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Worse than LTCM: Not Just a Liquidity Crisis; Rather a Credit Crisis and Crunch

Author: Nouriel Roubini  ·   ·   › Share This Print

The global market turmoil got ugly today forcing the ECB and the Fed to inject liquidity in the financial system as the concerns about subprime, credit and debt turned into a full blown liquidity run and crisis. As in 1998 at the time of the LTCM crisis, the Fed and global central banks decided to ease monetary policy in between meetings and injected a large amount of liquidity into the system. Coming two days after the Fed tried to prevent perceptions of a “Bernanke put” by signaling in its FOMC statement no Fed easing and no bail out of the financial system, the Fed actions today are certainly ironic if necessary given the massive liquidity seizure in the financial markets.

 

But the current market turmoil is much worse than the liquidity crisis experienced by the US and the global economy in the 1998 LTCM episode.  Let me explain why. Economists distinguish between liquidity crises and insolvency/debt crises. An agent (household, firm, financial corporation, country) can experience distress either because it is illiquid or because it is insolvent; of course insolvent agents are – in most cases - also illiquid, i.e. they cannot roll over their debts. Illiquidity occurs when the agent is solvent – i.e. it could pay its debts over time as long as such debts can be refinanced or rolled over - but he/she experiences a sudden liquidity crisis, i.e. its creditors are unwilling to roll over or refinance its claims. An insolvent debtor does not only face a liquidity problem (large amounts of debts coming to maturity, little stock of liquid reserves and no ability to refinance). It is also insolvent as it could not pay its claim over time even if there was no liquidity problem; thus, debt crises are more severe than illiquidity crises as they imply that the debtor is insolvent, i.e. bankrupt, and its debt claims will be defaulted and reduced. In emerging market crises of the last decade, we had liquidity crises (i.e. a solvent but illiquid sovereign) in Mexico, Korea, Brazil, Turkey; we had debt/insolvency crises (a sovereign that was both illiquid and insolvent) in Russia, Ecuador, Argentina.

 

The 1998 LTCM crisis was mostly a liquidity crisis: the US was growing then at 4% plus, the internet bubble had not burst yet, we were in the middle of the “New Economy” productivity boom, households were not financially stretched and corporations were not financially stretched with debt either.  In spite of those sound and solvent fundamentals the collapse of Russia – a country then with the GDP of a country such as the Netherlands – caused a global liquidity seizure and crisis of the type experienced by credit markets in the last few weeks: sudden demand for cash liquidity, sharp increase in the 10 year swap spread, sharp increase in the VIX gauge of investors’ risk aversion, liquidity drought in the interbank and euro-dollar market, deleveraging of highly leveraged positions, reversal of the yen carry trades. With the exception of the credit event in Russia, this was not a credit/insolvency crisis. And since it was a liquidity crisis the Fed easing – 75bps – was successful in restoring in a matter of weeks calm and liquidity in financial markets.  Even that liquidity episode had painful credit fallout: it is not remembered by most but the entire subprime mortgage industry went bankrupt in 1998-99 following the LTCM liquidity crisis.  So a liquidity shock event triggered massive credit events then.

 

Today we do not have only a liquidity crisis like in 1998; we also have a insolvency/debt crisis among a variety of borrowers that overborrowed excessively during the boom phase of the latest Minsky credit bubble.

 

First, you have hundreds of thousands of US households who are insolvent on their mortgages. And this is not just a subprime problem: the same reckless lending practices used in subprime – no downpayment, no verification of income and assets, interest rate only loans, negative amortization, teaser rates – were used for near prime, Alt-A loans, hybrid prime ARMs, home equity loans, piggyback loans. More than 50% of all mortgage originations in 2005 and 2006 had this toxic waste characteristics. That is why you will have hundreds of thousands – perhaps over a million – of subprime, near prime and prime borrowers who will end up in delinquency, default and foreclosure. Lots of insolvent borrowers.

 

You also have lots of insolvent mortgage lenders – not just the 60 plus subprime ones who have already gone out of business – but also plenty of near prime and prime ones. AHM – that went bankrupt last week – was not exposed mostly to subprime; it was exposed to near prime and prime. Countrywide has reported sharp losses not only on subprime lending but also on prime ones.  So on top of insolvent households/mortgage borrowers you have plenty of insolvent mortgage lenders, subprime and – soon enough  – near prime and prime.

You will also have – soon enough – plenty of insolvent home builders. Many small ones have gone out of business; now it is likely that some of the larger ones will follow in the next few months. Beazer Homes – a major home builder – last week had to refute rumors of its impending insolvency; but so did AHM a few weeks before its insolvency. With orders for home builders falling 30-40% and cancellation rates above 30% more than a few home builders will become insolvent over the next year or so.

 

We also have insolvent hedge funds and other funds exposed to subprime and other mortgages. A few – at Bear Stearns, in Australia, in Germany, in France – have already gone bankrupt or are near bankrupt. You can be sure that with at least of $100 billion of subprime alone losses – and most losses are still hidden given the reckless practice of mark-to-model rather than mark-to-market – many more will go belly up. In  the meanwhile the CDO, CLO and LBO market have completed closed down  – a “constipated owl” where “absolutely nothing moves” the way Bill Gross of Pimco put it. This is for now a liquidity crisis in these credit markets; but credit events will occur given that the underlying problem was not of of liquidity but rather one of insolvency: if you take a bunch of to-be-defaulted subprime and  near prime mortgages and you repackage them into RMBS and then these RMBS are repackaged into various tranches of CDOs, the rating agencies may be using magic voodoo to turn those junk BBB- mortgages into AAA tranches of CDOs; but this is only voodoo as the underlying assets are going to be defaulted on.

 

Moreover, the recent sharp widening in corporate credit spreads is not just a sign of a liquidity crunch; it is a sign that investors are realizing that there are serious credit/solvency problems in some parts of the corporate system. Ed Altman, a colleague of mine at Stern, is recognized as the leading world academic expert on corporate defaults and distress. He has argued that we have observed in the last few years record low default rates for corporations in the U.S. and other advanced economies (1.4% for the G7 countries this year). The historical average default rate for US corporations is 3% per year; and given current economic and corporate fundamentals the default rate should be – in his view –  2.5%. But last year such corporate default rates were only 0.6%, i.e. only one fifth of what they should be given firms’ and economic fundamentals. He also noted that recovery rates – given default – have been high relative to historical standards. 

 

These low default rates are driven in part by solid corporate profitability and improved balance sheets. In Altman’s view, however, they have also been crucially driven – among other factors – by the unprecedented growth in liquidity from non tradit
ional lenders, such as hedge fund and private equity. Until recently, their demand for corporate bonds kept risk spreads low, reduced the cost of debt financing for corporations and reduced the rate of defaults. Earlier this year Altman argued that this year “hot money” from non traditional lenders could move to other uses for a number of reasons, including a repricing of risk. If that were to occur, he argued that the historical patterns of default rates – based on firms’ fundamentals – would reassert itself. I.e. we are not in a new brave world of permanently low default rates. He said: “If we observe disappointing returns to highly leveraged and rescue financing packages, some of the hedge funds may find it difficult to cover their own loan requirements as well as the likely fund withdrawals. And broker-dealers who are not only providing the leverage to the hedge funds but whom are also investing in similar strategy deals will recede from these activities.” The same could be said of the consequences of the unraveling of some leveraged buyouts. Altman suggested that triggers of the repricing of credit risk could also be “disappointing returns to highly leveraged and rescue financing packages”. So he argued that the unraveling of the low spreads in the corporate bond market could occur even in the absence of changes in US and/or global liquidity conditions.

 

Thus, until recently the insolvent firms in the corporate sectors included corporations that could service their debt only by refinancing such debt payments at very low interest rates and financially favorable conditions. Many firms, under normal liquidity conditions, would have been forced into distress and debt default (either of the Chapter 7 liquidation form or Chapter 11 debt restructuring form) but were instead able to obtain out-of-court rescue and refinancing packages because of the most easy credit and liquidity conditions in bubbly markets.  Now that we are observing a liquidity and credit crunch and a vast widening of credit spread you will observe a sharp increase in corporate defaults and a further risk in corporate risk spreads.

 

Insolvent and bankrupt households, mortgage lenders, home builders, leveraged hedge funds and asset managers, and non-financial corporations. This is not just a liquidity crisis like in the 1998 LTCM episode. This is rather a liquidity crisis that signals a more fundamental debt, credit and insolvency crisis among many economic agents in the US and global economy. Liquidity runs can be resolved by the liquidity injections by a lender of last resort: in the cases of the liquidity crises of Mexico, Korea, Turkey, Brazil that international lender of last resort was the IMF; but in the insolvency crises of Russia, Argentina, and Ecudaor the provision of the liquidity by the lender of last resort – the IMF – only postponed the inevitable default and made the eventual crisis deeper and uglier. And provision of liquidity during an insolvency crisis causes moral hazard as it creates expectations of investors’ bailout.  Thus, while the Fed and the ECB had no option today but to provide massive liquidity in the presence of a most severe liquidity crunch and run, they should not delude themselves that this liquidity injections can resolve the deep insolvency problems of many overstretched borrowers: households, financial institutions, corporates. Insolvency/credit crises lead to financial and economic distress – hard landing of economies – and cannot be resolved with liquidity injections by a lender of last resort. And now the vicious circle of a weakening US economy – with a housing recession getting worse and a fatigued consumer being at the tipping point – and a generalized credit crunch sharply has increased the probability that the US economy will experience a hard landing. We are indeed at a “Minsky Moment” and this recent financial turmoil is the beginning of a much more serious and protracted US and global credit crunch. The risks of a systemic crisis are rising: liquidity injections and lender of last resort bail out of insolvent borrowers – however necessary and unavoidable during a liquidity panic-  will not work; they will only pospone and exacerbate the eventual and unavoidable insolvencies.

 

Thursday evening update:

Countrywide, the US largest mortgage lender, announced that it faces “unprecedented disruptions” in the debt market and secondary market for mortgages that ”could have an adverse impact on the company’s earnings and financial condition, particularly in the short-term.” Same for WaMu. This is a serious and scary development. As reported by Reuters:

 

Two of the largest U.S. providers of home loans, Countrywide Financial Corp (CFC.N: Quote, Profile, Research) and Washington Mutual Inc (WM.N: Quote, Profile, Research), on Thursday said difficult mortgage market conditions are likely to hurt operations in the near term.

Countrywide, the largest mortgage lender, said it faces “unprecedented disruptions” in the debt market and secondary market for mortgages. It said these “could have an adverse impact on the company’s earnings and financial condition, particularly in the short-term.”

Washington Mutual, the largest U.S. savings and loan, said liquidity in the market for less-than-prime home loans and securities backed by the loans has “diminished significantly.” It said that while this persists, its ability to raise liquidity by selling home loans will be “adversely affected.”

The lenders offered their assessments in quarterly reports filed with the U.S. Securities and Exchange Commission.

 

Filed under: Uncategorized

379 Responses to “Worse than LTCM: Not Just a Liquidity Crisis; Rather a Credit Crisis and Crunch”

John Ryskamp • August 9th, 2007 at 11:21 am

But the dollar rose against major European currencies, benefiting from safe-haven flows following the BNP announcement. Many analysts say the U.S. dollar is still considered the dominant and most liquid currency in the world.  ”Ironically enough, this doomsday scenario would likely benefit the U.S. dollar — the epicenter of the sub-prime mess — as the greenback would become bid on safe haven flows,” Schlossberg said. Thursday’s price action “is a good example of this dynamic at work.”   And so it will be. But who will have a dollar? And who will ride the General’s white horse? 

John Ryskamp • August 9th, 2007 at 11:25 am

Why don’t you just face it? America is declining because it has no new social policies. And where is it supposed to get them? Our political system has been taken over by the Mafia.  Soon the Fed will come out and say that it has limited power to intervene. Then all hell will break loose.   The powers that be want the Federal Government to liquidate its positions, a la Andrew Mellon. That is exactly what it is doing, and exactly what I said it has been doing since about June/July 2006. It’s circling the wagons.

John Ryskamp • August 9th, 2007 at 11:30 am

For a second straight day, President Bush emphasized the health of the nation’s economy Thursday, even as stocks traded sharply lower over fresh concern about credit markets. The U.S. economy remains “the envy of the world,” enjoying low unemployment and inflation, Bush said during a news conference at the White House.  ”I am told there is enough liquidity in the system to allow markets to correct,” Bush said. The Federal Reserve and the European Central Bank injected some $150 billion in liquidity earlier Thursday.  This means that he understands that there will soon be Bushvilles all over America. Read Herbert Hoover’s statements on the economy after the crash. He said exactly what Bush is saying now.  The powers that be are willing to have 300 million people starve. Impossible in today’s political situation. Suburbia will start a civil war.

John Ryskamp • August 9th, 2007 at 11:44 am

“I am told there is enough liquidity in the system to allow markets to COLLAPSE,”   That is precisely correct. Sick, eh? 

man in Hong Kong • August 9th, 2007 at 11:49 am

“I am told there is enough liquidity in the system to allow markets to COLLAPSE,”    That is precisely correct. Sick, eh?   YES, HE AND HIS TEAM ARE SICK. THEY MADE IT! THEY GOT TOO MUCH MONEY TO THROW, TOO MUCH TROOPS TO GIVE UP. YOU THE US PEOPLE MADE HIM.

John Ryskamp • August 9th, 2007 at 11:51 am

“Subprime problems have now gone global,” said Kathy Lien, chief strategist of DailyFX.com. The damage “is no longer limited to just small banks and mortgage lenders, but is now hitting Tier 1 banks around the world.”   I love everything and everyone.  P.S. You can stick a fork in Hong Kong. It’s done. 

John is a sucker • August 9th, 2007 at 12:01 pm

John isahump — You need some sleep son.  You sound like the whole worlds responsibilities lie on you. You shouldnt be so concerned. Mind your business and get lost.

John Ryskamp • August 9th, 2007 at 12:18 pm

Dreadful action in Treasuries. This is it.  Disaster in Black Mesa. Also note their comments. Horrific.

Guest • August 9th, 2007 at 12:30 pm

Black Mesa hedge fund warns of massive portfolio liquidation    By Alistair Barr  Last Update: 1:03 PM ET Aug 9, 2007      SAN FRANCISCO (MarketWatch) — Black Mesa Capital, a hedge fund firm that uses computer models to track down arbitrage opportunities, has told investors that at least one very large hedge fund or investment bank is liquidating “massive” trading portfolios, according to a letter the Santa Fe, NM-based firm sent to investors on Wednesday. That’s causing disruptions and triggering losses among other so-called market-neutral hedge funds, Black Mesa said in its letter, a copy of which was obtained by MarketWatch on Thursday. “Clearly, something is amiss in the markets that few in our strategy, if anyone, have experienced before,” Black Mesa wrote. The firm’s hedge fund is down roughly 7.5% in August, through Aug. 7 and could be down as much as 10% since then, Black Mesa noted. The Wall Street Journal reported on Thursday that a hedge fund run by Goldman Sachs (GS : Goldman Sachs Group, Inc  News , chart , profile , more  Last: 182.86-10.44-5.40%    12:49pm 08/09/2007    Delayed quote dataAdd to portfolio  Analyst  Create alertInsider  Discuss  Financials  Sponsored by:  GS182.86, -10.44, -5.4%) called the North American Equity Opportunities fund has sold some of its positions recentl  

man in Hong Kong • August 9th, 2007 at 12:31 pm

” down 3500 points today” could be offering a chance to reengineering the USA… good idea!

Guest • August 9th, 2007 at 12:42 pm

The dow should finish lower by 405 points today if thing get priced the way they should and no manipulation exists

John Ryskamp • August 9th, 2007 at 12:55 pm

Know what the market should really be?  Dow 1250 NASDAQ 300 S&P 125  Look how far we have to fall.

John Ryskamp • August 9th, 2007 at 12:56 pm

Look at this:   ”The ECB move shows that interbank financing is drying up. The banks don’t trust each other any more,” Heino Ruland, a strategist at Steubing AG in Frankfurt.  

John Ryskamp • August 9th, 2007 at 1:01 pm

The Fed itself has about one hour to announce that it is stepping in to do an orderly liquidation of funds. That will signal a change in social policy. Otherwise, it’s completely over.

Guest • August 9th, 2007 at 1:12 pm

The dollar is actually up today. This shows the Fed they can ease and the dollar will not be hurt. It is still the reserve currency of the world and other countries will buy the dollar to their flight to quality and Treas bonds.

John Ryskamp • August 9th, 2007 at 1:14 pm

Next watch the yen start falling, reflecting the fact that the underlying global economy has ground to a halt. Japan has NOTHING.

John Ryskamp • August 9th, 2007 at 1:21 pm

AS I SAID BEFORE, THIS SORT OF LAWSUIT IS NOT, I THINK, SUBJECT TO THE CAYMANS THANG, EVEN IF THAT SUCCEEDS. IT IS SUITS LIKE THE ONE BELOW WHICH WILL DRIVE B.S. INTO BANKRUPTCY. I DON’T KNOW IF THIS IS A RICO SUIT (TREBLE DAMAGES).  NEW YORK, Aug 9 (Reuters) – A large investor in one of the two Bear Stearns hedge funds that recently collapse has filed a lawsuit against the investment bank accusing its managers of taking only “meager steps” in the face of crisis.  New York-based investment firm Navigator Capital Partners L.P. filed the lawsuit this week in a New York state court in Manhattan. The complaint names Bear Stearns Cos (BSC.N: Quote, Profile , Research), its asset management division and the High-Grade Structured Credit Strategies hedge fund.  ”Defendants failed to disclose to investors the significant challenges facing the partnership, and the meager steps they were taking to face those challenges, while at the same time reaping substantial fees,” the lawsuit said.  Bear Stearns Asset Management made more than $13.3 million  

Anonymous • August 9th, 2007 at 1:23 pm

Bush against lifting Fannie, Freddie mortgage cap Says reform of government-sponsored mortgage buyers needs to come first By Robert Schroeder, MarketWatch Last Update: 12:26 PM ET Aug 9, 2007 

Anonymous • August 9th, 2007 at 1:32 pm

what about sovereign funds? (2trillion est)  On July 25th Alistair Darling, Britain’s chancellor of the exchequer, said that Britain would resist any calls for protectionism arising from worries about sovereign-wealth funds, as long as the governments that backed them kept their markets open. If they want things to stay that way, the funds should open up too. 

John Ryskamp • August 9th, 2007 at 1:42 pm

Two hedge fund investors who didn’t want to be identified said on Thursday that the current turmoil is reminiscent of the collapse of Long-Term Capital Management in 1998.  That giant hedge fund had some arbitrage positions based on the historical relationship between related securities. It made bets about the relationship between the prices of government securities from around the world. When Russia defaulted and devalued its currency the ruble, there was a flight to quality that caused the prices of U.S. Treasury securities to spike.  LTCM collapsed amid such rapid market dislocation and had to be bailed out by several of the world’s largest investment banks as part of a plan organized by the Federal Reserve.   This is LTCM X 13750. 

JMa • August 9th, 2007 at 1:44 pm

PG MCD and KO up for now… Historical fact, no single stock is exempt from the selling in a correction of the overall market – let alone a crash…  admittedly this is an empty post containing very little – i figured after Ryskamp’s 100th post I could let one fly…

Anonymous • August 9th, 2007 at 1:52 pm

The Bank of Canada issued a statement Thursday saying it would “provide liquidity to support the stability of the Canadian financial system” as part of its “normal operational duties.”  The central bank said it had intervened Thursday to the tune of $1.455 billion by buying government securities from market participants, and would sell them back the next day.   ”The result is that we are providing cash (or liquidity) to the overnight market,” Bank of Canada spokesperson Jeremy Harrison said in an e-mail.   

John Ryskamp • August 9th, 2007 at 1:56 pm

Robert Brusca, chief economist at FAO Economics and a former New York Federal Reserve Bank official, saw the move was an aggressive attempt to boost liquidity.  ”It seems to me, based on my experience, that this is meant to be a liquidity injection and doesn’t come out of the needs for monetary policy,” he said.  Before it provided the loans, the ECB had said it was prepared to meet all the requests that banks made.   THIS IS NOT ‘LIQUIDITY’–AND IT ONLY MAKES LIQUIDITY CONTRACT. IT IS SIMPLY BAILING OUT YOUR HIT MAN AND SAYING HE’S INNOCENT. HOW RIDICULOUS. 

John Ryskamp • August 9th, 2007 at 1:57 pm

The Bank of Canada issued a statement Thursday saying it would “provide liquidity to support the stability of the Canadian financial system” as part of its “normal operational duties.”    The central bank said it had intervened Thursday to the tune of $1.455 billion by buying government securities from market participants, and would sell them back the next day.    ”The result is that we are providing cash (or liquidity) to the overnight market,” Bank of Canada spokesperson Jeremy Harrison said in an e-mail.   RIDICULOUS CANADA, THIS EMPTY SHOE.     

John Ryskamp • August 9th, 2007 at 1:59 pm

By the way, I’ve never gotten a convincing explanation as to why Canada exists. Shouldn’t it properly be seen as an example of extraterritoriality enforced by large corporations?

John Ryskamp • August 9th, 2007 at 2:01 pm

“Folks are nervous – the question is whether investors will look beyond the valley of subprime to the peaks ahead. That’s the quandary that investors are going through,” said Al Goldman, chief strategist at AG Edwards.   HA HA! LISTEN TO THIS HYENA! 

