Current Market Turmoil: Non-Priceable Knightian “Uncertainty” Rather Than Priceable Market “Risk”

Author: Nouriel Roubini · August 15th, 2007 · 2106882007-08-15+10%3A51%3A53Nouriel+Roubini › Share This Print

Economists distinguish between “Risk” and “Uncertainty”: the former can be priced by financial markets while the latter cannot. The distinction between the two was made by the famous economist Frank H. Knight in his seminal book, Risk, Uncertainty, and Profit (1921). In brief, “Risk is present when future events occur with measurable probability” while “Uncertainty is present when the likelihood of future events is indefinite or incalculable”.

This distinction between risk and uncertainty helps to explain the recent market panic and turmoil. Today, the FT cites a market economist at Lehman who said: “We are in a minefield. No one knows where the mines are planted and we are just trying to stumble through it”. A few days ago another market participant put it this way: “It is not the corpses at the surface that are scary; it is the unknown corpses below the surface that may pop up unexpectedly”.

Unknown minefield; unexpected corpses: this is “uncertainty” rather than “risk”. Risk can be measured and priced because it depends on know distributions of events to which investors can assign probabilities. Uncertainty cannot be priced by markets because it relates to “fat tail” distributions and extreme events that cannot be easily predicted or measured. A few days ago the CFO of Goldman Sachs justified the massive – 30% plus – losses of the two Goldman Sachs hedge funds by arguing that these were unpredictable “25 standard deviation events” that should occur only once in a million years. The same thing was said by the LTCM “masters of the universe” when their highly leveraged hedge fund went belly up in 1998.

Too bad that these fat tail events do occur more often than once in a million years: the real estate bubble and bust and S&L crisis of the late 1980s; the boom and bust of the tech stocks in 2000-2001; the 1987 stock market crash; the 1998 LTCM debacle; the variety of asset bubbles that ended up into busts from Japan (1980s) to East Asia (1997-98).

Indeed, for many reasons the current market panic has to do with unpriceable uncertainty rather than measurable risk.

First, we have no idea of what the subprime and other mortgage losses will be: $50 billion, $100 billion, $200 billion? They could be as large as $500 billion if the US enters in a recession and we have a systemic banking and financial crisis. The uncertainty about these losses depends on the fact that we have no idea of how deep and protracted the housing recession will be and how much will home prices will fall. If home prices were to fall – as my research suggests as likely – more than 10% in the next year or so, the subprime carnage will massively expand to near prime mortgages and prime mortgages. There is already plenty of evidence that the delinquencies are not limited to subprime mortgages as a number of near prime and prime lenders are now bankrupt or in trouble (AHM, Countrywide just to cite two examples). The worse the housing recession will be the worse these now uncertain losses.

Second, we have no idea of where the mines and the corpses are. Every day the turmoil is popping out in unexpected institutions and places: by now hedge funds, banks and asset managers in US, France, Germany, UK, Asia, Australia have gone belly up. And every day a different financial market gets into a liquidity crunch and credit crunch: first subprime; then near prime, prime, CDOs, CLOs, LBOs, ABCPs, corporate credit spreads, overnite interbank loans, money market funds, mutual funds. Every day we get a different surprise that adds to the market’s uncertainty and investors’ nervousness.

This increased financial uncertainty is in part due to the increased opacity and lack of transparency in financial markets.

As pointed out by Gillian Tett in a January FT article the opacity of financial markets vastly increased in the last few years thanks to the rise in credit derivatives:

However, the fastest area of growth last year was in “structured finance” instruments, such as securitised products or derivatives.

The proliferation of such products, as I have often noted before, carries many benefits for the financial system (most notably that they disperse risk across a much wider pool of investors). But this trend also carries at least one downside; it is adding to the opacity of the financial world.

For although many corners of the structured credit universe are becoming more transparent, almost as soon as one chink of light emerges, another shadowy wave of activity emerges that is far more opaque.

Take collateralised debt obligations. Several investment banks and data groups have started to publish regular data about rated CDO issuance. That is a welcome step, given how much impact CDO issuance is having on the credit world. But such data is only available to the banks’ clients and contacts. And even these “public” (or, more accurately, semi-public) figures reveal just part of the tale. For banks are apparently also arranging billions of dollars of private CDOs too. Such activity is never included in, say, the Dealogic data on overall DCM issuance.

Such opacity is, of course, not new. And it undoubtedly serves many people well. Hedge funds, for example, thrive in the shadows. So do investment banks, and – arguably – parts of the media (after all, if every detail of financial activity was freely available on the internet, who would buy newspapers?).

But, even with these caveats,I still find it extraordinary just how little public debate occurs about the continued (large) pockets of opacity in the financial world. More notable still is the apparent lack of research examining whether this world is becoming more, or less, transparent to regulators, let alone “citizen investors” or politicians.

But that, of course, is precisely the conditions in which opacity can flourish – and, barring any large financial crisis, will continue to do so this year.

But it is not just credit derivatives that create market opacity. This increased lack of transparency in financial markets is much broader: thousands of hedge funds that not only are unregulated but whose activities are opaque and not measured by any supervisor; shift of the corporate system from a public to a private one via LBOs and private equity transactions; increased size of unregulated over-the-counter trading in derivative instruments rather than on regulated exchanges; development of complex financial instruments whose correct pricing and rating is increasingly difficult; mis-rating of these new instruments by credit rating agencies saddled with severe conflict of interest as a large part of their revenues come from rating these new structured finance instruments; a laissez faire attitude among US supervisors and regulators that allowed reckless lending to foster.

Here are two examples of how uncertainty and opacity has vastly increased in financial markets.

