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Is the recent episode of market turmoil a temporary shock or the beginning of a systemic risk episode?

Author: Nouriel Roubini  ·   ·   › Share This Print

Any time there is an episode of turmoil in US and global financial markets the question in the mind of investors is whether this is a period of temporary turmoil or the beginning of a more severe and protracted period of financial market volatility and downturn that could end up into a systemic risk episode.

In the last decade only the LTCM episode in 1998 at the peak of the Asian and emerging markets financial crisis and the bust of the tech bubble in 2000-2001 – that triggered the US recession of 2001 – had systemic implications. Since then we have experienced a variety of other episodes of financial turmoil that have ended up being only temporary shocks. In these episodes of temporary turmoil investors risk aversion sharply rose for a while, volatility indices and gouges of investors risk aversion (such as the Vix, the 10 year swap spread and credit spread) sharply increased; and the financial pressures spilled over from credit/debt markets to equity markets. But in each of the most recent episodes the turmoil was transitory (a few weeks or, at most, a couple of months); once the transitory sources of the financial disturbances disappeared, calm returned to markets and investors risk aversion returned to lower levels. 

One of such episode of temporary turmoil followed 9/11 in 2001 and the collapse of Enron in late 2001. Another episode of transitory turmoil occurred in early 2003 before the US invasion of Iraq when market started to worry about the risks and consequences of the war on the economy. A more recent episode was the one that – in the spring of 2005 – followed the downgrade of GM and Ford by credit rating agencies; that downgrade caused serious but temporary pressures in the credit derivatives markets and in equity markets. Another episode occurred in the spring of 2006 when a sudden “inflation scare” in the US (worries that inflation was rising and that, therefore, the Fed was not done yet with rising the Fed Funds rate) led to a sharp downturn in US and global equity markets and serious pressures on some emerging markets currencies, equity markets and bond markets.  And the final episode – before the most recent turmoil this summer – was in late February 2007 when the combination of a mini-crash in the Chinese stock market, rising worries about the fallout of the subprime crisis and a US “growth scare” affected mostly equity markets in the US.
 

Since most previous episodes of financial turmoil since 2001 have been temporary, the optimistic and consensus view in the markets is that the current financial turmoil will be again transitory and that risky assets – starting with equities – will recover their upward price path once investors’ nervousness abates. That is certainly possible as previous episodes of turmoil since 2001 were mostly contained. But I will flesh out a number of reasons why the current episode of market turmoil may be more serious and protracted than previous ones and why we should worry now about systemic risk.
 

First, most of previous transitory episodes occurred at the time when US and other G7 monetary policy conditions were much looser than today. Starting in January 2001 the Fed aggressively cut the Fed Funds rate that fell from 6.5% to a bottom of 1% by 2004. Next, the normalization of US monetary policy brought back the Fed Funds rate to 5.25%; while at the same time monetary policy has been tightened in all G7 countries and several other emerging markets. And with inflationary pressures being still on the upper limits of many central banks’ comfort zone further tightening is expected (say in the Eurozone, UK, China and many other economies). Thus, in past episodes, easy monetary conditions helped; today instead policy is tighter and on the way to further tightening.
 

Second, following the brief US recession between March and November 2001, economic growth – first in the US, then in other G7 economies and emerging markets – recovered rapidly and has remained high for a number of years. But starting with the fall of 2006 the US has experienced a serious economic growth deceleration that may turn out into a hard landing (either a growth recession or an outright recession). The rest of the world is growing robustly but the clouds over US economic growth are rising.  In previous episodes – like the spring of 2006 or early 2007 – we had an inflation “scare” or a “growth” scare and markets reacted sharply downward. Now, if instead of having a growth “scare” the US were to experience an actual sharp growth hard landing (say a growth recession) the financial consequences would be serious as hosuing, capex spending and private consumption would sharply slow down.
 

Third, between 2001 and 2006 the debt, credit and financial excesses of important sectors of the economy were contained; today they are not. At the time of the 2001 recession the balance sheets of the corporate sector were weak but those of the household were relatively sound. Today, instead, after six years of excessive borrowing and two years of negative savings the balance sheets of the household sector are weak and fragile. At the same time the process of releveraging of the financial and corporate system (hedge funds, private equity, prop desks, LBO and share buyback activity) has led to significant increase in the amount of debt and leverage in the private sector. As suggested by Ed Altman – the leading academic expert of corporate distress – corporate defaults have been kept at a much lower levels (0.6%) than justified by current corporate financial fundamentals (2.5%) only because of the slosh of liquidity that allowed potentially distressed corporations to refinance their debts or do out-of-court restructuring plans.  In the last few years a credit boom – if not a bubble – stimulated asset prices in a typical Minsky-style credit-driven asset bubble. The easy monetary conditions after 2001 and the continued wall of liquidity coming from highly saving and forex-accumulating emerging markets fed a US and partly global asset bubble and a credit/debt bubble. Thus, the excessive leveraging of households, some parts of the corporate sector and many financial investors is a new source of financial fragility and systemic risk.
 

Fourth, the housing bubble has already popped in the US and is at risk of popping in other bubbly housing markets (UK, Spain, Ireland, Australia, New Zealand, and Iceland to name a few cases). The fallout of the US housing recession has been twofold. First, spillover to other sectors of the economy (auto recession, weakness in durable goods and housing related sectors, weak capex investment of the corporate sectors, slowdown of private consumption among overstretched US households). Second, spillover to other financial markets as: a) this is not just a subprime problem but increasing a near prime and prime mortgage problem; b) there is now a liquidity and credit seizure in a variety of credit markets (LBOs, CDOs, CLOs, etc).
 

Fifth, we are now reaching a point where the distress of many and different economic agents may lead to a systemic effect. Some have argued that the growth of credit derivatives has diffused financial risks among many different agents and in a variety of countries reducing systemic risk. That is why – it is argued – the risk of one huge LTCM blowing up and causing systemic risk are limited. But the experience with previous episodes of systemic risk (the S&L crisis where hundreds of smaller financial institutions went belly up causing a credit crunch and the 1990 recession; the tech bust of 2000-2001 where hundreds of smaller tech and internet companies went belly up and triggered the 2001 recession) suggest that the LTCM type of systemic crisis (one large institution getting in trouble and taking with it most of the financial system) is the exception rather than the rule: many and different agents and institutions getting in trouble can lead to systemic effects especially after a period of asset bubbles driven by a
credit/debt bubble.
 

And today there is a variety of economic and financial agents that are under financial pressure if not outright distress. Specifically, hundreds of thousands of subprime and near prime households will default on their mortgage and their homes will end up in foreclosure; the ability of the financial and legal system to manage such a surge in bankruptcies is severely limited. Also, over fifty subprime lenders have now gone out of business and now some of the larger lenders – see AHM and Accredited Home Lenders Holdings Co.  - are also in trouble and near bankrupt; the mortgage rot is spreading from subprime to near prime and Alt-A (see Countrywide, IndyMac, etc.). Now, there are news of massive losses among major US home builders and rumors that some may be near bankruptcies. There are already half a dozen mid-sized hedge funds – between US, Australia and Europe – that have gone belly up; and every day financial institutions across the world are reporting large subprime-related losses as a lot of the RMBS and CDO were bought by foreign investors.  And in a world where most investors in these illiquid instruments (RMBS, CDOs, CLOs, etc.) are marking to model rather than marking to market the extent of the eventual losses is unknown and the number of financial institutions that will go belly up is also unknown and likely to surprise on the upside. Systemic risk episodes often occur with a death through 1000 cuts rather than one single major – a’ la LTCM – blow.

{ Friday Update:

Bond turmoil worse than Internet bubble: Bear Stearns CFO

Fri Aug 3, 2007 2:50PM EDT

NEW YORK (Reuters) – Bond market turmoil sending investors fleeing from risk may be a worse predicament than the 1980s stock market fall and Internet bubble burst, Bear Stearns Chief Financial Officer Sam Molinaro said on Friday.

“These times are pretty significant in the fixed income market,” Molinaro said on a conference call with analysts. “It’s as been as bad as I’ve seen it in 22 years. The fixed income market environment we’ve seen in the last eight weeks has been pretty extreme.”

“So, yes, we would make that comparison” to market events that also include the debt crisis of the late 1990s, he said. }

 

On the positive side – optimists argue – there is the wall of liquidity that is still sloshing around in global financial markets: given the excess of savings in China and other emerging markets and the surpluses of oil exporters the equilibrium real riskless rate may still remain low in the global economy; the accumulation of only partially sterilized reserves by many central banks is supporting easy liquidity conditions in their economies and around the world; the BoJ is still stuck with policy rates at 0.5%. This excess of global liquidity could certainly support the recovery of financial markets. But there are different types of concepts of liquidity: one is macro liquidity as measured by short term policy rates, forex reserves and measure of monetary growth; the other – and more important in episodes of turmoil – is market liquidity. Market liquidity is in vast supply as long as investors’ risk aversion is low; but as previous and current episodes of turmoil suggest such liquidity can disappear overnight if credit event occurs and risk aversion of investors increase.
 

In those situations when no one inside the private financial system is willing to provide market liquidity it is up to monetary authorities to restore such liquidity via monetary policy action. But as far as we can tell the Fed is now on hold as it perceives the current market turmoil as temporary and as it is still more concerned about inflation being too close to the upper limit of its comfort zone than it is concerned about growth. The optimists again say that, if market conditions become really distressed, the Fed has plenty of monetary bullets to use as the Fed Funds is at 5.25% and can be reduced as needed. But previous episodes – the S&L crisis the late 1980s and the tech bust of 2000-2001 – suggest that the Fed often moves too little too late. Thus, the economic damage that financial turmoil and credit crunches induce may become unavoidable as the policy reaction often tends to be slow and delayed.

 

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313 Responses to “Is the recent episode of market turmoil a temporary shock or the beginning of a systemic risk episode?”

Guest • August 2nd, 2007 at 1:35 pm

 Commentary by Dr W Curtiss Priest, Director    I appreciate Roubini’s caution that “it is always risky to call an equity market peak.”    Indeed, I believe Ravi Batra’s prediction of a depression starting in the late ’80s was sorely confounded by:    1. a very innovative group of “new financiers” and their ability to outfox the regulators    2. a nation-wide rise in house prices, the likes of which we have never witnessed, coupled with the insanity of lenders, sub-prime, “re-fi,” “cash-out,” and by various other disguises by which “upright American citizens” “sold the farm” and then some    We shall not subscribe to the notion that, just because the event did not occur when Batra (and many others) sensed the precariousness of our financial house of cards, that the event was “not to occur.” Rather, we do subscribe to the writings of Davidson and Rees-Mogg, that, by delaying the day of reckoning, that reckoning will only occur with greater, hurricane-like forces.    It is much like thunderstorms. If daily showers dissipate the sun’s energy, we have fairly calm storms. However, if the energy is allowed to accumulate, and come all at once, we expect to see many trees struck and torrential rains and considerable flooding.    So, we expect, soon I believe, to see many houses as if struck by lightning, and an unfolding of debt/credit recalls that will reveal the magnitude of the storm.    What I appreciate about Minsky’s description about this is his distinction between three groups. Those who have the resources to cover debts, those whoare “speculative borrowers” who can only service debts out of cash flows, and then those who are Ponzi-like, needing ever increasing debt burdens to finance and repay prior debts.    So, this view tells us precisely how the next stages will play out. While the stages will not be sequential, but rather, tightly coupled, we know that the Ponzi-like folk are already causing an implosion. Now, those who depend on incomes to service debts will be directly affected as they find that the whole class of Ponzi-like debtors can no longer afford goods and services, and those depending on an income stream will see their streams diminish, and thus force many of them to default. Finally, we get to the point where even the borrowers with best intentions are hit. We get to a point where FDIC can no longer pay for all of these failures, and so FDIC insured, “safe,” money is unavailable. Surely, some day, maybe some decade, FDIC will finally make good on their insurance, but, with much less than $1 for every insured $100 dollars, the system is not designed for catastrophe.    Meanwhile, by Executive Order, George W. Bush will convert all 90 day treasuries into 30 year bonds. I’ve been told he has the authority to do this. So, everyone holding treasuries are simply holding IOUs, which the US Federal government can get around to covering over 30 years. But, ohmi, so much damage can occur in even ten years.    Now we take the nearly $100 trillion in Federal liabilities and obligations (including FDIC, medicare, medicaid, new prescription benefits, pension guarantees, etc.) and, as Walker, head of the General Accountability Office, has been politely trying to inform people, even in the best of times, that there is no money to cover all of these liabilities and obligations. Now imagine the worse of times.  

Rich H • August 2nd, 2007 at 2:20 pm

Can someone with definative knowledge (not a theory) explain the nuts and bolts of the FULL effect of a forclosure?    ie. Buyer X buys a $200,000 house with no money down through a mortgage broker. He can’t make a payment. Who loses what? We all know the buyer loses house… but what is the broker on the hook for? What does the lender/bank lose? If the house is resold for $190,000, what happens to the proceeds? What about the security that on the secondary market? Do they actually wind up recieving the proceeds? What about the tranche it belongs too? Does that actually wind up receiving the proceeds? …and if so, how does it affect the tranche rate… etc… Likewise, if there were 10 houses in that same tranche all for 200k, and all 10 were foreclosed on and resold for 190k, would that tranche be at 95% of it’s real value? or would it be at 0% of it’s value?      My lack of understanding the secondary market is what drives this question.    Thanks.  

Anonymous • August 2nd, 2007 at 2:46 pm

 Thanks to both of you for cutting & pasting what has already been posted.  Waaahhh ! Where is a website where the only comments are ones I want to read ? Waaahhh ! 

Guest • August 2nd, 2007 at 2:47 pm

My understanding of tranches is that a specific house is not assigned to a specific tranche. The morgage is part of a pool that is divided into to 3 or more tranches. For example the bottom tranche may represent 10% of the pool, the middle tranche another 10% and the upper tranche 80% of the pool. A forclosure on one property in the pool would affect the value of the entire pool. The losses would flow to the lowest tranche first. Once the pool has lost 10% of its value the lowest tranche is wiped out. If the pool looses 20% of its value the 2 lowest tranches are wiped out. Any further losses and the top tranche will start to see losses.

JGU • August 2nd, 2007 at 2:52 pm

Professor, money needs a place. Which asset do you think can have a better return? Bond? Real estate? Commodity? I would say “stock”, how about you? Also, your view is short, so it is at best good for the traders, not investors. The world economy is stronger than ever because of the rise of China and India. I don’t know much about India, but China has decades of high growth to go. Globalization changed the game, for ever. Adjust your view accordingly. There are tons of parameters you can cite to draw a conclusion in whichever way, but the big picture is the world IS becoming better and better.  Best regards, 

London Banker • August 2nd, 2007 at 2:58 pm

In my youth I lived in West Michigan, where my father was responsible for enforcing EPA regulations favoring water quality. There were many chemical companies in the area. They frowned on his intervention in their dumping of toxic waste into whichever rivers and lakes happened to be most convenient. Their shareholders too objected to his diligence. The local politicians sought to protect their golf club cronies who were executives at the chemical companies. The unions sought to protect valued jobs. My father got death threats and gradually became less and less effective.  You know, it doesn’t take much toxic waste to ruin a lake for decades. Just a few rusting barrels in the depths can poison fish and deform their young for years and years. Not to mention the people who eat the fish – and their young.  The same is true about the toxic waste of bad CMOs, CDOs, CLOs and RMBS. There is a lot of toxic waste in portfolios out there – in pension funds, insurance companies, small banks, big banks, government investment accounts, mutual funds, hedge funds and elsewhere.  When we dissect this crisis what we will find is the old boy network behind LTCM and Enron writ large.   Guys in the investment banks sold toxic waste to their buddies in the hedge funds and suckered their clients in pension funds, mutual funds, insurance companies and other long term holders on the basis of higher yield. They valued the toxic waste using proprietary valuation models to be worth – let’s say $100x – knowing they would never have to prove that value in a traded market because these instruments were never intended to be traded. Then they lent $200x to $600x to their hedge fund buddies taking the toxic waste as collateral.  Now the whole thing is unwinding. Instead of deformed children we are going to see ruined retirements, bankrupt insurers, failed funds refusing redemptions, bank bailouts. And it will all be someone else’s fault for not shouting loud enough.  

Guest • August 2nd, 2007 at 3:08 pm

“Meanwhile, by Executive Order, George W. Bush will convert all 90 day treasuries into 30 year bonds. I’ve been told he has the authority to do this. So, everyone holding treasuries are simply holding IOUs, which the US Federal government can get around to covering over 30 years.”  Do I understand that right? The US President can brake a contract between the Federal State and an investor?  If so, the only place to be in is gold .. physical gold in a gold friendly country … Switzerland …  This is helarious. I can´t believe this.  AFFG  

John Ryskamp • August 2nd, 2007 at 3:17 pm

Ackman is right about MBIA. They’re heading straight for BK. Don’t believe a word they say about their exposure.

Brian O. • August 2nd, 2007 at 4:06 pm

  According to Chairman Bernanke and the consensus of the FOMC, household balance sheets are “generally in good shape” with the prospects of wage and employments gains considerably strong over the course of 2007 (See the July Monetary Policy Report to Congress).  Plus, the personal savings rate no longer accurately describes peoples’ savings habits. Wealth must now be measured in broader ways since so many people have money in non-traditional savings vehicles.  just a picky point…. 

Guest • August 2nd, 2007 at 4:22 pm

“According to Chairman Bernanke and the consensus of the FOMC, household balance sheets are “generally in good shape”"   Yep — If you count all that real estate wealth created over the last five years …   LOL   

Jason B • August 2nd, 2007 at 4:35 pm

“Meanwhile, by Executive Order, George W. Bush will convert all 90 day treasuries into 30 year bonds. I’ve been told he has the authority to do this. So, everyone holding treasuries are simply holding IOUs, which the US Federal government can get around to covering over 30 years.”   Prof Roubini – I am a fan, but extraordinary claims require extraordinary evidence. Please provide a source for this. I can’t find one myself.

Anonymous • August 2nd, 2007 at 4:35 pm

non-traditional savings vehicles.   yeah…they keep their money in the hem of their curtains Tembec losses grow on Louisiana mill closure Unilever cutting 20,000 jobs 

Guest • August 2nd, 2007 at 4:45 pm

I’d like to post a real life example of what’s been going on with MEW. I see a lot of charts and graphs but real life examples really illustrate the problem. I have two family members who shall remain nameless that have done their share of MEW spending.  Family member #1   House purchased in 2001 in NJ 115,000. Mortgage amount financed is 80,000. Current mortgage balance 2007 is 200,000. Spent an extra 20,000 a year for the past 6 years.   Family member # 2  House purchased 2002 in NJ for 124,000. Mortgage amount financed is 121,000. Current mortgage balance 2007 is 245,000. Spent an extra 24,487 a year for the last 5 years.  Now that these families have pretty much maxed out their house ATM’s there will be no more ridiculous spending. The other problem is  that now, they have to service this debt which means even less spending.   I can’t possibly know the only two families that have been living large on MEW. I think the national figures for MEW are low. I believe we are at a point in this country where consumer spending is just going to  fall off a cliff.  

John Ryskamp • August 2nd, 2007 at 5:24 pm

From Bloomberg. By the way, what are some B of A problems no one is talking about?   ”Bank of America Inc., for example, posted earnings of $1.28 per share in the second quarter, beating analysts’ average estimates of $1.20 per share. Bank of America’s earnings were boosted by its capital markets division and fee income. Despite beating earnings estimates, Bank of America reserved $1.81 billion for loan-loss and reported charge-offs rose to $1.5 billion in the second quarter.  Regional banks, with less diverse product offerings, derive most of their income from lending money to customers, and are thus heavily reliant on performance of those loans.  About 57 percent of Bank of America’s second-quarter earnings came from fees and charges, while Wachovia Corp. received 49 percent of its earnings from non-interest income. Regional banks like National City Corp., with 41 percent, and Regions Financial Corp., 39 percent, receive much less money from non-interest income, putting their earnings at greater risk to be affected by deteriorating credit performance.  Expect loan-loss provisions to continue to rise in coming quarters as banks try to catch up to higher default rates after putting away little money in 2006 to prepare for the problem, Townsend said. And, as loan-loss provisions rise, earnings will likely take a hit. Meeting future earnings estimates will be a matter generating enough revenue through other sources to make up for the rising losses.”  