AC • August 9th, 2007 at 2:03 pm

Whenever stocks suffer a substantial loss, the US dollar strengthens a bit against the euro. Does anyone know the reason?

John Ryskamp • August 9th, 2007 at 2:11 pm

Whenever stocks suffer a substantial loss, the US dollar strengthens a bit against the euro. Does anyone know the reason?   It’s regarded as a flight to safety. And it IS a flight to safety–as long as there IS safety.  But there is no more safety. So these investors will “put in at every stop down the river,” as we say down south. They’ll lose everything–and then wonder why they don’t have anything when the dollar is so strong.   Just like 1931.  As Chevy would say, isn’t it ‘ironic’? 

John Ryskamp • August 9th, 2007 at 2:13 pm

nafta wears the shoes   NAFTA=FOURTH REICH  OR RATHER  NAFTA + EC = FOURTH REICH  ANY ADDITIONS TO LEFT SIDE OF EQUATION?

Guest • August 9th, 2007 at 2:13 pm

The bears got the dow through 13,400 and now there’s a fight-a-brewin!!! The PPT will try and hold this level becuase it is technically signifcant. Pull up a chair, grab some popcorn and a beverage cause this is gonna be good. Like I said, if the PPT lets this alone, the dow should close down over 400 pts today

Guest • August 9th, 2007 at 2:20 pm

nafta wears the shoes    NAFTA=FOURTH REICH    OR RATHER    NAFTA + EC = FOURTH REICH    ANY ADDITIONS TO LEFT SIDE OF EQUATION?   yo,… John RyskampINSANE

well contained • August 9th, 2007 at 2:25 pm

 Not to worry ! Containment is well contained !   MSN is posting some gems today:   Not only did French bank BNP Paribas suspend withdrawals from three of its funds due to subprime woes, but the fact that its CEO reportedly said just last week that the bank’s exposure to U.S. subprime was “absolutely negligible” has proven even more unsettling …  …  The most liquid commodity in the world is BS !  LOL … (but not nearly as bearish as JR) …  

John Ryskamp • August 9th, 2007 at 2:31 pm

“There is a short term liquidity problem in the commercial paper market,” said Irene Tse, co-head of U.S. interest rates trading at Goldman, Sachs & Co. in New York. “Both the asset- backed CP market and Tier 2 CP market spreads are continuing to widen and maturities shortening.”    STEP TWO, RIGHT ON SCHEDULE. BAN HOUSING EVICTIONS NOW.  

Anonymous • August 9th, 2007 at 2:33 pm

The Credit Crunch means little about liquidity. Why even inject which won’t work? Looks like the economy had a mini-stroke in July. Continued into Augest. No doubt the credit crunch in play.

John Ryskamp • August 9th, 2007 at 2:39 pm

THIS REVOLTING LITTLE COMMODITY WILL SINK TO $3:   Last Update: 3:35 PM ET Aug 9, 2007   NEW YORK (MarketWatch) — Crude-oil futures fell Thursday, extending a losing streak that began last week, as fresh credit-market worries prompted a sharp sell-off on Wall Street and reinforced concerns that a slowdown in economic growth might lower energy demand.  ”Technical selling and a continued exit from the long side for funds” prompted the decline in crude, said Zachary Oxman, senior trader at Wisdom Financial, in emailed comments.  ”Many players today were liquidating to avoid margin calls and you saw a lot of money come out of

Guest • August 9th, 2007 at 2:41 pm

Your absolutely right, this is now a confidence problem. Cent Banks can throw all the money they want at this but if everyone is forzen and refuses to lend, it won’t matter.

Guest • August 9th, 2007 at 2:47 pm

IMHO, this is THE most dangerous position the US has been in from an economic standpoint since the great depression. Once fear an dpanic get instilled into every day news, the consumer will clam up and we got real trouble!

Guest • August 9th, 2007 at 2:59 pm

Another $43 billion in loan deals pulled in past two weeks  By Murray Coleman Last Update: 3:55 PM ET Aug 9, 2007   SAN FRANCISCO (MarketWatch) — In the past two weeks, another 13 corporate loan or bond deals have been postponed or reduced, representing just under $43 billion, in new research released Thursday by Baring Asset Management. The total number of deals pulled since June 22nd now stands at 46, analysts at the firm said, valued at more than $60 billion. That compares to last year where there were no pulled deals counted

Anonymous • August 9th, 2007 at 3:00 pm

Time for the 2:30 rally. Watch DJIA finish green. Written by Jason B on 2007-08-09 13:00:19  Remind me not to buy stocks from anybody named Jason B.

John Ryskamp • August 9th, 2007 at 3:08 pm

Time for the 2:30 rally. Watch DJIA finish green. Written by Jason B on 2007-08-09 13:00:19  BULLETIN DOW INDUSTRIALS FALL 380 POINTS; YEAR’S SECOND-WORST SESSION ENDS AT ITS LOW Late volatility deepens dive   JASIE HONEY, HOW’S LIFE ON PLANET WEIRD, MY LITTLE DINGLEBERRY?

Anonymous • August 9th, 2007 at 3:08 pm

If the FED cuts it will have to cut to ZERO if it wants to achieve anything at all (Which it will not!) and then the Dollar will go to ZERO, NULL, NOTHING, END, AUS, TERMINER, …

GGrzegorz Taraszkiewicz-Sirock • August 9th, 2007 at 3:10 pm

I answer AC….  Why USD rises when US stocks are being sold?  We’ve agreed an answer with my very clever friend who was an economist in one of big european banks.  It’s all about positioning.  EUR/USD generally rising for last few months or even years.  It’s natural taking prospects of interest rates differencials between USD an EUR.   This trade also gave big profits to hedge funds and other participants during low volatility periods.   Also natural is that rise of market volatilities globally pushes take profits.   So this is a reason.  Rising USD is a function of market’s volatility.   Cheers     

John Ryskamp • August 9th, 2007 at 3:12 pm

Your absolutely right, this is now a confidence problem. Cent Banks can throw all the money they want at this but if everyone is forzen and refuses to lend, it won’t matter.   Written by Guest on 2007-08-09 14:41:40   THAT’S RIGHT. THE BANK’S ARE NOW ON STRIKE. THEY WILL BEGIN TO LEND AGAIN ONLY ONCE THE UNITED STATES ANNOUNCES A BAN ON HOUSING EVICTIONS. UNTIL THEN, YOU WILL, DAY BY DAY, LOSE EVERYTHING YOU HAVE. NICE, EH?  AND WHY WON’T THE FEDS THROW MONEY AT THEM? BECAUSE THAT WAS NOT THE POINT OF NEW DEAL LEGISLATION. THE POINT OF NEW DEAL LEGISLATION WAS TO MAKE THE BANKS A MATTRESS BETWEEN THE CAPITOL BUILDING AND THE UNEMPLOYED.  THROWING MONEY AT THE BANKS MOVES THE FEDERAL GOVERNMENT CLOSER TO BECOMING THE BANKS. THAT MOVES THE MATTRESS OUT OF THE WAY AND POSES THE FEDERAL GOVERNMENT DIRECTLY IN FRONT OF THE AVANT GARDE.  ELEANOR AND HER COFFEE WON’T HANDLE THINGS THIS TIME. THE NOSTRUMS OF FRANKLIN ROOSEVELT AND NOT SUITED IN ANY WAY TO THIS CRISIS, ANY MORE THAN THE NOSTRUMS OF ABRAHAM LINCOLN WERE SUITED TO THE DEPRESSION. WE MUST THINK ANEW, AND THEN WE WILL SAVE OUT COUNTRY.  TRY THINKING THIS:  TO BE HUMAN IS TO BE HOUSED.   PROCEED IN YOUR ECONOMIC THINKING FROM THAT POINT.

Guest • August 9th, 2007 at 3:12 pm

And remind me to buy stocks from this guy:  ”The dow should finish lower by 405 points today if thing get priced the way they should and no manipulation exists Written by Guest on 2007-08-09 12:42:51″

Guest • August 9th, 2007 at 3:16 pm

I really think that Ryskamp (and his one note tune) needs to be banned from the comments section. He is sucking the life out of this forum.

John Ryskamp • August 9th, 2007 at 3:20 pm

I really think that Ryskamp (and his one note tune) needs to be banned from the comments section. He is sucking the life out of this forum.   Written by Guest on 2007-08-09 15:16:06  MY ONE NOTE TUNE IS REALITY, AND YOUR COMMENTS SUCK THE REALITY OUT OF LIFE. GET ONE.

AFFG • August 9th, 2007 at 3:21 pm

“It’s regarded as a flight to safety. And it IS a flight to safety–as long as there IS safety. “  THAT IS HORESE SHIT! In 1931 it was saftey. Today it is a problem! The Euro goes down when the stock markets in Europe go down because the American Banks and Funds are selling their assets to make them to Euros and then convert them to Dollars. That is dollar supportive, everytime things calm down the Americans cool off and start buying the indexes again … and the Euro goes up again! The Indexes which are mostly invested by americans fall harder then others. (Example the DAX and the CAC40).  That is why the Dollar will collapse if the FED cuts rates. That is why Bernanke did not want to signal a rate cut, because he can´t but I believe that at one point he will have to!

John Ryskamp • August 9th, 2007 at 3:22 pm

And you know, it wasn’t NEARLY the rout it should have been. What is it exactly our sick gentlemen are preserving?

Anonymous • August 9th, 2007 at 3:24 pm

The dot.com recession was caused by the Nasdeq’s bust from the tech’s imploding coupled with a manufacturing base in far overcapacity from a decade long boom. It actually was the lack of a credit crunch that kept consumer spending going and dulled the bust’s effect.   This reminds me more of 1990. That was the last credit crunch recession. Not a overly awfull one, but a argueably the last true recession.   Debt servicing is overwhelming actual debt. That is a problem and has triggered a credit crunch. Nobody wants to lend money because they worry about taking a loss. This could be a short, but very sharp recession.

AFFG • August 9th, 2007 at 3:31 pm

“THIS IS NOT ‘LIQUIDITY’–AND IT ONLY MAKES LIQUIDITY CONTRACT. IT IS SIMPLY BAILING OUT YOUR HIT MAN AND SAYING HE’S INNOCENT. HOW RIDICULOUS.”  It IS providing liquidity … only until tomorrow!  If we get a second blast of liquidity tomorrow .. then we will know how bad it is.  The ECB only gives them 24 hours after that they have to come back and pay the 100 Billion back … plus intrest … and that means the banks have to SELL!

Grzegorz Tarasakiewicz-Sirocki • August 9th, 2007 at 3:33 pm

Banks are cutting money market lines – that is true.  At this stage any government or CB verbal or real interventions wont work untill   market finds it’s equilibrum’s by itselve.

Rich H • August 9th, 2007 at 3:38 pm

JR, I’m betting Jason B was speaking tongue in cheek. He understands the scenario far better then you, but I believe his sarcasm was aimed at the PPT.

Rich H • August 9th, 2007 at 3:48 pm

…and one more thing JR. Enough of the “like I said” crap. If you make 40 preictions in all different directions, and 2 of them turn out right, you’re not predicting, you’re just confirming a couple of accidentally right guesses!  You’re on a blog filled with people who understand how grave things are. That’s why we’re here you idiot! Misery loves company! So you’re not saying anything we don’t know or think. EVER!!! You’re just trying to spread panic amonst a “bear crowd” which is pointless.   I’m actually beginning to wonder if you’re actually a wolf in sheeps clothes. (or should I say “Bull in Bears clothes”) and maybe your trying to spread fear via the internet to help “shorts” that you’ve got out on the market??? Maybe an investigator needs to take a look at your portfolio? (I’m pretty sure that kind of manipulation is illegal, and can make someone liable for damages??? Based on some email stock bashing that was busted a couple years ago.)   I hope that’s not the case?!?!? …because we’d miss your annoying posts. (RGEMonitor might be “block” in some jails???)

Guest • August 9th, 2007 at 3:52 pm

Ryskamp, why not give it a rest and shut up? You are becoming more than obnoxious. Toxic/obnoxious. Things may be bad, but nothing nothing is as bad as your doomsday nonsense. Go away.

Juan • August 9th, 2007 at 4:50 pm

Nouriel,  Nice post but I believe sharp distinctions between liquidity and solvency should, perhaps, not be made if we consider that liquidity can freeze, producing de facto insolvency…’freeze’ brought on through the artic air mass of risk recognition.

Jason B • August 9th, 2007 at 5:36 pm

These apocalyptic fantasies are juvenile. So is this DJIA and short term investment focus. This is not a get rich quick blog, this is an economics blog. Try looking at things from a macro view. Hedge funds, and maybe some other funds, are stuck with CDO’s and mortgage ponds that no-one will buy. We are just seeing the beginning of sub-prime ARM resets, which will go on for another year. http://www.irvinehousingblog.com/wp-content/uploads/2007/03/reset.PNG Assuming that the sub-prime arm resets are what caused the credit crisis, this is bound to get worse before it gets better. But the truth is in the perception. The truth is that the CDO’s still generate income. Some tranches will go to zero, but it isn’t the end of the world. Some investment banks who took on risky debt will have losses. But accounting regulations have already been re-written to help them out. Some builders will go bankrupt. Some people won’t be able to re-finance and will lose their homes and rent. Consumer spending will go down, and retailers and consumer based economies (China) will be hurt. China was growing too fast anyway, and people don’t need all that cheap crap. When this perception becomes mainstream, when ratings are trusted again, when underwriting is respected, credit will loosen up. Until then, things will be volatile. Probably for a year, while ARMS reset. This is not a French revolution scenario. People in the suburbs are not going to starve. “They” won’t build walls around DC and call out the troops. The staples and necessities of life will get more expensive for J6P, and people will grumble. Terrorists may see this as an opportune time to attack. Life will go on. Many people won’t even notice the difference.  Settle down, Ryskamp.  

John Ryskamp • August 9th, 2007 at 5:40 pm

Ridiculous. Look at reality. Banks are staring at financing $400 billion in short term loans, and NO ONE is interested in taking them. Will banks loan to anyone else? No way. This is a much sharper wake-up call even than the banks got in 1930. Banks will shut up shop. Businesses will contract completely in response.  Run your answer past a banker. He’ll think you just stepped out of Disneyworld.  By the way, hot shot, how’s the market going to do tomorrow?

John Ryskamp • August 9th, 2007 at 5:43 pm

Black Mesa Capital, a hedge-fund firm that uses computer models to track down investment ideas, said that at least one large hedge fund or investment bank is liquidating “massive” trading portfolios, according to a letter the Santa Fe, N.M.-based firm sent to investors Wednesday.    IS THIS GOLDMAN? IF SO, IT’S THE END OF THE WORLD.

Jason B • August 9th, 2007 at 6:00 pm

Ryskamp-  I’m not denying that there are problems, but this chicken little routine of yours is getting tiresome. Yes, banks are stuck with short term loans for LBO’s. Yes, that binds up their capital. But they will still loan. They might take a better look at risk, and ask for a better rate for that risk, but it is all about the price of money. For the universe of investment banking, $400 billion is not chump change, but they can ride it out and put it on the market later.  So far your predictions are DJIA down 3500 and oil down to $3, so settle down.

Jason B • August 9th, 2007 at 6:10 pm

Nah, can’t be true, they denied it.  Goldman Denies Global Alpha Liquidation Rumors August 7, 2007  Goldman Sachs denies that it is liquidating its troubled flagship hedge fund, Global Alpha.  The Wall Street giant is seeking to squelch today’s market rumors that it would be shuttering the once high-flying $10 billion fund, which has hit on hard times. The fund lost almost 8% in the week ended July 27, and is down more than 12% year-to-date. It’s in the throes of a 16-month-long losing streak after suffering its first down year in 2006.  Earlier today, Bloomberg reported that shares of defense and aerospace company EADS, Germany’s Continental Corp. and Italian car maker Fiat—all constituents of Global Alpha—were down on rumors that the hedge fund was on its last legs.  A call to Goldman Sachs was not returned by press time.

John Ryskamp • August 9th, 2007 at 7:03 pm

I like this guy, he’s poetic:  “Subprime is a car that is out of control, it is only a matter of time before it crashes,” said Alex Sinton, senior currency dealer at ANZ National Bank Ltd. in Auckland. “The New Zealand and Australian dollars are the possums in the headlights.”   

John Ryskamp • August 9th, 2007 at 7:04 pm

Sadly it is true. GS is lying so they can buy more time to address the problem.   THEY WILL FIND THAT THAT ADDRESSED HAS BEEN FORECLOSED.     

Hubbs • August 9th, 2007 at 8:01 pm

This Ryskamp guy has commandeered this blog, so much so that I think only 50% of what he writes may have some merit. The problem is I can’t tell which half, so it all is useless to me. Like one of the guests indicated, get over it, scroll on to the next comment….I did only to find another by Ryskamp, and another and another. So bye bye blog.

Amateur Econ • August 9th, 2007 at 8:07 pm

“The risks of a systemic crisis are rising: liquidity injections and lender of last resort bail out of insolvent borrowers – however necessary and unavoidable during a liquidity panic- will not work; it will only pospone and exacerbate the eventual and unavoidable insolvencies.”  So long as it postpones it until after the next election and Wall Street bonus cycles why should we care?

well contained • August 9th, 2007 at 8:28 pm

 I’m a media critic and part-time day trader … currently shorting S&P Financials & Homebuilders, Bernanke Aerodynamics, Maliki Civic Services, and Ryskamp Publishing, Inc.  LONG Alternative Energy.  LMFAO !!! 

Alex Grey • August 9th, 2007 at 8:29 pm

Could not agree more with this posting. A very insightful analysis – one of the best I have read. Looks like the stock market is signalling a sea change in the economy with a potentially dramatic deterioration in the economy imminent. As Albert Edwards argued the subprime crisis is a symptom of the over-extended US consumer.

well contained • August 9th, 2007 at 8:30 pm

 Hubbs, we can’t miss you – as this is the first time we’ve seen you. Thank you for your contributions – we guess.  ASIA is getting clobbered right now …   

Tom from Tokyo • August 9th, 2007 at 8:47 pm

“Next watch the yen start falling, reflecting the fact that the underlying global economy has ground to a halt. Japan has NOTHING.   Written by John Ryskamp on 2007-08-09 13:14:45″  What? Japan has nothing? Do your homework!! Japan has what really matters now!   Savings! and not just a little. that little island nation of 120mio people owns about 25% of the world savings.  So you keep on selling JPY, I’m happy to buy!!!

Nouriel • August 9th, 2007 at 8:57 pm

John Ryskamp: I appreciate you contributing to my blogs comments but hogging the comment section with dozens of comments is not appropriate behavior. So i would appreciate if you keep your comments to a modest amount. Thanks in advance. Nouriel

Jason B • August 9th, 2007 at 9:00 pm

Tom, that’s the right attitude. The market goes through cycles, and there is money to be made in all parts. I’m not a day trader, but I am investing to build and protect wealth. Times like these are when fortunes are lost – and made. Stop screaming that the sky is falling – its not. Think critically about the fundamentals of the situation. Look at what has done well in past recessions, and what has done poorly, and extrapolate to the present. There are once or twice in a lifetime opportunities coming up. Invest wisely. Good luck to all of you.

Anonymous • August 9th, 2007 at 10:31 pm

Thanks professor, for able to read all the above post without having to subscribe to the blog. Thank you again.

man in Hong Kong • August 9th, 2007 at 11:31 pm

Central banks’ cash injections just buy time for the irresponsible hedge funds. The bad boys fucked, their parents pay.

Ralph • August 9th, 2007 at 11:35 pm

The A$ and NZ$ are dropping quickly as the yen drops back through 118.  The carry trade unwinds. I suspect two drivers; cash is required to cover other positions that need to be liquidated and as the volatility increases the risk in the carry trade increases – not such a sure bet.

Suecris • August 9th, 2007 at 11:46 pm

The Bank of Japan just injected 1 Trillion (with a T) yen into the money market to help keep interest rates lower. It’s another short-term thing, like last night’s EU injection and today’s Fed injection.  http://www.nni.nikkei.co.jp/

Little Al • August 10th, 2007 at 12:16 am

It is fascinating how all world markets are getting clobbered at the same time. Do you think history books will call the beginning of the Great Recession of the 21st Century in August, 07? Since it’s “Armagedoning real bad out there” what will pull us out of this mess eventually? Perhaps the United States will suffer most from the meltdown, but who will ride out the storm the best?

Guest • August 10th, 2007 at 12:34 am

@Little Al: who will ride out the storm the best?  Perhaps an economy where more of the GDP comes from the production of commodities? Or a tiny self-sufficient island somewhere in the pacific that has not ties to the world economic grid (if such a place now exists).

Anonymous • August 10th, 2007 at 12:37 am

U.S. of A. is in an awkward X/Y-bind: X. on one hand the country is very dependent on money from abroad (due to low domestic savings) Y. on the other hand foreigners will be very wary of investing into the U.S. economy (seeing what has been going on) 

Guest • August 10th, 2007 at 1:13 am

Where to invest now? U.S. money market account, or carry trade currencies such as Japanese yen or Swiss franc? or ?????

london broker • August 10th, 2007 at 1:45 am

Crossover widens 50bp at open – yields tumbling and swap spreads widening, carry trade unwinding will induce more liquidations causing a vicious circle of loss of confidence which feeds on itself. We can only go by historical precedents as to how bad this will get but with $750 trillion of derivatives notional outstanding of which $250 trillion is credit alone, someone is going to have to pay the pied piper in an unprecedented way and inevitably that burden will fall mostly on us sucker taxpayers. I only hope that after all the carnage people will be angry enough to institute a sea change in their perception of their criminal governments that perpetuated this in the first place.

