morgages and sum up the amount they are upside down, I think we could easily reach $2-3 trillion.
I’m sorry, but no one is going to keep making payments on a $300K mortgage when the identicle house next door sells for $200K. Now add on the cost of doing the foreclosures.
I think $2 trillion in total losses is not only likely, but inevitable.
Credit enhancers? Sorry, but all the re-insurers are toast under those conditions. The mortgages go into default, the insurance is unable to pay, and the CDO holders are really the bag holders.
Pension funds collapse, big banks collapse, insurance companies collapse, Freddie and Fannie collapse…
The job market implodes as construction stops, financial services companies drastically slash, retail takes huge cuts, transportation slows, local governments are pushed into bankruptcy by falling tax revenues, the federal budget will have to be slashed….
Your post could be summed up as, “credit enhancers won’t be able to withstand the $2-3 trillion avalanche of defaults that are coming, so Great Depression type result is inevitable. $2-3 trillion in mortgage defaults will trigger a recession, which will cascade into mass losses in other consumer, commercial and governement debt will make avoidance of nuclear annihilation impossible.”
Query. I keep hearing about ppl leaving the keys and walking away if they go upside down on their mortgage. In most states can’t the banks still sue you for deficiency, and thus, those that can pay but are upside down may have an incentive to hold on. Is it really just leave the keys and walk away, or does it need to be accompanied by a personal bankruptcy? I am already a doomsayer, but if you just walk away from an upside down mortgage with no other ramifications it is much worse then I thought as 50% or more of all mortgages may be upside down within 2 years.
Tim — I don’t think that 50% of all mortgages will be upside down. It is possible that 50% of all mortgages originated between 2003 and 2007 could become upside down, but there are a huge number of existing mortgages that pre-date those. Now, if you add HE loans and HELOC debt to the older mortgages, you bump the numbers a bit, but still there is a lot of housing in this country that will not be underwater relative to the debt on it. But it all will be worth way less than it is today because falling prices affect all housing in the area. Most of us (at least used to) project that prices will revert to what they were somewhere between 1997 and 2002.
As for walking away from a mortgage, I think it has to do with whether or not the walker is in a “recourse” state. Also, I think it’s been posted here that second mortgages and home equity money is not forgiven when a first mortgage is called / repossessed. Congress appears set on making it easier to walk on these loan commitments by it’s desire to forgive the income tax otherwise due on the forgiven debt, which is unearned income.
There are, thankfully, still a fair number of people who consider it a grave moral dilemma, whether to hand in the keys and let the lender eat the debt they incurred. Nevertheless, I think it will become such a relatively common practice that it will be socially “acceptable” and then even the honest holdouts, by and large, will cave.
Sounds like an area you can “invest” in, if you ask me. I just found out last week that we could theoretically add onto our home going 20′ back. Since labor and materials are so cheap now, maybe I should add another 2400 square feet to my house, in the form of bedrooms and private baths. Rent them out to boarders when the inevitable happens.
We already rent one of our extra bedrooms to a boarder (who used to work for me) to the tune of $4800 a year (more than our property taxes). He’s using barely $300 a year more in utilities, and pitches in with a lot of household chores (taking trash out, watching the pets when we’re away). I’d have no problem moving a family or two into additional square footage if they had a private entrance shared. I bet it’ll be a booming market, actually.
One thing that makes little sense to me: if these CDOs get marked down to 20% of original value, it would seem it would be a relatively GOOD investment if the homes owned weren’t so diced and divided between various investors. I mean, seriously, the home assets are there, and even with massive defaults, an 80% haircut in prices is unlikely to happen. The problem with buying an investment at an 80% haircut but with assets only seeing a 50-60% haircut is that you’re not actually buying specific assets but a whole bunch of tiny pieces.
What a ridiculous investment scheme. “Here, buy these assets in tiny pieces! If they foreclose, you own a tiny piece of hundreds or thousands of foreclosed homes.”
People are sheep.
value of debt secured by mortgage, NPV interest payments.
“The subprime credit crisis in the U.S. hit the fund hard, and the municipalities, four of which invested a total of $739 million, were forced to place more money into the funds or face losing their investments.”
Now there’s a winning investment strategy: keep throwing more money after bad and doubling-down until you recoup your lossses. When you find yourself in a hole, keep on digging to China?