John Ryskamp • August 2nd, 2007 at 5:27 pm

Potential defendants in this case are any companies which did any business with them, on conspiracy causes of action:  NEW YORK, Aug. 2, 2007 (PRIME NEWSWIRE) — Kirby McInerney & Squire, LLP announces that it has filed a class action lawsuit in the United States District Court for the Eastern District of New York on behalf of all persons who purchased or otherwise acquired the publicly traded securities of American Home Mortgage Investment Corp. (“American Home Mortgage” or the “Company”) (Nasdaq:AHM) between April 26, 2006 and July 30, 2007, inclusive, (the “Class Period”).     The lawsuit alleges that American Home Mortgage and certain of its officers and directors violated Federal Securities laws. According to the complaint, throughout the Class Period defendants failed to disclose, among other things, that the Company was operating without adequate reserves for delinquent loan repurchases or an adequate strategic plan in relation to the volatility of certain of American Home Mortgage’s loan products. As a result of defendants’ failure to fully disclose that the Company was operating without adequate reserves in relation to the Company’s prior sales of certain of American Home Mortgage’s loan products or an adequate strategic plan for the repurchase of delinquent previously sold loans, defendants materially misrepresented to investors the true facts concerning American Home Mortgage’s financial performance and prospects.   Then, on June 28, 2007, American Home Mortgage issued a press release announcing that it will take “substantial charges for credit-related expenses in the second quarter.” The Company reported that the increase in losses was related to its practice of extending a three month timely payment warranty that the Company granted to loan buyers who purchased stated income loans. In response to this announcement, the price of American Home Mortgage stock declined from $20.91 per share to $18.38 per share on extremely heavy trading volume. Then, on July 27, 2007, after the close of the market, American Home Mortgage issued a press release announcing that its Board of Directors had determined to delay paying its dividend. In response to this announcement, on July 30, 2007, the NYSE halted trading in American Home Mortgage stock before the market opened.   If you are a member of the class, you may, no later than October 1, 2007, request that the Court appoint you as lead plaintiff of the class. Although your ability to share in any recovery is not affected by the decision whether or not to seek appointment as a lead plaintiff, lead plaintiffs can participate in important decisions which could affect the recovery for class members.   If you wish to discuss this action, or have any questions concerning this notice or your rights, please contact us, toll free, at (888) 529 4787 or by email at newcases@kmslaw.com   Kirby McInerney & Squire, LLP has specialized in complex litigation, including securities class actions, for several decades. The firm has repeatedly demonstrated its expertise in this field, and has been recognized by various courts which have appointed the firm to major positions in consolidated and multi-district litigation. The firm’s efforts on behalf of shareholders in securities litigation have resulted in recoveries totaling hundreds of millions of dollars, and the firm’s achievements and quality of service have been chronicled in numerous published decisions. More information about the firm, class actions in general, or about the role of the lead plaintiffs in a securities class action can be obtained through Kirby McInerney & Squire, LLP’s website at http://www.kmslaw.com   More information on this and other class actions can be found on the Class Action Newsline at http://www.primenewswire.com/ca.   CONTACT: Kirby McInerney & Squire, LLP  Francisco Loya  Sarah G. Lopez  888-529-4787  floya@kmslaw.com  830 Third Avenue, 10th Floor  New York, NY 10022   ——————————————————————————–  Keywords: CLASS ACTION LAWSUITS       PrimeNewswire | Class Action Newsline | Contact Us       

John Ryskamp • August 2nd, 2007 at 6:00 pm

The German banking sector is about to freeze up and go into crisis. It will be the target of lawsuits worldwide. Banks included are Deutsche Bank and Sparkassen.  In general the European banking system–as corrupt as it is possible to be–is scrambling unsuccessfully to avoid damaging disclosures. The lawsuits will flow like water and the Euro banking system go into a tailspin.

John Ryskamp • August 2nd, 2007 at 6:05 pm

Bank of England also in the crosshairs:   After Accountancy Age  highlighted the Bank of England’s decision not to take up the hedge accounting option of IAS39, the head of the ASB Ian Mackintosh spoke out in defence of the central bank and the standard.  ‘Given that hedge accounting is permitted rather than required by IAS39, it is clear that the Bank’s decision is not a departure from the standard. It therefore provides no ground for criticism either of the Bank or of the standard,’ Mackintosh said.  The move left the Bank’s gains and losses arising on some financial instruments (especially those that relate to arrangements that will affect the results of future periods) off the P&L, but these gains and losses were as real as many others that are reported, said Mackintosh.  Despite his staunch backing of the standard, the ASB chairman conceded that the accounting regulation was far from the finished article in its present form. ‘In my opinion, a better standard, providing more transparent information, would not contain an option for hedge accounting,’ he added.  The mixed attribute standard leaves room for loans to be recorded on a cost basis and derivative contracts on a fair value basis, but this creates a ‘mish-mash’, according to one source, which has been criticised by clients and auditors.  There are still major sticking points on the treatment of financial and non-financial host contracts. Detractors have highlighted the grey area that sees standard financial contracts eligible for fair value treatment, but some ‘non-financial’ agreements such as lease contracts and insurance contracts valued at cost.  Changes in fair value for financial host contracts are reported through the profit and loss accounts, but embedding a derivative in a contract that is not a financial instrument ‘should not allow circumventing the requirement to account for all derivatives under IAS39’, said one critic.  Another concerned party was the International Swaps and Derivatives Associates, representing 797 member institutions in 54 countries.  The ISDA thought that the standard was so shaky in terms of cash flow hedging requirements that it was being interpreted differently by the major audit firms 

John Ryskamp • August 2nd, 2007 at 6:20 pm

These monoline firms are all potential class action lawsuit targets: Ambac, FGIC, FSA, MBIA, and XL Capital Assurance.

Kokopelli • August 2nd, 2007 at 6:30 pm

Brian O,  Wealth and available cash are as different as eggs and oranges. They do not equal each other. There are ways to convert wealth to cash but that requires selling.   Don’t confuse yourself believing they are the same. You need cash to pay current expenses including principal and interest payments and if you can not convert or have to convert an asset in a very unfavorable market, your wealth may not matter as it may end up belonging to someone else before all is said and done. 

Basic • August 2nd, 2007 at 7:34 pm

 Kokopelli, I would have thought what you just explained would be obvious to everyone who graduated primary school, but regardless you put it eloquently.  Outside of the Wall St. casino, Americans by & large are NOT wealthy – they have just been conditioned to think they are.  

Guest • August 2nd, 2007 at 7:52 pm

Jason B, Guest, the statement you quote concerning GW Bush and treasuries was in the first comment. Prof. Roubini did not write it.  

Anonymous • August 2nd, 2007 at 7:52 pm

Interesting Observations:  1) NTAP preannounced today. They cited weakness specfically in the fincancial services vertical. Things are spreading quickly. 20% of IT sales go to financials.  2) Credit rating at credit insurers such as MTG are/will be down graded. In aggregrate, credit insuers guarantee 10 trillion of credit. They have total book value of about 30 billion. If the credit insuers go under, 10T of debt will be downgraded.  3) Both FL, CA, and NYC will run into fiscal problems. Which means defaults and or higher taxes.  4) Both CMCSA and TWX both cited weaker trends in housing as to why they missed estimates for cable subscriber growth.   5) Govts around the world will desperately try to inflate by lowering rates. Problem is that credit spreads will widen further. Wells Fargo mortgages are up 1.25% in one weak even though govt interest rates are lower.   6) As govts inflate, long term interest rates will raise which will further worsen the housing situation  7) Best long is gold, best short is any financial, but especially the major brokers such as Goldman Sachs.

MG • August 2nd, 2007 at 7:59 pm

Great Post.  I think we should also all watch China. If costs of production increases in China, taxes and other incentives initiated to cool the econmic ‘runaway train’ that is the Chinese market. Will the west have time to shift it’s dependence on China to Vietnam? Or even India (which is risky due to geopolitical instability)?    

man in Hong Kong • August 2nd, 2007 at 10:17 pm

ANY IDEA ABOUT THIS COMPANY? IS IT A BIG AND SIGNIFICANT PLAYER?  American Home Mortgage cuts staffing  American Home Mortgage Investment Corp., which raised fears this week that it may become insolvent, said Thursday it has stopped taking mortgage applications and is cutting most of its staff of more than 7,000 effective Friday.  ”It is with great sadness that American Home has had to take this action which involves so many dedicated employees,” Chief Executive Michael Strauss said in a statement issued late Thursday. “Unfortunately, the market conditions in both the secondary mortgage market as well as the national real estate market have deteriorated to the point that we have no realistic alternative.”  The company said it will keep about 750 employees to maintain its thrift and servicing businesses, and it is determined to slash its operating costs in an effort to preserve the value of its remaining assets.  

Guest • August 2nd, 2007 at 10:24 pm

Of Anonymous’ 7 points I disagree with #7. Gold is not a good long bet at the moment. When it took a dive right along with the rest of the market in late February I (finally) realized that gold is heavily infected with leverage like everything else. After the margin calls maybe, but not now.

JMa • August 2nd, 2007 at 10:27 pm

Can I ask another stupid question here ? All of this talk about US companies deriving x % of their sales outside the US – were any of them doing any business in 1987 outside of the US ? I mean isn’t that how you have a measure of trade deficits as there is trade occuring between companies between countries ? Did they measure trade deficits way back before time in 1987 as they do now ? I have grown tired of the bull argument for stocks deriving much of their sales outside US while the dollar plummets and this is such a good thing. Anyone any thoughts on say KO or any of the other DOW multinationals 87 global sales numbers or on this general idea ? Thx  

D Cheney • August 2nd, 2007 at 10:51 pm

and once the mortgage mess clears up everyone who has been driving the current situation (Wall St, home builders etc) will find out that in order to create growth in America they will need to start offering mortgages to low-income earners again. Or liars loans. Because the poor will always be with you. Only that time there will be more of them still.  Since debt is not wealth, why are household debt levels so high in “the worlds wealthiest nation”?  Or perhaps they came to the conclusion that it is the “wealthiest nation” by including inflated house prices. That would have been a typically WallStreetish way to measure it.

Robert B • August 2nd, 2007 at 11:18 pm

I would like to know what experienced financial minds think about the possibility of a US currency crisis unfolding based on current and probable future events. I understand it is in most trade partner countries’ best interest and nature to keep the dollar stable. But, under what conditions would the US Dollar crash? Is it at all likely considering the potential future challenges with Inflation and other issues?   Thanks!!!!  Robert

Juan • August 3rd, 2007 at 3:29 am

JMa,  There are no ‘stupid questions’.  A complete, all the gaps filled in, answer would require many pages, but  ”U.S. companies” in the context of your question, means companies headquartered in the U.S., i.e., we still assign nationality to companies even though they may be effectively not-national, dependent for their continued existence upon ‘foreign’ production, labor, sales rather than that within the U.S. The UN Commision on Trade and Developement, UNCTAD, provides quite a bit of information in its annual World Investment Reports. For example, this from 2005:  ”The stock of FDI in 2004 is estimated at $9 trillion. It is attributed to some 70,000 transnational corporations (TNCs) and their 690,000 affiliates abroad, with total sales by foreign affiliates amounting to almost $19 trillion.”  Now, if we were to compare number, size, and number of subsidiaries in 2004 with those of 1987, I’m very confident there would be substantial difference…to which I’ll add that even by the mid-1990s approximately 1/3 of total global trade was intra-corporate, i.e. transfers between subsidiaries located in different nations, which brings up your thought of trade occuring between companies and countries which is inaccurate as trade remains measured as between countries, between nation states, even though a large portion of this trade is in actuality transfers within the same company but transfers which cross national borders and profits being accumulated in tax haven and semi-tax haven nations even if the subsidiaries within these are hardly more than a few desks.  We continue to use nation-centric units of analysis even as these are overrun by globalization.  A fairly short article I think you might find interesting would be:  The Growth of Transnational Corporate. Networks: 1962–1998 http://jwsr.ucr.edu/archive/vol11/ number2/pdf/jwsr-v11n2-kentor.pdf (Journal of World Systems Research, December 2006)

AFFG • August 3rd, 2007 at 4:10 am

@John Ryskamp   ”The German banking sector is about to freeze up and go into crisis. It will be the target of lawsuits worldwide. Banks included are Deutsche Bank and Sparkassen.”   I have noticed that you bring tough comments, but they are almost never backed with evidence. Can you please post evidence for the comment above.   AFFG

Guest • August 3rd, 2007 at 4:21 am

Sorry, that’s apparently a bad link but you can find the above article among these:  http://www.googlesyndicatedsearch.com/u/jwsr?sitesearch=jwsr.ucr.edu&q=kentor&x=11&y=10  And, since I’m back, might as well note that this whole process of globalization was/is anything but smooth, especially as, in search of maximum direct and indirect subsidies, transnational firms have been able to play nation against nation, government against government while at the same time depending on a global order which they assist in disrupting.

Guest • August 3rd, 2007 at 4:27 am

@Hong Kong  ”ANY IDEA ABOUT THIS COMPANY?  IS IT A BIG AND SIGNIFICANT PLAYER?   American Home Mortgage cuts staffing “  it should be the no.10 mortgage company in US…  

Anonymous • August 3rd, 2007 at 4:37 am

Is the glass half full ,or is it half empty ….will the market go up ,or will it go down….with the greatest respect for economic analysts they tilt in the favour of their innate bias and when they get it right they tend to attribute it to their skill as forecasters and when it goes wrong , well we can’t be right all the time …c’est pas … when over the longhaul I would suggest they are doing no better than random. Making money from markets is a very personal thing geared predominantly to money management and mindset and none of these benefit from taking too much notice of other people’s biases in which ever direction they may be tilted. 

man in Hong Kong • August 3rd, 2007 at 4:37 am

AFFG,  what’s wrong with Depfa bank?  In China, several big banks are getting a bit lost on subprime bonds.  Anyway, it is not a big deal.  It is extremely funny that some big guns in the us like paulson still insist that the housing markets/mortgage market are in good shap.  

Main in Hong Kong • August 3rd, 2007 at 4:40 am

Union Investment Halts Redemptions From $1.3 Billion Bond Fund   By David Clarke  Aug. 3 (Bloomberg) — Union Investment Asset Management Holding AG, Germany’s third-largest mutual fund manager, halted redemptions from its ABS-Invest Fund after clients pulled 100 million euros ($137 million) in the past month.   The Frankfurt-based company also closed the 950 million-euro fund to new investments, spokesman Markus Temme said today. The fund, sold to institutional investors across Europe, has about 6 percent of its assets in securities related to subprime mortgage loans, Temme said.   The fund has taken the steps “because of illiquidity in the market,” Temme said in a telephone interview today.   Defaults on U.S. housing loans to subprime borrowers, those with patchy credit histories, have reached a 10-year high, driving down the value of bonds backed by mortgages and leading to losses at funds run by companies such as Bear Stearns Cos. and Oddo & Cie., a French stockbroker and money manager.   

gpierrepont • August 3rd, 2007 at 5:36 am

Pr Roubini,  As a catalyst of a systemic crisis, what do you think about the probability of a scenario with increased imported inflation in western coutries from China/India in the next months ?  1. would you think this increased importated inflation is probable in S2 2007, and 2008 ? 2. Would the implied negative shock in terms of real interest rates plumber households consumption ?   See for (2) the opinion of Pimco managers on Bernanke’s repeated warnings on inflation concluding :   ”Such well-anchored expectations, along with cyclical monetary restraint, seeking to nudge up the unemployment rate, do their “work” by transmuting the negative real terms of trade shock to a negative shock to real wage growth”  The entire article : http://europe.pimco.com/LeftNav/Featured+Market+Commentary/FF/2007/GCBF+July+2007.htm  Thanks in advance for your opinion Geoffroy

Guest • August 3rd, 2007 at 6:40 am

AFFG FYI Union Investment Halts Redemptions From Bond Fund (Update1)  By David Clarke  Aug. 3 (Bloomberg) — Union Investment Asset Management Holding AG, Germany’s third-largest mutual fund manager, halted redemptions from a fund holding subprime mortgages after clients withdrew 100 million euros ($137 million) in the past month.   

Guest • August 3rd, 2007 at 6:59 am

PPT to the rescue for last two days. you bears never learn. With Jumbo Jet Bernanke pumping M3. Market will not fall for to long, up we go.

AFFG • August 3rd, 2007 at 8:00 am

The DAX is litterly falling off the cliff.  Let me guess … US-Labor data was not that good. Are we surprised?  AFFG

London Banker • August 3rd, 2007 at 8:31 am

Regarding Guest’s comment about Helicopter Ben pushing out more dollars, I think not. M3 stopped growing about 6 weeks ago according to Shadow Government Statistics which still calculates the measure.  That is about the same time that European and Asian bankers started suffering indigestion and revaluing the mortgage derived assets in their portfolios and collateral pools. Even if Ben dropped interest rates to zero – which he can’t do given the need to finance the huge external account imbalance – he would be “pushing on a string” as long as the credit markets remain closed to new issues of poor quality assets.   The Asian, European and Gulf investors who got suckered into chasing yield by investing in toxic waste aren’t going to be keen to repeat the experience while simultaneously rebuilding their capital ratios and repairing their balance sheets. The banks in the UK on the hook for £24 billion in unfunded LBO deals are going to feeling fragile and skittish for a while. Supervisors are starting to go the rounds asking questions about exposure, asset quality, risk management models and collateral management.  Helicopter Ben’s options are very limited in this context, hence the private appeals to the Chinese and Saudis to keep the markets afloat for political reasons. It’s not clear that our self interest is exactly aligned with their self-interest, so the result remains very much in doubt.

AFFG • August 3rd, 2007 at 9:13 am

CNBC:   ”S&P Revises Bear Stearns Outlook to Negative; Ratings Affirmed”  Everything just working out …

Guest • August 3rd, 2007 at 9:23 am

If you go with us .. your going to be down a couple of hundred points today …  Does anyone know how much leverage was in the stockmarket? Or was that all savings?  AFFG

london broker • August 3rd, 2007 at 9:45 am

Bear Stearns Rating Outlook Cut by S&P on Mortgage Concern  By Yalman Onaran  Aug. 3 (Bloomberg) — Bear Stearns Cos., the manager of two hedge funds that collapsed last month, had its credit-rating outlook cut to negative by Standard & Poor’s on concern declining prices for mortgage-backed securities will reduce earnings.  A negative outlook means the rating could be downgraded in the next six months. S&P rates Bear Stearns debt A+, the fifth highest investment-grade rating. The rating was raised one level in October.  Shares of the New York-based company fell $7.58, or 6.6 percent, to $108.05 in composite trading on the New York Stock Exchange at 10:13 a.m.  –Editor: Dickson. 

man in Hong Kong • August 3rd, 2007 at 9:47 am

As I mentioned before, Bear Stearms maybe the 1st broker closing down in this round!

london broker • August 3rd, 2007 at 9:52 am

*COUNTRYWIDE CREDIT-DEFAULT SWAPS SURGE 112 BPS TO 325 BPS  I broke Credit Derivatives, we are seeing indices and individual names blowing out again after 2 days of relative calm – more pain to come for sure

AFFG • August 3rd, 2007 at 10:36 am

This IKB thing here is getting wierder and wierder …  The “Sparkassen” are rioting, because they see themselves unfairly treated. Private Banks are said not to be involved enough in the “rescue plan”. The opposition is asking very nasty questions. If this ever ends up in a parlemantary inquiry … the hole story could come out with very frightening contents.  http://www.handelsblatt.com/news/Unternehmen/Banken-Versicherungen/_pv/_p/200039/_t/ft/_b/1304151/default.aspx/sparkassen-meutern-wegen-ikb-rettungsplan.html

AFFG • August 3rd, 2007 at 10:38 am

CNBC:  ”DaimlerChrysler Says It Has Completed Sale of Majority Stake in Chrysler Group to Cerberus”

John Ryskamp • August 3rd, 2007 at 11:02 am

And just how often did I say this? The new government policy is “Liquidate liquidate liquidate” and that is EXACTLY what is happening. No new social policies–no more society.   Regarding Guest’s comment about Helicopter Ben pushing out more dollars, I think not. M3 stopped growing about 6 weeks ago according to Shadow Government Statistics which still calculates the measure.    That is about the same time that European and Asian bankers started suffering indigestion and revaluing the mortgage derived assets in their portfolios and collateral pools. Even if Ben dropped interest rates to zero – which he can’t do given the need to finance the huge external account imbalance – he would be “pushing on a string” as long as the credit markets remain closed to new issues of poor quality assets.    The Asian, European and Gulf investors who got suckered into chasing yield by investing in toxic waste aren’t going to be keen to repeat the experience while simultaneously rebuilding their capital ratios and repairing their balance sheets. The banks in the UK on the hook for £24 billion in unfunded LBO deals are going to feeling fragile and skittish for a while. Supervisors are starting to go the rounds asking questions about exposure, asset quality, risk management models and collateral management.    Helicopter Ben’s options are very limited in this context, hence the private appeals to the Chinese and Saudis to keep the markets afloat for political reasons. It’s not clear that our self interest is exactly aligned with their self-interest, so the result remains very much in doubt.   Written by London Banker on 2007-08-03 08:31:49  

Pete, CA • August 3rd, 2007 at 11:31 am

WEALTH DESTRUCTION IN AMERICA  ”PPT to the rescue for last two days. you bears never learn. With Jumbo Jet Bernanke pumping M3. Market will not fall for to long, up we go.”  Maybe it’s time for the bulls to listen. Have you considered the possibility that while you’re getting ready to buy into a low, the “smart money” is exiting the market by selling on the rising curve?  Jeremy Gantham is one of the better hedge fund managers in the US today. His fund is up 51% this year. According to Mr Grantham, half of all the hedge funds currently operating could be gone by the end of next year.  Now, let’s analyze this. And we’ll make some optimistic assumptions (yeah, I know. A shock for this blog). Let’s assume that Mr Grantham is too pessimistic, and he’s wrong by a factor of 2. That means only 25% of the hedge funds are gone. And let’s assume the process happens over 2 years, instead of one. Since there are currently about 9800 hedge funds running, with a total capitalization of maybe $1 trillion, we’d be talking about 2,450 of these funds going under. And the net loss to investors would be about $250 billion over the next 24 months.  Not exactly chump change.   These figures may still be seriously exaggerated. Hopefully some investors will get out, and some will recover part of their investments. But it goes a long way towards explaining why people are shifting to a strong defensive strategy, and why the Baby Boomers are more interested in wealth preservation than market speculation at this point.  If you’d like to read more on this subject, check Michael Panzner’s excellent blog at: http://www.financialarmageddon.com  Pete, CA

John Ryskamp • August 3rd, 2007 at 12:10 pm

“Meanwhile, Securities and Exchange Commission chief Chris Cox said the SEC is coming up with new, more flexible accounting rule interpretations that companies and others could use to avoid declaring their mortgage securities in default.”  Isn’t this monetizing of debt, absolutely pathetic? It shows the bankruptcy of Federal policy. Do they think this will actually work? Any sign this starts happening, and people will flee the United States economy in its entirety. Who exactly is this supposed to fool? Total B.S.  