Guest • August 10th, 2007 at 1:50 am

Where to invest now?  Well one possible route would be to keep your money in short term treasuries and wait for the storm to pass. I would bet that there will be load of bargains in the market during the next year. Stocks are always best when picked up cheap. As Buffett says, be greedy when others are fearful.

AFFG • August 10th, 2007 at 2:44 am

@Guest on 2007-08-10 01:50:13  ”Where to invest now?    Well one possible route would be to keep your money in short term treasuries and wait for the storm to pass. I would bet that there will be load of bargains in the market during the next year. Stocks are always best when picked up cheap. As Buffett says, be greedy when others are fearful.”  That is exactly what I believe we should do. Get your money out of the banking system. The last thing you want is money in a bank. I am sweating because I have everything in a money market account. I have just pulled it out and I am buying the German Bund and storing it outside Banks. I believe we will see at least one major bank disappear and I do not want to own anything in it. Next year will be the year of bargains. I believe though that our friends the “bulls” will then be the “bears”. They are riding the wrong wave doing the wrong thing on the wrong amplitude. ;-)   If the Central Banks inject more liquidity today then we know how serious it is. The major blast by the ECB was probably a one time thing, that is why it was so large. I would not be surprised if the BoJ and the FED continue to inject liquidity. The injections they did seemed quite little considering the leverage of the banking system.   @Nouriel,  that article is absolutely awesome. You will go into history as one of those few who had the guts to come out and say what was happening, while being insulted and laughed at from the majority of fools. People remember those they did not listen and were right and never those whom they listened and did not know what they were doing.

JMa • August 10th, 2007 at 2:56 am

I am on holiday now for these interesting developments… Professor Roubini, thanks for being all over this mess before anyone else and providing this forum. It may be time to direct attention to solutions to the problem as you have already succeeded in calling it if you will…  It seems during times like these each and every day needs to be digested and a new plan devised every day… my latest for US equities is we hit down 10% ish Fri or Mon and hang out there anywhere from 5 to 15 days (big range i know) before down 15 – 20 % and MAYBE crash… that is my amateur 2 cents worth anyways… (Guest – nice call on down 400!) By the Way i have been colossaly wrong on shanghai ! however, i believe nikkei had a delayed sell off in 2000 as shanghai may now after the global rout that appears to be possibly upon us… best wishes to all p.s.Cramer’s agenda to press Bernanke is quite interesting as we still sit merely 5 or 6 % from highs in equites and the dollar sits not too far from all time lows… these are very interesting times…

Flanders fields • August 10th, 2007 at 3:48 am

@AFFG Looks like al lot of people needs a lot of money… Get my money out of the banks?  ECB to hold 3-day tender: reports By Sarah Turner Last Update: 4:38 AM ET Aug 10, 2007  LONDON (MarketWatch) — The European Central Bank said that it will hold a 3-day tender on Friday to add more liquidity to the money market, according to wire reports. This is the second day in a row that the ECB will have intervened in the money markets. On Thursday the bank held a quick tender in a move that injected around 95 billion euros into the money markets.

AFFG • August 10th, 2007 at 4:23 am

“Get my money out of the banks?”  Thanks for the info. I missed that one.   In order to understand what is happening, you have to know that the central banks are trying to desinflate the world. Greespan basically killed the dollar tearing the rest with it. Now Ben, Trichet and his friends have to reverse that. The problem they have, is that doing that the commercial paper market is drying up faster than the rest (Stocks, Housing, and especially commodities). That market is though the last market which should dry up. So they are pumping liquidity in the cp market to bridge the excess liquidity to the central bank. The central bank wants Banks to stop lending to speculators, hedge funds, PE and financing of crazy mergers. They do that by squeezing liquidity in the stretched deals. The problem is: doing that the amount of quality paper compared to the toxic waste is going down. Somebody is going to have to sit on a lot of toxic waste (which the central bank does not accept) and file for bankruptcy in order to destroy excess credit. That is what our wall street colleagues do not understand. Credit has to be destroyed and that is only done with bankruptcy and that means recession. So the last thing you want is somebody/something which can go bust. And the last person/thing which goes bust in an organized credit crunch is the State (State Bonds). Those are the very same bonds, banks have to deposit at the central bank to get the cash they are getting at the tender. State Bonds are worth a fortune now and they are going to get even more expensive when things get worse. Once things are over sold you will be sitting on an extremely liquid market in an environment where liquidity is scarce. Stocks will be a bargain. FOR YOU!

man in Hong Kong • August 10th, 2007 at 5:25 am

@AFFG,  what happens in Europe? Stock markets dropping quickly… any ideas? ECB increased cash injections?

AFFG • August 10th, 2007 at 5:33 am

@Hong Kong,  YES … they opened a new discount window for 3 days at 4%. The amount of cash accessible is unkown yet. That gives the banks the weekend to get cash. Banks are hording cash and those who need it are selling! Non Bankers are doing what I did … selling … and buying treasuries.

Flanders fields • August 10th, 2007 at 5:46 am

CENTRAL BANK ACTIONS Bank Injection ECB $131 billion (Aug. 9) Federal Reserve $12 billion (Aug. 9) Bank of Canada $1.1 billion (Aug. 9) Japan $8.5 billion (Aug. 10) Australia $4.2 billion (Aug. 10) ECB $84 billion (Aug. 10) Total $240.8 billion

S Berkland • August 10th, 2007 at 5:48 am

Nouriel, this blog is the first to highlight difference between the illiquidity and insolvency.  Bulls say that the credit crunch is separate from reality, namely that corporate earnings are strong, profits are up, GDP is up, corporations are flush with cash and not leveraged enough, lower stock prices will be a good buying opportunity. Seek safety in large cap stocks.  So there is still, even among money managers, a lack of understanding of how credit markets underlie the financial system. Isn’t most of US corporations going to the credit markets to fund their operations, their share buybacks, their mergers and buyouts? Doesn’t the consumer need access to ever more cash to keep spending? These guys really think the credit market is a vacuum! It’s unbelievable these guys manage money.

FF • August 10th, 2007 at 5:52 am

Fund not related to subprime but collapsing??? Any idea?  Deutsche Bank’s DWS ABS Fund Assets Drop 30% Since End of July  By David Clarke  Aug. 10 (Bloomberg) — The assets of Deutsche Bank AG’s DWS ABS Fund fell by a third to 2.1 billion euros ($2.9 billion) from 3 billion euros at the end of July, as the fund’s investments lost value and clients withdrew money.  The fund doesn’t have any investments in U.S. subprime related debt, spokeswoman Anke Hallmann said today. DWS, based in Frankfurt, currently has no plans to limit redemptions from the fund, though that may change if markets were to “fall drastically,” Hallmann said.

london broker • August 10th, 2007 at 6:36 am

djia and s&p futures down 1%, europe off 3%, $ libor fixed at 5.96 up 10bp on yesterday, $/Y 117.65 – credit mkt continues to widen with crossover @378 heading for 400 – seems central bank action although required for liquidity freeze up has spooked everyone. Question today is,Black Friday or Black Monday? There are also rumours in interdealer mkt of a fed emergency ratge cut next week.

AFFG • August 10th, 2007 at 6:39 am

What I am keen in knowing is who is requesting cash and who is hording!  That should give us a good idea of who has what!

Guest • August 10th, 2007 at 6:51 am

How will the liquidity crisis effect the credit card business. As it would appear most Americans are finaning their lives with credit. Daily the banks have to send cash to merchants. How is the lack of liquidity going to impact this aspect of the businees community and how is the CDO market impacting the ability of banks to finance the credit card debt?

Anonymous • August 10th, 2007 at 6:55 am

Flanders fields on 2007-08-10 05:46:07: ECB $131 billion (Aug. 9)  Federal Reserve $12 billion (Aug. 9)  Does anyone know why ECB injects so much compared to FED when US is the one mainly in trouble?  

Guest • August 10th, 2007 at 6:57 am

imagine when the fear spreads from the financially intune and on to main street…. what is a one dollar/pound/euro note really worth?

london broker • August 10th, 2007 at 7:01 am

[Live In Play]  GS: Goldman Sachs: Sources say GS closing market-neutral hedge fund – DJ (182.25)  DJ reported last night that GS is closing a hedge fund that overseas more than $700 mln after recent losses, but the investment bank is keeping its largest hedge fund open sources say. The North American Equity Opportunities fund is shutting down after losses and has sold some of its positions recently, the person said, speaking on condition of anonymity. Losses suffered by Goldman’s largest hedge fund, the $9 bln Global Alpha fund, have sparked concerns that it could also close.  Briefing.com, Inc.  We’re now on the precipice, $/Y falling like a stone 117.25 

AFFG • August 10th, 2007 at 7:28 am

That is going to be a big one:  CNBC:  ”Fed Adds Temporary Reserves to Banking System Through 3-Day Repurchase Agreements.”  

Dave Chiang • August 10th, 2007 at 8:06 am

 Rumored that the European Central Bank is extremely angry at the conduct of the US Federal Reserve. Over the past decade, the Federal Reserve has been sleeping on the job in their oversight of the US Banking system. No one really knows how much bad debt in subprime and Alt-A mortgages there really is. 

AFFG • August 10th, 2007 at 8:07 am

Hey,  ”Fed Adds $19 Billion by Buying Mortgage-Backed Debt”  ”In repos, the Fed buys U.S. Treasury, mortgage-backed and so-called agency debt from its 21 primary dealers for a set period, temporarily raising the amount of money available in the banking system. At maturity, the securities are returned to the dealers, and the cash to the Fed.”  Does anybody know what they mean with “Mortgage-Backed Debt”.  http://www.bloomberg.com/apps/news?pid=20601087&sid=aWvmnW7kB4rM&refer=home

AFFG • August 10th, 2007 at 8:08 am

@Dave Chiang,  I do not think they are the only ones to be angry. The chinease and the japs are probably quite angry to.

Guest • August 10th, 2007 at 8:13 am

“Fed Adds $19 Billion by Buying Mortgage-Backed Debt”  Do they take subprime mortgage-backed? There could be a market for those…

man in Hong Kong • August 10th, 2007 at 8:17 am

@AFFG , I am a Chinese in Hong Kong.  I can tell you 90% of the Chinese are happy to see the US people in deep shit.  I think this time the God is doing his job…

Economist far North • August 10th, 2007 at 8:45 am

Nouriel Roubini: Thank you for your blog and your web-site which I have just signed up for.   I agree that the situation of the banking system in many western countries now may be more serious than we have seen for many years, and more serious than in 1998 during the LTCM crisis. But I am still not sure we should jump to the conclusion that this is a systemic solvency crisis. That should mean that banks have underwritten misallocations of capital exceeding their net value. The US sub-prime market alone cannot possible be that big. You mention for example that may be over 1 million US households may come to default on their mortgages. I guess there must be around 100 million US households, and 1% default rate may be higher than normal but should not wreck too many banks. That is even more so as the mortgages have been disbursed around the financial system mitigating any concentration risk — or at least so we have been told.   The latter qualification is important, though. Uncertainty about where the risk have ended up through recent years frenetic securitization activity, makes markets jumpy about where it actually lies. May be by accident (or design) it has not really been spread out, or it has at least eventually “coaleesced” and sits now as (hidden) lumps in a smaller number of financial institutions. As long as we don’t know, we don’t know, and we are easily scared by rumours about the bogey-man’s whereabouts. BIS and others have increasingly warned against the opacity left by complicated securitazation/derivative activities. This is said to be a new phenomenon of the present situation. The system may therefore not be more insolvent than for example in 1998 but investors cannot determine which financial institutions are at risk and so are more prone to strike at random.   Written by Economist far North 

Suecris • August 10th, 2007 at 8:45 am

@AFFG and Guest 10:08 – Steve Leishman (sp?) on CNBC, who is supposed to be an economist, just said that the Fed is not allowed to accept sub-prime MBS, can take only AAA. FWIW.

Guest • August 10th, 2007 at 8:49 am

SEC looks into banks’ books  The SEC doesn’t want to wait for the next company’s “whoops!” about the impact of the subprime market.   The Wall Street Journal is reporting that the SEC is looking into the accounting books at Wall Street’s biggest banks to make sure they are not hiding any losses resulting from the subprime meltdown.   

AFFG • August 10th, 2007 at 8:50 am

@Suecris,  from all jerks on CNBC Liesmann is actually the most literate. If he says so then it should be right. The problem is … How good is AAA?  By the way, Liesmann also said that there is a difference between the ECB injection and the FED injection. It was the NY Fed which took action. It seems they just jumped in and bought MBS for Cash. The ECB only borrowed it. Can anybody confirm that?  @Hong Kong,  ”I can tell you 90% of the Chinese are happy to see the US people in deep shit.”  It ain´t different here.

Dave Chiang • August 10th, 2007 at 8:56 am

 As he is nicknamed by the Chinese, “Little” Bush has no credibility in China. – Dave C.    President Bush makes counter threat to Chinese over US currency  http://www.washingtontimes.com/apps/pbcs.dll/article?AID=/20070810/BUSINESS/108100041/1006    President Bush said China’s option to use its foreign reserves to weaken the dollar and spike U.S. interest rates would “absolutely” hurt China more than the U.S.    Mr. Bush said he had not seen the London Daily Telegraph report that Beijing was hinting at such a move but warned against any attempt by China to hit back at Washington using vast foreign currency reserves.  

Guest • August 10th, 2007 at 8:59 am

 ECB Sends Additional $83.8B Into System http://biz.yahoo.com/ap/070810/europe_market_jitters.html?.v=7  ECB Injects Additional $83.8 Billion Into Banking System Amid Jittery Credit Markets   FRANKFURT, Germany (AP) — The European Central Bank injected another $83.8 billion into the banking system Friday amid signs that bad U.S. mortgages were digging deeper into the world economy. But investors did not seem appeased 

Anonymous ibid. • August 10th, 2007 at 9:03 am

Good grief. With all this turmoil, the S&P is still up for the year.   I’m not saying that this is good, or even necessarily a buying opportunity, but I suspect that someone wanted this drop to occur.   Please, everyone. Be just a little bit skeptical.

Guest • August 10th, 2007 at 9:08 am

NEW YORK (MarketWatch) — Shares of Countrywide Financial Corp., , fell more than 15% ahead of Friday’s open, retreating after the largest U.S. home lender said problems in the U.S. mortgage market poses a serious threat to its earnings and financial condition

Guest • August 10th, 2007 at 9:19 am

Ya know what is spooky…the S&P peaked on 7/20/98 when LTCM came to light. The index fell 19.16% between then and 8/31/98. THis year, the s&P peaked on 7/19/07. If it is a similar situation, that means the S&P should fall to 1255, a 19.16% drop from the peak. HOWEVER, I would contend this is much, much worse than LTCM so that should at least give us a benchmark to gauge just how much manipulation may be going on in the markets. The S&P should at a minimum fall the the 1200′s…so far we are only down 7.22% from the peak.

Guest • August 10th, 2007 at 9:26 am

Let me cheer you up. I bopught property when no one was interested. I sold equities when everybody said they’re going to the moon. I have sat on increasing wadges of cash patiently for two to three years and endured the crap that passes for financial wisdom. Now at last you know what is going to bloody happen. I am actually going to be able to call a bloody plumber and find he wants to get off his arse and come and work for me at rates that don’t involve me wondering what kind of rocket scientist this guy thinks he is. God yes, at last tradesmen who don’t have that much business they can afford to be ignorant , uncouth and downright sloppy. Bring on the Armegeddon here’s somebody who’s loving it.

well contained • August 10th, 2007 at 9:36 am

 Even though Guest at 09:26:55 badly needs a remedial spelling lesson, he/she is a reminder of something very poignant:  Whether it was politics or financial advice or any of a number of other themes, (ultimately) the most rewarding attitude to have over the last few years in this world full of disinformation has been cynicism, disbelief, distrust, and scorn.  It’s a sad statement, but no less true for that.  The emperor has no clothes. Pay no attention to the man behind the curtain.  (Unless his name is Nouriel – but he’s not behind anything – he said what he thought and damm the naysayers. WELL DONE.) 

Guest • August 10th, 2007 at 9:38 am

From London Broker ”We can only go by historical precedents as to how bad this will get but with $750 trillion of derivatives notional outstanding of which $250 trillion is credit alone … I only hope that after all the carnage people will be angry enough to institute a sea change in their perception of their criminal governments that perpetuated this in the first place. “  The risk in the US is that the banks have a number of practises that contribute risk. Tehy do indeed have very low loan loss reserves – which is why the Fed is kicking in emergency money this very minute. They also have the problem that the US consumer has not been saving any money for over a year now (negative savings rates). Consequently, the banks have been drawing funds from peoples’ checking accounts using “sweeps” to do this. Few Americans are aware that when they go to the ATM machine and check balances on their demand accounts (checking) that it does not necessarily exist at the bank. It has been loaned out. But the biggest problem by far is that the major banks in the US are heavily involved in derivatives trading. That means that if there is unexpected volatility in the futures markets, their derivatives trades could go belly up. The best thing that US banks could do right now is to seriously deleverage and exit their derivatives positions. The Fed should have been monitoring and restricting this activity for some time – but has let it go. The ECB is right to be upset with the Fed about lax regulatory policies.  ”Mr. Bush said he had not seen the London Daily Telegraph report that Beijing was hinting at such a move but warned against any attempt by China to hit back at Washington using vast foreign currency reserves.”  The US is not in a position to be making threats to anyone at this stage … particularly because the crisis is completely our own doing.  Pete, CA    

Guest • August 10th, 2007 at 9:38 am

Those of you with greater understanding of this issue then me…. Please help me connect the dots so a layman like me can understand what this means….   What does this all mean to the current market dynamics of the last 72 hrs?? See Salient points of the article below.   http://money.cnn.com/2007/07/13/markets/dollar_yen_carry/index.htm?postversion=2007071312  Dollar-euro? It’s the yen, stupid  The greenback may be hitting record lows versus the euro but the more worrisome problem – a big drop against the yen. By Grace Wong, CNNMoney.com staff writer. July 13 2007: 12:37 PM EDT  LONDON (CNNMoney.com) — The dollar hit a record low against the euro this week, but the bigger story for many currency watchers was the greenback’s slip against the yen.  That’s because a sharp rise in the yen could have nasty consequences for millions of investors around the world.  The dollar slid to a one-month low of ¥120.96 yen on Wednesday, raising concerns that a strengthening of the Japanese currency could put billions of dollars worth of low-cost yen loans in peril…  For years, investors have been borrowing at Japan’s super-low interest rates and selling yen to buy investments in higher-yielding currencies – a trading bet known on Wall Street as the “yen carry trade.”  A big, sustained rebound in the yen could jeopardize those trades, Laidi said. “The yen is a funding currency. When it rallies, it makes the repayment of those yen loans more expensive, even though interest rates are low,” he said….   Thanks a Million

section321 • August 10th, 2007 at 9:49 am

Dateline 8/9/2007 Countrywide CEO Exercises Options  ”The chairman and chief executive of mortgage lender Countrywide Financial Corp. exercised options for 92,000 shares of common stock under a prearranged trading plan, according to a Securities and Exchange Commission filing Wednesday  In a Form 4 filed with the SEC, Angelo R. Mozilo reported he exercised the options for shares on Wednesday for $14.69 apiece and then sold all of them the same day for $28.74 apiece.”  Yesterday, I saw this new item and once I read thought… “OK, no big. He exercised options on a preset schedule. Should be no foul…”  But, then to drop the bomb they dropped this morning! How is this not blatant insider trading. The lawyers had to be working on this at the same time. He waited until his options were exercised and then dropped the bomb. He timed it. Blatantly.  For every $1 CFC goes down, Mozilo would have lost $92,000.   With all the money this guy makes (has made), this seems like a paltry sum to expose yourself to the Martha Stewart treatment.    

Guest • August 10th, 2007 at 9:52 am

“Those of you with greater understanding of this issue then me…. Please help me connect the dots so a layman like me can understand what this means…. “  It means that hedge funds in the US are in trouble. So they are eliminating some of their trades. These are the so-called “carry trades”. As they do this they must unravel the trades back through Toky, because they borrowed Japanese yen when they made the original transactions. This causes the yen to climb in value … exactly what it is doing now. This process is not over yet … and it is a very big deal.  Pete, CA 

Guest • August 10th, 2007 at 10:05 am

Here come da morning buyers, I still don’t get who is silly enough to step in to markets here-if they want to lose their money that badly, just write me a check!

AFFG • August 10th, 2007 at 10:06 am

@Pete, CA,  Absolutely. That is where my eyes are stuck! Wait until this picks up some speed. The net liquidity position injected in the Euro banking system is today at about 40 Billion Euros. The Fed is at about 20 Billion $ for the week … the BoJ is going to start to blast a multitude of this to keep it´s system afloat.