More brilliant ’strategery’:
“Frank Candy, president of the American Speakers Bureau…says business with the mortgage industry is up about 20 percent. Frank Candy: ‘The one thing that’s gotten myself and a lot of my friends who are in this business through is believing in yourself and hope for a better tomorrow.’”
Uh, huh… Wish in one hand, sh*t in the other and see which fills up quicker.
“Wish in one hand, sh*t in the other and see which fills up quicker.”
Now that’s there’s just too funny. And true!
I hope chicken noodle soup cleans off of keyboards good, lol.
“The viability of an SIV relies on its ability to continue borrowing money. Amid this year’s flight from risk, lenders in the commercial paper market have frequently balked at letting borrowers ‘roll over,’ or extend, their debt. This is what is happening to most of the world’s roughly 30 SIVs, which collectively manage about $320 billion.”
Fab4 4Ever
I’m gonna write a little blog letter
Gonna e-mail it to my local dj
It’s a rocky horror record
I want my jockey to play
Rollover loan liars, I gotta hear it again today
You know, my temperatures risin’
And my bandwidth blows a fuse
My heart’s beatin’ rhythm
And my soul keeps on singin’ they’ll lose
Rollover Citigroup and tell JP Morgan the news
I got the rockin’ rollover pneumonia
I need a shot of rhythmic good news
I think I’m rollin’ arthiritis
Sittin’ down by the rhythm review
Rollover Bank of America rockin’ in two by two
Well, if you feel you like it
Go get your rollover, then reel and rock it
Roll it over and move on up just
A trifle further and reel and rock it
Roll it over
Rollover Chase & Co. rockin’ in two by two
http://www.youtube.com/watch?v=WYkxnQajVNw&feature=related
The job of defrauding investors does indeed not belong to the Treasury or the Federal Reserve.
That job belongs to top-tier Wall St firms and certain large banks.
We need to get the division of labor straight here.
They play for the same team.
Right, Maven, but it’s Paulson’s job to steer the investors to the Wall Street firms for defrauding. He should not be doing it himself. It’s just not right.
lol. nice one.
not Central Banks?
oh, thats where ya steer the Soveriegns?
“JPMorgan said it has reduced subprime originations and operations staff because of home price weakness and tighter credit standards. About 40 percent of JPMorgan’s 2006 subprime originations would not be approved under today’s standards, the bank said in a statement.”
So the fallacy that the bubble peaked in 2005 really is just that…. a fallacy. I’ll go on record and say the unsustained bullrun in housing reversed September 2007.
Depends on how you measure it. Total mortgage originations in $: 2003. Top in homebuilder stocks, summer 2005. Greatest speculation: 2006. The actual prices broke at different times in different regions, but they all broke.
“Greatest speculation:2006″
If that is true it really slices to ribbons the MSM mouthpieces who say that “we’re in the 3rd year of the bust”. We had a link to that tripe on this blog maybe a couple weeks ago. Nevertheless, it answers why we didn’t see any blood on Main Street last year.
I actually think it was multiple bubbles: As you say, bubbles in origination, stocks, and housing prices. Speculative bubbles in bonds, CDOs etc. as well. But also regional bubbles, by which I mean regional and even local RE markets, and different types of RE as well. For example, I believe that commercial RE is in a bubble, but it’s not all over the news yet. That’s why it’s not all tanking at once, even though some days it seems like it is. A nice frothy mass of co-dependent bubbles.
I measure it by the “squirrel Scale”, the top was hit when an idiot in SF required the purchaser to “feed the squirrels”. The bottom of the market will be hit when there is a new recipe book at Amazon, ‘50 ways to cook your squirrels’.
Seek, and you shall find:
http://www.backwoodsbound.com/zsquir.html
LOL. We need to add “San Francisco Squirrel.”
While the median price as recorded by the NAR rose until recently, I’ll bet that the price a given house could sell for peaked in summer 2005, at least in real dollars.
Prices certainly peaked in 2004/2005 in San Diego. The low-income ‘hoods actually continued increasing into 2005 while the mid-high end has been pretty stagnant since 2004.
Now? Prices in the low-income areas are down about 30%, even more if you hold DOM steady WRT 2004 sales times.
For San Diego, 2003 was the top in number of sales. 2004 would have been higher, but the second half of the year saw a pretty significant slowdown (beginning of the bust here).
Spring of 2004 also had lowest inventory and highest turnover rates. Houses were selling in an hour or less (no exaggeration) in spring of 2004. In a sense, that was another peak.
Prices peaked some time in 2005, as a whole, even though some areas topped in 2004.