Suecris • August 3rd, 2007 at 12:23 pm

@Guest at 11:12 -  Here’s Diana Olick’s take on the Wells Fargo rate hike: http://www.cnbc.com/id/20107397  And, as someone who keeps CNBC on most of the time in the background, I’ve noticed today that the ubiquitous Countrywide ads are GONE. Simply gone.

John Ryskamp • August 3rd, 2007 at 12:51 pm

By the way, this garbage–commodities–goes next. Who was the clown on this site who said copper would go to $6 before it fell to $1. Not bloody likely!!   1:36Sept. copper falls 2.6% to close at $3.479/lb 

John Ryskamp • August 3rd, 2007 at 1:09 pm

By the way, where are the clowns now? Where is that idiot dog “Guest” who kept saying everything is fine, look at the stock market soar? Where is that scum now?

Anonymous • August 3rd, 2007 at 1:39 pm

FROM NOW ON, LET’S LIMIT OUR COMMENTS TO REPORTING PROBLEMS AT VARIOUS COMPANIES/INSTITUTIONS. THE SITUATION IS DETERIORATING VERY QUICKLY NOW, AND THAT WILL BE OF THE GREATEST ASSISTANCE TO READERS.

Guest • August 3rd, 2007 at 1:44 pm

SAN FRANCISCO (MarketWatch) — Sowood Capital Management Founder Jeff Larson apologized to investors during a conference call on Friday after hedge funds run by the firm lost more than half their value at the end of July. The esimated net asset value of the funds is $1.4 billion, Larson said. That’s down from a $1.5 billion estimate earlier this week, he noted. Sowood sold most of its portfolio to Citadel Investment Group because that was the best option. Without that deal, Sowood investors would probably have been left with a total loss, Larson said. Citadel got a “substantial discount” for taking on the positions, he noted. Sowood has been contacted by regulators who want to know what happened and the firm is cooperating, Larson explained. The firm is putting roughly $90 million in incentive fees that it earned in 2006 back into the hedge funds, he also said. Sowood will now unwind its few remaining positions and return capital to investors as quickly as possible, Larson said. “There is no way to express how sorry I am about what has happened,” he concluded. “This experience has harmed not just our clients but our friends.   In a perfect world, this monkey would go straight to the wall.

Guest • August 3rd, 2007 at 1:51 pm

BULLETINANNOUNCEMENT   Due to severe dislocation in the secondary market, NovaStar Mortgage Wholesale is temporarily suspending approval and funding activity on all loan transactions that have not been locked via a NovaStar Lock In Confirmation until Tuesday, August 7th, at which time the policy will be reevaluated. Locked loans and loans with docs out will continue to fund as scheduled. This is effective immediately.  New loan applications will continue to be accepted however will be held until the temporary suspension on loan approvals and fundings has been lifted.  We apologize for short notice and will be reviewing market conditions and updating our policy on a daily basis.    

John Ryskamp • August 3rd, 2007 at 2:17 pm

BIG FAT MONETIZATION ALERT. GET OUT OF THE MARKET IMMEDIATELY.       Will government bail out mortgage market? Congress, Fannie and Freddie might provide only limited help  By Alistair Barr, MarketWatch Last Update: 2:55 PM ET Aug 3, 2007   SAN FRANCISCO (MarketWatch) — The crisis in the mortgage market has increased the likelihood that the Federal government could intervene in some way to alleviate a credit squeeze.  However, Congress and government-sponsored enterprises like Fannie Mae (FNM : Fannie Mae News , chart , profile , more Last: 57.83-1.13-1.92%  2:56pm 08/03/2007  Delayed quote dataAdd to portfolio Analyst  Create alertInsider Discuss Financials  Sponsored by: FNM57.83, -1.13, -1.9%) and Freddie Mac (FRE : Freddie Mac News , chart , profile , more Last: 56.92+0.31+0.55%  2:56pm 08/03/2007  Delayed quote dataAdd to portfolio Analyst  Create alertInsider Discuss Financials  Sponsored by: FRE56.92, +0.31, +0.5%) might only offer limited support.  Some parts of the secondary mortgage market have ground to a halt in recent days as investors shun many types of mortgage securities that don’t conform to Fannie and Freddie’s standards. See full story.  A broker at Ace Mortgage Funding LLC, a leading mortgage brokerage firm, estimated on Friday that 90% of these so-called non-conforming home loans have disappeared in the past three days, leaving home buyers with far fewer options. The broker declined to be identified because they didn’t want to be seen as exacerbating housing market problems.  The crisis in mortgage availability could prompt action from Congress, several mortgage market experts said.  ”The chance of government intervention in the marketplace in response to current events has increased significantly,” said Andy Chow, portfolio manager at SCM Advisors LLC, a $14 billion San Francisco-based investment firm specializing in fixed-income and structured-finance markets.  Mike Perry, chief executive of mortgage lender IndyMac Bancorp (IMB : IndyMac Bancorp Inc News , chart , profile , more Last: 17.60-3.45-16.39%  2:56pm 08/03/2007  Delayed quote dataAdd to portfolio Analyst  Create alertInsider Discuss Financials  Sponsored by: IMB17.60, -3.45, -16.4%) said on Thursday that he got a phone call this week from U.S. Sen. Christopher Dodd, D-Conn., who asked whether Congress can help the U.S. mortgage industry in any way.  At a hearing in Washington D.C. on Thursday, Dodd said that he’d spoken this week with several mortgage bankers “to solicit their opinions as to what they thought was happening and what solutions may lay out there to try to deal with this seizing up of credit that is really getting rather dramatic.”  Indymac’s Perry said he’d also talked to the chairman of Fannie Mae on Thursday and had traded calls with the chairman of Freddie Mac.  ”Fannie Mae’s Chairman (is) telling me that they are ‘prepared to step up and help the industry’,” Perry wrote on the company’s blog.  Fannie and Freddie have a Federal charter that requires them to provide liquidity and stability to the mortgage market. However, those organizations made it clear on Friday that any help will be limited.  ”Congress is very focused on this issue,” Doug Duvall, a spokesman at Freddie Mac, said. “There’s a squeeze in the market right now and lenders are tightening their standards. But having a little more prudent underwriting isn’t a bad thing. It’s important to keep people in their homes and to make sure they buy homes they can afford.”  Freddie has pledged to invest $20 billion in new subprime mortgage products. However those loans have to meet much stricter underwriting standards.  Brian Faith, a Fannie Mae spokesman, said the company is “playing an active but prudent role in the effort to stabilize the secondary market.”  Fannie has so far refinanced $5.4 billion of formerly subprime mortgages, bought $450 million of state HFA rescue packages and modified terms on more than 20,000 loans, he noted.  ”We will continue to work with our lender customers to provide additional liquidity where we can to help stabilize and support the market,” Faith added.  However, another person close to Freddie Mac who didn’t want to be identified stressed that Fannie and Freddie aren’t just going to buy up non-conforming loans to bail out troubled players in the secondary market.  Alistair Barr is a reporter for MarketWatch in San Francisco.   

John Ryskamp • August 3rd, 2007 at 2:23 pm

BEAR STEARNS MOVING RAPIDLY TOWARD BANKRUPTCY   NEW YORK (MarketWatch) — U.S. stocks saw their losses accelerate in afternoon trade Friday, after comments from Bear Stearns about the impact of bad home loans on its funds failed to reassure the market. Earlier, Standard & Poor’s downgraded the outlook of Bear Stearn’s credit ratings to negative. The Dow Jones Industrial Average was down 145 points at 13,317, as 22 of its 30 components fell. The S&P 500 ($SPX : S&P 500 Index News , chart , profile , more Last: 1,448.77-23.43-1.59%  3:23pm 08/03/2007  Delayed quote dataAdd to portfolio Analyst  Create alertInsider Discuss Financials  Sponsored by: $SPX1,448.77, -23.43, -1.6%) lost 21 points to 1,450, while the Nasdaq Composite (COMP : Nasdaq Composite Index News , chart , profile , more Last: 2,534.39-41.59-1.61%  3:23pm 08/03/2007  Delayed quote dataAdd to portfolio Analyst  Create alertInsider Discuss Financials  Sponsored by: COMP2,534.39, -41.59, -1.6%) dropped 38 points to 2,537. Bear Stearns tried to reassure investors in a conference call, but “the call didn’t help,” said Mike Malone, trading analyst at Cowen & Co. “The market wasn’t convinced.”

John Ryskamp • August 3rd, 2007 at 2:31 pm

Market taking this news VERY badly. Why? Because it does NOT mean a bailout. It means “LIQUIDATE LIQUIDATE LIQUIDATE” exactly as I have said all along.     August 3, 2007 3:29 P.M.ET BULLETIN A mortgage rescue ahead?    

John Ryskamp • August 3rd, 2007 at 3:00 pm

Bear Stearns probably in BK mid-next week:  Bear Stearns preserving capital to weather storm S&P cuts outlook, saying hedge fund troubles have damaged reputation  By Murray Coleman & Alistair Barr, MarketWatch Last Update: 3:55 PM ET Aug 3, 2007   SAN FRANCISCO (MarketWatch) — Bear Stearns said on Friday that it’s preserving capital to weather the current storm in credit markets, but investors took little solace as the bank’s shares continued to fall.   

John Ryskamp • August 3rd, 2007 at 3:02 pm

Bear Stearns BK over weekend? What think?   thestreet.com Brokerage stocks were dropping sharply again Friday as Bear Stearns (BSC – Cramer’s Take – Stockpickr – Rating) tried to reassure investors of its “abundant liquidity.”     

AFFG • August 3rd, 2007 at 3:13 pm

What did I say this morning .. you are on for at least a couple of hundred points off the DOW. ;-)   Honk Kong you were right with the selloff on Friday. ;-)   Do not forget, everytime the DOW goes down … The balancesheets of Banks, Hedgefunds and PE get ruined. Subprime could be the smallest problem on the “Houston, we have a problem” radar. Commodities are going to get hit last.  We must be seeing Billions being destroyed withing days.  Peter Schiff rules. The poor man has been on television so often trying to warn people but they simply do not want to believe that the US (and the rest of the world) has a massive problem. Take a look at his homepage under Videos.  AFFG

Ryan Darwish • August 3rd, 2007 at 3:29 pm

RE: Friday update ”On the positive side – optimists argue – there is the wall of liquidity that is still sloshing around in global financial markets: given the excess of savings in China and other emerging markets and the surpluses of oil exporters the equilibrium real riskless rate may still remain low in the global economy; the accumulation of only partially sterilized reserves by many central banks is supporting easy liquidity conditions in their economies and around the world; the BoJ is still stuck with policy rates at 0.5%. This excess of global liquidity could certainly support the recovery of financial markets. But there are different types of concepts of liquidity: one is macro liquidity as measured by short term policy rates, forex reserves and measure of monetary growth; the other – and more important in episodes of turmoil – is market liquidity. Market liquidity is in vast supply as long as investors’ risk aversion is low; but as previous and current episodes of turmoil suggest such liquidity can disappear overnight if credit event occurs and risk aversion of investors increase.”  While it may be true that the potential for continued liquidity remains, the nature of capitalistic motivation suggests that those who have the ability to provide liquidity would withhold it in order to maximize the gain from thier liquidity. Reading the accounts of LTC’s demise shows this is exactly what happened. The nature of a shark is to attack when it smells blood in the water. I suspect that whatever liquidity there may be from private, quasi-private, or quasi-governmental sources will be used as leverage to maximize their profitability.

John Ryskamp • August 3rd, 2007 at 3:49 pm

LOOK FOR A WAVE OF BK FILINGS SOON:   ”There have been a lot of operational problems and other problems within some companies that have been masked by liquidity in the marketplace and the ability to refinance their debt,” said Jeff Marwil, a partner in Winston and Strawn’s restructuring and insolvency practice in Chicago.  The end of the credit party  Until recently, investors have gorged on complex securities that include strips of corporate debt from a number of companies. The relentless demand for these securities has provided financing for some companies that might have otherwise collapsed.  ”There are a lot of underperforming companies that have been able to finance their way out of problems and put off dealing with the operational need to fix their business,” said Lisa Donahue, co-head of the turnaround and restructuring practice at AlixPartners in New York.  That’s helped keep default rates among risky borrowers at historic lows, despite an explosion in the issuance of risky corporate debt – the default rate fell to 1.57 percent last year, the lowest since 1981, according to Moody’s Investor Service.  

JMa • August 3rd, 2007 at 4:20 pm

thanks for the Cramer link – I am still stunned by it… these are interesing and very trying times for many people… 

Guest • August 3rd, 2007 at 4:29 pm

One reason to expect the housing sector to go from bad to worse is a shift in people’s expectations about future house price appreciation. As recently as June 2006 Robert Shiller reported that the majority of house buyers thought houses were still a good long-term investment (see http://www.projectsyndicate.com and “What are Homebuyers Thinking?”). The financial turmoil in the housing sector is likely to feed into this slump in housing demand. One wonders what their expectations are now? As expectations are ratcheted down there is a significant likelihood that housing demand will continue to decline. David Rosenberg stated on July 26: “This (referring to house construction) cycle has already broken the 34% aggregate decline in the early 1970s, so we are basically on the precipice of seeing the very worst housing cycle of all time. Any new sales number of 775,000 or lower will do the trick, and the latest pullback in the NAHB housing index suggests that this is a very strong likelihood.” (See http://askmerrill.mlcom). As far as I know he is the first to make this dire assessment. A deep slump in housing demand would probably have severe consequences for the consumer sector. In particular, there is a lot of circumstantial evidence that consumers have been relying on house price appreciation to provide their savings, in particular savings for retirement. I think that the economy would have turned down more sharply in the last few months if it had not been for the stock market boom (the top 20% of households who account for most of NIPA savings also have large equity holdings). The recent turn down in the stock market may be the turning point of the whole economy as it slips rapidly into recession. This may underlie some of what is being seen in the credit markets where lending has been predicated on a much more optimistic outlook. This would support Professor Roubini’s view that developments in the credit market have more ominous overtones.

Ryan Darwish • August 3rd, 2007 at 4:47 pm

Let’s not forget the ripple effects of the housing/credit market debacles. A large segment of the US and other economies have been supported by the employment opportunities offered from these areas. As an example, I believe I read American Home Mortgage was cutting its workforce from around 7,500 to 750. Then we have the construction trades, and companies like Weyerhauser which recently reported serious earnings declines attributed to the slowing housing sector.

Guest • August 3rd, 2007 at 5:51 pm

Jim Cramer is concerned about the “pressure” on the [multi-billion dollar] financial firms and worried about people losing their homes? He says to the Fed “This is not the time to be complacent.” ???  Where was he when the same financial firms were being complacent in using the [bad] mortgage-backed securities? Where was he when these “poor” homeowners were buying homes that they certainly could not afford in the first place? Does he think that the Fed should simply lower the interest rates whenever the rich people on Wall street cannot bear the pain? 

Jason B • August 3rd, 2007 at 6:00 pm

I say to Cramer – don’t play the game if you can’t stand to lose. These guys get the big rewards because they take the big risks. They should have stashed aways some of their bonuses from the last decade for a rainy day.  Boo hoo. Cry me a river. 

NFrazier • August 3rd, 2007 at 6:12 pm

One of the primary positive feedback loops that drives a real estate market down is: falling real estate prices causes falling consumer spending causes falling corporate profits causes rising unemployment causes falling real estate prices…  A cursory inspection of the related industry sector indicies: REIT’s & forestry products, consumer goods & services, and employment training are all lagging the major market indicies over the last few months. I.e., with the exception of corporate profits (which are currently at record highs), it looks like the above feedback loop is poised to be activated.   With high oil prices, falling consumer spending, and increased credit risk premia – it is possible that these record corporate profits will not remain at record levels for many more quarters…

Well Contained • August 3rd, 2007 at 6:13 pm

 ”Where was he when these “poor” homeowners were buying homes that they certainly could not afford in the first place? Does he think that the Fed should simply lower the interest rates whenever the rich people on Wall street cannot bear the pain?”  EXACTLY RIGHT.  Anybody who acts on Cramer’s hyperbole (INCLUDING the Feds) is nuts.  I’m with JasonB … cry me a river, Jimbo.  

Peter J Bolton • August 3rd, 2007 at 6:30 pm

Ssssh, please  The Fatt Lady is singing the first chorus of “The Whole World”  ”No pain, no gain” but the next game looks far more interesting.  peter

Jason B • August 3rd, 2007 at 7:07 pm

Let me get this straight… The investment banks lobbied for looser regulations and got them. They got enough rope to hang themselves, and did so out of greed. Now they want to be bailed out with public dollars, or inflated out of trouble and debase my savings.  They’re eating a sh*t sandwich because they ordered it. If they are bailed out every time they get into trouble, whats their motivation for prudence and responsibility?  Eat up.

Guest • August 3rd, 2007 at 7:20 pm

I am short on CFC. I want to see it go belly up soon. My put expires in September. Bear Sterns? Going BK? Ryskamp, what makes you think its gonna happen next week? Dont be so sure.

Anonymous • August 3rd, 2007 at 11:05 pm

I wonder who the FED chairman will be in 2009? I have a feeling Bernanke will get canned at some point.  

man in Hong Kong • August 4th, 2007 at 2:47 am

It is said that 7 million owner will stop payment mortgage. any ideas about this?  

AFFG • August 4th, 2007 at 5:22 am

@Anonymous on 2007-08-03 23:05:50,  yeah … maybe Old Al will be able to celebrate a comeback. ;-)   AFFG

man in Hong Kong • August 4th, 2007 at 7:58 am

@AFFG, It seems that quite a lot German funds/banks… are suffering now. I heard that HSBC got problem with their fund in Germany… not sure.  What is the general feeling in Germany now? In Hong Kong, now some people are expecting a quick and big drop next week.  

tiempolargo • August 4th, 2007 at 8:34 am

this is a credit crunch liquidity crisis of epic proportions as the credit markets for leveraged loans, mortgage backed paper of all classes, derivatives tied to those instruments, junk paper, and the like is essentially dead.  wall st (and soon the general public upon receving their investment fund statements) realizes that the trillions of dollars worth of this paper is actually worth a fraction of the value it was orginally bought for. this became glaringly evident when the creditors of the recently imploded bear stearns leveraged funds made margin calls and realized they could only sell/liquidate the bear funds’ holdings for a fraction of what they were really worth.   this margin excercise exposed that trillions of dollars worth of derivative credit paper held by hedge funds, pensions, insurers, mutual funds and big banks is for lack of a better word, garbage.   creditors and investors are now trying to get their money out before the “run on the bank” occurs, creating current market conditions where there is zero demand for these credit investments, and plunging prices. the investment community is now shunning other debt creations of wall st., finally recognizing these similar financial animals are backed by highly suspect asset values and contain subprime-like features/clauses that scream “too easy terms.”   this run on the bank will continue in masse and on an international scale as trillions of this suspect credit paper was sold throughout the international financial systems, from thailand to buenos aires, as more funds suffer the same predictable fate:   credit asset held in their portfolios are re-valued, creditors/investors request margin calls/redemptions and the funds announce they are “clsoing” and liquidating their assets as they realize any attempt to sell into the market will be futile and they will receive pennies on the dollar for their assets.   all of these liquidations will put tremendous pressure on the world’s stock prices, as assets will be sold to raise funds and as general market anxiety causes the declines to steepen.   this sorrry state has been compounded by the large increase in risk-adverse, short-term oriented investment funds that have used excessive amounts of leverage to amplify returns, falsely believing they could earn easy money on assets they thought were not risky based on the high ratings these investments were given by moody’s and s&p and the implicit blessings of the world’s top banker, alan greenspan who implicitly encouraged the credit bubble (creative mortg banking finance and derivatives) and failed miserably in his job as fed chairman.   the current fed should not come to the rescue by bailing out the funds and companies that hold these instruments as they are suffering the consequences of their own failure to exercise prudence and due dilligence in making sound investments. the managers of these funds in fact should be exposed to industry penalties and legal liability, as many of these highly risk-averse mangers failed their clients/investors miserably in their repsonisbility to invest on their behalf. in typical fashion, the losses will be spread out amongst the millions of investors/fund holders, who probably have no clue they are exposed to these dubious investments through their mutual funds and pensions.  the dollar is on the brink of collapse at 25 yr lows, and the markets would pummel the dollar further should we enter a sustained loosening of monetary policy. the markets will lose all confidence in the u.s. dollar should bernanke drop rates now, as it will view the fed as weak on inflation and weaker yet in its resolve to defend its currency. this is precisely the time yet one more greenspan “put” is not needed.  let the free markets due their work and allow the gamblers who are largely responsible for putting us in this position, pay for their risk adverse behavior. unfortunately, the natural price readjustments that occur will not be in an orderly fashion.   however, it is long overdue and welcomed, as this purge of our credit system will put the markets back to a more normalized, healthy state. living within your means is not such a bad thing. 