Guest • August 10th, 2007 at 10:10 am

That buying spree was teh $16B the fed gave to its PPT banks to buy stocks. Looks like it di 5 minutes worth of good, just like yesterday’s $19B really did some good! The fed is a worthless joke!

Marc August • August 10th, 2007 at 10:11 am

Just out from the Fed…  Release Date: August 10, 2007     For immediate release   The Federal Reserve is providing liquidity to facilitate the orderly functioning of financial markets.   The Federal Reserve will provide reserves as necessary through open market operations to promote trading in the federal funds market at rates close to the Federal Open Market Committee’s target rate of 5-1/4 percent. In current circumstances, depository institutions may experience unusual funding needs because of dislocations in money and credit markets. As always, the discount window is available as a source of funding.  

man in Hong Kong • August 10th, 2007 at 10:14 am

I can tell you, next week you will hear that the Asian central banks are selling US bonds. This will be another hot topic!

man in Hong Kong • August 10th, 2007 at 10:21 am

‘WOW, dude … how do you know that?  Written by Anonymous on 2007-08-10 10:18:32′  This is as secret as the fed’s minute… :(

Guest • August 10th, 2007 at 10:26 am

Looks like large sums of money going into financials. maybe they are trying to prop up financials since they tend to lead the overall market. What we need here is for all the greedy pigs who caused this mess to get slaughtered-that is the only thing that will fix this is a complete and utter washout!

Guest • August 10th, 2007 at 10:56 am

There is NO reason stock should be holding in this well given the state of things! Who in their right mind is going to hold positions over the weekend?? If Countrywide, Bear or Goldman announces anything negative over the weekend, look out!

John Ryskamp • August 10th, 2007 at 11:06 am

Mixed messages from both the Fed and the ECB signal government worldwide has lost control of the economy.

well contained • August 10th, 2007 at 11:22 am

  Correct me if I’m worng here, please … that makes 2 seperate Fed injections to the tune of 50 Bln plus just today !??!?  ”Free” market – WHAT A JOKE !  I’m supposed to buy stocks … and wait for Helicopter Ben to bail me out ?  WHAT A PATHETIC JOKE !  

Marc August • August 10th, 2007 at 11:25 am

It appears that the Fed is trying to accomplish a fix by applying its tried and true (up until now) remedy of pumping liquidity into the markets. As Nouriel pointed out, this might help the liquidity shortfall that is a result of the current crisis, but will offer little in the way of a solution for a credit portion. The markets will probably be forced to realize this fact. It is interesting that the current crisis is a result of the very same liquidity pumping that has continued for years. Of course, the markets will temporarily believe that this is the answer to the problem. It is very similar to the plans being promoted for helping out the homeowners who are struggling with mortgage problems by throwing more money their way. We figured out a long time ago that the answer to home fires is not to hire an never-ending number of firefighters, but to work harder at preventing fires in structures in the first place.  This may very well be the most direct example and proof of the way the President’s Working Group on Financial Markets actually operates. Although a never-ending stream of government officials have recently been pounding the pavement insisting that all is well and very contained, the Federal Reserve has suddenly seen fit to invoke “emergency” measures in what must clearly be a response to the fears of a stock market meltdown. The result of their press release today certainly had the effect of “plunge protection.” Once again we buy a little ‘time.”

Guest • August 10th, 2007 at 11:29 am

New highs! New Highs! New Highs!  This is what happens right after a (fed) ‘shot of methadon’. But they will be wanting more and more and more…

Jason B • August 10th, 2007 at 11:33 am

I expected the PPT to go into the markets at 2:30 yesterday, but I guess I was a little early. Smart money is always too early ;)   They are blowing against the wind. This rally is not sustainable. My guess is they want the markets to calm down so people think happy thoughts over the weekend.

Anonymous • August 10th, 2007 at 11:38 am

This is no friggin free market.  US government is buying the toxic mortage securities. This is Mafia in action.

man in Hong Kong • August 10th, 2007 at 11:52 am

Even in China, the CCP have not been doing such obvious means in affecting the stock markets.

Anonymous • August 10th, 2007 at 11:52 am

This is going to end VERY VERY BADLY. Something makes me believe we are going to experience one heavy crash soon. Do not forget … the economy is sound … when the markets catch message that the banks are under water and the economy is a wreck then there will be no halt. This is all happening without the “R” word.

son of the paul • August 10th, 2007 at 11:54 am

One leg’s broken – housing market. They will not let another leg -the stock market- crash!

Guest • August 10th, 2007 at 12:47 pm

Sounds like the Fed is starting to panic:  1:45 Fed takes third action Friday to add liquidity to markets

JMa • August 10th, 2007 at 12:48 pm

Round 3 of Fed injections… Why doesn’t the market just close today and the White House Economic Team tell us all where the market closed. In fact, why don’t they do this every single Damn Day ! I am sorry I am sick and freaking tired of this crap. President Bush, Bernanke, Hank, PLEASE DEFINE MARKET !   I am 35 years old and I do not know what a stock market is anymore ? 

shawn • August 10th, 2007 at 12:49 pm

Professor Roubini, I read somewhere that FED is taking the banker’s MBS (mortgage backed securities) as a collateral to loan/inject 35 billions to them today.    My question is, since MBS now is fetching so much less than before, and in some cases probably little bid, so how is FED valueing these MBS to make them a collateral?    Also, suppose FED take these MBS at face falue (say $100 per tranche paper), wouldn’t it be nice for these bankers to dump all these MBS to FED and never repay the money they loaned from FED? At least they can find the idiot buyer FED to take these MBS at face value when they can hardly find a buyer out there.    So that means FED will end up being a Mortgage Servicer owning these MBS? Or FED will just print money to cover its losses?

Greenspit • August 10th, 2007 at 12:53 pm

 Alan Greenspan, who can take dubious credit for his part in this development, going down in history as “Mr. Bubble,” is responsible for the recent explosion of the casino economy. After the Crash of 1987, which showed parallels with “Black Friday” of 1929, he had the glorious idea of inventing “creative financial instruments.” To that category belonged, among other things, credit derivatives. By 1998, the volume of credit derivatives amounted to $180 billion. When, in September of 1998, the LTCM hedge fund, in the context of the Russian state bankrtupcy and the GKO crisis, threatened to go bankrupt, the G-8 nations decided to set a huge liquidity-pumping machine into motion. In 2006, the volume of the “wonder-weapons” of financial transactions, the so-called collateralized debt obligations (CDOs), reached a fabulous $3 trillion.  Through these “structural products,” the bankers package credit risks of totally different kinds of debtors into bundles, divide them into different classes of risk, and sell them to investors. The defenders of this practice argue that the hedge funds thereby play a positive role, because they spread the risk onto many shoulders. This theory has only one devastating flaw: As long as all asset prices are rising, everything functions wonderfully—because there is also no risk; but at the moment a reverse-leverage collapse sets in, the linkage between the different market segments through the hedge funds drags the whole system into collapse. 

AFFG • August 10th, 2007 at 1:05 pm

“”They only added 3 Billion this time. ”  maybe they just have 3 billion… “  That would answer the question why the only gave 3 when the banks asked for 11. ;-)   You can not believe what the asked this morning. It just boggles you mind.

AFFG • August 10th, 2007 at 1:12 pm

As I said before this is really going go bad. They can´t go on like this for ever. People are going to ask questions about this. I mean this is really hilarious. Normally the Banks give Agents and Treasuries. MBS are almost never deposited. Now the FED is swallowing all the MBSs it can get and no Treasuries. If Ben comes out a forth time … he has to loose credibility. The best part of the story is that the bad news is not out yet. Wait until the news comes out that the US is heading into a recession. That is going to be a blast. Now that the markets know that the FED is basically just keeping everything alive with the money injection everybody is going to look at the economy and any sign of weakness is going to send this scam where it belongs!

Guest • August 10th, 2007 at 1:21 pm

Yes. S&P500 holding at about the 200-day moving av and Dow still well above the 200-day moving average so far. So the injections of liquidity are having an effect. Do Paulson and Bernanke know how to spend money (credit) … or what?!  Take a look at the financials, however. For example, check the Financials SPDR (XLF of Yahoo Finance). Note that it has been increasing today since the open. So if you want a definition of “outrageous” that would be it. Not only are the big brokerages throwing Fed money at the market … they are pumping the financial and bank stocks. Does anybody seriously believe that this sector is not a bunch of dogs, especially after the events of the last 36 hours.  ”Also, suppose FED take these MBS at face falue …”  It does appear that one option on the table is for the Fed to buy back bad mortages – apparently at face value. I suspect personally that the Fed may already have a secret conduit open to Fannie Mae where they have removed some bad-performing loans and replaced them with high-quality debt. There’s no proof, but how else did Fannie make a recovery? Apparently, they are considering the idea of widening this conduit with some type of immense bailout. It would be a huge waste of public money.  What they haven’t really considered yet is – what happens if the world does indeed lose its taste for US bonds? You can only create credit … if someone wants it.   Pete,CA

Guest • August 10th, 2007 at 1:30 pm

 http://www.businessweek.com/investor/content/aug2007/pi2007088_450016_page_2.htm  Among the most prominent is Allan Meltzer, a Carnegie-Mellon University monetary economist who is writing a history of the Fed. “The people on Wall Street are making a lot of noise for a Fed bailout because they don’t like to lose money, and we can all understand that,” he says. “But…it would be a huge mistake to change monetary policy to rescue a bunch of people who made stupid mistakes.” In fact, argues Meltzer, losses by speculators could clean out the financial markets and make them healthier. “Capitalism without failure is like religion without sin,” Meltzer says. “It doesn’t work.”   

Guest • August 10th, 2007 at 1:49 pm

This is supposed to be a blog for economic policy not a sound off or crisis hotline for SHORTS who are looking to make $$$$$ while the greater society suffers. the job of the FED is to keep the system working. Not to be hands off so short speculators can make money. All these shorts should be taken to CLEANERS! All they are doing is hopin to profit from the MISERY of others. Shame on you!

Guest • August 10th, 2007 at 1:57 pm

Latest from Peter Schiff,  http://www.europac.net/newspop.asp?id=9538&from=home    Amid all the recent hoopla about defective Chinese exports, America has proved that when it comes to flooding the world with shoddy merchandise, nobody beats the good old USA. Sporting higher yields than Treasury bonds, investment grade ratings from reputable agencies, and juicy commissions for the investment banks that packaged them, these structured mortgage bonds have quickly become America’s greatest export.    This week, several of Wall Street’s best foreign customers announced staggering losses on the American mortgaged backed securities they had been sold. The fundamental issue underlying these losses is that Americans borrowed more money than they can afford to repay. As initially low teaser rates expire and mortgage defaults increase, foreign lenders are discovering that the residential properties that collateralize the mortgage bonds are not worth anywhere near the loan amounts.    As more of our nation’s creditors finally realize that they have been duped, the credit well fueling American consumption will run dry. Foreign lenders will simply refuse to accept our IOU’s as payment for their merchandise. Lacking in savings and productive capacity, we will be forced to accept dramatic reductions in our standard of living as a result.  

Guest • August 10th, 2007 at 2:00 pm

I am not short the market.  In my opinion – America is NOT a stronger country if we don’t have a real free market system. The Fed is certainly justified in providing short-term liquidity to keep banks operating. But the real essence of economic freedom (and strength) is not in how high the Dow may become. It is in having fair trading practices, and lack of corruption, in the markets. Otherwise the proper mechanisms of price discovery are destroyed.  It is remarkable how many current leaders in Wall St and the US administation have lost sight of this fundamental principle.  Pete, CA

Guest • August 10th, 2007 at 2:07 pm

 The bursting of the housing bubble will act as a detonator for a massive pension crisis. US Pension funds are heavily invested in MBS, and CDO securities that are vaporizing as we speak.  

Guest • August 10th, 2007 at 2:08 pm

The PPT is going to cram this market hard in the last 20 minutes today, lets see if its 13,003 or 13,300!!!

Guest • August 10th, 2007 at 2:12 pm

Heeeeerrrrrreeeeee comes the PPT as we speak, no one in their right mond would want to be freshly long over this weekend unless they were being told to be.

Guest • August 10th, 2007 at 2:15 pm

Only 3 more week of growth in contining jobless claims similar to yesterdays jump and my short term economic model will be saying we are in a recession…for what its worth…

well contained • August 10th, 2007 at 2:24 pm

 I am not short a single thing (single humorously intended prior post to the contrary) EXCEPT for this bullshit coming out of the directors of our supposed “free market” system.  If you think I come here to try to influence the trades of the small-fry who read this blog you are completely delusional.  STFU, you clown. 

Guest • August 10th, 2007 at 2:34 pm

Pete, CA… Very interesting, what will happen if carry trade ends over the next 8 months. Thanks allot for your wisdom!  Our original string below…  ”Those of you with greater understanding of this issue then me…. Please help me connect the dots so a layman like me can understand what this means…. ”    It means that hedge funds in the US are in trouble. So they are eliminating some of their trades. These are the so-called “carry trades”. As they do this they must unravel the trades back through Toky, because they borrowed Japanese yen when they made the original transactions. This causes the yen to climb in value … exactly what it is doing now. This process is not over yet … and it is a very big deal.     

Guest • August 10th, 2007 at 2:36 pm

have to say i’m not too sympathetic to any homeowner bailout either . . .  . . . but it is depressingly symbolic of our times that the i-banks are basically getting the bailout that the homeowners will be denied. both banks and homeowners made stupid decisions out of pure greed — the difference is that the banks profited ferociously from it for a while. guess who’s getting the handout, though?  the overwhelming corruption will be the biggest obstacle for the u.s. in getting over this crisis. the gov.’s main interest is in protecting share price & profits & market shares, even if it takes bailouts and the gutting of antitrust laws — when what capitalism and our markets require is that some of these banks go down

Guest • August 10th, 2007 at 2:39 pm

Unbelievable! That is all yo ucan say about the criminal element involved with wall street and the govt. I need a beer, have a good weekend all…

load of BS • August 10th, 2007 at 2:41 pm

 Indexes flat line (or up) to end the day …   I AM FURIOUS AT THIS BLATANT MARKET MANIPULATION (and, yes, I am long – in my retirement accounts) – what the goddam hell have those of us who have been suspicious of this artificial equity bubble recieved for being cautious during the last so obviously speculative years ?  A bailout for criminal crony Wall St. insiders.  To hell with this goddam corrupt casino. To hell with it. 

Guest • August 10th, 2007 at 2:59 pm

Headlines prove existance of PPT!!  U.S. stocks stabilize after Fed, central banks intervene  By Nick Godt Last Update: 3:51 PM ET Aug 10, 2007   NEW YORK (MarketWatch) — U.S. stocks managed to crawl back from earlier steep losses Friday, after the Federal Reserve and other major central banks intervened in an attempt to kick-start frozen credit markets

Guest • August 10th, 2007 at 3:16 pm

See how they engineer the positive outcome to reprot in the headlines:  NEW YORK (MarketWatch) – Stocks crawled back from earlier steep losses Friday after the Federal Reserve and other major central banks intervened in an attempt to jump-start frozen credit markets, with the Dow ending 58 points, or 0.4% higher, for the week. 

Anonymous • August 10th, 2007 at 3:25 pm

Load of BS on 2007-08-10 14:41:26….  Couldn’t agree more. Rhetoric of free markets is an illusion for the sheeple. PPT will not allow the Market to fall… Powers-to-be are united.

Guest • August 10th, 2007 at 3:34 pm

Here is the misleading part of that Dow headline, it is only 30 stocks. Todays tape paints a different story when you dig a little deeper:  NYSE new hi’s = 30 NYSE new Lo’s = 457  So most people will read the headline and feel better but more than likely their mutual funds were down a % or 2 this week…

Guest • August 10th, 2007 at 3:38 pm

To expand on that thought for a minute, for the week they are bragging the Dow was up for the week, weekly new hi& lo numbers tell a different story:  NYSE new Hi’s = 283 NYSE new Lo’s = 1699

antiroubini • August 10th, 2007 at 3:38 pm

With so much efforts to talk prices down, it only remains to wonder why houses are getting ever more expensive.

Guest • August 10th, 2007 at 3:49 pm

For the people who say the markets will not fail, have you been living in a cave the past 7 years? What happened to the S&P 500 between the middle of 2000 and the beginning of 2003? It lost almost half of its value!   Give me a break! Give me a friggin break! This was four years ago! Aaaagh! You guys are so short-sighted and lack so many facts. It makes everything you say useless.

Anonymous • August 10th, 2007 at 4:11 pm

So how long will it take for the collapse of the stock market to be complete ? How long will the artificial life support be able to delay what seems to be inevitable ? 

Anonymousnot buying, not selli • August 10th, 2007 at 4:20 pm

 It’s ironic …   How could anyone not decide – after the “stimulus” of the last two days – to freeze up and do exactly nothing ?  Wait & see, that’s where I’m at. Congrats, Ben. You froze me solid. I don’t know what’s up or down at this point. Night is day, white is black.  

ewulf • August 10th, 2007 at 4:28 pm

So far it is the typical case of moral hazard.However,with some perspective ,it still seems to be that the problem is how to cope with the short term effect of a market correction, taking control of further damage.After all ,core financial institution,which are the benchmark, have applied a more cautious policy.-

Jason B • August 10th, 2007 at 5:33 pm

C’mon guys, don’t act so surprised. I thought they would intervene yesterday afternoon. I guess they figured they could punish the shorts and kill two birds with one stone.  The can’t keep the DJIA up forever, but long enough. This administration can let the DJIA go to pieces along with everything else.  And as for Bush’s no bailout stance, what do you call taking RMBS at the Fed discount window? Maybe that will free up some cash and get the constipated owl making pellets again.

Peter J Bolton • August 10th, 2007 at 5:46 pm

Ahhh, Yes: Moral Hazard – indeed  Now we rest for the weekend and those that created this mess (global collapse) have a few new inputs to quickly factor during this period of rest.  1. The Central Banks (CB) will continue to inject top value cash (taxpayers funds) into the markets (casino) to protect the financial industries (punters) (“share values and profitability”) and,  2. the CB’s will continue to intervene to stop the sell-off of near worthless ubiquitous paper, and  3. the FedRes appears ready to swap $4$ (face value) toxic waste CDO’s and their ilk in return for Prime cash (taxpayers cash).  Now and obviously to the bB (bigBoys) these considerations are now paramount and this weekend (I predict) will be spent (by the bB) considering the new nasty route to ensure that their held Toxic paper can be converted into taxpayers Prime CB fiat: That is, Moral Hazard.  This now will be the Prime Game prior to the Insolvency Play (EndGame) and will begin Monday US time (NYSE) with a few leakages and signs in the earlier global markets which come prior to the opening of US SEX (pun intended).  There are a lot of desperate heads on the block and one can be assured, that self-personal-survival (extremis) is and will remain the a priori agenda du jour – er from here on in (as it was before).  Moral Hazard. 

antiroubini • August 10th, 2007 at 6:08 pm

“we like sourcing & stats here, “anti”   I tend to believe the evidence of my own eyes. Here in NY I see nothing but growth. A 1-bedroom Coop that could be had for $220K this January will cost you $290K now. A $400K condo will cost you $500K if you can find it. The same is true for every class of housing except maybe the luxury segment, which I don’t follow. Try to shop for a house where you live, who knows, maybe your local market is different.

bbybmr53 • August 10th, 2007 at 6:49 pm

Central banks and the Big Money behind them may be the cause of these boom/bust cycles. Bernanke has admitted the Fed engineered the Great Depression. Central banks have engineered this last reall estate bubble too. Congress has given the Fed the authority to regulate unfair lending practices. What happened? The Fed is supposed to smooth out economic cycles and keep inflation down. But we just had a historic inflationary run up in housing prices with shady lending involved. What happened Fed? The problem of our boom/bust cycles lies with the Fed and other central banks. The Fed prints money backed by nothing and then creates debt with interest that has to be paid. Who’s paying the interest on all the currency loaned to the U.S. Government? Who are the major shareholders in the largest banks serviced by the Fed? Are there wealthy families making money on inside info and timing these cycles? Are there investors who make money in war or peace, depression or boom times? Who sold warplane fuel to Hitler’s ‘Blitzkreig’ airforce? Who laundered money here in the U.S. for the nazis.  It’s time to look into central banks and the investors behind them? These market cycles are ovviously manipulated. Someone profits from a crash. it’s time to find out who. it’s time to find out how the private central banks like the Fed operate. The Fed is actually very secretive and not transparent. The Fed isn’t Federal and the ‘reserves’ are inflationary currency which is ironic. The Fed is supposed to be fighting inflation. They didn’t fight housing inflation. The bubble was blown up by the Fed and then allowed to pop. Why? Who’s profiting from these swings?

well contained • August 10th, 2007 at 7:09 pm

 ”houses are getting ever more expensive” anti – 2007-08-10 15:38:44  ”maybe your local market is different” anti – 2007-08-10 18:08:11  this just in: Manhattan is not necessarily the rest of the world.  Thanks for that deep wisdom, anti …    …   PeterB, thanks for this:  1. The Central Banks (CB) will continue to inject top value cash (taxpayers funds) into the markets (casino) to protect the financial industries (punters) (“share values and profitability”) …  Sums it up pretty nicely. 

antiroubini • August 10th, 2007 at 7:36 pm

I was talking about Brooklyn and Queens, well contained. The Manhattan story is by far more dramatic. Would you be so kind as to name markets where houses became cheaper? Death Valley? Trailer parks in Nevada? Slums in Deitroit? The Arizona desert? Other such places that everybody is running away from? And when should we expect this trend to reach people in normal places like Portland, Seattle, Washington DC, or us New Yorkers?