By 2006, the slowdown here was obvious to anyone who cared to notice.
Since mortgage debt has lost so much value, some types of mortgage debt are selling at less than 20 cents on the dollar, this would likely lead to losses for investors in SIVs.”
Wrong! The loss has already occurred, but you haven’t realized it until you sell; therefore no one wants to sell.
You can hold this stuff forever, the value isn’t coming back. Ask any dot.com investor how much their Pets.com stock is worth today.
So how can managers pump up the workforce? Hire business cheerleaders.
The cheerleading from the NAR present and past economists have had little to no effect on the consumer. The cheerleading by the band on the Titantic had no effect on the outcome. I doubt cheerleading will help much if your the one losing the job due to the subprime mess!
RE: JPMorgan
“The bank has discontinued, for example, all subprime home equity loans.”
Another shot fired at the foundation of the pyramid.
The Fed injecting more money via Repos:
http://www.bloomberg.com/apps/news?pid=20601087&sid=a5tREH0PkNj0&refer=home
“The Fed is pulling out all stops to try to alleviate funding pressures in the money and financing markets as the markets lurch into year-end…Given the heightened state of credit aversion going on it looks like the only magic bullet that they have to help the markets is a rate cut.”
Can the Fed actually cut rates, however?
“The average U.S. overnight rate has been above the Fed’s 4.5 percent target almost every day since Nov. 9, suggesting banks are reluctant to lend to each other amid mounting subprime market losses.”
Would you loan moneys to a bankrupt company without recourse? Banks not loaning moneys to other banks gives a good idea of the severity of the problem.
Despite the Federal Reserves stated actions total repos are a pittance and are rollovers other than the 10B put in for the past weekend.
Today there was $10.25B in 1 day rollover, so tomorrow it will appear that an additional 27B is infused. BS
A Californian hedge fund has made more than 1,000 per cent return this year by betting against US subprime home loans, making it one of the world’s best-performing funds of all time.
Lahde Capital, set up in Santa Monica last year by Andrew Lahde, last week passed the 1,000 per cent mark, after fees, following the latest leg of the credit market turmoil. The fall in the value of subprime-linked securities has boosted a group of funds which spotted the problems in advance.
Our entire banking system is a complete disaster,” he wrote. “In my opinion, nearly every major bank would be insolvent if they marked their assets to market.” He also said he would be putting some of his own profits into gold and other precious metals.
http://www.ft.com/cms/s/0/7b6160be-9b80-11dc-8aad-0000779fd2ac.html
Seems like a smart guy. Lucky him and his customers.
Yeah, well if I were one of his customers, I’d be redeeming right now. That was a one trick pony show and now this guy probably thinks he’s a genius. Kinda like house flippers in ‘05. I’d be saying, “thanks for the memories . . . can I have my money now?”
He is (or has been) mailing out checks. The letters read “The risk/return characteristics are far less attractive than in the past.”
What do you think of his idea to start shorting collateralized credit card debt? I thought I saw that in the story…
Yeah, good idea but bet it doesn’t pay off like the housing debt did.
Yeah, he’ll probably only make a measley 300-400% return on the CCs…
The chances for profit are definitely gone. I was desperate to buy 2 year leap puts in wamu and NEW at the end of ‘06, but no one would approve me due to lack of adequate income and experience.
3 months later the value of those damn NEW puts went up 40 times, and that was just after the price fell in half. And the wm ones are up something like 10x. So a 10% investment as a ‘hedge’ (my original plan, 5% in wm and 5% in new) would have increased my total portfolio 5x by now. I hate people who think they know what’s better for your finances than you.
The ‘insurance’ premium is just too damn high now. The hedge fund guy might well know this, but if you were getting such high fees and such a high cut and didn’t have a good moral base, you would continue the strategy too.
Now, if you were a young Warren Buffett you would probably return the money to the shareholders, claiming that “no great investment opportunities present themselves now”
Don’t think every hedge fund guy is an idiot, even if most of them are.
The WAMu Jan puts I owned since August is approaching 850%, maybe it’ll get to 1000%, too bad I didn’t buy more and sold some earlier.
“The scandal involves a credit-focused Citigroup hedge fund marketed by Terra Gruppen and sold to local townships in the Scandinavian country.”
The subprime kingpins know no shame, and there seems to be no limit to their reach.
If they were able to suck in bureaucrats in a nation of only about 5 million or so, then indeed they have spread this crap almost everywhere.