Little Al • August 4th, 2007 at 8:50 am

Watching Cramer is like watching a traffic accident for those in the know. We all concur that his advise is ludicrous, and yet everyone knows what he says. The MSM knows that Cramer represents the best financial advise that your average J6P is receiving. Hence, his passionate plea to Bernanke is a ruse to convince the average Joe Schmoe that there is someone with compassion (albeit schitzo compassion) at the  helm. Better tell your kiddos about 07. Maybe it will help them when they’re older to grow a brain.

Guest • August 4th, 2007 at 9:06 am

According to Jim Cramer, “7 million people who took the teaser rate loans will lose their homes” and so he is yelling at Ben Bernanke to “open the discount window” and [let the market be flooded with funds again so that another 7 million people can get into foolish mortgage commitments ???].  I just cannot stand this nonsense anymore. I have been waiting on the sidelines for more than 3 years now so that I don’t get myself into a mortgage that is beyond my limits. If I knew that somebody was going to make enough noise and get the government to bail me out, I would have bought a million dollar home by now!  It’s not that anybody in the government is going to listen to Jim Cramer! But the thought that somebody would actually take sides with the very people who let their greed lead them into this mess sickens me!

Guest • August 4th, 2007 at 9:56 am

No worry friends, be happy.  US government keep printing money, people keep spending money and keep buying home  Chinese, india and japanese keep absorbing the made in the usa bonds.  Safe!?

Jason B • August 4th, 2007 at 10:15 am

After a big party (dot com boom) you wake up with a hangover (dot com bust). You can start drinking again (Greenspan liquidity), but sooner or later you are going to have to sober up.

John Ryskamp • August 4th, 2007 at 11:50 am

Bear Sterns? Going BK? Ryskamp, what makes you think its gonna happen next week?  Dont be so sure.    I’m pretty sure, you old monkey:  ”Bear Stearns has material exposure to holdings of mortgages and MBS (mortgage-backed securities), the valuations of which remain under severe pressure,” Hinton added. “It also has exposure to debt it has taken as a result of unsuccessful leveraged finance underwritings, and it has significant further underwriting commitments.”  

John Ryskamp • August 4th, 2007 at 11:54 am

“The company’s board will meet on Aug. 6 to discuss the departure of Spector, one of its two presidents, who was widely viewed as a leading candidate to become chief executive officer, the Journal reported. A spokesman for the company declined to comment, the report said. Jessica Shepherd-Smith, a London-based spokeswoman for Bear Stearns, declined to comment today when contacted by Bloomberg. .   Spector, 49, has worked at Bear Stearns for his entire career.”   I DIDN’T KNOW PHIL SPECTOR WORKED FOR BEAR STEARNS! WOW! THAT DUDE’S NUTS!!! 

AFFG • August 4th, 2007 at 12:58 pm

@Hong Kong,  The words “Panic”, “Scare”, “Flee”, “1931 Banking Crises”, “Systemic Crises”, “Collapse” and “Rescue” are some of the most used words in the German press.   The Press does not believe the “repricing” story, they see a massive risk of a systemic crises. People like Nouriel Roubini are gaining a earing here. It has not struck the yellow press yet …   I think German funds are doing a bit better than the rest, the difference is that German Banks are very “open” when it comes to “speaking out the truth”. That is due to the fact that Germans do not trust banks. It is in the nature of the culture. Weimar and the collaps of the banking system in 1932 is still very present, suprisingly enough even in young people´s minds. Most people believe that there are three thiefs und liars: Politicians, Bankers and Insurance Companies.  I spoke to a fiend of mine, who admitted to be buying Gold for his retirement as the “saving of last resort”.   I do that to. Something tells me we need to … ;-)   AFFG

AFFG • August 4th, 2007 at 1:25 pm

When I was in the US not too long ago, I talked to a couple of Americans about mortgages and the conditions. I was stunned by the “possibilities”. In Germany to get an 80% Mortgage on a 200.000 € Home you need at least 100.000 €/a … at best split on two incomes. 10 Years fix at about 4,5 – 5% eff. You need to document your income over the last 2 years and a fulltime working contract. The 80% exclude tax and fees. In this case if you do not have a minimum of 40.000 € Cash, forget it. 1% repayment minimum. Banks here push people to do 2-3% and a supplementry of 5%/a optional or to save. Banks here advise people to reduce their debt to about 50% before refinancing and to finance fix over 10 years maybe even 12 years.  As you see .. things here are way tougher. In Germany in most cases ever German court would have declared the mortgage contract as “sittenwidrig” – immoral.  AFFG

John Ryskamp • August 4th, 2007 at 3:36 pm

TWO VERY STUPID REMARKS:  STUPID REMARK NO. 1:  I think German funds are doing a bit better than the rest, the difference is that German Banks are very “open” when it comes to “speaking out the truth”. That is due to the fact that Germans do not trust banks. It is in the nature of the culture. Weimar and the collaps of the banking system in 1932 is still very present, suprisingly enough even in young people´s minds. Most people believe that there are three thiefs und liars: Politicians, Bankers and Insurance Companies.   THE GERMAN BANKS ARE JUST AS CORRUPT AS THEY CAN POSSIBLY BE, AND THEY ARE HEADING DIRECTLY FOR CRISIS. CHECK OUT DEUTSCHEBANK’S EXPOSURE. LOOK AT THIS CRAP:  IKB, a specialist lender based in Düsseldorf, was bailed out by the German government. According to the Financial Times, Jochen Sanio, head of Germany’s financial regulator, is said to have warned of the worst banking crisis since 1931.”  IKB had invested heavily in sub-prime investments.   Along with the German government, DeutscheBank (DB) and Commerzbank invested in the bail-out.  STUPID REMARK NO. 2:   I spoke to a fiend of mine, who admitted to be buying Gold for his retirement as the “saving of last resort”.   NOTHING WILL SAVE GOLD IN A GENERAL DEFLATION. IT WILL SIMPLY BE WORTH NOTHING, ALONG WITH EVERYTHING ELSE. SILLY FOOL. 

John Ryskamp • August 4th, 2007 at 3:49 pm

It’s this sort of thing which will bring down Bear Stearns and every other major financial institution. Just add up the exposure, compare it to the assets, and head straight for the bankruptcy court. In short, the mattresses are being removed between the crowd and the United States Capitol. There is absolutely nothing the Federal Government can do about this. The American people are stupid and fascist and would rather shoot themselves in the head than change their corrupt minds. And what are the Federal Government’s resources in the face of $100+ trillion finance problems. The whole Federal budget this year is only $2.9 trillion.  COLCHESTER, Conn., Aug. 3, 2007 LAWFUEL – The Litigation Newswire — On August 2, 2007, Scott+Scott, LLP filed a class action against American Home Mortgage Investment Corp. (“American Home Mortgage” or the “Company”) (NYSE:AHM) and certain officers and directors in the U.S. District Court for the Eastern District of New York. The action is on behalf of American Home Mortgage common stock purchasers during the period July 26, 2006, through July 27, 2007, inclusive (the “Class Period”), for violations of the Securities Exchange Act of 1934. The complaint alleges that defendants made false and misleading statements and material omissions regarding the Company’s business and operations and that, as a result, the price of the Company’s securities was inflated during the Class Period, thereby harming investors.   If you purchased American Home Mortgage stock during the Class Period and wish to serve as a lead plaintiff in the action, you must move the Court no later than 60 days from today’s date. Any member of the investor class may move the Court to serve as lead plaintiff through counsel of its choice, or may choose to do nothing and remain an absent class member. If you wish to discuss this action or have questions concerning this notice or your rights, please contact Scott+Scott scottlaw@scott-scott.com 800/404-7770, 860/537-5537) or visit the Scott+Scott website, http://www.scott-scott.com, for more information. There is no cost or fee to you.   According to the complaint, during the Class Period, defendants made false and misleading statements regarding the Company’s quarterly financial results and profits, in active concealment of the true extent of the growing level of loan delinquencies and resulting adverse impact on the quality of the Company’s collateralized debt obligations (CDOs), earnings and profits. Specifically, Plaintiff alleges that defendants actively concealed the growing inability of American Home Mortgage to make timely payments on its CDOs and to securitize its loans, caused in part by the declining quality of its loan portfolio; and that the Company failed to incur necessary asset impairment charges, to adjust downward the value of its loan portfolio.   According to the allegations, rather than disclose the truth of these matters, defendants were upbeat in the assessment of the Company’s performance. As late as June 28, 2007, as facts regarding substantial impacts to the Company’s discontinued products and loan portfolio began to leak out, the Company stated that it could rely on its “substantial reserves” to contain any foreseeable losses and that it was expected that “total stockholder’s equity will actually be higher at the end of the second quarter compared to the first quarter of 2007.” On the startling news of June 28, 2007, the price of American Home Mortgage stock tumbled 12.1%, closing at $18.38 per share.   Following this, on July 27, 2007, the Company announced that it would suspend payment of its coveted quarterly dividend, admitting that it was aware of “major write-downs of its loan and security portfolios.” The shocking news awaited a resumption of trading in the stock — once trading was resumed on July 31, 2007, the price of American Home Mortgage stock plunged $9.43 or 90%, closing at $1.04 per share, on heavy volume of over 31.3 million shares, for an overall loss of more than $1.7 billion in total market value.   Numerous questions remain about the failure of risky mortgage-based collateralized debt obligations issued by American Home Mortgage and others and their impact on the financial markets. The Street.com recently commented that skeptics view the issuance of risky “BB” to “BBB” rated CDOs notes as akin to “putting horse dung and other garbage into a grinder to make some sausage.” Indeed, reported losses now range from $95 million in equity exposure to American Home Mortgage CDOs at RAIT Financial Trust (NYSE:RAS) to over $1.6 billion in losses to funds managed by Bear Stearns Co., Inc. (NYSE:BSC).   The plaintiff is represented by Scott+Scott, a firm with significant experience in prosecuting investor class actions. Please visit our website at http://www.scott-scott.com for current information on the litigation of major securities, antitrust, employment and employee retirement plan actions throughout the United States, including information on the recent landmark decision to certify a class action for the benefit of present and former UPS employees, dating back to May 2000, who were precluded from returning to work due to medical reasons and the firm’s recent $80 million settlement on behalf of class members in a securities case against Priceline.com. The firm represents pension funds, charities, foundations, individuals and other entities worldwide.   More information on this and other class actions can be found on the Class Action Newsline at http://www.primenewswire.com/ca/       

John Ryskamp • August 4th, 2007 at 3:50 pm

By the way, what they’re looking for in these cases are the deep pockets–not American Home, which has zilch. The big boys for whom AH served as pimps: the banks, the finance houses, insurers, and so on.

AFFG • August 4th, 2007 at 4:04 pm

@John Ryskamp,  ”SILLY FOOL”  I would be very gratefull if you would be a bit more carefull with your “language”. Calling people “fool”s or monkey´s is not necessary.  German Banks are as corrupt as American, British, French, Japanese or even North Tebetian Banks … I never said that they were “Angels”.  If you had read some of my posts you would have acknowledged that I was the first one to point out the problems with the IKB and the comparison with 1931.  Futhermore I wish to say, that I was writing about “Funds” not Banks.  If you think the US is heading for a deflation you are wrong. The US Dollar is more likely to end in a Hyperinflation. But even if this was not the case, you would be doing best with Gold. Gold kept it´s purchasing power in the great depression and it did it´s best in hyperinflations. That the nominal price of Gold is going to go down … that is clear … but you have to decide, if you are prepared to take the risk in holding bonds and have Helicopter Ben flood the market with Cash .. (Cash, not Credit!)  AFFG

winjr • August 4th, 2007 at 5:28 pm

“PPT to the rescue for last two days. you bears never learn. With Jumbo Jet Bernanke pumping M3. Market will not fall for to long, up we go.”  LOL! Nice call, Guest! LOL!!!  

John Ryskamp • August 4th, 2007 at 7:44 pm

More on Bear Stearns liability. It is finger-pointing–far more than sketchy paper–which will bring a collapse of the financial system. While the finger-pointing goes on, NO ONE will invest:   The ratings agency said negative publicity about Bear Stearns’ hedge fund woes has damaged its reputation “leaving the company a potential target of litigation from investors who have suffered substantial losses.”  In fact, one such lawsuit has already been filed. It was brought on behalf of a 73-year-old investor in a hedge fund that the firm closed in June after heavy margin calls and redemption requests. The fund was one of three Bear Stearns (nyse: BSC – news – people ) investment vehicles that suffered huge losses from the crisis centered around subprime mortgages. (See “Bear Scare”) Earlier, the firm shuffled management in its asset management group in an attempt to stop the bleeding.

Robert B • August 4th, 2007 at 10:36 pm

Can anyone comment on the potential likelyhood of a US currency crisis? What are we looking at here? Time to switch stocks to cash and trade them in for Euros for a while? The dollar is already weak, under what conditions would the dollar crash in value? And if that happened would China, and everyone else who trades with us attempt to stabilize the dollar out of their own self interest?  It seems to me that, just like Germany (who is hurting right now because they can’t export goods to the US at a reasonable cost) that countries like China would do everything they could to avoid that situation (since if the US is economy is bad, the Chinese will feel it tenfold). Right?   Thanks,

Guest • August 5th, 2007 at 6:27 am

Robert B,  only the Chinese/Japanese/Indian… government are fool enough to buy USD/bonds.  

JJ • August 5th, 2007 at 6:38 am

@Robert B Many of the items manufactured in EU are sold in the US as luxury or gourmet items. Besides that these are often marketed to the upper middle class, they are also sold to the same segment in China,Japan,Australia and New Zealand (so U.S. is by no means the only market). Many of the euro -based corporations also have hedged themselves against the appreciation of their currency (eg by doing some of the manufacture to the U.S.).

Anonymous • August 5th, 2007 at 7:58 am

Mr. Ryskamp is this your blog? You make many claims about impending BKs. Where do you list sources?  

Gamma • August 5th, 2007 at 9:55 am

I agree with Ryskamp that we are headed for deflation. You have to think about constituents when you think about inflation/deflation. Hyperinflation does not serve the DESIRES of the constituents, but deflation DOES.  While, I agree with Ryskamp, I must say I don’t agree with his manners. For someone who is so “educated” I would expect significantly better manners, but as they as say the “trend is your friend” and he’s been rude and abusive with his “intellectually superior” attitude since the day he arrived on this board. Kind of funny he hangs out here since he has his own “blog” – though no one posts there. JR – people learn better when you act like they’re smart enough TO LEARN. Try it out – you might make a new friend!!!

Pete, CA • August 5th, 2007 at 10:55 am

US HOUSING  TO: Partipants on this blog. Can you please remember to argue the facts of your case. Insults and personal attacks ruin your own credibility – and harm this blog. ————————————————————————-  TO: Man in Hong Kong  The advice we gave you about our housing market remains true. It is sinking. Wells Fargo Bank has just raised its prime mortgage rate to 8% – a jump of roughly 1.5%. This will undoubtedly make it more difficult for buyers to afford expensive housing.  For a very good, independent assessment of US housing see the new blog  by Mr. Mike Morgan in Florida. Mr. Morgan is heavily involved in real estate and has a very good knowledge of the building industry.  http:/www.treasure-coast.us/weeklyupdate08-04-07  Regards, Pete, CA  

John Ryskamp • August 5th, 2007 at 11:16 am

Currencies are where it’s at now. The last phase, of course. But please make SURE you vet your currency trader. Currency trading is the last bastion of insider trading: it’s the state entering the marketplace with information only the state possesses. So it’s best if your currency trader is someone high up in the Mafia.  Actually the moves into currency started happening about three or four months ago, which is when I said they would occur.  The difference between now and the last time this happened in the early 80s is the huge amount of debt/credit out there. Wait til you see this week. Complete collapse. People will just sit on what money they have, instead of putting a lot of effort into a losing game.

AFFG • August 5th, 2007 at 12:49 pm

@Gamma,  I agree with your thoughts and yes I believe we will go in to a credit/asset deflation. That will only last a max of 12 months and then the FED will flatten the accelerator faster than you can say “hello”. If the credit market continues to implode the way it is, there will be litterly no banks left.  If Bear Stearns was to go bust, then it will take a hell of a lot of banks with it. I do not see this in the interest of the “Bankers”. We are going to get the Bernanke “PUT” and the Dollar is going to plunge.  If you think the US is going to go into the GREATEST DEPRESSION … forget it. Helicopter Ben has a reputation to loose.  The “Deflationists” are technically right, when it comes to explaining the Creditsystem and the implications of Fundrate changes which interact with the markets and the economy. But the “Hyperflationists” are politically correct. One day somebody is going to have to pull the plug … this is the interest of the “majority”. The “Saver” is in the minority. Watch the Bond purchases of the FED very carefully. If they start buying Mortgage Bonds … then run for hard assets … and fast …   AFFG

Gamma • August 5th, 2007 at 1:49 pm

The powers that be don’t care about the majority. This is hardly about the majority, it’s about power and hyperinflating the dollar will lead to a loss of global power by the TINY minority. They will let the majority rot in debtor prison for life – because it will only enhance their grip on power.  Now – anyone who reads this and thinks it’s a big conspiracy is only partially correct. A mouse trap was definitely set – but EVERY single person caught in it should take PERSONAL RESPONSIBILITY for walking into the trap. You hardly needed to be a financial genius to know that “it was too good to be true” (100% LTV, cheap teaser rate, no documentation, and “real estate never goes down”). The cheese they offered didn’t pass the common sense test. To those headed to debtor prison – it will be an expensive lesson and possibly the only inheritance you will pass on to your children.  When people spend more time following Brittany Spears than their personal finances, they have nobody to blame but themselves!!! The masses want money but spend zero time learning about it, so they are soooo easily seperated from it – which only adds to its allure.  

Gamma • August 5th, 2007 at 1:54 pm

Also – Heli Ben is going to find himself pushing on a string if he tries to reinflate and I think they know it. People will be so scarred from this that they won’t think about borrowing money, at any interest rate, for a very long time.  That said AFFG… I can’t predict the future and I’m frequently wrong, so I appreciate your points and think it bears watching. If things play out as you say – I won’t be in the dollar and I may physically relocate my family. I’ve been prepping them for that as a worst case scenario. Maybe I’ll try and move in next to Jim Rogers (I’d prefer Singapore to China, but close enough).

Guest • August 5th, 2007 at 2:19 pm

Things are not good, but Ryskamp is a hoot. A “Chicken Little” running around in a panic saying “the sky is falling, the sky is falling.” I doubt the sky will fall. A few bits and pieces may drop off. LOL.