Ernst • August 10th, 2007 at 7:49 pm

I am sorry, but I don’t understand all the fervency and intensity of the above posted comments. All of us who have partaken in this blog for the last couple of years are wholly aware that we will face a serious recession. I went as far as to predict, over one year ago, that it would happen during the second half of THIS year. Opposing a bet by Absolute Return Partners who predicted it would happen in 2008. So why is everyone so berserk when we knew long ago what was going to happen? I fully recall Nouriel stated in his blog a long time ago that the Fed would cut rates before any hike. And, furthermore, that it would not alter the scenario one iota. We all know how this will unravel and it’s just starting to happen. Yes: Just starting. The markets will continue their wild gyrations for another month or so, while liquidity is being pumped in. Until sometime, in the fourth quarter, they will rise no more.   Please allow me to share with you an entertaining piece from The Daily Reckoning:   Oh la la…   Is our Crash Alert flag still flying? Yes, it is…flapping in the breeze…almost proudly this morning.   Yesterday, the Dow lost 387 points. The reason for the beating? “Subprime concerns,” say the papers.   Perhaps the most immediate concern came from an unlikely source – France’s biggest bank, BNP Paribas. The bank has followed Bear Stearns (NYSE: BSC) by sealing two of its funds; for the moment investors are stuck.   “The complete evaporation of liquidity in certain market segments of the U.S. securitization market has made it impossible to value certain assets fairly regardless of their quality or credit rating,” BNP Paribas said in a statement.   But don’t worry, dear reader. All is well. How do we know? George W. Bush said so. He says he is “confident,” that our modern markets “will work through these issues.”   Everyone is confident. Because we are all true believers in the Theology of Capitalism. But just in case this capitalism thing doesn’t work out, the Bank of Japan, the Bank of Canada, the European Central Bank and the Fed all joined to say that they would put some additional liquidity into the system. The ECB, for example, announced that it would make “unlimited” amounts of money available at 4% interest. The idea is to protect the financial system from a serious mishap. In a truly capitalist world, of course, there are no protections. People get neither what they want nor what they expect. Instead, they get what they’ve got coming . But the world’s banking cartels have stepped in to fix the credit system and make sure real capitalism doesn’t happen.   Meanwhile, Toll Brothers’ (NYSE: TOL ) chief executive says he hasn’t seen such little interest in housing in 20 years. And Bloomberg has a report predicting that the housing slump will deepen amid further “mortgage disruptions.”   Thanks to these problems, the entire markets seem to be ‘re-pricing’ risk, say the experts. It looks to us as though they had re-discovered risk. Volatility, long thought dead, seems to have suddenly risen from the grave.   But, we repeat, don’t worry, dear reader. This too shall pass…and soon stocks will be headed to new heights of glory… they will mount the hills of Zion, for sure.   That must be what investors in Blackstone’s new fund think. Blackstone (NYSE: BX ) has raised the world’s biggest pile of private equity money ever – more than $21 billion. Even the California state teachers have put a billion dollars of their pension money into it. Talk about true believers! What is Blackstone going to do with so much cash? How is it going to find such huge values that, somehow, the investing public has overlooked?   But that is what happens when you reach the silly side of a credit bubble. People are ready to believe anything. They no longer fear losing money. And they can’t tell the difference between an investment and a rank speculation. So, even pension funds and bible schools put money into swaps, CDOs and private equity funds. They can’t imagine losing it. Things always go up, don’t they?   And things always do go up when the credit bubble is expanding. When it contracts, most things go down. If we are not on that side yet…we will be sooner or later. So, we’ll leave our Crash Alert flag up for a while…   *** The Wall Street Journal reports that desperate builders are offering incentives to get buyers in the door. In Virginia, for example, they’re advertising “Sizzlin’ Summer Sale Savings.” Then, running out of ‘s’s, they offer, yes, free granite countertops. This is amazing to us. We thought every kitchen in America already had granite countertops. We considered granite countertops the one solid, lasting, tangible thing this boom had really produced. Apparently not. There seem to be a few counters still in the USA without granite on top. We hope this boom continues for another couple of years in order to complete the granitization of America’s kitchens.   *** What happened in Florida, according to the press, is that the flippers got flipped. They bought condos and houses…expecting to flip them to other buyers at a higher price. Some new apartment houses were bought almost entirely by flippers. They all thought that the final buyers would come along with fat wallets and empty heads. Many did. But not enough. After flipping the places back and forth between themselves, the flippers could not find retail buyers willing to move in, pay the taxes and mortgages. The whole market is suffering from an overhang of properties – which could take years to work down.   Thank you for your patience and please do not panic. All the learned ones who participate in this blog know exactly what will happen.    Ernst

Anonymous • August 10th, 2007 at 9:17 pm

What Fed did was buy toxic mortgage-assed securities from sellers and cash is deposited in commercial bank so that banks can continue to lend and buy and sell securities. The sellers are supposed to buy the securites back within a short time but will they really buy it back and at what price?

Anonymous • August 10th, 2007 at 9:40 pm

My family’s fortune was ruined in 1929 (thanks to advice from the Girard Investment Bank of Philadelphia) for having precisely invested in home mortgage paper as a hedge against volatily in the securities market. (Of course all investors were ruined in 29). In his late eighties my father would still turn red with anger at the very name Girard.   But really, I think no one has genuinely understood capital destruction. Economists will now have an opportunity to rethink the issue.  I write summaries of articles in the financial press for a living and based on what I’ve read, the current crisis was foreseen and understood at least for the last 18 months. Moreover, central bank economists has been gaming this scenario since last summer. This is not confidential information.  There is more than one Grendel out there: the sovereign funds, carry trade, hedge funds, the US wars in Asia, mushrooming liquidity (but strangely no corporate investment), and consumer hyperindebtedness.    Institutions will be tested.

Guest • August 10th, 2007 at 10:43 pm

“Pete, CA… Very interesting, what will happen if carry trade ends over the next 8 months. Thanks allot for your wisdom!”  Guest, I think you are giving me too much credit there. I made a resolution to myself several years ago to stop being a part of the “dumb money”. I’ve worled hard since then to try to improve my understanding of what’s really going on in the US economy – probably like many other readers on this blog. But I would not count myself as being in the “smart money” yet.  Incidentally, if you are looking for some good free advice – try looking at articles written by Paul Kasriel and published fairly often on http://www.financialsense.com. If you are willing to pay a yearly subscription, then the newsletters by the Contrary Investor (www.contraryinvestor.com) and Gary Dorsch (www.sirchartsalot.com) are both excellent. None of these sources will tell you where to put your investments specifically. But they do have very good data analysis.  I’d like to hope that the yen carry trade slows down a bit over the next year. But I doubt it will stop – unless something drastic happens. Japan has been slowly raising its interest rates, and they may do so again soon. This is slowing things down a little bit, because it is lifting the value of the yen. But not by very much. Quite likely the hedge funds and large trading desks (not to mention Japanese investors) will be active for a long time. The current crisis shows you what can happen when these trades slow down (unwind) in a short time period. But generally it wirks the other way around – and traders are busy running trades to take advantage of low rates from Japan.  Personally, I think the yen carry trade is a problem for the global economy right now. It makes the global system too vulnerable (dependent on value of yen), too volatile (hedge funds can cancel carry trades very quickly), and too focused on short-term goals. There are people inside Japan who also advocate steps to reduce this trade, but it has been difficult to eliminate for political reasons (not to mention the fact that Japan makes a lot of money from the earned interest).  My advice is not to worry about the yen carry trade too much. These trades are generally focused on short-term investment goals. You can afford to think longer term. It would be more of an advantage for you to consider what the US dollar will do over the coming years. If you look at the Broad Dollar Index (http://www.economagic.com/em-cgi/charter.exe/fedstl/twexbmth) you’ll see that it is decreasing quite steadily in value. It might be worth factoring that into your investment plan, and taking advantage of some global investments.   Regards, Pete, CA   

acrabbe • August 10th, 2007 at 11:02 pm

Hey, you guys all seem to be pretty smart, in a logic/reason sort of way. So I’ll take a stab at letting you now what’s REALLY down the pipe. Hopefully you’re not too brainwashed by the past (substitue your age for X) X years in a managed society and in front of a TV to see things as they are. Not as they appear to be.  This is a managed market/economy. You better dash any hopes of any sort of permanent recovery from this point on. Period. The United States faces unprecedented challenges in the next 5 – 10 years. Challenges that are actually impossible to overcome. The past 35 years have been a shell game, a diversion. An “aside” if you will. I am tempted to venture into topics outside of economic/market theory, but the bottom line is that bad things are going to start happening in this country during the next few years, and will only accelerate in ways that (right now) you can’t even imagine.  Maybe if I put it this way, you’ll get it. Look at the past 3000 years of human civilization, and look at the way governments have treated their respective populace. ok. Now consider that today we on this blog have been calling the bluff of these worthless bastards/shills/charlatans for months and months. Years even, yet the shill gamehas continued uninterrupted. ok. WHAT MAKES YOU THINK THIS IS ISOLATED TO ECONOMICS AND FINANCIAL MARKETS? What makes you think this type of disinformation and corruption isn’t even MORE prevalent in other parts of our society? Like the LEGAL system, or the ENTERTAINMENT system, or the HEALTHCARE system. HAHA! Do you think we can actually meet even a small fraction of our 53 Trillion in total future obligations? That’s the type of debt you rack up when you absolutely DO NOT INTEND TO PAY IT BACK.  I’m not going to start ranting, and I won’t say “I told you so” in 7 years when the US constitution has been nullified and a state of emergency has been instituted due to some “false flag” attack or other silly scapegoat scare tactic. Have fun working the concentration camps or eating the gas/bullets from your own national guard slash military.  It’s never different. The past 60 years have just been a holiday in the annals of history. I’m definitely not going to be in this country 24 months from now. And I will definitely have a HARD CURRENCY in my possession. Fiat currencies have never lasted longer than a human lifetime. Ever. In the history of civilization.  1984. Behold a Pale Horse.  I can’t tell if we’re still warming up, or in early innings. It’s hard to tell hen all public information and all public figures are there merely to disinform and mislead you. You guys are supposed to be the smart ones. C’mon!   disclaimer: i make alot of money, i’m an ivy league graduate, i am not an american citizen, i hold a greencard from a foreign country. I’m not a quack. I’ve been reading this blog for the past 24 months because roubini is prescient and brilliant and the comments ar always VERY ENLIGHTENING. so i thought i would return the favor. i’m not a quack, but i doubt i will post again here.  This is all i will ever say about this topic on this blog unless prompted for more. I apologize for interrupting your CONTAINED (ironic?) financial discussions that seem akin to “arguing over an airplane seat during a flight that is destined to crash”  i truly hope that none of you experience the indentured servitude / concentration camps / multiple alternate horrors that will befall this once great country in the stunningly revealing years to come.  i can’t even write the names of book references because they will be tracked and censured and traced back to me. as has been the case in the past!  HAH!  Bury your gold/silver in your backyard and buy some guns / bullets / canned food / water / blankets / generators.   I hope none of you forget this post completely. Goodluck.

Guest • August 10th, 2007 at 11:08 pm

I am curious to know what world antiroubini lives in. He wonders in what markets houses became cheaper. One wonders if he has heard about places like Los Angeles, San Diego, Las Vegas, Miami. Real out of the way places, just a start really. One also wonders how long he has either lived in New York or paid attention to its real estate market. Does he remember or know what New York and the NYC real estate market was like in the late 1970′s? Don’t be fooled that it could never happen again.

Anonymous • August 10th, 2007 at 11:21 pm

How will all the academic “mark-to-model” types explain this shit storm? For kicks, I used Google scholar to look up a few upcoming papers. E.g., here’s one that solves a Karlin-Taylor recirsive partial differential equation to “derive” CDX prices: “An empirical analysis of the pricing of collateralized debt obligations“. The mark-to-market value on this stuff is at $0, without the “poly-affine closed-form solutions.”  Will a paper like this be published anywhere anymore?  On the analytic side, what’s primarily to blame for this mess: faulty analysis, faulty assumptions, or both?  

Anonymous • August 10th, 2007 at 11:32 pm

More on the CDX pricing paper mentioned above—this is really hilarious:  On average, the expected time until an idiosyncratic or firm-specific default is 1.2 years, the expected time until a clustered industry default crisis is 41.5 years, and the expected time until a catastrophic economywide default event is 763 years.*  *An expected time of 763 years may seem unrealistically long, but it is important to observe that there has never been a credit event in U.S. history—not even during the U.S. Civil War or the Great Depression—in which more than 50 percent of the firms in the economy defaulted or went bankrupt.   

Guest • August 11th, 2007 at 12:27 am

As I pointed out to Ryskamp some time ago, if things get bad for the super rich the government will step in and bail them out. Only little people get screwed in the USA. It was Martin Luther King who said in the USA it is capitalism for the poor (you make a mistake and you pay for it; you lose your house for example) and socialism for the rich (you make a mistake and invest in worthless mortgages and you are bailed out by the government.) Just what is happening now.

swedish statistician • August 11th, 2007 at 3:26 am

On the analytic side, what’s primarily to blame for this mess: faulty analysis, faulty assumptions, or both Written by Anonymous on 2007-08-10 23:21:22 Their assumptions (Poisson processes, Gaussian processes a.s.o) are more founded on mathematical convenience then observations of reality. If you don’t simplify things you may not solve the differentail equations and you don’t get this nice mathematics. I don’t think all this financial mathematical statistical stuff has so much to do with reality. It’s just a lot of nice mathematics and probablity theory. But it seems that a lot of people have been fooled by it. You should always remember that a model is always a model and neve a perfect description of reality.  

bbybmr53 • August 11th, 2007 at 4:00 am

To: acrabbe Sounds like you’re thinking the New World Order may be comming. The Halliburton camps? If false flag operations were conducted, the perpetrators can stay above the law by creating a police state with a series of executive orders. Sounds liks fiction…the sequel to 1984…maybe 2008. I brought up the phoney but powerful Fed, how it’s a private organization of private bankers manipulating currencies and interest rates that create disastrous boom/bust cycles. Many of the blogger as you said don’t see the forest for the trees and are drowning in economic trivia and detailed microscopic arguments. One more ’911′ that maestro Cheney is predicting that will be carried out like the last slam dunk 911 and in the midst of this global finance collapse, the you know waht will hit the fan. Wake up trivia nerds. Who making the big bucks from war and peace and boom and bust. It’s not the bloggers here, it’s probably bloodline families worth trillions.

Jason B • August 11th, 2007 at 4:08 am

http://www.commondreams.org/headlines06/0820-06.htm  Has Goldman Sachs Taken Over the Bush Administration?    When US President George W. Bush stepped forward to announce his new treasury secretary on May 30, a few Goldman Sachs friends likely knew Henry Paulson had the job.   Has Goldman Sachs Taken Over the Bush Administration?  Paulson was not the first Goldman executive to join the Bush administration from the 137-year-old investment bank described by the president as one of America’s “most respected firms”.  In fact, he was following in the well-heeled footsteps of three other former Goldman alumni who answered Bush’s call, although Stephen Friedman who briefly headed the White House National Economic Council, has since returned to “the firm” as it is known on Wall Street.

bbybmr53 • August 11th, 2007 at 4:16 am

No Goldman Sachs didn’t take over the Bush administration, Cheney/Rumsfeld/Wolfowitz/etc and the Project for A New American Century did.

Peter J Bolton • August 11th, 2007 at 7:57 am

To be clear:  As the banks stop lending then ‘deals’ stop getting done: no deals equals no derivatives! Existing derivatives just fade away as deals are completed!  No new derivatives (no loans = no deals) means disappearing “assets” for the banks; the bottom line becomes less – far less, until bankruptcy er insolvency.  Just to note: I believe that ‘derivative-assets’ started to save (acceptably by the ECB) Europe’s banks (almost all) way back in 1998 (magic date) and that “derivate assets have actually becomes a priori statutory requirements (within Europe) (unofficially mais oui). Am I wrong?   So top line EBITDA: Gross Revenues + Gross Assets less Derivative Assets – Less CDO/LDO etc. Assets, = ? (a lot less that 2 weeks ago and perhaps even today.  peter

guest-t • August 11th, 2007 at 8:14 am

Did I see it wrong or they put a news on cnnmoney (regarding existing buyout deals may be cancelled, or at least postponed a few weeks) and then it disappeared?  PPT?

Even worse • August 11th, 2007 at 8:15 am

Sad, USA has a large population of people who do not even have a decent Euro-area style yearly vacation. But they do not even have more cash, only more debt. And they are not even able to make the payments on their debt to keep their own homes.   

Ryan Darwish • August 11th, 2007 at 8:26 am

Marc,  I would expect that a country building up huge reserves of fiat currencies, would be looking at exchanging these currencies for assets of strategic value such as energy, natural resources etc. A smart country would also be looking at optimizing the value of this exchange for itself, eg purchasing these assets when the prices had been driven down, when the fiat currencies were relatively strong, or some combination. My guess is that is where those petro dollars and sovereign wealth funds will be looking to diversify or divest of dollars, or manipulate circumstances to create a favorable purchase opportunity.

Guest • August 11th, 2007 at 8:53 am

It is now clear that we face another group of terrorists who are holding the world’s financial system to ransom, namely investment banks and hedge funds. I say this because it is obvious they believe that they can make the most ridiculous bets and still get bailed out if things go wrong. Central bankers, lend me your ears! What is so wrong with a poorly run bank or reckless hedge fund going to the wall. Will that not remove the deadwood and make the system more efficient?. Is that not the very essence of all free markets? What a sad spectacle it was to see billions that could have been spent on health care, social services and education being wasted on these buffoons! Come on Mr Bernanke, we know you have balls. Show them for goodness sake and leave an everlasting legacy for posterity as a man of principle and integrity.

Anonymous • August 11th, 2007 at 9:11 am

Give me your tired, your poor, Your huddled masses yearning to breathe free  I will make sure they stay poor And end in mortgage slavery

Marc • August 11th, 2007 at 9:12 am

Yes Ryan and that is exactly what for e.g. China does. They are buying strategic resources(energy, metals) everywhere in the world (Latin America, Afrika, Iran, Russia). For example, the total value of all the companies in Africa is about 800 Billion US$. If China would purchase them they still would have some 400 Billion left and own all the companies in Africa..all of them! The big players don’t care about the money…money comes and goes..and print more if need be..they care about assets; people need assets to life (food, clothing, shelter etc.). Our fiat system is beyond rescue but the CB’s are trying to stretch the game as long as possible.  Just look who participates in the Plunge Protection Team:  http://www.crmpolicygroup.org/docs/CRMPG-II-Ex-I-II.pdf   Says enough to me.  My advice would be to do exactly as the big players are doing…get some resources…solar panels, gold/silver/land..we are just very small, very, very small players in the global markets..our impact is neglible.  But as always….no energy, no economy. Consider the Olduvai Theory of Richard Duncan..Our society/economy needs cheap energy because our fiat currencies are based on that..well cheap energy is not availiable anymore (peak oil, and soon, peak gas)..the global economy will get local once again. Make sure you have some tangible local assets.  

Anonymous • August 11th, 2007 at 9:17 am

To swedish statistician:  ”all this financial mathematical statistical stuff has so much to do with reality. It’s just a lot of nice mathematics and probablity theory. But it seems that a lot of people have been fooled by it. You should always remember that a model is always a model and neve a perfect description of reality.”  Are you really saying that all the bond ratings agencies were basing AAA on idealized solutions to PDEs, while ignoring the price-to-rent and price-to-salary ratios on the properties they were underwriting!!? This stuff has been on the bubble blogs and even Wikipedia for years! 

Guest • August 11th, 2007 at 9:20 am

Central bankers are even more stupid than I thought. Imagine giving a drunk with a hangover, more alcohol! If they must do a bail out, they should throw the money from helicopters at homeowners in Florida, California, Nevada etc. They are the ones who need it most and surprise, surprise, they are the root cause of the current crisis. If they can’t do that, they have no business pouring money down a black hole by trying to bail out the banks. It might work in the short term but the problem won’t go away.

man in Hong Kong • August 11th, 2007 at 9:24 am

China and Japan are foolish enough to keep the US bonds. Once they throw such papers into the sea… It is coming!!

AFFG • August 11th, 2007 at 9:38 am

What is all this story about bailing the banks out. For the time being they are being tortured. If you think the actions of th ECB were there to bail them out, you do not understand the system. The bailout will come when they cut rates. But until then the money base is going to shrink. So before getting too wild about Gold, Silver and Land (I have all three of them!) I would advise you to buy Bonds which are NOT stored in a bank or anything which looks like a bank!!! The Gold story has still to come.   We are now in a deflation and the CBs have no way out. SCHACH MATT I say.