Up to 45,000 more layoffs at Citigroup. Considering other bank, hedge funds and brokers with the known multiplier effect on employment, where does that leave the real estate market in New York in a years time?
It’s different here. The foreigners will buy it all. You can read all about it here:
http://www.nypost.com/seven/11252007/business/mondo_condos_810486.htm
“Now, with a housing slump sweeping the nation and the devalued dollar making the U.S. a bargain for Europeans and Asians, savvy entrepreneurs selling new condos are going where the money is: Abroad. ”
“Developers that once had lines out their sales door are pursuing foreigners by attending property shows around the world, setting up private presentations for buyers in their offices, and including amenities that are specific for the international audience.”
“New York purchasers are starting to dry up, so you always go to where the money is.”
“In 2006 I sold mostly to Americans, now 4 out of 6 leads are from foreign investors.”
We’ll have entirely empty city of buildings requiring no services but paying property taxes. You’ll see.
“New York purchasers are starting to dry up . . .”
I’m stunned that they would actually admit this.
” savvy entrepreneurs ”
I hate that word, “savvy”. It’s been way overused in financial “reporting”. Almost as obnoxious as “snapped up”.
Only Jack Sparrow is allowed to say “savvy”.
It’s CAPTAIN Jack Sparrow
Just like all of those savvy Japanese investors that bought up NYC commercial real estate in the ’80s at inflated prices…and then lost their shirts.
Maybe this is a sort of reverse Nigerian scam.
New York real estate is absolutely screwed. This is a one in 15 year event where we see 50% haircuts overnight.
It looks like those Europeans will have to start worrying about their own backyard before they start trying to buy seemingly cheap real-estate with their funny money.
The Euro can’t go up anymore, Airbus is already in big danger and other manufacturers are in a world of hurt.
Can anyone say, “competitive devlauation?”
But if you bought a New York condo outright with your ‘equity’ somewhere in Europe, you’ll be able to flee the country when your home plummets in value. Right?
Sorry, but every Canadian is going to buy a condo in Phoenix. Our local paper quoted a local real estate analyst who said it will happen, so obviously, it will happen…
Up here in Calgary they are running ads like crazy for US real estate, how they can save CDN buyers thousands… investment seminars, etc. Totally stupid. I posted a link about this in the Saturday bit bucket thread.
“So how can managers pump up the workforce? Hire business cheerleaders.”
My heck! This is what all the upper management is focussing on where I work (top 20 builder). Forget the fact that there are no leaders here, and that I’m the only one in the company with actual technical knowledge, all we need to do is chearlead??? Oh I forgot the other part of the survival strategy - fire all competant employees with next to no severance. That way no one is left that knows how incompetent the executives are, or can replace them and do a better job.
Suprisingly I’m not on the terminate list yet, but the only people I could carry on an intelligent work replated conversation with are gone…. But by all means, chearleading should solve the problem.
Rant off
Good points, Devildog.
OOooooorah! DD
“…net asset values have fallen to 70 percent from 100 percent in July, according to data compiled by Fitch Ratings….”
This is subterfuge -deception by artifice or stratagem in order to conceal, escape, or evade -
Net Asset Value is currently level 3 modeling. What needs to be determined is NLB. “A net liquidating deficit is an amount
owed to the FCM resulting from the combination of the customer’s
debit or credit ledger balance and the mark-to-market gain or loss
on any open positions in the customer’s account. A debit balance is
the amount owed to the FCM by the customer represented by the debit
ledger balance, and implies that there are no open positions in the
account….The amount of the offset is limited to the market value of the securities…” From Commodity Future Trading Commission
Mr. Warren Buffett iterated that to find the market, sell 5% of your holdings then mark the rest accordingly. It is getting uglier.
These guys are too smart for that strategy. All they have to do is have an agreement to buy each other’s crap at artificial prices and the game continues.
The Wall Street Gangsters excel in this area.
In a liquid market this would normally be correct, except a bank or 3 really want out and since this is an illiquid market, and if somebody offers a bid for an
ABX-HE-BBB 07-1 of more than 12 (87.5% discount), it may be hit. In this market, it is difficult to paint the tape. If you tried to paint the tape with a 17.5 trade somebody would offer it at 15 to screw you for not letting them sell at 16.5.
What I am saying is these guys can get together and make gentlemen arrangements to buy each other’s debt in very small portions for an agreed upon bogus price. This has the benefit of allowing all players to value ALL of this crap at bogus pricing, which is the next best thing to selling it. Then the game can continue and it adds legitimacy to all the crap their buddies are holding.