John Ryskamp • August 5th, 2007 at 3:08 pm

Actually, ACA is very close to BK. Liabilities from lawsuits are huge, and the suits against it will also have players like Bear Stearns as defendants. And BS is not the only firm which will decide–after adding up the exposure to lawsuits–that its liabilities outweigh its assets, and run to BK court.  NEW YORK (Reuters) – ACA Capital Holdings (ACA.N: Quote, Profile , Research) shares, already down 50 percent in the last two months, could fall further if the subprime mortgage crisis continues, Barron’s said on Sunday.  ACA, with a market value of about $260 million, has guaranteed $61 billion of collateralized debt obligations, including subprime and other instruments backed by various corporate and commercial mortgage debt, Barron’s said in its August 6 edition.  Should the U.S. subprime troubles prove to be systemic across different geographies, then not only would shares be hammered, but the company could be toast, Barron’s said.  If ACA buckles under, Wall Street firms whose securities the company insured would also be hurt. The $61 billion of ACA’s insured exposure would come cascading back to balance sheets of the likes of Bear Stearns (BSC.N: Quote, Profile , Research), Merrill Lynch (MER.N: Quote, Profile , Research), Lehman Brothers (LEH.N: Quote, Profile , Research), and Citigroup (C.N: Quote, Profile , Research) along with some 25 other Wall Street counterparties, Barron’s said.    © Reuters 2007. All Rights Reserved. | Learn more about Reuters   

John Ryskamp • August 5th, 2007 at 3:12 pm

  I agree with your thoughts and yes I believe we will go in to a credit/asset deflation. That will only last a max of 12 months and then the FED will flatten the accelerator faster than you can say “hello”. If the credit market continues to implode the way it is, there will be litterly no banks left.    If Bear Stearns was to go bust, then it will take a hell of a lot of banks with it. I do not see this in the interest of the “Bankers”. We are going to get the Bernanke “PUT” and the Dollar is going to plunge.    If you think the US is going to go into the GREATEST DEPRESSION … forget it. Helicopter Ben has a reputation to loose.    The “Deflationists” are technically right, when it comes to explaining the Creditsystem and the implications of Fundrate changes which interact with the markets and the economy. But the “Hyperflationists” are politically correct. One day somebody is going to have to pull the plug … this is the interest of the “majority”. The “Saver” is in the minority. Watch the Bond purchases of the FED very carefully. If they start buying Mortgage Bonds … then run for hard assets … and fast …    AFFG    YOU OVERRATE BOTH THE POWER AND WILL OF THE FED. IT HAS NO POWER IN A SITUATION LIKE THIS–YOU HAVE TO HAVE A WHOLESALE POLICY CHANGE ON THE PART OF THE FEDERAL GOVERNMENT FOR ANY EFFECT. THE PROBLEM IS THAT THIS POLITICAL SYSTEM WILL NOT CHANGE POLICY WHOLESALE.   THEREFORE A POLITICAL CRISIS. ONCE THIS BECOMES CLEAR, THE REMAINDER OF THE ECONOMY WILL SIMPLY STOP. NO ONE WILL INVEST ANYTHING IN THE U.S. WHEN THERE IS A POLITICAL CRISIS.

John Ryskamp • August 5th, 2007 at 3:13 pm

In short, you’re coming up on a revolutionary situation. Same one which caused the French Revolution: economy not so awful, but government bankrupt, hasn’t a clue about changing fundamental policies.

AFFG • August 5th, 2007 at 3:19 pm

@Gamma,  ”If things play out as you say – I won’t be in the dollar and I may physically relocate my family. I’ve been prepping them for that as a worst case scenario. Maybe I’ll try and move in next to Jim Rogers (I’d prefer Singapore to China, but close enough).”  So have I, but they all think I am crazy. ;-)   Singapore … nice choice … very different mentality though.  Never forget … Louis XVI and his austrian wife got their head chopped off for having acted against the majority. When power in a society is too concentrated, then the masses do count. You will undoubtly witness this. It seems to be the fate of mankind.  AFFG

AFFG • August 5th, 2007 at 3:46 pm

For those who understand german:  http://www.tagesschau.de/video/0,1315,OID7221678,00.html  This is a comment from the ARD about the “problems” which have occured. It was broadcasted on Friday.  What he basically is saying is that the comparison with the 1931 Banking Crisis by the Bafin boss Sanio should have never been told publically. BUT he thanks him, since what he said is the truth. The Americans have been living over their means for so long and have an “Empire of debt”. It is time for everybody to reconsider their saving attitudes. The price for Gold and other “Safe” investments is going to go up.  Bit by bit .. the severity of this crises is working it´s self closer to the wide masses.  AFFG

Juan • August 5th, 2007 at 8:48 pm

NFrazier,  If by ‘profits’ you mean economic profits, not earnings, these need to be seen in relation to either GDP or Total National Income and – in relation to the former – these peaked 3Q06 and even then was not the ‘record’ which most media love to advertise. Same time, as the attached points out, ‘U.S.’ profits have become much more dependent on foreign operations.  ”Bulging Profits in U.S. Often Originate Overseas” http://www.nytimes.com/2007/08/04/business/04charts.html?_r=1&oref=slogin

Anonymous • August 5th, 2007 at 9:08 pm

I’m guessing there are quite a few on this board that have been waiting to say:  ”where are all the sucking bulls? keep being so bullish so that I can keep shorting and making so much money.”  anyone remember that guy?

John Ryskamp • August 5th, 2007 at 9:18 pm

Where oh where is that little hyena who, on this blog, said copper would go to $6 before it would go to $1?!?  Bloomberg:– A measure of six metals traded on the London Metal Exchange, including copper and nickel, declined 2.3 percent Aug. 3. Copper fell 2.6 percent, nickel lost 2.5 percent and zinc dropped 3.3 percent. Crude oil for September delivery dropped 2 percent to $75.48 a barrel last week and recently traded at $74.76.   

John Ryskamp • August 5th, 2007 at 9:19 pm

It’s going to be a bumpy night.    Yes, where is Bette when we need her? Remember when she said, “It was no joke when he closed those banks.”

John Ryskamp • August 5th, 2007 at 9:21 pm

More German flummery. You people live in a welfare state idiot’s dreamworld. There are no safe investments not–CERTAINLY not Treasury notes. Why didn’t we Balkanize you imps after WWII?   ”What he basically is saying is that the comparison with the 1931 Banking Crisis by the Bafin boss Sanio should have never been told publically. BUT he thanks him, since what he said is the truth. The Americans have been living over their means for so long and have an “Empire of debt”. It is time for everybody to reconsider their saving attitudes. The price for Gold and other “Safe” investments is going to go up.”   

Suecris • August 5th, 2007 at 9:29 pm

@AFFG – Please don’t let the above incredible rudeness from Mr. Ryskamp bother you – please continue to contribute. I enjoy reading your perspective.

Jason B • August 5th, 2007 at 9:47 pm

During 2007 $1.5 Trillion of arms will reset. So far about $220 Billion have, and look at the damage.  These ‘homeowners’ will either try to refinance in a credit crunch, or sell into a falling market, probably for a loss.  Then, according to the Credit Suisse ARM reset schedule graph, resets increase again after a lull.  This is going to be really awful. How can it not become a bloodbath in the financial sector? I don’t see any way around it.   The big boys aren’t ‘keeping their powder dry’ waiting for buying opportunities. They are packing their powder up and taking it out of the country.  The US has serious underlying problems in addition to all this bad paper. Unfunded entitlement programs, current account deficit, federal debt, a failed war, high consumer debt and crumbling national infrastructure. We don’t have the resources to deal with all of this.  This is going to get worse before it gets better. A whole lot worse.

Juan • August 5th, 2007 at 10:33 pm

AFFG,  If we ‘time travel’ back to the 19th c. prior to the rise to dominance of neoclassical economics with its basis in the subjectivities of marginalism and individual preferences, not to mention dependence on general equilibrium notions and many other distortions which demand that reality conform to theory rather than theory as reality informed, there had been a long-term understanding that all commodities – everything produced to be sold – had both objective, labor based, value and price, and that these two were not identical, i.e. that price diverged from value, exceeding it during the economic upswing and falling below it during contraction.   In other words, throughout most of capitalism’s history the cycle was also one of inflation and deflation…the latter very associated with a decline in rate and mass of profit, something else which was also generally recognized and, particularly following the great depression, was to be avoided at all cost via state fiscal and monetary interventions, counter-cyclic policies that have over the decades become very credit dependent, morphing into a form of ‘permanent crisis management’ post-1973-75.  Globalization – inter-penetration – of national economies has made such ‘management’ very much more difficult, probably impossible, while at the same time private credit money creation has, thanks to financial globalization etc, escaped state control…we’ve been moving into the realm of uncontrollability for years, which became the death warrant, now tombstone, for all ‘the Fed will save us’ beliefs.  From a slightly different angle, it’s possible to think of the ballooning of financial instruments, stocks prices, etc. as representative of fictitious capital which existance, as claims, ultimately depends on a relatively shrinking real economy surplus production…meaning that substitution of credit money/debt for surplus has limits beyond which the financial ediface cracks with prices falling to and below value, i.e. asset price deflation.  Short story: rise of uncontrollability is also the diminished effectiveness of national counter-cyclic policies is also a ‘return’ to something more like the classical cycle in which contraction and deflation, real and financial, again become very evident, though in the present case, price/value gaps have become very extreme.

Anonymous • August 5th, 2007 at 10:47 pm

Before you all work yourselves up into a panic and start frothing at the mouth, you should realize that the US Tres. would not allow businesses like MLynch or Morgan Stanley to go bankrupt. The government would step in and guarantee enough for long enough to allow them to survive. They could be deeply wounded but will not go belly-up. Ditto with Citigroup and any other big bank. Time, I would say, to calm down.

Anonymous • August 5th, 2007 at 11:46 pm

The Big 3(Chrysler,Ford and GM) will announce major layoffs next month. Possibly 1,000,000ish total. These are big time. Major production drop coming. I have also heard major closings to hit some overstretched retail chains by January 08. Flat ugly stuff. Let the bleakness overwhelm you.

Fed Up • August 6th, 2007 at 12:32 am

Nouriel should simply ban John Ryskamp and delete all his comments. The guy is delusional and spams comments, makes the most ridiculous assertions, is rude and ignorant, and in general is an embarrassment to this blog and bloggers in general. Which lowers the credibility of the entire blog, the comments are so absurd and time-wasting.  Imagine you are a serious economist or academic or investor who had heard of Nouriel Roubini but never read the blog before until he clicks a link,, or comes across it thru a Google search. Then you come here and read the comments. You’d likely be put off and never return.  Sad really. Ryskamp, get your own blog, so no one else has to read the crap you continually spout unlkess they want to. Somehow I bet few would.

london broker • August 6th, 2007 at 1:36 am

Ok, opening wider here on iTraxx Crossover to 430bp from a close of 400 friday – bid/offer spreads wide enough to drive a bus through, it feels like liquidity beginning to seize up so we await a tumultuos day.

Anonymous • August 6th, 2007 at 2:31 am

“Nouriel should simply ban John Ryskamp and delete all his comments. The guy is [...] an embarrassment to this blog and bloggers in general. Which lowers the credibility of the entire blog, the comments are so absurd and time-wasting.  +1

AFFG • August 6th, 2007 at 2:38 am

@Juan,  very nice post and very convincing when it comes to making a case for deflation.   The question is … will the real economy be deflated or will the dollar deflate (fall) leaving nominal prices in the US where they are at best. The Hyperinflation of Wiemar was known because of it´s wheelbarrows load of money to buy bread. But you could buy a full block of appartments in the best part of Berlin for a small handfull of Gold (= about 4000 Dollars). It is a question from which perspective you look at it. For a German prices went through the roof (Hyperinflation), for Americans prices plummeted (Deflation).   We will see where we are going. If the fed leaves things as they are, you will be right.  AFFG

bbybmr53 • August 6th, 2007 at 2:38 am

It’s a red flag when I see the phrase ‘worthless hysteria’. I wonder how much ‘worthless hysteria’ was floating around in 1929. The bubbles are bullish hysteria driven by private banking interests administered by the ‘private’ Federal Reserve. Normally bullish stock picker and pundit Jim Cramer just went into hysteria against the sleeping Fed. The Fed allows these bubbles with sustained low interest rates and then stays ‘neutral’ when deflation lies in wait and the credit time bomb blows up. Someone makes a lot of money in timing these bubble cycles. Who are the major stockholders in the banks the Federal Reserve services with their non-governmental currency printing press. You guys that say calm down probably were bullish on the growing bubble before it popped. Bulls blow up thebubbles with the easy money printed by the Fed. Are you guys who say calm down sick of these artificial, debt driven bubble cycles whether it’s in real estate or tech companies? Don’t tell people to calm dowm…people will lose a lot of money from jumping into the latest Fed created, bull-mania bubble!

AC • August 6th, 2007 at 2:59 am

I often see arguments saying that the best or only way to get out of the huge US debt is a hyerinflation. I wonder if the US Government/FED/? could allow it? After a hyperinflation, the government could simply start to print the new dollar, and since most americans don’t have much svings, they could not feel much pain. Maybe the government could even issue some startup money for every family. However, foreigners who had dollars, or bonds, or anything else in dollar, would be hurt. Since the structural economical problems of the US would remain (a few hundred billion current account deficit per year), the US would still need foreign financing. I wonder if any one would be willing to finance the US after a hyperinflation. Or sell its commodities for US money anymore. Or simply keep the new dollar. The loss of the reserve currency status, the loss of dollar-denomination of commodities, and the loss of foreign financing would hurt the US very much. It is much better to have a severe recession which puts the US finances and economy in order, than a hyperinflation.

bbybmr53 • August 6th, 2007 at 3:31 am

With all that’s going on including the drying up of financing, the slide of the dollar, the loss of equity, etc., does anyone have a feel for what will happen to the economy with the next ’911′ type attack like the last unsolved 911 attack. Sources in our government including Cheney and the head of Homeland Security are predicting a new Big Attack which of course we’ll be unable to prevent like the last big attack.  This real estate bubblethat’s fizzling fast really took off after 9-11, 2001. The U.S. government owes the Fed a lot of interest for the endless Iraq War. A new attack would of course be blamed on Al Queda in Iran and maybe Bin Laden in Pakistan.  How much money(Blood In The Streets)can be made in endless wars in Iran and Pakistan? We’ll have a lot of government and contractor job openings in the new Middle East Oil Wars. The unemployed in the U.S. will be able of course the Armed Forces. So ‘governmant mercenary’ employment opportunities in the future may increase along with the number of U.S. citizens who go back to being renters. Don’t you just love the New Americam Dream for the New American Century? Wake up blog ‘economists’!

AFFG • August 6th, 2007 at 3:37 am

@AC,  ”It is much better to have a severe recession which puts the US finances and economy in order, than a hyperinflation. “  Very good point, but we agree that this recession is going to make the Great Depression seem like a small incident. Are politicians going to withstand this pressure? We have had such a recession in Germany since the last 10 years due to the fact, that East Germany collapsed and I can tell you … hit hurts and what we have experienced over last years is nothing compared to what the US is going to hat to do to get itself back into shape.  AFFG

AFFG • August 6th, 2007 at 3:47 am

Here a couple of interesting pieces of information from the ECB:  http://www.ecb.int/press/pr/wfs/2007/html/fs070731.en.html  Position 2.2: Deposit facility is skyrocketing. This position is Cash from Banks which can be invested at the ECB at about 3%. Banks are horting cash outside the Banking system loosing about 1,3% percentpoints to the German Bund. That means the Banks do not know what to do with their cash. They do not trust one another anymore.  2.1 Current accounts (covering the minimum reserve system): Going up by about 5 Billion … which means that people are horting money on their bank account not knowing what to do. Banks are leaving that cash beyond their minimal banking reserve requirements on the account.  If this trend continue then Nouriel Roubini has his proof that their is a systemic crises and that it is everything but contained.  But since most Wall Street economists (and elsewhere too) can not read a balance sheet anymore, they probably do not care.  AFFG

Amateur • August 6th, 2007 at 3:59 am

“I agree with your thoughts and yes I believe we will go in to a credit/asset  deflation. That will only last a max of 12 months and then the FED will flatten  the accelerator faster than you can say “hello”. If the credit market  continues to implode the way it is, there will be litterly no banks left.”  As far as I can understand it, deflation is much worse to cure than inflation,  so I think AFFG could be right. So I guess during those 12 months it is time  to buy gold, houses etc

AFFG • August 6th, 2007 at 4:42 am

Somebody is using the yen carrytrade to buy the DAX this morning. The Dax slides slowly down and then with no reason the DAX goes straight up like a rocket in the green.  All other Idexes are going red .. MDAX -0,53, TechDax -1,78 %, SDAX -1,7% … DAX +0.2%  What do these yoyos think their up to?  AFFG

JJ • August 6th, 2007 at 7:25 am

@AFFG: ”2.1 Current accounts (covering the minimum reserve system): Going up by about 5 Billion … which means that people are hording money on their bank account not knowing what to do.”  The way you are writing makes it look like people don’t know how to spend/invest their money so they are just leaving it to the account. Makes it look like there is a “problem” of some sort.  How about people just having more money at hand and wanting to save it?? After all that is one of the problems with the U.S. economy: household savings rate is too low.  Besides Europeans have not yet made it to a “tradition” to shop on credit, at least not to the same degree as in the U.S.  Another thing is that I do not think private investing in stocks & such is as common in the EU countries as in the US. So very likely they would not be investing their cash anyway. At least in the northern EU this is because of the government provided social benefits.  

AFFG • August 6th, 2007 at 7:37 am

Next Money Market Fund shutdown:  http://www.ftd.de/boersen_maerkte/marktberichte/:Auch%20Frankfurt%20Trust%20ABS%20Fonds/235504.html  @JJ,  I agree strongly on what you write. But Germans/Europeans invest more in stocks than people think. It is a question of “generations”. In the last 7 years people have been more cautios on stocks and are now sitting on a mass amount of cash. People here though are more likely to invest long term in stocks. Buy and keep for thirty years. You can´t immagine … People who inherit from their parents and find out that their parents were millionaires but lived very modestly. Throwing your money on peoples faces and “showing off” is not very German. Being rich is almost considered as a sinn. ;-)   AFFG

Joshua • August 6th, 2007 at 8:13 am

“Nouriel should simply ban John Ryskamp and delete all his comments.”  I agree. Ryskamp is a vile individual. This comment by Ryskamp is really very ugly:  ”More German flummery. You people live in a welfare state idiot’s dreamworld. There are no safe investments not–CERTAINLY not Treasury notes. Why didn’t we Balkanize you imps after WWII?”  

Guest • August 6th, 2007 at 8:20 am

COMMENT: “Ok, opening wider here on iTraxx Crossover to 430bp from a close of 400 friday – bid/offer spreads wide enough to drive a bus through, it feels like liquidity beginning to seize up so we await a tumultuos day. “ RESPONSE: This is going to be a rough couple of weeks for the hedge funds. Any fund that reports its NAV based simply on Ask prices could experience are very bad day. Reports on second quarter performance are due very soon. Fund managers had better come clean with their investors.  COMMENT: “I doubt the sky will fall. A few bits and pieces may drop off. LOL. “ RESPONSE: Maybe. But those are some pretty big chunks of sky. Wall Street made a classic business mistake – it forgot who its customers are. We are the Baby Boomers, and we have a long memory. We remember 2000-2002 very well. The Boomers are not going to sit still and see their accumulated assets over 30+ years be enviscerated here. There is no reason to risk anything in the stock market, when there are perfectly good risk-free options.  Pete, CA    

Guest • August 6th, 2007 at 8:24 am

funny how slow motion this is occuring, and how far behind mainstream news is on the story. After watching more carnage on the ASX today and now reading the opening bell headlines up north it seems US market has forgotten what happened last week, forgotten the fundamentals and the punch bowl is refilled for another week……. lets see how long the cautious optimism lasts

london broker • August 6th, 2007 at 8:56 am

Bear Sterns rumored to have been shut out of the CP market -implies they are meeting with the Fed tonight. ** Bear Sterns CDS now at spreads not seen since the last US recession. ** US financials CDS curves beginning to flatten, en route to inverting – a major credit risk signal!

Dave Chiang • August 6th, 2007 at 9:02 am

 Beginning under former Treasury Secretary Robert Rubin and Federal Reserve Chairman Alan Greenspan, the narrow economic interests of Wall Street financial institutions prevailed over other industrial and productive sectors of the US Economy. On Wall Street, the “Greenspan-Rubin put” referred to federal government intervention in the marketplace to eliminate “moral hazard” for Hedge Fund speculators and Wall Street investment banks. By socializing risk to the US taxpayers, the Federal Reserve’s bailout of Long Term Capital and other highly leveraged Hedge Funds has increased systemic risk to the entire US Economy; the dispersion of risk has generated additional leveraged speculation in capital markets. Over the past two decades, capital has been massively misallocated across the US Economy into non-productive speculation in financial assets. The $11 trillion Credit Bubble in real estate and $750 trillion in financial derivatives are products of the Wall Street-Treasury complex, extreme financial leverage coupled with weak financial regulatory oversight. With real estate prices collapsing, trillions of dollars of home equity and credit will soon be wiped out, imploding the US Economy into a severe recession.    