Guest • August 11th, 2007 at 9:54 am

“What is this PPT that’s often referred to? The Plunge-Protection-Team?”  We thought that’s what it meant. But maybe there’s a new definition …  PPT = “Profit Protection Team”  i.e. Wall St profits.  Pete, CA

Guest • August 11th, 2007 at 10:18 am

Swedish Mathematician says: ”You should always remember that a model is always a model and neve a perfect description of reality.”  You are absolutely right.   And let’s take this issue of improper computer modeling one step further. I myself work as the manager of a team that develops computer models. We do NOT work in the financial industry. But we do deliver our results to professional clients. And the team members who work for me are very bright (probably like the quants who work on Wall St).   There is NO way that professionals ever run these computer models without checking their behavior. In my business, if someone did that then they wouldn’t have a job. At a bare minimum, models are always run at least three ways: 1) With normal (nominal) set of assumptions, 2) With worst-case assumptions, and 3) With best-case assumptions. This helps to explore how sensitive the predictions are to possible changes within the computer model. In fact, our own team runs MANY more checks than this – looking for any possible irregularities in both the data and mathematical details.   Therefore … I simply don’t believe that the ratings agencies in the US who rated those CDO’s did consider possible effects of changes in the data. Let’s face it, there has been data available for US home foreclosures now for months and months. The data set shows a trend line that is parabolically increasing. Nobody could look at that data without at least considering the possibility that the current trend will continue – and then putting that assumption into their valuation model (in terms of increased market risks). I suspect the ratings agencies MUST have had other predictions for the possible values of these CDO’s – even if they are not disclosing them.  Pete, CA

man in Hong Kong • August 11th, 2007 at 10:50 am

Are the US peopel are still buying hedge funds now?  Where/how can figure out this?  any ideas?

think • August 11th, 2007 at 11:31 am

Investment Dealers are excited to announce the newest structured finance product - Constant Obligation Leveraged Originated Structured Oscillating Money Bridged Asset Guarantees, or COLOSTOMY BAGS. Designed to accommodate the most sophisticated investment strategies, Colostomy Bags contain the equity tranches of Structured High Interest Taxable Derivatives, or SH IT, and are leveraged an infinite amount of times through the innovative use of derivatives.  ”Its an actively managed, unlimited liability, open ended investment with no maturity date, which pays LIBOR plus 5,000 and has no correlation to traditional investments” said a spokesman for the Investment Dealer who engineered the product. “It’s based on a CDO structure, but it’s designed to default BEFORE the first coupon payment, which you’ll agree has no correlation with stodgy traditional investments and is a perfect fit for portable alpha scams, er, strategies.” Following the default, each month more leverage is added to the structure to pay for the coupon and the Dealer’s fees which are set at 80%. “We feel the fees are reasonable, given the adrenaline rush you’ll get each month attempting to mark these.”  The Colostomy Bags carry a AAAA rating, based on the rating agencies opinion that they are even safer than Treasuries. “You can’t use traditional credit analysis to value these babies, no sir-ree” said a spokesman for a rating agency. “Just like Icelandic Banks, we give them the highest rating because you just know that the Fed will bail out all the hedgies who buy these things..remember like Long Term Capital? And the best part is, the beauty of this structure is that the loss given default is NEGATIVE, so by extension we feel that the CDS will trade through Treasuries.”  Inhaling deeply on a fatty, he continued “We’ve been tinkering with our model, which served us well for Enron and the Telecoms in ’02, and our stress testing shows that the probability of loss in the senior tranche is close to zero.” The model, constructed of a wishing well, Joseph Jett’s trading blotter, and drawings of Unicorns then collapsed in a heap. “Well, back to the drawing board!” he cackled.  A real money investor, huddled on the windowsill outside his office, said he remained optimistic about holding the Colostomy Bags but was a bit concerned with the 95% decline in value on the first day they traded. “We’ve taken a bit of a haircut on these but I’m waiting to see the first servicer report, which should arrive in a few months. At first I was annoyed that the dealer who sold them to me refused to make a market in them, but that makes my job easier since I’m not tempted to sell.”  We located a hedge fund manager at a due diligence meeting in the VIP room at Stringfellow’s. He said he was skeptical of the structure at first but was dared into buying it by a fixed income salesman. “He said to me, ‘what’s wrong with you, its quadruple A rated, just buy it, what are you a pu ssy?’ He also said it was going into ‘an index’, although he didn’t say which one, but I felt that I had to buy it. And that was good enough for me, bro’.”   

hmmmmm • August 11th, 2007 at 11:56 am

 There was a great comment between Ernst on 2007-08-10 19:49:16 … and Anonymous on 2007-08-10 20:47:14 (who replied, “Well said well contained. Well said.”) … but it would appear that it has been censored.  Fascinating how Ryskamp goes ape with 400 raving comments a day for weeks, and gets a gentle rebuke from Nouriel only after major pressure from readers – and reader “well contained” makes one comment about how corrupt this whole thing is – and promptly gets the axe.  Too bad … some of us saw the comment, though.  It WAS “well said”, indeed. So long, well contained – we’ll miss you …    

Ryan Darwish • August 11th, 2007 at 5:25 pm

Marc,  Looks to me that the Blackstone and Barclay propositions are a strategic end run around potential nationalistic political opposition in asset acquisition. What’s your read on this?  RD

Peter J Bolton • August 11th, 2007 at 6:46 pm

Re: Swedish statistician on 2007-08-11 03:26:49  The foundation of science is that Theory must, a priori, be tested by demonstration in – prediction. A theory must always allow for negation.  Economic Theory has always failed in prediction through demonstration (constant) and therefore an economist must be defined (within scientific terms)as someone who ‘guesses’. This may sound cruel (it is but a crude and rough explanation just enough to send the message) but it is essentially and effectively factual and true.   Every ‘economist’ has an opinion and Prof. Rubini (I do not state this disrespectively) stands just to the left of ‘mainstream’(political correct) while others group together in a variety of odd assortments (bents) – whereby none can predict what is going to happen Monday – whatever time, in terms of economic activity.   Why?   Because ‘economics’ is not a science; simple!   Economics is and has become a religion – That is a cult.  Same with “Weather Theory” – Astronomy, Politics, Physics, Mathematics, etc., etc.  William Blake refers to our current state of mental assumptiveness, as “Newtonian Sleep”.  

Jason B • August 11th, 2007 at 7:30 pm

Peter -  I would argue that William Blake is a poet, not a scientist, and was arguing for poetry over rationalism and reductionism. Clearly Astronomy, Physics, and Mathematics are sciences, as they can be used for prediction, for example the motion of planets.  Poetry nourishes the soul, but I dont want a poet designing a bridge or the plane I fly on.

Peter J Bolton • August 11th, 2007 at 8:16 pm

Jason B on 2007-08-11 19:30:55  My point is that Economics does NOT meet the criteria of a science or anything else – that is to say, Economics is purely reactive guesswork in the hands of those of popular mainstream ‘opinion’ or iow consensual guesswork. Economics, the supposed science (applied) is merely a popular cult and therefore does come under the realm of William Blake the Poet.. for argument sake.  And, this popular cult controls our lives – through mainly ‘political agenda’. Or, if you prefer, those ‘economists’ that are ‘playing with the global economic system (which is now completely gutted through corruptive agents) have absolutely no idea what they are doing BECAUSE there is NO scientific basis or foundation to substantiate their (economic) actions!  ’Economic decisions’ are occasionally and supposedly based on lagging indicators of suspect credibility and consensual ‘opinion’ and designed a priori, purely to avert the responsibility of wrong decisions (an example of this is where Corporates that file for Chapter 11; the same Executives normally and typically remain at the helm after reconstruction has been effected and blessed by the Regulators as were responsible for the corporate mismanagement in the first instance. – and after a large percentage of the workforce has been dumped).  Someone once said that government is merely a ‘protection racket’ as old as 3000 years in written history whereby the exchange of goods (trading) can never be stopped due to the nature of men – the context of this exchange being on the essential nature of the individual – and that ‘economics’ per se is merely a sophistication of tax collection by and for those of government and those co-joined at the hip er cronies.  ”Clearly Astronomy, Physics, and Mathematics are sciences, as they can be used for prediction, for example the motion of planets.”  FYI – Astronomy today is ruled by “Theoretical Mathematics” which also rules Physics – sadly. And, the ‘prediction success rate’ track record is far more than dismal. Whereby the success rates that are high and rising dramatically (wonderfully) are in the technologies areas.  Do not confuse Technology – with – Science as they are two very different arenas.  Bottom-line: Until the basic principles of economics are established without doubt within the terms of criteria of science, then economics will remain a cult, as morality; a fleeting and fanciful popular fashion statement dominated by opinion and political persuasion.  kindest

Jason B • August 11th, 2007 at 8:45 pm

Geez, Peter, its worse than I thought then.  Its all become make believe. We have made a giant, inverted pile of crap, all sitting on the shoulders of the one guy who is still producing something tangible and valuable.

Guest • August 11th, 2007 at 9:54 pm

@acrabbe  Thanks for telling us twice that you are not a quack. Now we understand.  Seems like the market turbulence is bringing out the worst in everyone. The econ blogs have each become a zoo.

Peter J Bolton • August 11th, 2007 at 10:08 pm

“Geez, Peter, its worse than I thought then.”   Far worse Yes!   ”Its all become make believe. We have made a giant, inverted pile of crap, all sitting on the shoulders of the one guy who is still producing something tangible and valuable.”  Yes, indeed. You are correct!  The argument is … we just do NOT understand how the art of economics works… so, we guess! While pretending that we do know how it works! This, I believe that you would agree, is folly, particularly when it embraces the whole of our global society and will eventually be paid for in full, at face value, by the hard work and sweat of that individual at the bottom of the fashionable society pyramid.  It is encouraging that you are beginning to understand.:-)  The basic sound concept of the economy is the purchasing power of that dollar earned through the work (and sweat)of the individual.  The acceptable practice of the current state of the global economy is founded not on work (sweat) but on the creation of virtual capital ‘ex nihilo’ (through spin) which according to well founded and established science, cannot be done or better, cannot be sustained.  We are at the point of a global meltdown (as aforesaid) that will lead initially into a global depression (a state of mind entrenched in helplessness) – from which we will emerge to build a far better (sound)society er civilization which will be founded in fact and not ‘assumption’! IMO  peter     

Ernst • August 11th, 2007 at 10:56 pm

Peter Bolton: You define as science a set of knowledge that will always be able to predict the correct outcome of a situation given a finite or infinite set of circumstances. That is a very high standard to achieve and, possibly, not many have achieved this. Although some have partially achieved this for a given set of circumstances. You set the bar too high. I will not discuss whether economics is a science or not since it is irrelevant to the matter at hand. Economists don’t only look through a microscope to discover minimal minutiae, like physics is looking for quarks or strings that vibrate in the infinitesimal small. They also look at the big picture which encompasses the whole world, how it works, all the social sciences including psychology (you must have heard about psychology of the consumer for various countries, propensity to save, propensity to consume, etc.) and many others. The important thing is to use logic and common sense. This above all. Even so, different economists have different views of possible outcomes, there are different “schools” of economics (monetarist, Austrian, Keynesian, etc.) and different ways in which they confront situations. But they all have logical explanations as to how they arrive at their conclusions. It is now up to a third person (maybe an economist also or a statesman) to dive into the big arguments of different economists and decide which makes more sense. Or which course will foster a better future of events. Since economics, amongst other things, deals with human behaviour, it cannot be an exact “science”. We just try to do the best we can using our common sense and the limited intelligence with which we are endowed.  Dr Ernst

Ernst • August 11th, 2007 at 11:11 pm

And, Peter, most economists work for pay for some institution. Government, Wall Street, Investment Banks, supra national organizations, private or public corporations, even private individuals. These are all subject to the whims of their masters lest they get fired. So their opinions should mostly be biased. Only few, like me, have the privilege of being independent and answer to no one. I only dedicate myself to raising wealth and am not a US citizen nor a US resident nor intend to be one or the other. So beware of the word of most economists since they are normally bound to a special interest group they must represent and defend.  Ernst

Ernst • August 11th, 2007 at 11:44 pm

A couple of comments. Someone mentioned Japan, carry trade, etc. Yes, Japan is the second biggest economy in the world. Curiously, latest economic indicators are signaling to a deflationary environment again. Trend for banks and financial institutions’ stock prices are showing us the floor. I mean, the trend is clearly downward. Reminds me of the USA somewhat. Draw your own conclusions. Something important can be triggered in Japan.  Somebody else, if I recall correctly, mentioned that the US economic problems are puny when compared to all the world with the Eurozone, China, Japan, India, Russia, Brazil, etc. Allow me to remind this commentator that the US represents over one quarter of total world GDP.  Ernst

man in Hong Kong • August 12th, 2007 at 1:28 am

the US of A is still fine as long as China and Japan are foolish enough in holding the bonds offered by the the team under the son of the paul.  Th is a political matter! 

Guest • August 12th, 2007 at 1:40 am

@Hong Kong, I agree. When China says: No, thank you.We are fine. The world will be changed completely. 

Petr J Bolton • August 12th, 2007 at 2:18 am

Ernst: “You define as science a set of knowledge that will always be able to predict the correct outcome of a situation given a finite or infinite set of circumstances.”  I accept most of that you have written except that above and a few other points below.. I explain: I believe that scientific principles do apply to economics – as well as all other things including ‘human behavior’. I accept that we do not know ‘everything’ and therefore further accept that we will and cannot at this time, precisely predict in all fields given an infinite set of circumstance – and facts. Surely this is a given state in evolution?  What I am saying is that our “institutional mainstream economists” do not understand even the basic scientific principles involved with economic practices and do practice applied political agenda – that is to say, ignorance of the physical characteristics of the phenomena with which they ‘play’ added to a high proportion of Moral Hazard..   I also doubt very much that most of these mainstream economists do understand human behavior or see the big picture.  And: “You set the bar too high”. What does this mean? Of course I set the bar high as there are billions of lives at stake here and I will never accept a compromise on such matters when it is indeed well within our capacity to do a lot better than that mediocrity which spins out of the economist’s corner as “excellence” and will lead us into global depression.  It is the essential difference between an ape and a human – which are not related despite what we have been told.  So the question begs: can the current global situation be fixed to which I answer, Yes! But, will it be fixed? to which I answer, No! Why? Moral Hazard and political agenda! End of story.  So let us all prepare to wallow in our “excellence” with the bar set at knee high… and eat cake.  respectively  peter

Anonymous • August 12th, 2007 at 3:22 am

China’s bond bs is overrated. The credit bubble can blow with or without them.   The fact is, the decade old credit bubble is bursting. Thus the scare.

bbybmr53 • August 12th, 2007 at 3:53 am

I’ve mentioned it a couple of times but the Federal Reserve who can supposedly supply liquidity(short term loans) for the coming meltdown actually LET THIS REAL ESTATE FINANCE BUBBLE INFLATE without restraint but by supplying easy money and not regulating shady loan products. The Fed basically caused the bust or at best let it happen. Check the history of the Federal Reserve. Very secretive and not a government entity, but a private group. bernanke has admited the Fed caused the Great Depression. What do you think they are doing now?

shanghai man • August 12th, 2007 at 4:57 am

we will stick to the bond, we will not sell. other than buying us bond we don’t know what else we can buy. but after this crisis i think china will start to learn, and sell at least its half us assets and switch to euro and to commodities such as oil and gold.

taipeimarc • August 12th, 2007 at 6:19 am

It seems that the root cause of this current meltdown was that the rating agencies were in cahoots with the creators of the MBS and CDOs. (plus cheap money from yen carry trade, low fed rates, 24/7 us printing press, unscrupulous mortgage lenders and ubergreedy hedge fund managers).   How the SEC let these criminals get away with it for so long is disturbing. Then again with CronyBushCorp leadership, nothing is surprising.   Foreigners (China,Arabs,EU/AU banks) must be pissed since much of the securities and other financial packages they bought are near worthless. Not to mention how much the value of thier US$ forex is decreasing as the dollar tanks.   Then again, its their own fault for not doing due diligence. Even myself as a layman could see this meltdown coming over a year ago.  My biggest worry, since I an am American living in Taiwan, is how pissed off are the Chinese? Are they going to pull the carpet out from the USA and tank the system? Is this there ploy to finally take back Taiwan? Has Paulson and bush’s advisor kissinger sold out Taiwan again? (Keep purchasing MBSs or Tbills, then after the Olympics, the USA will no longer will support Taiwan?) Not that I really care, the Taiwan government makes it extremely difficult for Americans to come here and do business ~ I just want to be prepared. I’ve been to China many times and understand the trade vs. social unrest issues.   BTW: It’s seem’s more than a coincidence that Blackstone’s founder, Stephen Schwarzman was Bush’s roomate at Yale and now China has bought in $3Billion of Blackstone’s IPO. Are they the tool that will be used to purchase all the assets in the USA if the supersized-bust happens?  I’ve noticed quite a bit of negative reporting on China lately, from the RMB peg, to faulty and deadly products, to air pollution in Beijing and how it will affect the Olympics. Its seems like the MSM is gearing up for something.   Other references: http://globaleconomicanalysis.blogspot.com/ http://market-ticker.denninger.net/  Mike Whitney articles are also good at: http://www.informationclearinghouse.info  I would like to hear other’s opinion on China’s reaction. Sorry if this post is a bit amateurish.  

taipeimarc • August 12th, 2007 at 7:00 am

I should add to my list of meltdown reasons the manipulation of the unregulated GSE, Fannie Mae. There is a good post about this on the site: http://globaleconomicanalysis.blogspot.com/ (Aug8)  ”Yesterday afternoon there was talk the Office of Federal Housing Enterprise Oversight, the GSE regulator, was actively working on ways to expand the portfolio caps that legislation this past spring reduced. Why? Because, as FNM interim chief executive Daniel Mudd and FRE Chief Executive Richard Syron explained to the Senate Banking Committee this past spring, the ability to hold onto some of those loans, and to expand them, can keep funding available in a crisis.  Sure enough, a piece on Bloomberg yesterday afternoon reported, “Fannie Mae, the largest source of money for U.S. home loans, asked its regulator for permission to take on more mortgage assets and help ease a crunch in the credit markets, a person with knowledge of the request said.” Well, considering that’s the same thing Fannie Mae has been saying for the past two years as legislators sought to cap their portfolios it’s hardly news. Unless… unless it’s not Fannie Mae doing the asking.  Who else might be asking? Politicians being pressured by banking executives who are worried about how serious the situation in credit markets has become. That would mean that in less than three months we’ve gone from political pressure to limit the portfolios of GSEs, to political pressure to expand the portfolio limits of the GSEs.  So, who’s afraid of Fannie Mae? Us. If these portfolio caps are raised, it would suggest credit market problems are far more serious than thought.”  >>Bush mentioned the ceiling won’t be raised until FNM is reorganized, but who can believe this guy?   BTW: Paulson’s contact in China is Vice Premier Wu Yi, a former petroleum engineer and staunch anti-Taiwan(er). http://en.wikipedia.org/wiki/Wu_Yi (if anyone cares. I point this out because Taiwan has to be in the US/CN financial equation somewhere/somehow).

London Banker • August 12th, 2007 at 7:44 am

@taipeimarc  I’ve also been wondering about China’s role in current events. While the Blackstone participation looks like a good way to appear supportive of the Bushista junta and crony capitalism, the Chinese may be playing a much subtler game. They have been tying up long term resource treaties everywhere – in Africa, South America and the Middle East. They are shifting cash for hard assets and outright ownership of strategic industries where possible.   I agree that they will put Taiwan in play at some point, but they will only do it when the US is incapable of serious retaliation.  Much more immediate than Taiwan is Iran. Cheney and his minions are pushing strongly a September strike, knowing that the window for getting away with another war for the Khuzestan oil fields (90 percent of Iran’s oil reserves in the tiny area adjoining southern Iraq) is closing rapidly. Given their investment in Iran, China cannot be best pleased.   The US stands no chance of holding on to Iran’s Khuzestan fields – no matter how many millions of cluster bombs it drops on the surrounding mountains. When the US military is finally destroyed, then China will have no opposition to supporting Iran and restoring its dominance in Iranian oil development and also taking back Taiwan for good measure. Russia will also help Iran resist a US occupation. Military defeat and economic turmoil will cause the US so many domestic problems, it won’t be able to forestall Chinese and Russian advances and influence.  The US crony capitalists have sold China the rope with which to hang them in the form of dependence on Chinese finance for our ponzi markets and debt-led consumption. I’m not happy about the way this is likely to play out with China the emergent superpower, but it merits grudging respect.

JMa • August 12th, 2007 at 9:28 am

It is ironic that companies who can hardly produce financial statements with credit and derivative exposure known likely to literally not ONE single knowledgeable person on Earth are going to save the day ? Someone mentioned previously here I believe that the legislation to slow their expansion may have shielded them in the last few most troubling years of MBS production which is a RARE good piece of news amidst the current storm. Good Job elected leaders ! Way to go ! However, these entities often were making markets in these MBS products AND buying and keeping product themselves in their own portfolios right ? Are they not clearly the most dangerous of all participants in this mess with their own existing exposure ? One of the proposed bills commented on regularly in the WSJ years ago included giving another entity outside of these two Titans of Credit the power of authority in the event they go into receivership. So somebody clearly was worried about them at some point in time.   Do you ever wish you could take the blue pill ?  It is interesting that equity markets were managed / supported / manipulated all the way up to DOW 14,000 for the most part and now they have to do the same on the way down and there appears to be some risk of an event to the down side. Why did it go so high to begin with ? Oh that is right, a few more deals had to get done so a handful of people could add to their millions if not billions at the expense of the entire society / market to some degree…    

man in Hong Kong • August 12th, 2007 at 11:35 am

what is the function of central bank?  If cash injections(by central banks) can cure credit crunch, central banks are nothing more than useless! A money printing machine is more useful than a central bank? Maybe bush just needs to make an order that the money on the US people hands to be doubled/tripled in value… Your life is so easy USA??