As I have posted before, it is nothing but a new twist on the Japanese tactic of keeping bad loans on the books at artificial prices for decades. This stunt makes it possible.
The highest bid will win, so this arrangement would work. Then the government can just inflate away the problem while waiting for the next boom to show up.
As long as the Wall Street Gangsters can get their bonuses I don’ think they will give a shit.
LOL,
Painting the tape only works in a liquid market. Right now - today - there are financial companies that HAVE to sell, they are technically BK. There are banks that would sell at any bid to get out of a crappy position. Painting the tape won’t work. No liquidity, in forced liquidations. If I am willing to sell at 15, I cannot allow a trade to occur from ABC bank to XYZ bank at 16. I can allow a trade to occur at 14.5, but if it occurs at 15, I have to be a seller. SOP
Although I do agree the the wall street gangsters are in cahoot’s so to speak I gotta believe that human nature will take over and greed and fear will over take a few who will try to save there own skin and there by bring the whole scheme down…
problem with painting the tape, is ya gottta pull it off right after the finish.
Gotta love that Dow. Struggling to get and stay at 13,000 or above. Not makin’ it. IthinkIcanIthinkIcan.
Uh oh, 15:28 EST - free fall, JPY on a tear driving for 107.
What’s up? A little more pouting by the boyz before the next FOMC?
The Ancient Egyptians had Pyramids to show as their lasting accomplishment, and so do we.
alternate to the ol’ Joshua tree??
We will have Granite counter tops and Cathedral ceilings to mark our passing. At least the Egyptians created great funeral art before their Civilization fell.
“‘It’s so nice to get a personal invitation to go to Washington and have a one-hour visit with Ben Bernanke,’ said Fuss, who decided participating wasn’t worth the risk to his firm. ‘Oh, boy, did I feel important for about 27 seconds, and then you smell a rat.’”
(single-b rated) must have been crestfallen, that he couldn’t take somebody else down with him, on the Good Ship Loanprop.
“‘Why should we put something on our balance sheet that is going to result in further writedowns?’ is how most contributors will respond, Bove said in an interview. ‘The job of the Treasury isn’t to go out and defraud investors.’”
It isn’t?
“Loomis Sayles & Co. declined to invest after receiving one of 16 invitations for a personal meeting last week with current Fed Chairman Ben Bernanke…”
Shotgun financing?
Crossing the RubiCON
“‘It seems to be a confluence of calamities,’ said Neil Wesley, who helps oversee about 165 billion pounds ($340 billion) at London-based Morley Fund Management Ltd., which owns Royal Bank shares. Royal Bank dropped 37 percent in London trading this year.”
Stand by for the 3 pm PPT spike. As I mentioned the other day, you can almost set your watch by it.
http://bigpicture.typepad.com/comments/2007/11/dow-sell-signal.html
market timers are still all in.
Sorry I am to busy playing playing whac-a-mole to worry about a real or semi mythological PPT.
“Once the game starts, the moles will begin to pop up from their holes at random. The object of the game is to force the individual moles back into their holes by hitting them directly on the head with the mallet, thereby adding to the player’s score. If the player does not strike a mole within a certain time or with enough force, it will eventually sink back into its hole with no score. Although gameplay starts out slow enough for most people to hit all of the moles that rise, it gradually increases in speed, with each mole spending less time above the hole and with more moles outside of their holes at the same time. After a designated time limit, the game ends, regardless of the skill of the player. The final score is based upon the number of moles that the player struck.”
Good analogy, Hoz.
Really?
Not today, it appears.
PPT seems to be sleeping today, as it was last week. I think the bond market liquidity problems are seeping into equities. I guess it wasn’t all contained !
“Carmen says there’s life after subprime for mortgage brokers. If nothing else, they can earn commissions off the speculators buying homes in foreclosure.”
What speculators? The few knife-catchers will soon bleed out, then that’s it. Carmen is another ‘feel good’ fool mouthing empty platitudes. All that “just think positive” crap works great in an up market, less so in a down.
I don’t think too many serious speculative investors are going to enter the R/E market right now! Certainly not to buy homes. It’s hard to “store” them without them deteriorating rapidly.
Perhaps, some will buy empty undeveloped lots of significant size, or entire apartment buildings that can efficiently be mothballed, but that’s about it.