AFFG • August 6th, 2007 at 9:14 am

I have the impression that hedgefunds in commodities are getting beaten up now …  We are going to hear futher funds in commodities going belly up and that will send oil prices down. 20$ are certainly pure speculation.  The usual blubber on CNBC is now concentrating on the FED having to ease.  Interesting thing by the way:  I cannot see “Mad Money” with Cramer online from Germany … but the diffused “explosion” of Mad Jim which was a Mad Money Show was accessible around the world, it was not blocked like the others. Wierd.  AFFG

london broker • August 6th, 2007 at 9:21 am

Another rumour making the rounds on the Street today is that Lehman’s will be making surprise announcement on subprime losses later today

Guest • August 6th, 2007 at 9:33 am

“You guys that say calm down probably were bullish on the growing bubble before it popped.”  Quite the contrary. I have thought the market over priced for some time and have invested only in non $ stocks. I have been amazed at how long the overvaluation has lasted. But, at the same time, when the party stops one needn’t get hysterical. After all the US government has unlimited credit and will certainly use it if necessary to prevent a disastrous “melt-down”. Long run that may be unwise. But today no government is going to allow another 1929 to occur. So CALM DOWN.

AFFG • August 6th, 2007 at 9:40 am

From CNBC:  It seems that Bear Stearns CEO was scared of a run on the bank.  http://www.cnbc.com/id/15840232?video=456727188&play=1  What do you mean with “Another rumour making the rounds on the Street today is that Lehman’s will be making surprise announcement on subprime losses later today”  ”But today no government is going to allow another 1929 to occur.”  No government can stop it. Do you think that the government did not try to stop the collaps of the Stock Exchange?  AFFG

Guest • August 6th, 2007 at 9:45 am

eZ to be calm when your in cash, US govt having unlimited credit started the problem, its not gonna solve many problems now…. Academics better than Bernanke are gonna be studying this period in future with a smirk.

Guest • August 6th, 2007 at 9:53 am

AFFG  Stop the childish hysteria. The government can put together any package of support it wants if it feels that is necessary to prevent a bankruptcy of a bank or brokerage. It was done with Long Term Capital before and can be done again. Your hysteria is ludicrous and silly and makes it clear you are a fool.

JMa • August 6th, 2007 at 10:06 am

honest the PPT is not involved in supporting this market this morning, really they are not… WHO IS BUYING THIS MORNING ? I have often said here that catastrophic disaster could strike NYC and there would still be a DOW data stream being sent out unchanged with the PPT running their script regardless of what happens… The current situation with this intervention is absurd. There is clearly a crisis, the investment banks are getting pummeled yet the overall indices and market are amazingly unscathed down 6 or 7 % from the highs ? These are legitimate markets honest. Got a go I just saw a unicorn flying outside my window…

AFFG • August 6th, 2007 at 10:20 am

@JMa,  maybe our friend “Guest on 2007-08-06 09:53:02″ is buying up everything … he believes that banks can not go bust.   the fool,  AFFG

Guest • August 6th, 2007 at 10:27 am

AFFG:  Hey put up or shut up. What banks will go bust in the next month? Citibank? J P Morgan? Barclay’s? Deutsche bank? Merrill Lynch? Morgan Stanley? Tell us now so we can see how smart you are a month from now when they have all crashed and burned. LOL.

Guest • August 6th, 2007 at 11:13 am

The government will step in before the bottom falls out:  The crisis in the mortgage market has increased the likelihood that the federal government could intervene in some way to alleviate a credit squeeze. However, Congress and government-sponsored enterprises like Fannie Mae and Freddie Mac might offer only limited support.  Some parts of the secondary mortgage market have ground to a halt in recent days as investors shun many types of mortgage securities that don’t conform to Fannie and Freddie’s standards.  The crisis in mortgage availability could prompt action from Congress, several mortgage market experts said.  ”The chance of government intervention in the marketplace in response to current events has increased significantly,” said Andy Chow, portfolio manager at SCM Advisors LLC, a $14 billion San Francisco-based investment firm specializing in fixed-income and structured-finance markets.  Mike Perry, chief executive of mortgage lender IndyMac Bancorp, said Thursday that he got a phone call this week from U.S. Sen. Christopher Dodd, D-Conn., who asked whether Congress can help the U.S. mortgage industry in any way.  At a hearing in Washington on Thursday, Dodd said he had spoken this week with several mortgage bankers “to solicit their opinions as to what they thought was happening and what solutions may lay out there to try to deal with this seizing up of credit that is really getting rather dramatic.”  IndyMac’s Perry said he also had talked to the chairman of Fannie Mae on Thursday and had traded calls with the chairman of Freddie Mac.  So CALM DOWN.

John Ryskamp • August 6th, 2007 at 11:20 am

Why am I so vile? Because I want a ban on housing evictions and you don’t? Why provide carrion for fascists?

Shabba • August 6th, 2007 at 11:28 am

The problem isn’t the seizing up of credit markets! This is just the symptom. The problem is that house prices are too high. Do you think congress will lower the price of housing? :) . Do you understand the amount of funds that would be required to bail out housing?  I think people still don’t understand the problem, or the magnitude of what we are dealing with.

Guest • August 6th, 2007 at 11:41 am

One of your problems, Ryskamp is your naivite about how the USA works. Housing evictions will not be banned since most of the evicted are poor and powerless. Big banks and brokerages will be protected since they involve the rich and powerful. When a crisis hits in the USA it is always the little guys who get hurt the worst. You may not like it, but there is NOTHING you can do about it.

Guest • August 6th, 2007 at 11:55 am

No need to ask PPT on duty. Too much good news… -Subprime’s gone -rate cut -Oil price down -japnese yen down  Dow to go up 400 today?

Shabba • August 6th, 2007 at 11:59 am

You could be right about that. I think you would almost have to turn the US into a communist country for it to happen. Taxes would have to go up dramatically to bail all of this out. Once the problems here become more apparent the dollar will do even worse and this country will be less and less attractive to foreign investors, that means it will just be up to us.  One thing I think is certain though, this problem will transcend economics and will bring about social and political changes. This mess will be much more painful that a lot of people losing considerable amounts of money like the NASDAQ bubble. I think this blow up will enrage the masses so to speak. It will be interesting. When and how this will truly blow up is anyone’s guess, it’s getting awfully close though.

Guest • August 6th, 2007 at 12:10 pm

So many donkeys in China are ready to burden the US sustained and increasing debts.  Crash in the US… No way!

JJ • August 6th, 2007 at 12:54 pm

@AFFG: Throwing your money on peoples faces and “showing off” is not very German.  I can imagine. I’m from Scandinavia and “showing off” is generally frowned upon there as well. But perhaps slightly less nowadays than for example back in the 70′s.  As to investing, well, in Scandinavia 401k plans do not exist in the same way as in the US. This is because people normally get a gov’t pension at retirement. Some people do choose to invest into mutual funds for retirement but they do this often through their bank or an insurance company. In other words, people’s retirement benefits are not exposed to a stock index in the same way as in the US.  And other forms of “investing” (currencies, etc) does not seem as common as in the US, UK or Australia where the gov’t seems to emphasize personal investing for retirement (and other reasons). Same thing with credit cards; for example on-line shopping is commonly done in a COD (cash on delivery) fashion through the local post office…so there is not a ‘need’ for a cc in the same way (as in US).  But comparing the US to the EU countries (at least the northern European) is sort of like comparing apples to rubber tires. UK, on the other hand, would probably have been moving more to the direction of US (politically), if it wasn’t for all that EU regulation. I think they have been encouraging a more similar mentality among the population when it comes to “investing”, and loans have been readily made available for this as well. This of of thing of course also contributes to the “growth” of an economy. Drawback is just that it eventually leads to a bubble which breaks like the ancient dutch one with tulips.   On the other hand it does not look like a mortgage bubble will break in EU, yet. When it does break it may do so because of different reasons than those in the US.   

Anonymous • August 6th, 2007 at 1:05 pm

The Yen isn’t really down FWIW.   Typically market reactions. Nice selloff tomorrow, up days Wed and Thur and selloff Friday. The market should relax for the next few weeks. The big selloff won’t occur to September-October timeframe like usually(ala 89 and 00).

John Ryskamp • August 6th, 2007 at 1:36 pm

DON’T BUY THIS. THEY FACE LEGAL LIABILITY IN UPCOMING LAWSUITS:   SAN FRANCISCO (MarketWatch) — Wilmington Trust Corp. (WL : Wilmington Trust Corporation News , chart , profile , more Last: 38.11+0.66+1.76%  2:15pm 08/06/2007  Delayed quote dataAdd to portfolio Analyst  Create alertInsider Discuss Financials  Sponsored by: WL38.11, +0.66, +1.8%) on Monday called reports that list it as among the largest unsecured creditors of American Home Mortgage (AHM : american home mtg invt corp com News , chart , profile , more Last: 0.44-0.25-36.69%  10:22am 08/06/2007  Delayed quote dataAdd to portfolio Analyst  Create alertInsider Discuss Financials  Sponsored by: AHM0.44, -0.25, -36.7%) incorrect. “Wilmington Trust has no credit exposure whatsoever to American Home Mortgage,” said Wilmington Chairman and Chief Executive Ted Cecala in a statement. “American Home Mortgage’s bankruptcy filing does not affect our balance sheet or bottom line, and it poses absolutely no credit risk to us.” Wilmington said it provides trustee services for some of American Home’s creditors, but the services don’t include making loans. American Home filed for bankruptcy earlier today.    

man in Hong Kong • August 6th, 2007 at 1:39 pm

@John Ryskamp ,  can you say more about -Watch out for Cerberus. Its problems are snowballing today. -Goldman Sachs hedge funds exploding, and they are looking at big time legal liability.   source? It couls be interesting!

John Ryskamp • August 6th, 2007 at 1:40 pm

Just to give you some indication of how corrupt the U.S. is, Countrywide’s legal exposure is about 7 X $46 it CLAIMS to have. And look at how many hyenas believe those thieves:   Countrywide tries to reassure investors By GARY GENTILE – AP Business Writer  LOS ANGELES –Countrywide Financial Corp. said Monday it has access to $46.2 billion in cash, credit lines and other investments, a move aimed at reassuring nervous investors the nation’s biggest mortgage lender can weather a market downturn.

John Ryskamp • August 6th, 2007 at 1:41 pm

Countrywide’s “reassurance” was just a few minutes ago. Their statement is about seven statements from bankruptcy. Can you believe how degenerate it all is?

Guest • August 6th, 2007 at 1:46 pm

Isn’t there a moderator for this blog who can stop the name-calling? I feel like I slowly am losing the interest in reading the posts because some people are dominating this blog, making unsubstantiated claims about different entities and in general fighting among themselves!  Does anybody else feel this way? It is possible that one of the same people will come charging at me and ask me to “stop reading the blog if I don’t like what I see being posted”! Professor, please do something!

John Ryskamp • August 6th, 2007 at 1:46 pm

What you are seeing today is the financials all trying to protect each other. Both UBS, which upgraded Merrill Lynch, and Merrill Lynch itself have legal exposure for their financial shenanigans, as suggested by this note:   NEW YORK, August 6 (newratings.com) – Analysts at UBS upgrade Merrill Lynch (ticker: MER-I) from “neutral” to “buy,” while reducing their estimates for the company. The 12-month target price has been reduced from $98 to $86.  In a research note published this morning, the analysts mention that following its recent decline, the company’s share price now mostly reflect the turmoil in the mortgage and credit businesses. Merrill Lynch has exposure to CDOs, sub prime and leveraged lending and the industry headwinds are expected to persist for a while, the analysts say. The EPS estimates for 2007 and 2008 have been reduced from $8.55 to $8.46 and from $9.00 to $8.25, respectively.       

John Ryskamp • August 6th, 2007 at 1:48 pm

Isn’t there a moderator for this blog who can stop the name-calling? I feel like I slowly am losing the interest in reading the posts because some people are dominating this blog, making unsubstantiated claims about different entities and in general fighting among themselves!    Does anybody else feel this way? It is possible that one of the same people will come charging at me and ask me to “stop reading the blog if I don’t like what I see being posted”! Professor, please do something!    NO, FRANKLY NO ONE FEELS THIS WAY. WE’RE JUST TRYING TO GET TIPS FROM EACH OTHER. SO PUT YOUR JUICIEST ONES ON THIS SITE. AND PROFESSOR, YOU JUST COOL YOUR JETS, BABY.

John Ryskamp • August 6th, 2007 at 1:53 pm

This, I figure, is the Yale crowd at work–until they get plowed under.   August 6, 2007 2:52 P.M.ET BULLETIN Financials underpin rebound    Market turns around a volatile morning to deliver gains for the Dow as investors snap up heavily sold financial shares.    

AFFG • August 6th, 2007 at 1:53 pm

@Guest on 2007-08-06 13:46:08,  I agree. I have been adding large amounts of posts. I will reduce the quantities and focus on a couple with the “absolute necessary”.  AFFG

John Ryskamp • August 6th, 2007 at 2:02 pm

YES JUST GIVE US YOUR JUICIEST LATEST ON VARIOUS THIEVING COMPANIES WHEN THEY COME TO GRIEF. WHO’S NEXT, YOU ALL. JUST GIVE US WHO’S NEXT. DEUTSCHE BANK IS IN TROUBLE BIG TIME:   I agree. I have been adding large amounts of posts. I will reduce the quantities and focus on a couple with the “absolute necessary”.    AFFG  

John Ryskamp • August 6th, 2007 at 2:28 pm

   you posts are pushing up the stock markets.   Written by Guest on 2007-08-06 14:11:08   NOT FOR LONG, HONEY. THE FUN IS JUST BEGINNING.

Anonymous • August 6th, 2007 at 2:34 pm

This is a sad suckers rally. Will be sold off as soon as it was bought. Starting to get very typical.

Guest • August 6th, 2007 at 2:35 pm

Ryskamp, please post the source for “National City now in big trouble” – Otherwise it is non-sensical.

Anonymous • August 6th, 2007 at 2:43 pm

“This is a sad suckers rally. Will be sold off as soon as it was bought. Starting to get very typical.”  Yeap … seen the Yen .. ? ;-)

JMa • August 6th, 2007 at 3:01 pm

so far the only suckers are the ones who are waiting for a real correction in US equity indices that is beyond a 6 or 7% decline we do not even have that and people are clamoring for a rate cut F _ _ _ Them all !

Guest • August 6th, 2007 at 3:06 pm

We have to admit that the market sure supports Ryskamp. It is up 286 points today. Doomsday surely is near. LOL

Anonymous • August 6th, 2007 at 3:06 pm

if investors don´t buy this rally, then you are going to get your correction.  It is all running on Yensteroids. Yen down 1,58% …

John Ryskamp • August 6th, 2007 at 3:09 pm

We have to admit that the market sure supports Ryskamp. It is up 286 points today. Doomsday surely is near. LOL   Written by Guest on 2007-08-06 15:06:43  DON’T GET SOLD ON AN OVERSOLD, PROGRAM RALLY MY LITTLE CHICKADEE. LOOK WHAT OIL’S DOING, MY PET.

well contained • August 6th, 2007 at 3:24 pm

 What could be more predictable than a pre-Fed-selloff relief rally ?  Oh, that’s right – people making daily market predicitions on an economics blog.  

Guest • August 6th, 2007 at 3:41 pm

The better the market is the more crazy and hysterical Ryskamp gets. I guess a market on the upswing just drives him crazy. LOL. Now tell us when National City will declare bankruptcy. And don’t mince your words. LOL.

Guest • August 6th, 2007 at 4:10 pm

LOOK WHAT OIL’S DOING, MY PET  Yes it is going down as it has numerous times in the recent past since people think less will be used in an economic downturn. So……this means the sky is falling in? Only to a dunce like you.

Anonymous • August 6th, 2007 at 4:56 pm

What we are seeing is the credit bubble bursting, but it hasn’t reached equities yet. So right now stocks look very cheap as they always do at this junction. They go through waves of fear and selloff then calm down and buy up in high amounts when the panic passes. Then they panic again. When the equity bubble does burst, stocks will look very expensive.   Unlike 1999, no one is hugely optimistic about the stock market, but we need more people downtrodden to get a real equity bubble bust going. I say another 4-6 weeks should get the ball rolling.

John Ryskamp • August 6th, 2007 at 5:49 pm

From The Times:  ”Chris Whalen, of the Institutional Risk Analytics consultancy, predicted that Wall Street would see far more Chapter 11 filings connected with the sub-prime mortgage fall-out over the next few months. He added: “We’re only in the first innings. At the moment, we are hearing silence. There are plenty of banks out there who had the same asset allocation as Bear Stearns. So where are all the others? People are only just beginning to ’fess up to their exposure.”     

Anonymous • August 6th, 2007 at 8:06 pm

Just as I predicted, the government will come to the rescue if need be:   Aug. 6 (Bloomberg) — U.S. stocks rallied the most in four years, led by financial companies, on speculation the government will take steps to limit losses in mortgage lending.  Citigroup Inc., American International Group Inc. and Bank of America corp. helped the Standard & Poor’s 500 Index and Dow Jones Industrial Average rebound from three weeks of declines. Wells Fargo & Co. posted its biggest climb in five years after saying it will buy back $1.7 billion in shares. U.S. stocks recouped $363 billion of the $1.6 trillion wiped out since July 13.  Fannie Mae had its biggest gain in 20 years and Freddie Mac advanced the most since 2000 on expectations regulators will loosen restrictions on how much they can spend on home loans. Procter & Gamble Co. led a gauge of consumer shares to its biggest increase in five years after falling oil prices bolstered prospects for Americans to spend more.   Meanwhile Ryskamp’s friends might call for someone to come and take him away……you know where.

bbybmr53 • August 6th, 2007 at 8:37 pm

TIP: Don’t buy anything but food and necessities. Sell everything. Just kidding. Real estate wouldn’t sell right now anyway. Unless the selling price is discounted a lot. Someone said the government has unlimited credit. Do they have unlimited debt too? When do these loans get paid? Oh they don’t. Guess the Fed will always loan money to the Government and we all can pay the interest in income taxes? Whoopee. Talk about a license to print and make money from the printed money. The Fed has it made whatever happens. It’s NOT a government agency but I think it has much to do with fueling irrational exhuberance with easy money that finally dries up and the bills have to be paid. Is there such a thing as irrational caution? The roller coaster is in for a dip. Compute that blog economists. Thanks Fed for the ride that wasn’t free.

John Ryskamp • August 6th, 2007 at 11:46 pm

Bear Stearns Caymans Filing May Hurt Bankrupt Funds’ Creditors   By Jeff St.Onge and Bill Rochelle  Aug. 7 (Bloomberg) — Bear Stearns Cos.’ decision to liquidate two bankrupt hedge funds in the Cayman Islands instead of New York may limit creditors’ and investors’ ability to get their money back.   While most of their assets are in New York, the funds filed for bankruptcy protection July 31 in a court in the Caymans, where they are incorporated. The bank also used a 2005 bankruptcy law to ask a U.S. judge in Manhattan to block all lawsuits against the funds and protect their U.S. assets during the Caymans proceedings.   The Bear Stearns cases may establish a precedent that would let other failed hedge funds liquidate in the Caymans, where judges have a track record of favoring management. The local monetary authority estimates that three out of four hedge funds globally are incorporated in the islands.    NOTE THAT THIS DOES NOT PROTECT BEAR STEARNS ITSELF AGAINST LIABILITY FOR FRAUD, CONSPIRACY, RICO CHARGES, ETC. THE ONLY WAY BEAR STEARNS ITSELF IS PROTECTED IS BY GOING INTO BK ITSELF.

Juan • August 6th, 2007 at 11:47 pm

AFFG,  Thank you, and, if you were, I don’t believe it correct to compare Germany’s early 1920s hyperinflation with the seemingly permanent though relatively low rate inflation of the last decades or what is likely going ahead. In short, there is difference between a paper money driven (hyper)inflation such as was the case in Germany immediately prior to the Stresemann government, and a credit money regime which, as debt accumulation, contains inherent limits such as ability to service. A system of credit money can provide the appearance of solidity even as it becomes increasingly ponzi-like. Still, uneven limits are reached, limits which themselves have to do with the inflation that the same credit expansion/debt accumulation has assisted in creating, so returns us to developing realization crisis and real economy deflation that I’d mentioned above.  The Fed talks a big game, helicopters and all, but provision of free money to the mass of the population would not assist real profits which is, after all, what capitalism is about. In the same vein, hyperinflation is destructive of finance capital so an unlikely policy option when that form of capital has, not just recently, captured the state.  Taking your frame of reference point, yes, I agree that, as consequence of differential currency ‘values’, there could be a ‘fire sale’ of productive U.S. assets/unproductive properties…which does not mean that there cannot be domestic deflation, only that it would be at a different rate. 

man in Hong Kong • August 7th, 2007 at 12:18 am

“NOTE THAT THIS DOES NOT PROTECT BEAR STEARNS ITSELF AGAINST LIABILITY FOR FRAUD, CONSPIRACY, RICO CHARGES, ETC. THE ONLY WAY BEAR STEARNS ITSELF IS PROTECTED IS BY GOING INTO BK ITSELF. “  To be honest, if Bear Stearns is going into BK, we will see 2,3,4,5 or more similar cases.  What do you think John Ryskamp ? 