Satish • August 12th, 2007 at 11:44 am

US Government in technical default on debt  The U.S. has hit and gone through the debt ceiling of $8.965 trillion that was set by Congress in March of 2006. – M. R.

Mark T, Salt Lake City • August 12th, 2007 at 11:45 am

 First of all, I want to say that I just discovered this site today and am glad I did – excellent!!  Secondly, I would like to point out that much of, if not most of the aggressive mortgage lending that has created this mess was not performed by banks, but non-bank mortgage lenders. Regulation of those entities is not performed by the Fed, nor the FDIC. I don’t know about other states, but here in Utah the regulation of non-bank mortgage lenders is not performed by the agency that regulates banks – but another agency that regulates consumer lending. If regulators are to be blamed, the blame should be placed accordingly (which is not on the Fed, FDIC, or certain state bank regulators).

taipeimarc • August 12th, 2007 at 11:52 am

@Londonbanker  I see it the same way with Iran. If the US goes into Iran, its the end of free Taiwan. (Just a blockade of the ports for a day or two is enough to close this place down).  Taiwan deserves better. I don’t like the government bureaucracy, but the people here are decent and hardworking. Its a much better life here than in toxic dump China.

Guest • August 12th, 2007 at 11:52 am

“US Government in technical default on debt “  Never mind! The us of a is born to save the world. If more cash/bron/debit can help, why not??  easy fed, just do it!

John Ryskamp • August 12th, 2007 at 12:54 pm

As I said earlier, Goldman Sachs is in big trouble and on its way to bankruptcy. Countrywide is holding on a little longer than I expected, but will also go into BK.  The reason these BKs come out of nowhere now is the litigation departments add up the liability for lawsuits which have not even been filed yet. That’s more than assets. Into BK they go.  But that evaluation of litigation exposure, is not public.

John Ryskamp • August 12th, 2007 at 12:59 pm

As a matter of fact, a lot is going on in private now, for example the evaluation that FM would not increase its mortgage pool.   The pressure now is coming from the banks to keep people in houses–the banks turn out to be the strongest supporters of the New Bill of Rights. But they are a weakening ally, because no one wants their money, and they are being dragged into the swamp.  Soon you will see something from the Fed to the effect that there is a limit to what it can do to affect fundamental economic conditions. That is, liquidate liquidate liquidate.  The problem is that the political system is nothing but a bunch of trained monkeys. Do you think Hillary Clinton and her insurance industry thugs, know what to do? Nonsense.   Thus, it is the political system itself which is weakening. Day after day, it sits there doing nothing–that’s digging its own grave.  Time to start investigating those shadow governments which have been waiting for this moment. There are some real killers among them. Hope you’re ready.

Guest • August 12th, 2007 at 1:08 pm

@Mark T  ”I would like to point out that much of, if not most of the aggressive mortgage lending that has created this mess was not performed by banks, but non-bank mortgage lenders”  Then why the banks in Europe and probably all over the world start panicking? Who gave those mortgage lenders hughe credit lines? Who used them as vehicles to create  more money? Who was rating them? Who didn’t provide subprime or alt A loans itself, BUT accepted the derivatives as collateral for giving multiples in credit to hedge and other investment vehicles? That’s why there’s panic…  ”A ‘sound’ banker, alas, is not one who forsees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him.”   John Maynard Keynes   

taipeimarc • August 12th, 2007 at 1:15 pm

Thanks for that AFFG. I was trying to find the English version of that article on the South China Morning Post, but it’s a shitty paper and you need to pay for access. I did notice another eye-catching headline:  ”Mainland credit crisis could dwarf US”  Raymond Li, Associated Press and Agence France-Presse Aug 12, 2007 The mainland faces a home-loan credit crunch as bad as or worse than the US subprime crisis that is causing turmoil on the world’s stock markets, an academic warns…. http://www.scmp.com   

Jason B • August 12th, 2007 at 1:32 pm

RMBS and CDO’s are a small time crisis compared to peak oil and water shortages. Money can always be printed to avoid another 1929 Great Depression. The big problem there was strict monetary policy – just look at the amound of script circulating in 1932.  Don’t live at the edge – always have a cushion of money in your budget for inflation.  Wait until the Ghawar and Candrell Oil Fields and the Ogallala Aquifer really start to drop off. Now there’s a crisis I can really scare myself about.

Guest • August 12th, 2007 at 2:06 pm

“I would like to hear other’s opinion on China’s reaction. Sorry if this post is a bit amateurish.”  One of the most surprising developments in the last week has been America’s response to China’s (implicit) threat to sell US bonds. Virtually the whole of America has written off these warnings. Not only the US govt, but a wide variety of financial sources and even blog authors.   What if the Chinese do take action? They don’t even have to sell US bonds. They only have to stop buying them. Of course China will take some losses if the dollar sinks, but the US will take an enormous hot right now if long-term interest rates rise. In fact, we should expect that over the long term that theese rates will indeed rise.  Which country is in the stronger position here – China with enormous trade surpluses, or the US with enormous trade deficits? This is not an equal battle. The US needs to re-think its strategy, and it’s definitely not a good time to be kicking sand in the face of China.  Pete, CA 

AFFG • August 12th, 2007 at 2:19 pm

“They don’t even have to sell US bonds. They only have to stop buying them.”  Yes, you got it.  ”Of course China will take some losses if the dollar sinks, but the US will take an enormous hot right now if long-term interest rates rise.”  There going to make loss, whatever happens.

AFFG • August 12th, 2007 at 3:25 pm

Ok Boys … this part of the world is starting to cook …  http://www.bild.t-online.de/BTO/news/2007/08/11/boerse-talfahrt/finanzkrise-gefaehrdet-aufschwung,geo=2295912.html  This is a yellow press newspaper. The title: Can I get to my savings at any time?  If there ever is a run on the bank here, then it will be this newspaper which will trigger it.  People on blogs and newspaper commentries are already starting to believe in a sort of Black Monday. I guess if enough people believe in it, then it could just happen … or not.

Pete, CA • August 12th, 2007 at 3:58 pm

AFFG   Interesting press article. Can you tell us a little bit more about what it says – I don’t speak German.  The amazing thing, really, is that the USA is still in the early stages of this mortage meltdown. Most of the losses on sub-prime and Alt-A mortgages have not even happened yet. The major resets to higher interest rates (hence higher home foreclosures) will be happening in the next 12 months.

Pete, CA • August 12th, 2007 at 4:03 pm

CHANGE IN THE WIND – USA MORTGAGES  I was at a work-out (exercise) on Sat morning in California. A couple of the guys there are in the local mortgage industry. They were saying that the mortgages here have now gone from one extreme to the other. Instead of being easy to obtain, mortgages have suddenly become ridiculously impossible to obtain. The joke is …”Sure we’ll give you a mortage. You’ll need to put down 100% of the principal, and we’ll arrange financing over 36 months!”.  Expect to see a significant drop in CA home sales in August/September. Buyers were already drying up. This wil kill everything. It is, of course, a huge over-reaction. But the USA tends to do things in extremes.  Pete, CA

An unpaid and upset landlord i • August 12th, 2007 at 6:04 pm

i rented and apt. in Panama to a man, a retired vet who went bankrupt, lost his house to ABN in march 2006, shipped a few items after his retirement, he was so upset with US that he did not say good bye to his family or friends, did not tell them where he was going to immigrate.. Then after a few months he had a nervous breakdown and fled the country leaving many bills, rents behind, back to his wife. The lady he was living did not know he was married and in such difficult financial situation and was left behind, no visa, no money, no airfare.   Now that man is back in Blacklick, Ohio, living with his elderly wife using her pension while trying to find a new life in the Phillipines in at least 20 paid sites, maybe a rich woman so naive and innocent as the last one… Is this the result of the big crisis the country is facing now or just another crook using the dating sites?.

An unpaid and upset landlord i • August 12th, 2007 at 6:15 pm

I forgot to mention he goes online using the nick: mikejb5293, mikee5293, mikeej, mike5293 paying cherryblossoms, aziandating, asianmeetpeople and other sites while I am here in Panama with all the late receipts, unpaid bills, i was unable to paid the mortgage, the bank foreclosured the apartment rented to Mr. Michael Jay Bulger from 8133 Equitana Way Blacklick, Ohio married to Constance Spence Bulger… He will be moving to the Phillipines soon http://amigos.com/view/9979017_17585.html as soon as he find a lady that can pay his bills but he will never divorce her since they have a sexless relationship since they married in May 2004 after his ex ran away with his african american friend.  I am very upset with what’s going on in the real estate market, the housing slump, the wall street troubles, but this is no excuse to use a false profile, 80′s picts and move to a country exploiting poor, honest people like us, Panamenians.  God bless you all.  

KP • August 12th, 2007 at 6:19 pm

Much ADO about nothing.  Foolish speculators got crushed coming into the final stages of the Dot.Com bubble as did overleverged hedge funds all due to a liquidity bubble triggered … once again … by our Federal Reserve. After much bloodshed, crying, finger pointing and a never ending barrage of lawsuits, The FED, once again, attempting to save it’s Banker Brethren from yet another debacle during the Tech meltdown, floods the system with cash and lowers rates to record low levels. Once again, the foolish speculators … take the bait and charge into the real estate game. Naturally, hedge funds, now having learned how to get 80:1 leverage on arcane swill brewed on Wall Street charge into the real estate game as well, only this time they decided to feed on the foolish speculators in real estate. Big sharks feeding on little sharks and a feeding frenzy erupted for a few years.  So where are we today? Well, once again, foolish speculators and aggressive, over leveraged hedge funds are getting their teeth kicked in … again. Guesstimates for Florida are that nearly half of all problem real estate is tied to in state residents speculating in real estate with many leveraged up on two to as many as five properties.. The ‘flippers’ are being flipped off once again and the ‘quants’ that fed the frenzied masses are once again discovering that their models are no better than those devised by LTCM.  SO … FOOLISH, GREEDY SPECULATORS GET BURNED ONCE AGAIN. Mr. Market has been short greed and long fear for many many decades and Mr. Market always wins. Aside from foolish, greedy speculators … how is the overall economy doing?  Not too bad at all and the global economy is doing even better. Almost every summer we get a big blue light special on Wall Street and as always the news is horrible and it’s the end of the world as we know it. Then, after all of the weak hands and foolish speculators are squeezed out and calmer heads prevail … the market rallies up again. It’s already starting to happen in real estate in Florida as speculators are starting to walk away in disgust, taking big capital hits. Florida real estate, in some markets has started to move into the CAPITULATION phase of the cycle and within 90 days there will be some really good deals in certain markets. We’ll see the same thing in stocks only the cycle will be much, much shorter. This is a global economy and it doesn’t just go from explosive growth to depression in a few weeks. We are at the PANIC stage of this storm and by mid September we’ll hit the CAPITULATION stage and after that there will be some amazing bargains for those that don’t lose their nerve. Once the dead cat bounce is completed there is usually one last strong move down to wash out any remaining dreamers. After that, we’ll see the big dogs move back in with a vengeance. We are only three or four weeks away from some of the best prices on quality stocks that you’ll see for the next 12 months so … ‘Don’t Worry .. Be Happy”

Anonymous • August 12th, 2007 at 8:10 pm

NR,  Please note the potentially libelous statements made by:  An unpaid and upset landlord i  at 18:04:53 and 18:15:45

artichoke • August 12th, 2007 at 9:01 pm

I imagine that China has given permission for the actual intervention done by the central banks: increasing liquidity thru Open Market Operations. Helicopter Bernanke is able to do his thing ;) — actually the Europeans had to do more of it than the Americans — and the Chinese realized something had to be done about the Commercial Paper market and MBS values. Chinese did not approve a cut to Fed Funds rate, and so that was not considered. Chinese are the creditors and get to call some shots. Since US and others are complying, China will not dump dollars in this round. They will keep their word and their credibility.  Flooding the market with liquidity should be inflationary worldwide, but the greater liquidity injection in Europe should cause the dollar to go up against the euro  Declining housing prices are the proximate cause of this crisis, but the crisis will not necessarily cause further deterioration of prices. I’ve heard that mortgages are still easily available for prime borrowers (I don’t know about 100% financing though) and the rates have even improved. I think the lower-income areas will experience some continued downward price pressure, because borrowers in those areas are affected by mortgage crackdowns.

LesserBee • August 12th, 2007 at 9:31 pm

Here is an english version (Rueters) of the South China Post article on China’s subprime being far worse than the US’s/  {China’s mortgage quality worse than U.S.: academic Sun Aug 12, 2007 4:20AM EDT   HONG KONG (Reuters) – The quality of Chinese home loans is worse than in the United States, where a subprime mortgage crisis is causing turmoil in global financial markets, according to a prominent academic quoted in a Hong Kong newspaper on Sunday.  Yi Xianrong, a banking and finance expert at the Chinese Academy of Social Sciences, said Chinese banks had been lax as they built up 3 trillion yuan ($396.2 billion) of mortgage lending.  Defaults in the U.S. subprime mortgage market now total about $200 billion, on some $1 trillion of loans, according to Credit Suisse.  ”The quality of housing loans are much worse than the subprime loans in the United States,” Yi was quoted as saying by the South China Morning Post.  ”At least there has been a credit check system (in the United States) but in China anyone can borrow money to buy a house.”  China’s property market has been booming thanks to a hunger among a fast-growing middle class for new apartments, but the government has been wary of rampant speculation in major cities, particularly Shanghai.  Fearing a dangerous bubble could be forming, authorities have tried several measures to try to cool the market, including interest rate rises, rules to curb foreign investment in property, and steps to encourage construction of cheaper homes.  Global financial markets are jittery, and credit has dried up, because it is difficult to say to what extent a U.S. housing downturn will hurt funds holding securitized mortgages held in collateralized debt obligations (CDOs).  However, securitizing mortgages is new to China and not as widespread, although banks and consumer sentiment would still be hurt by a housing downturn and mortgage defaults.}    http://www.reuters.com/article/ousiv/idUSHKG13669020070812

LessorBee • August 12th, 2007 at 9:41 pm

In India as well?? Especially the last paragraph on Tata Steel’s buyout loan.   [A Butterfly Effect 13 Aug 2007, 0002 hrs IST   It's been said about the arcane world of physics that a butterfly fluttering its wings in the Amazon forest in Brazil might set off a typhoon on the east coast of China. Something like that might apply to global finance as well, where what was originally a crisis in the American sub-prime mortgage market is triggering market crashes everywhere.  As banks reeling under losses from the mortgage fiasco refused to lend to each other, the US Federal Reserve and the European Central Bank stepped in to inject billions of dollars into the market. This move by monetary authorities evoked unpleasant memories of the 1997-98 crisis, when the biggest hedge fund collapsed. Because of relative insulation of its economy India escaped the debacle then. But trade and financial linkages have made the world much more integrated today, which means that the world is more prone to financial epidemics than ever before. An example is the sub-prime muddle itself. Modern financial innovations like structured credit products and asset-backed securities have made it possible for companies to sell their debts to investors and agents across the world thereby spreading the impact of risks globally. While this can ensure stability, it can also lead to a major global catastrophe in case the debts turn bad and become contagious.  The impact of the crisis on India is expected to be minimal, at least for the time being. The fact that on Friday the Sensex plummeted over 500 points in early trading and recovered almost 300 points at close indicates that there is enough liquidity available in the Indian market. However, the risks are growing. The high volatility in the markets reflects this. Risk aversion among global investors seems to be at a high. While the sub-prime problem does not seem to have a direct impact on the Indian real estate market, the sluggish performances of some recent public issues of companies in the real estate business raise questions about the confidence of investors.  Global funds are increasingly reallocating capital. As credit becomes scarce, Indian firms on an expansion spree will be adversely affected. The debt raised by Tata Steel to acquire Corus has been restructured by banks with reports suggesting that the company has to pay a higher rate of interest on part of the loan. Is this just a passing phase or a sign of things yet to come? We can only guess. But let's keep our fingers crossed that a mortgage crisis in America will not make the Indian economy reel.]  http://timesofindia.indiatimes.com/A_Butterfly_Effect/articleshow/2276123.cms 

Guest • August 12th, 2007 at 9:53 pm

Two views of the liquidity crisis, from very different points of view. But both very helpful:  1) http://globaleconomicanalysis.blogspot.com/ See Mish’s blog tonight (Sunday), under the title “Busted Bonds and Financial Illusions”. See subtitle: “Greatest Bait and Switch Ever”. Not the first time I’ve seen these kinds of comments. Troubling.   2) http://www.dollarcollapse.com/.  See the article “The Fugu Ultimatum” by John Mauldin. Very helpful for getting the liquidity crunch in perspective. I’m not sure why so many financial reporters (WSJ, Bloomberg) have not covered some of the details in John Mauldin’s article. It probably would help to avoid some of the hysteria about the current conditions.   Pete, CA

Guest • August 12th, 2007 at 10:24 pm

“Declining housing prices are the proximate cause of this crisis, but the crisis will not necessarily cause further deterioration of prices”  This could be true for some parts of the USA. But it’s not true where I live in Los Angeles. Let’s take a look why.  In the South Bays of L.A. you can buy a small family home for about $700,000. This is a peak price (early 2006), and things have dropped a little. Such a home os about 800-900 square feet, has two bedrooms, and not much of a yard. So it’s not very attractive for families.  Families who want a home with about 1500-1800 sqaure feet and some yard space can expect to pay around $1,000,000. If you want a really good yard, maybe $1,300,000. Prices go up if you want an ocean view.  Let’s do the math. Mortgages have suddenly tightened. If you want that larger family home, now we’re looking at 10% down. That’s $100,000. And then you have to finance the remaining $900,000 at 8% interest. Guess what? No-one can do that – with the possible exception of a few very lucky people with very high savings in the bank.   No need to tell you why the volume of buyers in this “frothy” area is going to plunge to near zero. I expect prices to crash by Dec of this year.  Of course, lots of people could just buy in a less expensive suburb. True. And many do. But they are commuting 2-3 hours on the road each day to get to work. Think of the gasoline cost, since few folks drive hybrid vehicles yet. Lots of gas guzzlers still on the road.  No need to explain why the consumer spending is set to plunge, and housing prices will crash in some areas.  Naturally, other parts of the USA are more affordable. True. And frankly, I would not be surprised to see an increased exodus from California to some of those other places.  In time, home prices will plunge here and become more affordable. In my opinion that’s good. The local economy makes no sense when only 14% of buyers can afford a house. But there seems no doubt that foreclosures are due to go up – even on the more expensive CA properties.  Pete, CA

why not • August 12th, 2007 at 10:34 pm

 I think I’ll buy stocks tomorrow … after all, if we get into any trouble, the Fed will prevent a crash.  After all, they did last week – why not this week ?  

Anonymous • August 12th, 2007 at 11:55 pm

LOL, prime loans are not going well. The Jumbo markets are in crisis and agency is the only thing moving.   The intra-cut is a hoot. Like that would help.

Anonymous • August 13th, 2007 at 12:42 am

Now this whole thing is getting more interesting by the day.  I see a lot of people coming out of this debacle wearing nothing more than a baseball cap and Nike shoes.  Let’s see who has been swimming naked now that the tide is going out. LOL

Guest • August 13th, 2007 at 1:08 am

The us of a is using the same way as the japanese have used in 1990. Good luck!  If money printing machine is everything, why you american debtors still need the fed?

Guest • August 13th, 2007 at 1:10 am

An Economist is a person who sought to become an Accountant, but just didn’t have the personality for it.

London Banker • August 13th, 2007 at 1:40 am

A financial economist is someone who watches how the markets work in practice and wonders whether they work in theory.

Juan • August 13th, 2007 at 1:59 am

Anon,  though the category has long disappeared from mainstream discourse, you may want to consider what is called ‘fictitious capital’.

AFFG • August 13th, 2007 at 3:02 am

“An Economist is a person who sought to become an Accountant, but just didn’t have the personality for it.”  You need personality to become an accountant? I always had the impression you had to have everything but “personality”.  @Pete, CA,  The article basically does some kind of QaA. The bottom line is, the crisis is very serious, banks have problems but you still can get your money, no need to panic … bla bla bla. Just the fact that this newspaper has been covering this makes it scary. I believe it was not the last article they wrote about this issue. But once things get ugly, they are going to be the one with the title plastered with “BANKING CRISIS, WE ARE DOOMED!!”  @artichoke,  ”Flooding the market with liquidity should be inflationary worldwide, but the greater liquidity injection in Europe should cause the dollar to go up against the euro”  The ECB and the FED did not bail out banks. They merely provided liquidity. That very same liquidity is back in the CB this morning. The only reason the dollar could (and will) go up, is because the American consumer is tapped out and imports are going to collaps. By the way today Export numbers came in today. German exports went up 11%. The amount of exports to the dollar has gone down and the amount of exports to Asia, Russia, middle east and rest have skyrocketed.  http://www.handelsblatt.com/news/Konjunktur-%d6konomie/Konjunktur/_pv/_p/200053/_t/ft/_b/1307758/default.aspx/finanzkrise-perlt-an-wirtschaft-ab.html

Guest • August 13th, 2007 at 3:53 am

ECB to inject again.  the US of A fucked free of charge. -China is happy to pay. -ECB will not reject the bill.  how lucky you are son of the paul. 