“Frank Candy, president of the American Speakers Bureau…says business with the mortgage industry is up about 20 percent. Frank Candy: ‘The one thing that’s gotten myself and a lot of my friends who are in this business through is believing in yourself and hope for a better tomorrow.’”
Let me guess…
At the end of the yes I can, yes I can session, all participants will be able to karate chop through a block of wood with one bare hand, proving their mortgage mettle?
At the end of the yes I can, yes I can session, all participants will be able to karate chop through a block of wood with one bare hand, proving their mortgage mettle?
Actually, its a lot easier than you might think.
For the better part of a decade, we’ve had 4-5% retail spending growth and 1% wage growth. The result is that the median American household now spends about 10% more than it makes. It has done this by adding over $5 trillion (I think it is closer to $6 trillion) in debt (just in consumer debt, businesses and governments have added trillion upon trillion more).
How can this end in ANYTHING other than a Great Depression? Assuming all else is equal, we’d have to cut 10% from spending just to stop getting further into debt. Sorry, but cutting 10% from consumer spending IS going to result in a recession in an economy that is 2/3rds consumer spending. That recession will hit income, causing a feedback loop into consumer spending cuts.
If we can not keep spending 10% more than we make, there will be a depression. We’re being crushed by debt payments and defaults, therefore we can’t keep spending 10% more than we make.
If not Debt, then Depression.
Not debt.
Therefore:
Speking of asking for more but spending less…..
http://www.azcentral.com/business/articles/1126biz-blackfriday26-ON.html
“Nearly 5 percent more shoppers hit the malls and big box stores over “Black Friday weekend” than the same weekend in 2006,”
“They spent 3.5 percent less than shoppers did a year ago”
More people spending less money…. most hit Wal Mart or Target and were done by noon.
Yep, that was my experience. WAY more people at Wall Mart this year than last, and they bought up the loss leaders and not much else.
I heard some number thrown around on the radio this morning, something like projections of 7% UP over last year. Anybody else hear this? Surely I heard it wrong.
“JPMorgan’s involvement in the fund is meant to help SIVs ‘properly liquidate,’ CEO Jamie Dimon said on Nov. 13. ‘SIVs don’t have a business purpose’ and will ‘go the way of the dinosaur,’ he said.”
Wrong. SIVs had a great purpose: to suck in the liquidity provided by the dumb investors - particularly the so-called ‘global investors’, and leave them high & dry. It was a nice bit of financial engineering from the MBA-types inhabiting the Wall St and the City.
Now, they will be on to some new trickery.
“Properly Liquidate” = sell the assets for enough to cover the loans that the parent bank made to the SIV….even if that leaves no money for the investors or other lending institutions the SIV borrowed from.
Damn, better clean the guns!
A new Mike Whitney column: Professor Roubini’s Crystal Ball: “A Generalized Meltdown of Financial Institutions”
http://www.smirkingchimp.com/thread/11234
excerpts:
“The global credit crisis has hit Asia with a vengeance for the first time, triggering a massive flight to safety as investors across the region pull out of risky assets. Yields on three-month deposits in China and Korea have plummeted to near 1pc in a spectacular fall over recent days, caused by panic withdrawals from money market funds and credit derivatives.”
…
“On Tuesday Chinese government officials ordered a complete halt to bank lending to slow the speculative frenzy that has created an enormous equity bubble in the stock market.”
…
“Renewed credit turmoil and volatility led the European Covered Bond Council (ECBC) on Wednesday to suspend inter-bank market-making in covered bonds until Monday, Nov. 26.
The move is a sign of the stress in the covered bond market, which is dominated by German institutions that have almost a trillion euros of covered bonds outstanding.
Covered bonds — backed by pools of assets that remain on the borrower’s balance sheet — are usually highly liquid and typically rated triple-A by ratings agencies. The ECBC’s recommendation is aimed at relieving the pressure on market makers who are forced to quote prices at a fixed bid-offer spread.
Note: This isn’t mortgage-backed junk that’s being sold, but highly liquid bonds that are usually easy to cash in. The ECBC’s action is a sign of pure desperation and indicates that credit paralysis has infected the entire euro banking system.”
…
and a Paulson quote:
“The nature of the problem will be significantly bigger next year because 2006 [mortgages] had lower underwriting standards, no amortization, and no down payments….We’re never going to be able to process the number of workouts and modifications (to mortgages) that are going to be necessary doing it just sort of one-off. I’ve talked to enough people now to know that there’s no way that’s going to work.”