Suecris • August 7th, 2007 at 1:36 am

The NY Times has an article today about funds in Germany collapsing (a few), or revealing larger-than-expected exposure to the U.S. MBS market (several). The problems are expected to be more widespread when all is sorted out than anyone currently realizes.   http://www.nytimes.com/2007/08/07/business/worldbusiness/07subprime.html?_r=1&oref=slogin  It was fun reading a “hot off the presses” NYT article filled with information I had already learned – from AFFG!

Anonymous • August 7th, 2007 at 1:49 am

For once I must agree with Ryskamp that liquidating the funds in the Cayman Islands is a hilarious way to stiff the bullfools who invested in them. I now incline to the view that (un)Bear(able) Stearns will probably be bought up on the cheap by some more solvent brokerage. And who might that be? Dunno, at the moment.

AFFG • August 7th, 2007 at 1:53 am

“Just as I predicted, the government will come to the rescue if need be:”  Yes well let´s do the maths then. Here a list of the banks and the liabilities they have for LBOs pending.  http://www.handelsblatt.com/news/Default.aspx?_p=300036&_t=ig_p_text&ig_xmlfile=hb_banken_kredite.xml&ig_page=1  ING Groep 6,805 Billion $ -> 19 deals pending Unicredit 8,442 Bn $ -> 24 deals pending …. Deutsche Bank 16,346 Bn -> 19 deals pending Goldman Sachs 27,849 Bn $ -> 24 deals pending Citigroup 31,087 Bn $ -> 21 deals pending Banc of America 32,755 Bn $ -> 24 deals pending JP Morgan 35,078 Bn $ -> 23 deals pending  And that does not include the Subprime bust neither does it include existing deals done in the last years which have lost a massive amount of value and which are in the books of these dear banks. With the Stock Market just going down, the write off orgy has not even started.   A senator in NY was considering putting up 300 Million $ to bail out subprime borrowers. LOL . He is going to need much more then that … and NY is doing well … 

AFFG • August 7th, 2007 at 5:11 am

Luminent has suspended payments of dividend due to “unforeseeable” refinance issues. Stock plunges 30%.  Cerberus is not buying MBSs anymore.  Aegis is not closing Mortgage requests which were in the “pipeline”. Aegis says it has problems to refinance Mortgages and is therefore pulling itself completely out of the mortgage business.  National City is not financing increases in capital either.  Fannie Mae is trying to reduce the downsides by extending it´s credit line. The problem is that the maximal credit witch may given to a person is “only” 417.000 $ and therefore problematic in regions like California.  http://www.handelsblatt.com/news/Unternehmen/Banken-Versicherungen/_pv/_p/200039/_t/ft/_b/1305242/default.aspx/hypothekenkrise-fordert-weitere-opfer.html

Guest • August 7th, 2007 at 7:45 am

U.S. Productivity Rose 1.8% Last Quarter; Labor Costs Up 2.1%  By Shobhana Chandra  Aug. 7 (Bloomberg) — U.S. worker productivity improved less than forecast last quarter as the economy rebounded, and labor costs over the last year jumped, a government report showed.

Dave Chiang • August 7th, 2007 at 8:32 am

 From Washington Times. Government supported Fannie Mae to purchase Subprime Toxic Waste from Wall Street Investment Banks. Ultimately, the US taxpayer will be on the hook for trillions in losses. http://www.washingtontimes.com/apps/pbcs.dll/article?AID=/20070807/BUSINESS/108070057/1001/METRO&template=nextpage  Fannie Mae gave hope to gloomy markets yesterday by asking regulators for permission to purchase more mortgages from struggling lenders — a move that would help to ease the worsening Wall Street credit crunch.  The possibility of a rescue from Washington came as American Home Mortgage Investment Corp. filed for bankruptcy in Delaware, becoming the second-largest mortgage lender to go under this year.  Fannie Mae’s request helped spur a 287-point jump in the Dow Jones Industrial Average, retracing a 281-point loss in the blue-chip index Friday on news of widening credit woes.  

Guest • August 7th, 2007 at 9:34 am

Thanks to the “cheap money” monetary Asset Bubble policy of the Greenspan-Bernanke Federal Reserve, who needs savings?    From Bill Fleckenstein,  http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/AmericaFollowsJapansMisguidedPath.aspx    It got me to thinking just how much the world has changed, and not for the better, due to the irresponsible behavior on the part of Alan Greenspan’s Federal Reserve over the past 20 years or so.    That essentially-free money has been part of the reckless lending and misallocation of capital that has proliferated around the planet.    I’m not going to recount all the mistakes made by Greenspan that precipitated the late-1990s equity bubble — which, suffice to say, was the biggest our country has ever seen.    After that bubble, Greenspan took a page out of the Bank of Japan’s book and lowered rates to 1%. That helped precipitate the housing bubble here that ended in 2005.    In the years since our equity bubble peaked, trillions of dollars’ worth of debt have piled up throughout corporate America. So now, as we enter recession, we will experience not just a weak economy, real-estate market and stock market, but the exacerbating effect of a mountain of bad debt, completing the analogy to Japan of the 1990s.    The mainstream news media and Wall Street aren’t interested in the big picture. Those are the folks who said subprime is not a problem. Then they said it was contained and that it wasn’t going to spread. Now that supposedly higher-quality Alt-A loans are a problem, they’re saying the same thing.    Eventually, they’re going to find out that there’s a problem in all mortgages, because people overreached to buy houses they couldn’t afford, because they believed the price would go up, as did the lenders, which is why anyone with a pulse could get money.    Hopefully, this synopsis will help readers see how the misguided money-printing policies of central banks have created a world fraught with financial risk, even as those policies have made Wall Streeters fabulously wealthy.

JMa • August 7th, 2007 at 9:38 am

Fannie and Freddie took a couple of peanuts off the top of this massive housing boom and gave them to Washington politicians and now the American taxpayer is going to pay and perhaps even scarier we head further down a path of destruction ? This is not a time to operate based on special interests. This is a time to operate based on systemic interests. Wake Up ! Where are the Leaders ? This is not a poll / lobby driven decision !

well contained • August 7th, 2007 at 9:38 am

 MSN Money … “Q2 productivity rose less than expected 1.8%; downward revisions made to last three years of data … “  THREE YEARS !? That’s either political or criminally negligent … or both.  …  How much am I enjoying all the “free” market,  ’keep-government-out-of-our-lives’  types whining and pleading for the Feds to save them ?   A LOT.  Crash & burn, you moronic, greedy, two-faced speculators. 

AFFG • August 7th, 2007 at 10:08 am

@well contained,  yes, I was a bit surprised about that to. Someone is trying to make the numbers look better than they really were.

Greenspit • August 7th, 2007 at 10:31 am

 Wall Street’s favorite mantra: “Privatize profits, socialize risks”.   There’s a Congressional hearing right now on how to bail out the banks and lenders with taxpayer money. Wall Street is also betting that Fannie & Freddie will significantly up the conforming loan size limit, purchase more subprime toxic waste, relax income/assets documentation standards, or both. 

Guest • August 7th, 2007 at 10:40 am

 Yep. More of this stuff in the pipeline:  Aug. 6 (Bloomberg) — Goldman Sachs Group Inc.’s Global Alpha hedge fund fell almost 12 percent in the two weeks ended Aug. 3, bringing this year’s decline to 16 percent after losses in stocks and bonds.   This year’s drop in the $9 billion fund, managed by Mark Carhart and Raymond Iwanowski, follows the loss of about 9 percent in 2006, said two investors in the fund….  http://www.bloomberg.com/apps/news?pid=20601087&sid=ak5AyYBt_meA&refer=home  

man in Hong Kong • August 7th, 2007 at 10:52 am

Printing money to settle the problems that have been casued by too much money…  what is the rule of the game in the usa???????????

Alex Grey • August 7th, 2007 at 11:13 am

I have noticed some comments about the idea that the economy may drift in an inflationary direction e.g. stagflation or worse. I have been thinking about these issues for some time and have waited a long time for them to surface (not wanting to appear like Chicken Little myself). Here are my opinions for what they are worth. First, with respect to stagflation, I think that this is an erroneous view based on an application of the experience of the 1970s. The main difference between then and now is that private debt relative to GDP has virtually doubled, from 109.1% in 1972 to 275.3% in 2006 (includes borrowing by Domestic Financial Sectors) . This means that the economy cannot support a rise in nominal interest rates that would result from stagflation, unlike the 1970s, when individuals were still able to increase their debt holdings as interest rates rose until interest rates shot up in the early 1980s. Second, there is a current of opinion that a country can inflate its way out of a credit crunch/financial crisis through injections of liquidity (essentially increasing M1). This is the view of Bernanke, and plays a central role in his diagnosis of the Great Depression. However, Krugman (1998) remarks that while the BOJ did succeed in increasing M1 during the 1990s, during the same time M3 continued to decline as indiviauls reduced their borrowing. So that the main effect of the BOJ purchasing long government bonds was to increase the M1 share in M3. This is a very telling observation on the effect of monetary policy in stabilising the economy (makes one think of Keynes’ opinion that monetary policy in a liquidity trap is “like pushing on a string”). Like Japan, the U.S. is likely to experience a credit contraction which the Fed will not be able to stem even by purchasing long bonds. The type of sea change that this involves cannot be counteracted by the Fed as the contraction of M3 is driven by individuals selling assets and paying off their debts and once this sentiment takes hold it would be very hard for the Fed to reverse it. Of course this is what led to the banking crisis of the 1930s i.e. Bernanke and others have the causality backwards. As for the idea of hyper-inflation, this is primarily caused by massive capital flight which would otherwise cause depression e.g. Germany in the 1920s or a number of Latin American countries. I don’t think you would see this kind of capital flight from the US economy because it would be so destabilising to the global economy that it would transmit recession-depression internationally very quickly.   Krugman, P. R. (1997), “It’s Baaack: Japan’s Slump and the Return of the Liquidity Trap”, Brookings Papers on Economic Activity, no. 2, 1998, pp. 137-87  

Anonymous • August 7th, 2007 at 12:01 pm

AFFG:  Well the total for the “deals” you indicate in the US is about 100 billion. This is peanuts for a government that spends (how many?) billions each month fighting a pointless war in Iraq.

Guest • August 7th, 2007 at 12:05 pm

American operations in Iraq now cost $12 billion a month, and the total cost of the war could reach $1.4 trillion, according to a new report from the Congressional Research Service.   And if push came to shove the government would spend on defending the economy rather than the useless war in Iraq.

Guest • August 7th, 2007 at 1:13 pm

“Fannie Mae gave hope to gloomy markets yesterday by asking regulators for permission to purchase more mortgages from struggling lenders”  A pretty remarkable development, don’t you think? When was the last time that Fannie Mae presented a clear account of all their current financial obligations. I think it’s still missing after several years … or am I wrong?  And does this recent development imply that the Fed will then buy back assets from Fannie that are based on bad mortgages, and exchange them for high-quality debt (US bonds)? That’s a pretty big injection of liquidity into the system – if that’s what’s being implied here. Who authorized such a big move?  Pete, CA

John Ryskamp • August 7th, 2007 at 1:20 pm

11:15 AM (SF):  FED TO MARKET: DROP DEAD.   This is there way of saying: liquidate liquidate liquidate. We’re circling the wagons around Washington. Are you kidding? We’re supposed to monetize $100+ trillion of bad paper? Drop dead–we’re calling out the army. Next step in the Depression.

AFFG • August 7th, 2007 at 1:25 pm

Anonymous on 2007-08-07 12:01:14,  you have a good point. BUT if the dollar is so weak then it is also due to the Irak war. Stop the war and the Dollar would skyrocket.  If you do a bailout in the magnitude of 100 Bn the Dollar will continue to fall. The 100 Billion only account for pending LBOs. The total pending credit contracts with subprime and so on is about 400 Bn with out the 800 Bn Bucks of ARMS witch are going to reset in the Home Mortgage Market in the next 18 months. So we are talking about about 1,3 Trillion Bucks which have to be recycled at about 8% or more from about 4%.   One small question about this Freddie Mac or Fannie Mae plan everybody is talking about. Who is going to buy Freddie Mac or Fannie Mae Bonds when they are to absorb all the toxic waste from the Investmentbanks? Somebody is going to have to provide the billions to these institutions. They may have state guarantees but do you remember what it the S&L bailout costed? What ever you do .. the toxic waste is there and somebody is going to have to pay for it and if it is not the investor or borrower then it will be the taxpayer. How high do taxes have to go in a country where tax increases are considered as a diabolic sin and if it is not financed by tax increases (which probably won´t) does that mean the US government is going to continue to balloon the economy with credit and a falling dollar?  What ever you do .. it doesn´t look good. Sorry.

AFFG • August 7th, 2007 at 1:31 pm

@Pete,  ”And does this recent development imply that the Fed will then buy back assets from Fannie that are based on bad mortgages, and exchange them for high-quality debt (US bonds)?”  Can they do that?

JMa • August 7th, 2007 at 1:32 pm

do you hear that ? i just heard Cramer crying… sorry buddy, your stock peddling show and books will still be ok buddy…

John Ryskamp • August 7th, 2007 at 1:37 pm

This is part of what I have said for some time now: the Federal Government is detaching itself from the society, which is exactly what it did during the Depression. The only policy of the Federal Government is: power first. Don’t even dream that YOU are included in this policy.  NEW YORK (MarketWatch) – The Federal Reserve’s newest policy statement Tuesday “may have been a disappointment to the markets, which may have expected the Fed to be more flexible on inflation,” said Michael Englund, chief economist at Action Economics. “But it was what Fed watchers were expecting.” The statement, which accompained the Fed’s decision to leave the overnight rate unchanged at 5.25% once more, said that the central bank needs more evidence to conclude that inflation has successfully moderated. “And the descrption of the problems in the credit markets is in the past tense,” he said. “This removes the need of the Fed to link the problems to its policy.”    

John Ryskamp • August 7th, 2007 at 1:39 pm

This is also a signal to the banks to shut up shop, which they will now rapidly proceed to do:   NEW YORK (MarketWatch) – Shares of U.S. financial stock indexes slipped Tuesday afternoon after the Federal Reserve left a key interest rate unchanged and kept its focus on inflation.  The Fed acknowledged that risks to growth have increased in its statement following the meeting behind closed doors.  The Amex Securities Broker/Dealer Index (XBD : amex securities broker/deale xbd News , chart , profile , more Last: 220.29-2.15-0.97%  2:37pm 08/07/2007  Delayed quote dataAdd to portfolio Analyst  Create alertInsider Discuss Financials  Sponsored by: XBD220.29, -2.15, -1.0%) slipped to off 0.2% after standing up 1.6% before the Fed comment. The Philadelphia Bank Sector Index (BKX : kbw bank index usd kbx News , chart , profile , more Last: 105.97-1.33-1.24%  2:37pm 08/07/2007  Delayed quote dataAdd to portfolio Analyst  Create alertInsider Discuss Financials  Sponsored by:  BKX105.97, -1.33, -1.2%) traded off 0.6% after being up 1.1% ahead of the Fed decision. See full story.  Many investors had hoped the Fed would modify its stance on the threats to the U.S. economy and acknowledge a role in trying calm recent market jitters caused by tightening credit and falling real estate prices.  

Guest • August 7th, 2007 at 1:58 pm

@Pete,    ”And does this recent development imply that the Fed will then buy back assets from Fannie that are based on bad mortgages, and exchange them for high-quality debt (US bonds)?”    Can they do that?   RESPONSE  The honest answer is – that I don’t know. But it seems to me that the potential losses at Fannie Mae are significant, and I don’t believe the Fed can just ignore them. Technically the Gov’t is only responsible for Ginnie Mae, but practically I can’t imagine they would tolerate a situation where things at Fannie got out of hand. So what possible alternatives are available to bail out Fannie? I’m speculating that they could take bad mortgages and essentially transfer them to Govt debt. I don’t know if there is any precedent to this … it is one type of hypothetical Gov’t bailout. The problem is the amount of debt transferred could be pretty large. Anyone have any comments?  Pete, CA

Ryan Darwish • August 7th, 2007 at 2:20 pm

Alex:  Considering the two components of stagflation, that being inflation and a recession, it appears to me the circumstances are ripe for both. The overall flavor of your argument appears to me to attribute too much of the mythical Fed power as a means of monetary control. The events you cite against stagflation occurred in a very different global economy.  As I see it, cost push inflation, driven by increasing demand for and decreasing supply of things such as energy, natural resources, agricultural products, healthcare, and even water have a groundswell from the rapidly developing countries as China, India, and the other emerging market countries. Additionally, the lower cost manufacturing advantage, in large part atributable to cheap labor, appears to be increasing labor costs. This is also an inflationary driver. If we couple that with the fact that much of what we consume is imported and purchased with dollars that are becoming worth-less, our real costs of consumption are rising. Clearly, there is much to suggest an inflationary environment.  At the same time, there is emerging the distinct likelihood of a US economic slowdown. How severe it will be is open to speculation, but it at least has the potential to be quite severe.  If we couple these together, it sure looks like a stagflationary potential to me.  Ryan Darwish Author of The Emperor’s Clothes: A look at the MegaTrends Affecting Your Financial and Investment Decisions Available at amazon.com

Guest • August 7th, 2007 at 4:11 pm

$100+ trillion of bad paper?  Please break this down, Ryskamp. Where do you get such a figure? Do you stick a wet finger toward the heavens and some vibe comes down with the number? LOL. PS The entire GDP of the USA is something like 10-11 trillion. I think you have billions and trillions mixed up.

Guest • August 7th, 2007 at 4:21 pm

Fannie and the Fed are gonna shaft the taxpayer without any KY what-so-ever. That is what is going on here.

Peter J Bolton • August 7th, 2007 at 4:23 pm

John Ryskamp: “the Federal Government is detaching itself from the society, which is exactly what it did during the Depression. “   I believe this to be a significant factor in the USA and it does seem to be strongly supported by much evidence. It is a “walled city” ideology which they – government, are probably not aware of and which certainly does have its previous instances in written history; for example in Egypt when the Hykos took over (temporarily) and the Vatican when the RCC went into walled retreat (permanently) etc, to nominate just two –   I wonder though if this is a type of socio-economic bifurcation indicating perhaps a radical change? but whatever, I believe it important to watch.

Guest • August 7th, 2007 at 4:23 pm

Here is Calif, June jobs were only 400!(June ’06 was 26K+) Negative #if you take out gov’t; housing-related has fallen off a cliff, San Diego has to be about 50% housing-related.I work for (public)builders, they are halting any new projects right & left.

Anonymous • August 7th, 2007 at 4:59 pm

Ryan,  Another thing that’s changed since the 70s, even since the early 90s, has been a (greater) financializing of many commodity prices such as those of the energy complex, with prices having less to do with real (global) economy fundamentals and more with a large influx of $$$s which has also been been seen as quite a jump in 04 and 05 trading profit in at least two of the largest financial institutions, many more CTAs, energy and/or commodity specific funds, commodity etfs, etc, driven by and combined with return-seeking momentum/trend-following behavior.   Sure, so long as someone presupposes efficient markets, which is a general supposition or at least argument, financialized commodity prices will be taken as precise or nearly precise reflections of present/near future real economy activity…while ignoring changes of price regimes which have taken place. Moreless a theory über alles sort of thing.  Ask yourself, when did the (since 2001 ICE owned) International Petroleum Exchange open the crude oil futures market, when did Nymex, when did global electronic trading platforms such as the ICE first appear,,,or, from another side, excepting part of 04, why, even though supply has been more than sufficient, price(s) have nevertheless more than doubled. People may still believe that OPEC controls but that ended in the 1980s; some people, after reading pop analyses, may even believe ‘peak oil’ has arrived, others may use such fears for their particular gain; many others, after hearing it a sufficient number of times, believe the demand-side developing world/China story…there are such a number which all help reinforce one another that reason to question drops away.  My point is not about manipulation but basic, simply that price making shifted to trade in paper (barrels, etc), or as one well known commodities analyst hinted last year, moved ‘beyond fundamentals’, from which perspective, financial crisis alone might be expected to deflate commodity prices so move contrary to ‘stagflationary’ scenarios.  I’ll end this with a quote from a 1998 Simmons Intl. paper, applicable then and moreso today:  ”For all those that fervently believe price movement always reflects fundamental changes in physical markets, the discussion in this paper bears careful reading. Our work strongly suggests that large swings in the funds’ net position in oil contracts…have driven virtually every significant movement of crude oil since the MG position was unwound in early 1994. The single exception was a brief period in the fall of 1996 when physical tightness in the market itself set the price of oil.” (To which must be added further development of OTC trading as well as interactions between off and on-exchange activities).  Recent weeks have also seen near record net long CL positions though, according to today’s Petromatrix, some of these may be problematic:  ”…from June 26 to July 31 the large speculative funds have added 67,000 fresh longs that have now gone into losses or break-even at best,..”  