JLarkin • August 13th, 2007 at 7:14 am

These numbers match our discussions of a few months ago:  Christopher Cagan, CoreLogic’s director of research and analytics, predicts about 1.1 million ARMs totaling $325 billion will sink into foreclosure as rising monthly payments squeeze borrowers. After accounting for the money recovered through property sales, he expects the losses from the fallout to total $112 billion, with the damage spread out over six years.   Although significant, the losses won’t be large enough to topple the United States’ $12 trillion economy, Cagan said. “This is the turning of a business cycle,” he said. “There will be some pain, but most people will be fine and most lenders will be fine.”   http://news.yahoo.com/s/ap/20070811/ap_on_bi_ge/toxic_mortgages;_ylt=AgjQJcnI.qa216QEYMxatuyyBhIF  Nouriel correctly predicted the subprime mess and the attending fallout with the big banks. Thankfully I avoided bank stocks. I don’t recall, however, anyone predicting the fallout affecting European banks and funds to this extent.  

son of the paul • August 13th, 2007 at 7:53 am

what made you sucker bears so happy? You will never agree the fed has done the right works! Shame!

Anonymous • August 13th, 2007 at 8:11 am

Run quickly … look good news:  CNBC Alert:  ”CNBC’s Faber: Goldman’s Global Equity Opportunities Fund Down Almost 30% YTD; Global Alpha Fund Down 26%”  If you are fast enough you might be able to buy cheap so you can sell even cheaper. LOL! ;-)

Guest • August 13th, 2007 at 8:36 am

Hey, c’mon, all is well. The banks injected less money this morning and Goldman got a mysterious $3B bailout over the weekend. Retail sales wer bigger than expected even though the trend is still down YOY. Open the gate and let the bulls run baby, all the system ills are cured, no worries mate…

Guest • August 13th, 2007 at 8:40 am

More proof on PPT and how active they have been, from the WSJ: ”The market turmoil prompted the President’s Working Group on Financial Markets — the Treasury, the Fed, the SEC and the Commodities Futures Trading Commission — to trigger protocols established by Mr. Paulson shortly after he took office last year. They include a detailed list of who is going to call financial institutions, risk managers, traders and chief executives to keep tabs, how often they should call and the like. When he first joined Treasury from Goldman Sachs, Mr. Paulson instructed Emil Henry, then the Treasury official in charge of financial institutions, to craft guidelines for five or six “meltdown” scenarios. One was a catch-all “General Withdrawal from Risk Taking.” Others include a liquidity crisis, stock-market meltdown and oil shock. The Working Group has held conference calls, principally among staff, at least once a day in recent days.”  

Guest • August 13th, 2007 at 9:02 am

Yeah, just ignore the HOV news this morning and the Sears Holdings warning and oh yeah, just ignore this too:  ”10:00U.S. June business sales down 0.3%, biggest drop since Jan.” 

Guest • August 13th, 2007 at 9:16 am

“Open the gate and let the bulls run baby”  Yeah. Kinda like the running of the bulls in Spain each year. :-)   As I look at EUR/JPY and USD/JPY this morning (Mon, Aug 13′th) I’m not seeing a dramatic recovery. Looks a lot like there are still more hedge funds selling assets to me. I wouldn’t be surprised to hear more news about funds in trouble this week.  Pete, CA

Guest • August 13th, 2007 at 9:30 am

“The American investment bank Goldman Sachs has put together a $3bn re-capitalisation package for one of its troubled hedge funds – although it insisted today that the cash injection was an “opportunity” rather than a “rescue”.”  why it didnt tell last week? why it is going to hold a conference call today? why didnt do it last week? Did it get any cash injection hints before…? 

guest-t • August 13th, 2007 at 9:38 am

this much for the bulls I guess… Now come the real sellers, all is organized to sell before ordinary people (or even make them buy when the prices are “cheaper”), when they are paralysed with the news and volatility…  I do expect a big crash today in stock market… quiet before the storm… 

Guest • August 13th, 2007 at 9:45 am

My model for S&P 52 week forward earnings growth just got updated this a.m. and the news aint pretty. It is predicting growth of 6.5% which is not bad UNLESS you compare it to the streets estimate of growth North of 12%!!! This model has an r squared of .77 going back to 1993 so who am I gonna beleive, my model or the street (whch had a buy on Enron until the day it collapsed)????

Guest • August 13th, 2007 at 9:55 am

Translating those earnings estimates into an estimated fair value gives us 1351 on the S&P today. This is hardly bullish for stocks or the economy…

Alan.com • August 13th, 2007 at 9:56 am

I am the real expert in making/settling the credit crunch. I tell you now the most important thing is to have a good job!  Alan.com

Guest • August 13th, 2007 at 10:02 am

“My model for S&P 52 week forward earnings growth just got updated this a.m. and the news aint pretty. It is predicting growth of 6.5% which is not bad UNLESS you compare it to the streets estimate of growth North of 12%!!! This model has an r squared of .77 going back to 1993 so who am I gonna beleive, my model or the street (whch had a buy on Enron until the day it collapsed)???? “  What principles/factors is your model built on?  Thx 

IG • August 13th, 2007 at 10:21 am

Hi folks. I linked to this site for a quick look..that was over 2 hours ago! It makes a pleasant change to read informed, intelligent comment without the denigration & abuse that occurs on many blogs.  There’s not much I can contribute as I left school (expelled, to tell the truth)at just over 16 yrs and apart from the ‘net in recent years, haven’t had a day’s education since. So much of the technical stuff swooches right over my head.  However, I did get street smart early and have been self-employed since my mid-20′s. At about that time I began to realise that the system was corrupt (politics; then I followed the dots to economics & financial areas).  As a result I began buying gold and now I’m about 50/50 in bullion & short term deposits, + a bit of farm land; I feel quite comfortable with that.  Many of you guys are in high-powered positions and/or have considerable experience & specialised financial/economic knowledge. So it’s quite re-assuring to me that, whilst I can’t articulate & explain it the way you can, we’re at least on the same side of the street (I still can’t persuade friends, even family, that something very dark & ugly comes this way: I see people in none-too-secure jobs loading up with debt with nary a care in the World..)  It seems we’re teetering on a shifting pack of cards built on foundations of lies by a totally amoral, greedy & power seeking elite. An elite who may very well ‘get away with it’ while ordinary folk go down the tubes (in reality, no-one ‘gets away’ with it – our time frame is often too limited to see results).  Enough of a ramble, just wanted to say I’ve enjoyed reading the posts and I’ll be lurking & not posting in future… Cheers IG PS Has JR paid enough penance; can he come back if he’s very good? I quite like his comments, esp WHEN HE SHOUTS… :)     

Guest • August 13th, 2007 at 10:29 am

Mortgage market in ‘downward spiral’ Credit pain to further weaken housing market, Stifel Nicolaus says By John Spence, MarketWatch Last Update: 11:20 AM ET Aug 13, 2007   BOSTON (MarketWatch) — Problems in the nation’s mortgage and housing markets are feeding off each other and creating a “vicious cycle,” analysts at Stifel Nicolaus & Co. said Monday. ”The rapidly increasing scope and depth of the problems in the mortgage market suggest that the entire sector has plunged into a downward spiral similar to the subprime woes whereby each negative development feeds further deterioration,” wrote analysts Chris Brendler and Michael Widner in a research note.

AFFG • August 13th, 2007 at 10:31 am

@IG,  ”short term deposits”  Do you mean cash at the bank? If so, I would recommend to do something better with that.

Guest • August 13th, 2007 at 10:36 am

Looks like the Fed pumping is hitting the markets as I type. “Free Markets”…yeah, free for wall street pigs and congress…what an absolute joke the US has become

Guest • August 13th, 2007 at 10:52 am

Home builders hammered again Sector trades lower following Beazer’s delay, Hovnanian’s order decline By John Spence, MarketWatch Last Update: 11:48 AM ET Aug 13, 2007   BOSTON (MarketWatch) — Volatile home-builder stocks traded lower Monday following news that Beazer Homes USA Inc. delayed its quarterly report and Hovnanian Enterprises Inc.’s orders fell 24% in the latest quarter. 

Tuncay • August 13th, 2007 at 2:46 pm

USA don t need to pay theır debt to china but…ssssttt don t tell anything USA =cow boy they always wın they sold theır debt then chına belıes they possess usa through ıt and can also make grow theır market enormous bıg debt corrupcy

martin • August 14th, 2007 at 9:09 am

Dear Mr Nouriel Roubini,  I was aware of all this to take place several years ago by our mentors Mr Parravicini & Ludovida Squirru, ARGENTINA was going to be a first example clear of what the Economic world was going to go through some years later like we did in year 2001 & 2002 with default…SO IMAGINE the World or Europe – EEUU & Other U$Dollar economies going into a crach like 1929 or even worst., ARGENTINA is the Place to live, place investments and enjoy PROFITS Benefits revenues liek nowhere else.. email and I will send my Master plan of Investment for 300 u$ million investment for 10 to 12 Billion benefits in 3 to 4 years., sincerely, martin

taipeimarc • August 15th, 2007 at 1:28 am

If anyone is still reading this comment forum, I’d like to leave this link:   Helicopter Ben Unleashes Dollar Hyperinflation http://rense.com/general77/ben.htm  A long, but interesting take on the bond/credit meltdown by Webster Tarpley. Some people may put Tarpley in the CT camp, but I think he puts together a good argument.   It’s interesting that he mentions BOWA bank in Taiwan as one of the losers (a smaller bank here). Just the other day it was taken over by government regulators. Also a big insurance group in Taiwan, ShinKong, lost a lot of money. I am sure more will follow.  I would be interested to know what financial websites other commenter’s browse My list: (sorry some duplicates from previous posts)  -rgemonitor.com -financialsense.com (Jim Willie, especially) -Prudentbear.com -globaleconomicanalysis.blogspot.com/ -http://market-ticker.denninger.net/ -kitco.com -minyanville.com (sort of) -http://www.theinternationalforecaster.com/trainwreck.php -http://www.informationclearinghouse.info/ (Mike Whitney articles, also they track US deaths in Iraq) -http://stockcharts.com/def/servlet/Favorites.CServlet?obj=msummary&cmd=show,idayY&disp=SXA (Stockchart market summary for US$ index and VIX mainly) -http://www.niagarafallsreporter.com/gallagher327.html (Bill Gallagher, tells it like it is)  Along with huffingtonpost.com , crooksandliars.com , atimes.com and several others.  There was another good website called EconomicPolicyMonitor.com written by Raymond Weber, but it went offline all of a sudden a couple of months ago. Does anyone know anything about this?

Guest • August 15th, 2007 at 9:55 pm

8/16/2007 Press Release from The Swiss Confederation Institute  The Federal Reserve is to blame for the financial panic sweeping the world.   Today in August 2007, the world financial systems and investment markets, real estate and the availability of credit are all under direct assault due to past actions of the Federal Reserve in the United States.   Read and sign the Ron Paul Is Right – Abolish the Federal Reserve Petition at http://www.petitiononline.com/fed/petition.html   Please link to the petition and forward this message to your friends and help the general public wake up during the current financial panic conditions to the problems we face from the Federal Reserve.  

Guest • August 19th, 2007 at 12:53 pm

I just posted an analysis of previous market corrections and their forward returns after reading your post.  http://mktbetadata.blogspot.com/  The short version is that short term returns and relative volatility are very similar to 1978, 1987, and 1998. If you take into account that there is currently no recesion the similarities increase further and exclude most of the other corrections since 1970. Looks like there is a 10 yr credit cycle.  JC

Anonymous • August 19th, 2007 at 3:39 pm

I have it on good authority to withdraw ALL your cash from banks tomorrow.There is going to be a freeze on transactions over $1000.00 that are not part of your account history.

taipeimarc • August 20th, 2007 at 11:57 am

What’s up with Germany? A few days ago, we learn that Greenspan took up a advising position at Duetsche Bank.   Next we learn that “Deutsche Bank taps Fed credit window” (a sign of weakness?)  http://www.ft.com/cms/s/0/699699f4-4f21-11dc-b485-0000779fd2ac.html  In addition, several other German banks, Deutsche Postbank, IKB, WestLB and Sachsen LB are all having trouble.  http://www.smh.com.au/news/Business/US-subprime-morass-entwines-German-bank/2007/08/13/1186857379492.html  Deutsche Bank and Commerzbank are listed among the creditors of US mortgage group HomeBanc Corp that filed for Chapter 11 bankruptcy protection last week.  Mish (Aug 16) mentions that the key change to the fed discount rate cut is the lengthening of the loan duration from overnight to 30 days. In his Countrywide bets the farm article, he quotes Christopher Wolfe, managing director at Fitch Ratings “When a company draws on its bank lines, it just basically gives off the impression that it has run out of options.” “Typically these bank lines are there but not really meant to be used.”   Lastly, ECBs on Standby (Aug 19) http://www.ft.com/cms/s/0/84911cc6-4e94-11dc-85e7-0000779fd2ac.html 

Guest • August 20th, 2007 at 8:16 pm

Vote for Ron Paul! He is the only politician that studies the economy and cares enough to make the changes. Check out his views on the monetary and foreign polices

Anonymous • August 23rd, 2007 at 1:22 pm

What I do not understand is how and why the crisis originated. I understood Prof. Roubini’s piece about what is to be xpected, but why did households suddenly become illiquid or insolvent and were unable to pay their mortgages? the economy is doing OK, unemployment is not out of the line, so what gives? And I thought the mortgage-backed securities were bundles of low-risk as well as high-risk mortgages, not just subprime.

Guest • August 23rd, 2007 at 3:50 pm

From my basic understanding (since I had some hand in doing this a few years ago) this problem has a fundamental root in 1 thing: consumer overspending. Consumers spend too much on goods and services with depreciating value, and overspent on home purchases (and as mortgages are underwritten with an appraisal done per market value the overspending resulted in higher home prices which resulted in more overspending, etc, etc.) Sub-prime borrowers could only qualify for the home purchases by obtaining 2-3 year ARM products, 80/20 mortgages, or any number of “creative” high risk loans. The rise in self-employment also contributed towards this by creating a large pool of “no-doc” loans were income wasn’t verified. Due to the housing price “bubble” (inflated “value” due to the above appraisal practices) created alot of “fake equity” that people leveraged to purchase more consumer goods.  The overspending on consumer goods typically contributed towards increasing their debts (credit cards/home equity LOC). When the interest rates hit lows refinancings went through the roof, so the fictitious equity in their homes (again based on the appraisal standards above) saved the day. But that works only once. Now everything theoretically should have been fine, if jobs remain stable and spending was adjusted to create savings. Of course, generally, jobs are never safe and spending was not adjusted. Therefore homeowners were faced with rising cost of living (minimum wage increases, fuel prices, healthcare costs, etc.) and now rising mortgage payments on homes that never should have been valued at the price they purchased them.  Faced with feeding their families, commuting to work, paying their doctor bill, and not being able to declare an bankruptcy as easily anymore; the only option was to default on the loan.  Mortgage brokers pushed alot of bad products trying to get as many people refinanced or to purchase as big of home as possible (they get paid on a commission) and realtors did the same (commission also), the problem that this posed to the economy was that the underwriters for the mortgage banks let them. Some of them were more strict than others, but this was compounded once it was sold in a package of loans as a security and it lost it’s original classification as a high risk investment.

Anonymous • August 25th, 2007 at 12:08 am

History shows that every Fiat monetary system has failed every time it was used. So here we stand on a pile of worthless paper. Shaking our fist crying out I believed in you how could you let us down. What I worry about is not the fall any idiot could see that coming but what history has also shown as the aftermath and the rebuilding. In every case a dictator stepped in and the rule of torment was followed by large groups of genocide type of deaths. So what can we do living in this house of cards that is about to fall? Protect your loved ones get your house in order. History show’s that the commodities held up the best, gold got many a family through. But you need it in your hands not in your portfolio. Stocks even gold stocks are in the end just paper. Once the system falls apart and promises cannot be kept. I believe we still have some time but time is relentless and ruthless. If you have read this and got the chill up your spine don’t delay.  Lastly, in a sad commentary about where we are as a country, U.S. Comptroller General David Walker was quoted Tuesday (also in the Financial Times), as follows: “Drawing parallels with the end of the Roman empire, Mr. Walker warned there were ‘striking similarities’ between America’s current situation and the factors that brought down Rome, including ‘declining moral values and political civility at home, an overconfident and overextended military in foreign lands, and fiscal irresponsibility by the central government.’ ”  

Anonymous • August 25th, 2007 at 9:41 pm

Nouriel, why are you no longer on the Kudlow program? I just want to say that he makes me throw up. He gave your ideas little respect, and I am hoping you were the one to tell him his daily cheerleading of this pathetic economy was too much to stomach!

Guest • September 8th, 2007 at 6:19 pm

…..I’d like to understand what is really moving the economy.  …..The DOW seems to go up due to a simple flight to unending optimism, greed, and an attempt to immortalize ourselves by investments in someone else’s vision of the future. All of these are failing qualities with no hope of continuance. Nothing lasts forever. Yea, there are “players” who make a lot of money upon the movement of money in the markets but they are few and there are so many of the rest of you… …..The Dollar is going down in value because we are printing paper or inflating our currency exactly like the Nazis, the French and others. Central banks can rename it anything they want. The governments can attempt to lead the people around like a bunch of sheep with stupid names for what it is but it is all the same… Paper. Government is the only entity which can take valuable paper and put ink on it and make it worthless. Give me gold. Back my money with gold, or silver but don’t give me worthless paper and tell me that it has value.  …..For chart readers here is some news: The past is not a projection of the future. You wanna see the future get some Tarot cards, or a pile of chicken bones and throw them in the dirt the value is the same.  …..Here is what happens, as I understand it, I give you my money as an investor to your corporation and you overpay yourselves. You throw money around like it has been a gift from God and because you were somehow chosen to have it. You give me back little or no profit because it was justified under Common Accounting Practices. You may, perhaps, give me some of MY money in the future only if everything works out as it was planned.  …..My ownership of the company, which could be the result of years of saving as a result of my labor is simply a few pieces of paper. If the entire venture does not go exactly as planned I have just given you a few years of my life. Failure means that I will never get back either money nor importantly time. I may as well have been imprisoned for those years. As an “investor/speculator” I have proven myself a fool.  …..To those CEOs, CFO, and all those other OOOOs; All my time and money would be better spent building my own empire, Investing my own money in myself and my own business and not sharing a thin dime with your vision of empire building. My losses would be my own and my gains would only have been shared with my family. You would not have a job in my company. …..For all the grand vision. For all the great salesmanship. For all the puff and wind that YOU are I could and should be working on Myself and securing my own ship and it’s goods and my Family Heritage.  …..That, my friends, is economics as I understand it.

Guest • September 14th, 2007 at 8:30 pm

I find it hard to believe that Greenspan was unaware of the problems of low cost of money. It seems that the corporations have capitalized on this with the blessing of the current administration, ( they gave us the cash refunds back a few years ago). This cheap liquidity encouraged the public to overextend themselves to the point many are becoming insolvent. The result of this will be lower priced  assets(homes) a devalued currency. This is an excellent way to make the US worker more competative globally without asking him/her to take a pay cut.

Conspiracy Theory, not. • October 28th, 2007 at 9:44 am

bbybmr53, here’s the answer to your blog (which appears below my URL):  ”The Money Master” (a 3.5 hour documentry on the world “money changers”)  http://video.google.com/videoplay?docid=-515319560256183936   Central banks and the Big Money behind them may be the cause of these boom/bust cycles. Bernanke has admitted the Fed engineered the Great Depression. Central banks have engineered this last reall estate bubble too. Congress has given the Fed the authority to regulate unfair lending practices. What happened? The Fed is supposed to smooth out economic cycles and keep inflation down. But we just had a historic inflationary run up in housing prices with shady lending involved. What happened Fed? The problem of our boom/bust cycles lies with the Fed and other central banks. The Fed prints money backed by nothing and then creates debt with interest that has to be paid. Who’s paying the interest on all the currency loaned to the U.S. Government? Who are the major shareholders in the largest banks serviced by the Fed? Are there wealthy families making money on inside info and timing these cycles? Are there investors who make money in war or peace, depression or boom times?  Who sold warplane fuel to Hitler’s ‘Blitzkreig’ airforce? Who laundered money here in the U.S. for the nazis.  It’s time to look into central banks and the investors behind them? These market cycles are ovviously manipulated. Someone profits from a crash. it’s time to find out who. it’s time to find out how the private central banks like the Fed operate. The Fed is actually very secretive and not transparent. The Fed isn’t Federal and the ‘reserves’ are inflationary currency which is ironic. The Fed is supposed to be fighting inflation. They didn’t fight housing inflation. The bubble was blown up by the Fed and then allowed to pop. Why? Who’s profiting from these swings?   Written by bbybmr53 on 2007-08-10 18:49:15

Anonymous • December 1st, 2007 at 1:04 pm

It’s sad to drive around US and see so many empty homes, what’s happening to Citigroup where my friends work, homeless in every town, such a nice country on the verge of a recession. Is there a light at the end of the tunnel now? No way.

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