John Ryskamp • August 7th, 2007 at 5:21 pm

John Ryskamp: “the Federal Government is detaching itself from the society, which is exactly what it did during the Depression. ”    I believe this to be a significant factor in the USA and it does seem to be strongly supported by much evidence. It is a “walled city” ideology which they – government, are probably not aware of and which certainly does have its previous instances in written history; for example in Egypt when the Hykos took over (temporarily) and the Vatican when the RCC went into walled retreat (permanently) etc, to nominate just two –    I wonder though if this is a type of socio-economic bifurcation indicating perhaps a radical change? but whatever, I believe it important to watch.   IT’S SIMPLE. THE FEDERAL GOVERNMENT GAVE SUBURBIA THE REINS–AND SUBURBIA BOUGHT BARBIE DOLLS. END OF SUBURBIA. SUBURBIA NO LONGER PULLS ITS WEIGHT. IT’S OVER. DO YOU THINK A BUNCH OF THUGS IN WASHINGTON AND THEIR THUG BACKERS ARE GOING TO DROWN THEMSELVES IN THE TEARS OF DISTRESSED SUBURBIA? THEY’LL SAY TO HELL WITH SUBURBIA–CALL OUT THE GUARDS. 

John Ryskamp • August 7th, 2007 at 5:22 pm

I think you have billions and trillions mixed up.   Written by Guest on 2007-08-07 16:11:31  NO I DON’T.

John Ryskamp • August 7th, 2007 at 5:27 pm

The honest answer is – that I don’t know. But it seems to me that the potential losses at Fannie Mae are significant, and I don’t believe the Fed can just ignore them. Technically the Gov’t is only responsible for Ginnie Mae, but practically I can’t imagine they would tolerate a situation where things at Fannie got out of hand. So what possible alternatives are available to bail out Fannie? I’m speculating that they could take bad mortgages and essentially transfer them to Govt debt. I don’t know if there is any precedent to this … it is one type of hypothetical Gov’t bailout. The problem is the amount of debt transferred could be pretty large. Anyone have any comments?   THEY WON’T DO A THING ABOUT IT–DREAM ON. ONCE THEY GO DOWN THE ROAD OF BUYING BAD PAPER, THEN WHAT? BAD AUTO LOANS? BAD CONSUMER CREDIT DEBT? ANY MOVE TOWARD IT SAYS THE FEDERAL GOVERNMENT IS THROWING IN THE TOWEL. THE FEDERAL GOVERNMENT IS BROWN BROTHERS HARRIMAN. DO YOU THINK THEY’RE GOING TO THROW IN THE TOWEL? THEY HAVE CONSULTED THE OUIJA BOARD (YES! THOSE STILL EXIST–AND DON’T MAKE HURTFUL COMMENTS ABOUT THEM!!) AND SUMMONED UP THE SPIRIT OF ANDREW MELLON.  GUESS WHAT THE OUIJA BOARD SPELLED OUT?  L I Q U I D A T E   And then there was a knock on the door and a voice said:   Hurry up please it’s time Hurry up please it’s time 

John Ryskamp • August 7th, 2007 at 5:31 pm

I don’t know, I already see the meathooks under their chins. Does this desperation move make YOU want to drink the Kool Aid?   Aug. 7 (Bloomberg) — Bear Stearns Cos. sold $2.25 billion of notes at yields that approach those normally demanded of high- yield, high-risk companies, paying the price for the failure of two hedge funds and the collapse of the subprime mortgage market.   Bear Stearns sold the five-year medium-term notes at a premium, or spread, of 2.45 percentage points more than the comparable U.S. Treasury, according to people familiar with the sale, who declined to be named because the terms are private. The bonds are rated A+ by Standard & Poor’s and A1 by Moody’s Investors Service, the fifth-highest investment grade.   The premium is four times as wide as that offered by New York-based Bear Stearns on a five-year note in January and 0.82 percentage point wider than the average offered by BBB rated companies, which are two steps above junk.   “Bear Stearns needs to shore up confidence and this is an attempt to do that,” said Matt Hastings, who helps manage the $1.4 billion Schwab Total Bond Market Fund at Charles Schwab & Co. in San Francisco.   ….The sale shows Bear Stearns can tap the credit markets for money, assuaging concerns that the company may be unable to raise capital, Cusser said.   “They’re capable of paying,” Cusser said. “It doesn’t look like a place going out of business anytime soon.”    IS THERE A DISCONNECT HERE?  

John Ryskamp • August 7th, 2007 at 6:09 pm

THIS ‘COMPREHENSIVE SPECIAL AUDIT’ IS GOING ON BEHIND CLOSED DOORS WITH EVERY COMPANY IN THE WORLD–AND GUESS WHAT? NOTHING BUT DISASTER.  The bank said yesterday that it formed a crisis task force led by a KfW executive and authorized PriceWaterhouseCooper to conduct a “comprehensive special audit.”   Gluder, a KfW director who was appointed to IKB’s management board on July 30, was born in 1955, spokesman Gert Schmidt said. Doberanzke was born in 1963.   IKB also announced an 80 million euro ($110 million) investment in Rhinebridge Plc to ensure the solvency of the fund, which it started in June. The bank will consolidate Rhinebridge’s $2.4 billion of investments, comprised of securities with credit ratings of A or higher.   “We decided to consolidate Rhinebrdige mainly for funding,” Schmidt, the IKB spokesman, said in an interview. “We hope it will be possible if times get better to issue commercial paper to fund Rhinebridge.”   In the statement, IKB said the bailout is a “proactive measure and an important contribution towards market stabilization.”   IKB said its board proposed eliminating the stock dividend at the next meeting of shareholders, which Schmidt said may be held in the fourth quarter. The meeting had been scheduled for Aug. 30.   IKB shares climbed 8 cents, or 0.6 percent, to 14.30 euros in Frankfurt yesterday, before the statement was released. The stock, which pays an 85-cent annual dividend, has dropped 51 percent in the past year.   

Ryan Darwish • August 7th, 2007 at 6:26 pm

Anonymous,  Very good points. I believe the baseline is, however, that we really don’t know how “financialized” commodity prices really are. Although I am not, in general, much of a believer in the efficient market dogma, it is possible that the trading of commodities could have become more efficient through the “financialization”. As distinct from other types of derivative instruments, commodities represent a “hard” asset that can be taken possession of. They also represent an asset that is in growing demand. As far as their appropriate valuation, I guess we will find out over time. In a world of fluid, volatile, and often times fictitious asset values, I find some comfort in having at least some stake in assets that are going to be needed and are in diminishing supply relative to that need.  Additionally, you make the point that “after reading pop analyses, may even believe ‘peak oil’ has arrived”. Perhaps I am misreading your point, but your representation of the idea of peak oil appears to marginalize its validity. While the point can, and is, debated, the credentials of many of the proponents of peak oil extend far beyond a “pop analysis”. A misreading of such an important concept, I believe, makes one more prone to errors of judgement when considering future valuation prospects.  Ryan Darwish

John Ryskamp • August 7th, 2007 at 6:48 pm

Re: Those flighty bankruptcy and litigation predictions of mine (where do I get this stuff?!?—hurtful!!!!!!!))  Luminent Mortgage Capital May Be On the Verge of Bankruptcy Posted on Aug 7th, 2007 with stocks: LUM   Chad Brand submits: I can hear the class action lawsuits being lined up already. On July 30th, mortgage REIT Luminent Mortgage Capital (LUM) issued a press release confirming that their 32 cent per share quarterly dividend would be paid as scheduled and not canceled, as many on Wall Street were predicting. The stock closed above $7 per share on the news. A week later on August 6th, they canceled the dividend and may be on the verge of bankruptcy, as evidenced by the stock’s more than 85 percent drop to less than a buck.  Either Luminent’s management team has no clue about their business, or there was some wishful thinking inside the company that will likely have to be defended in court. You often hear investors getting upset when companies fail to come out and deny Wall Street rumors that appear are untrue. However, in the case of Luminent it appears that even if a company does issue a statement it might not be accurate.  Now, it’s true that the mortgage-backed security [MBS] market has dried up quickly, but given the market environment, if there was any chance at all that things at Luminent could have worsened that much in a week’s time, the company really blew it by confirming the dividend. Just think how many people held on to the stock (or even bought) because of that press release.  If you own stock in any mortgage REIT, make sure you understand how quickly things can turn for them. Since they are forced pay out their income in dividends each quarter, they can’t stockpile cash for tough times. As a result, when the margin calls come there is no money there to pay, causing the stocks to be worthless nearly overnight. New Century Financial (NEWCQ) might have been the first mortgage REIT to go under, but it wasn’t the last, and Luminent won’t be either. Many think NovaStar (NFI) might be next.  

D Cheney • August 7th, 2007 at 7:23 pm

@well contained: downward revisions made to last three years of data… ”    A nice article about this here: http://www.1115.org/2007/07/27/lies-damned-lies-statistics/  @Peter J Bolton: I believe this to be a significant factor in the USA and it does seem to be strongly supported by much evidence. It is a “walled city” ideology which they – government, are probably not aware of…  The US government has ‘features’ that can be found in some previous governments but that are accomplished in a more abstract or underhanded way in the US. For example USSR controlled their news media, and everyone knew that they did so. USA runs the news media as a “soft machine” and no one seems to know that;-)  Or how about some dichotomies: a. children grow up pledging allegiance to whoever the flag represents, yet b. the government promotes a ‘keep-government-out-of-our-lives’ mentality  In other words, be loyal to your government but if daddy gets sick and you are kicked out of your house for not paying the mortgage/rent, do not expect any part of the gov’t to come and help you. You are on your own, buddy. But please remember to love your government.  Or how about this one: a. when they kid grows older they are encouraged to support their government by joining the armed forces, yet b. the gov’t has no consideration for either their own children or those of another nation when starting a war against them.  After all Saudi Arabia and Uzbekistan are not democracies but both are US allies. Neither one respects human rights but they have not been publicly denounced for that…  And how about this one: a. the government promotes a ‘keep-government-out-of-our-lives’ mentality, yet b. they seem to want all domestic spying rights that they can possibly get c. and yes, they do not mind taxing people. 

Little Al • August 7th, 2007 at 8:17 pm

Hillary’s bailout plan is quite brilliant. The duped buyers haven’t got the mathematical sense to see how meaningless this bailout is, and the educated will scoff and see it as no bailout so she’ll gain votes going both ways. Can’t we have a ticket with Hillary and W for maximum comedy?

Anonymous • August 7th, 2007 at 8:46 pm

Ryan,  Thank you for the nuanced reply.   I agree that quantifying degrees of commodity price ‘financialization’ in any precise or even near precise manner may not be possible but then that was not my point, only that such should be taken into account when considering stagflationary scenarios. Being more familiar with energy markets than, say, base metals, let me note that while, yes, crude oil for example is defintely a ‘hard’ asset, there is large divergence between trading ‘paper’ barrels and taking delivery, with only a minor fraction of the trade ever doing the latter. Delivery through Nymex (CL) contracts has for some time, years, been less than five percent; most all open interest is offset through another transaction rather than taking possesion of the underlying physical asset. Still, to the extent speculative activity drives price higher, producers are ‘incentivized’ to increase E&P and/or amounts in storage which, though I cannot even imagine the circumstances, would nevertheless be generally unable to fill ‘paper’ demand if we were to assume this all being exercised.   Clarifying. Yes, some day there may be such thing as peak global production of crude oil but, so far, methodologies and data quality/availability are inadequate, especially when they tend to ignore economic and technological change in favor of a geologic determinism. Often, true believers in near-term ‘peak oil’ engage in nothing more than ad hominem ‘arguments’ when confronted with analyses such as those which M. Lynch has performed, or in Duncan Clarke’s forthcoming book ‘The Battle For Barrels: …’ ’Pop analysis’ referred primarily to the fear mongering practiced in main stream media’s accountings; if we look at credentialized, more serious analyses, many of the same ‘what if’ flaws and biases are evident as also what strikes me as misreadings of, e.g. SPE papers.

Ryan Darwish • August 7th, 2007 at 10:29 pm

Anonymous,  I agee with your point that the ‘financialization’ of commodity valuation should be taken into account when considering the possibility of stagflation. You and I both seem to agree that breaking out the component of valuation due to ‘finanicializing’ versus true delivery demand, it seems we are only left with basically anecdotal type perpectives as to the conclusions we can be drawn. The growing demand from China, India and the other emerging market countries seems pretty convincing to me. It also seems pretty convincing that production from major fields is declining, as for example referenced by Simmons, recent data on the Cantarell Fields, declining accessibility due to geopolitical instability as in Nigeria, etc. While we may debate what the price of oil should be, it seems pretty clear that we have growing demand and constrained or declining supplies. Oil is just the one prominent example which can be a model of sorts, for other essential commodities. From this perspective alone, inflationary pressures appear growing. This is only one dimension of the inflation push. We also have increased wage demand in countries that had the low cost wage base, continued and growing monetization of the financial system to fund non-discretionary entitlements such as Medicare, Social Security, etc, funding defense appropriations, etc. While there are no perfect crystal balls, the preponderance of evidence, anecdotal though it may be, speaks rather loudly to me of a strong likelihood of a severe inflationary outcome.

Anonymous • August 7th, 2007 at 10:39 pm

Ryskamp what about Countrywide filing Bankruptcy by midweek this week? Where did you get that from?

Guest • August 8th, 2007 at 12:35 am

@well contained ,  chinese communist government will not do anything bad to the US… They are just able to kill/control the donkeys in mainland China.  No worry, US people, just keep spending, keep printing money/bonds. Chinese people are ready to absorb you.  the game is endless…

Anonymous • August 8th, 2007 at 2:39 am

Ryan,  Anecdotal it may be but a ‘risk premium’ of $20-25/barrel is likely in the ballpark.  Yes, some major fields are in decline though I would not say that Ghawar is one of these. When mentioning Simmons, were you referring to ‘Twilight in the Desert’? If so, please read Micheal Lynch’s ‘Crop Circles in the Desert: The Strange Controversy Over Saudi Oil Production’, which is downloadable and relatively short. You might also find some of Robert Mabro’s overly fair work, e.g. ‘The Peak Oil Theory’ of interest. http://www.oxfordenergy.org/comments.php  (the mentioned short paper is within the Index). Given its questionable data quality, noted by Littell at least as early as 1999, I probably should not mention the IEA 7 August ’07 release, but, well, world consumption growth rate slowed in 1h 07 and projected to be slightly lower in ’08.   Demand growth from BRIC and others is not linear. China consumption, for example, was flat in 2005 and, particularly with its greater openess and world market integration, there’s no good reason to believe it and others would escape a global slowing, recession, with obvious demand side consequences. An example might be the sequential and multi-year decline in world crude oil consumption resulting from the double slump of the early 1980s.

Guest • August 8th, 2007 at 2:51 am

stock makrets are going up, japanese yen is heading south. Subprime’s gone. Our world is safe now!!!!!!!!!!!!  Well done heliben!!!!!!!!!!!

Guest • August 8th, 2007 at 2:55 am

market turmoil a temporary shock !!!!!!!! Sure!!!  Th US is equipped with such a powerful money printing machine… Recession? No way!!!!!!!!!

Flanders fields • August 8th, 2007 at 4:41 am

# 11:29**ING: 93 PROCENT PORTEFEUILLE HEEFT RATING AAA OF AA # 11:29**ING: EXPOSURE SUBPRIME 3,2 MILJARD EURO

Anonymous • August 8th, 2007 at 4:51 am

“interestingly, when the markets are doing good, you will see little posts here.”  True. but when the markets are doing bad, you will see little posts from bulls here too.  ”Sometimes doing nothing is better than trying to fill the space.”  Jay Sigal

Guest • August 8th, 2007 at 5:15 am

“# 11:29**ING: 93 PROCENT PORTEFEUILLE HEEFT RATING AAA OF AA  # 11:29**ING: EXPOSURE SUBPRIME 3,2 MILJARD EURO   Written by Flanders fields on 2007-08-08 04:41:41″  what is that?

Anonymous • August 8th, 2007 at 8:47 am

I have just had a stunning convesation with a american CEO. He said the FED will drop intrest rates and the dollar will go UP to the Euro. He could see from my face that I had problems understanding that. As I asked him why he told me that is what he was told.   Can anybody tell me how such a senario can work out?

Ryan Darwish • August 8th, 2007 at 8:48 am

Anonymous,  Thank you for the references you offered. They look like they might be interesting. As to the “risk premium” for oil, it is unclear to me why you have suggested it in the context of discussing the possible occurrence of stagflation.  While I agree it is likely that the BRIC countries will not escape some impact from an economic slowdown in the US, if a country is growing at 10-12%, even a slowdown to 5-6% would leave a rather large demand profile with 3 billion or so potential consumers. In the context of constrained, or reduced production, that still appears to provide a continuing shift in the suppply demand pricing mechanism toward the inflationary side.

Guest • August 8th, 2007 at 9:24 am

do you guys still think the us will be in recession this year?  where are the sucking bears??

D Cheney • August 8th, 2007 at 9:28 am

ah, who cares if there’s a recession? It’s only people who suffer anyway. If that’s too much to take, folks, we can just redefine “suffer”.  ”enjoy” is henceforth the new “suffer”. “questioning” is the new “torturing”. “soft patch” is the new “recession”.

Anonymous • August 8th, 2007 at 9:43 am

@Guest on 2007-08-08 09:24:56,  The US Economy is in a recession. There still are too many fools running around the place buying stocks.   ”Truth is not determined by majority vote.”  (Doug Gwyn)  Why does everyone want to have rate cuts when the economy is blooming?

Guest • August 8th, 2007 at 10:20 am

” There still are too many fools running around the place buying stocks” maybe we can say too many navie people sold their stocks last week?  truth? who knows?

Anonymous • August 8th, 2007 at 5:19 pm

Ryan,  I mentioned what is the moreless commonly accepted ‘risk premium’ as that portion of crude’s price inflation which could most quickly evaporate during a generalizing asset price deflation, i.e. as ‘financialized’ prices begin moving to value. (‘Value’ not in the sense of neoclassical subjectivism but the older, more objective, labor theory of value which, as I might have implied above, understood that price and value are not identities but diverge over the course of the cycle. In at least one of its manifestations, this theory understood that creation of large quantities of fictitious capital, essentially claims to value production, and a rentier ‘class’, is inherent to the capital system after it reaches sufficient level of development. At that time, mid-later 19th c., economic crises generally provoked destruction of most such claims while also assisting a process of ownership centralization — the theory did not foresee the levels of credit creation as experienced over the last decades, its long-run substituting for investment capital and insufficient wage-based effective demand. It did not foresee ‘the fight against deflation’ yet nevertheless understood that this process is limited, that claims cannot, ad infinitum, expand more rapidly than that which they lay claim to)  Growth rates and development of internal demand are not identical, especially for labor surplus export dependent or monoculture nations, which can become trapped in forms of immiserizing growth. Those billions are, as you say, potential customers, a potential which anywhere near-term realization is stifled by firms and states’ struggle to hold wage bill to a minimum as well as competition driven change in capital:labor ratios…greater productivity of labor is also an at least relative reduction in the number of employees required. The whole process of job creation can be grindingly slow relative to the number of potential employees, a situation that’s been covered in Mike Davis’ recent book, ‘Planet of Slums’. In short, moving from potential customers to actual customers and then actual customers with a sufficiency of disposable income is not so automatic as many seem to assume when speaking of, or advertising, ‘giant markets’.

Alex Grey • August 9th, 2007 at 8:23 pm

Ryan,  What I am arguing is likely to happen is a deep recession with price deflation drive by a slump in aggregate demand. This will swamp any cost-push inflationary pressures. First the U.S consumer  is terribly over-extended – a major consumer retrenchment would itself so wonders for sources of cost-push inflation e.g. rising commodity prices. The economies of China and to a lesser extent India are heavily dependent on exports. Stephen Roach has been making the point for several years of how unbalanced the Chinese economy is with an investment share of GDP growth approaching 48%. This makes them highly vulnerable to a U.S. recession which will add to deflationary pressures. Minsky himself saw the dangers of credit crises leading to deflation. However his main argument why Fisherian debt-deflation (i.e falling asset markets leading to a contraction of the economy) should not occur was the presence of “Big Government” which can act to support aggregate demand and to support the financial system. However, asset market effects  stemming from a credit crunch could well be large enough to swamp government efforts to support liquidity. The actions of the ECB today are a warning of the gravity of the situation. I think Nouriel`s posting today clearly outlines the seriousness of the situation and the likely failure of efforts to support liquidity. In simple terms just think what will happen to house prices as those houses seized from insolvent borrowers are put on the market.

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Edward is a macro economist, who specializes in growth and productivity theory, demographic processes and their impact on macro performance, and the underlying dynamics of migration flows. Edward is based in Barcelona, and is currently engaged in research on aging, longevity, fertility and migration, and the impact of all of these on economic growth.

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