First, you take a bunch of shaky and risky subprime mortgages and repackage them into residential mortgage backed securities (RMBS); then you repackage these RMBS in different (equity, mezzanine, senior) tranches of cash CDOs that receive a misleading investment grade rating by the credit rating agencies; then you create synthetic CDOs out of the same underlying RMBS; then you create CDOs of CDOs (or squared CDOs) out of these CDOs; and then you create CDOs of CDOs of CDOs (or cubed CDOs) out of the same murky securities; then you stuff some of these RMBS and CDO tranches into SIV (structured investment vehicles) or into ABCP (Asset Backed Commercial Paper) or into money market
funds. Then no wonder that eventually people panic and run – as they did yesterday – on an apparently “safe” money market fund such as Sentinel. That “toxic waste” of unpriceable and uncertain junk and zombie corpses is now emerging in the most unlikely places in the financial markets.

Second example: today any wealthy individual can take $1 million and go to a prime broker and leverage this amount three times; then the resulting $4 million ($1 equity and $3 debt) can be invested in a fund of funds that will in turn leverage these $4 millions three or four times and invest them in a hedge fund; then the hedge fund will take these funds and leverage them three or four times and buy some very junior tranche of a CDO that is itself levered nine or ten times. At the end of this credit chain, the initial $1 million of equity becomes a $100 million investment out of which $99 million is debt (leverage) and only $1 million is equity. So we got an overall leverage ratio of 100 to 1. Then, even a small 1% fall in the price of the final investment (CDO) wipes out the initial capital and creates a chain of margin calls that unravel this debt house of cards. This unraveling of a Minskian Ponzi credit scheme is exactly what is happening right now in financial markets.

So combine an opaque and unregulated global financial system where moderate levels of leverage by individual investors pile up into leverage ratios of 100 plus; and add to this toxic mix investments in the most uncertain, obscure, misrated, mispriced, complex, esoteric credit derivatives (CDOs of CDOs of CDOs and the entire other alphabet of credit instruments) that no investor can properly price; then you have created a financial monster that eventually leads to uncertainty, panic, market seizure, liquidity crunch, credit crunch, systemic risk and economic hard landing. The last two asset and credit bubbles in the US – the S&L real estate bubble and bust of the late 1980s and the tech stock bubble of the late 1990s – ended up in painful recessions. The latest credit and asset bubble was much bigger: housing, mortgages, credit, private equity and LBOs, credit derivatives, corporate re-leveraging. So, the current bust and de-leveraging of the financial system is likely to lead to another painful economic hard landing.

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210688272 Responses2007-08-15+10%3A51%3A53Nouriel+Roubini to “Current Market Turmoil: Non-Priceable Knightian “Uncertainty” Rather Than Priceable Market “Risk””

John Ryskamp • August 15th, 2007 at 10:54 am

As I said recently: Countrywide Cut by Merrill; Bankruptcy Seen Possible (Update2) But what’s keeping Bear Stearns afloat (apart from lying)? It’s nothing but a den of thieves. Oh well. BK soon for BS.

SB • August 15th, 2007 at 11:10 am

Nouriel, this is well said. It is the fear of the unknown that is causing the market to panic. This fear is the direct result of hidden and misleading behavior of market participants, particularly investment banks, rating agencies, and mortgage companies. They thought by spinning straw into gold, they could offload their junk to the rest of the world. Just read this letter from J. Kyman Bass, Managing Partner of Hayman Capital, where he recounts a conversation with a senior executive of a structured products marketing group in one of the largest brokerage firms in the world, who explains without even blinking that they had to make the equity and mezzanine tranches of CDOs into AAA bonds and offload them to the Japanese and Chinese banks, because that is the only way to get rid of them. Now we are left with this: after creating this financial illusion and defrauding the very investors who have provided liquidity to keep the US economy operating, do we expect them to come back for more? Who will provide capital to keep the US economy operating? Our government, corporations, and housing market are addicted to foreign investment. We have negative savings, so we cannot lend to our own capital market. We’ve screwed our investing partners, now what happens to us? The housing market is on its next leg down. Fannie and Freddie are already burdened with subprime debt on their books. They have bought 1/4 of all Countrywide subprime debt, and who knows what else they are holding. Maybe someday the accountants can make sense of it. In the meantime, lenders cannot sell mortgages, so the mortgage market is coming to a halt. Without funding, who can buy a house? In CA, the $417K conforming loan limit is too low. Even the townhouse that I rent costs more than that limit.

Guest • August 15th, 2007 at 11:16 am

Capital inflows into the U.S. fall Capital inflows drop to $58.8 billion in June, nearly all are from foreign governments and central banks. August 15 2007: 11:00 AM EDT NEW YORK (Reuters) — Net overall capital inflows into the United States dropped to $58.8 billion in June from May’s revised inflow of $107.3 billion, hurt by a plunge in net purchases of U.S. securities by private investors. June’s net overall capital inflow barely covered the U.S. trade deficit for the month, which was $58.1 billion. Net long-term capital inflows totaled $120.9 billion in June from a revised $126.0 billion in May. ”We’re still seeing healthy net long term inflows which is positive,” said Brian Dolan, FX research director at Forex.com in Bedminster, New Jersey. “The report is not a real dollar negative as we’re able to still cover the trade deficit.” The dollar showed little reaction in foreign exchange markets after the U.S. Treasury flows report, while U.S. Treasurys held steady at higher price levels. The report showed that nearly all of the net capital inflows in June, including investments in short-term securities, were from official sources such as foreign governments and central banks. Net private sector inflows added just $700 million in June, slumping from $109 billion in May. Data also showed that U.S. June net purchases of securities from official sources totaled $53.8 billion, the biggest since March 2004. Inflation moderate, in line with forecasts Foreigners snapped up a net $54.2 billion of U.S. Treasuries, from $21.6 billion in May. Japan was still the largest holder of U.S. Treasuries with $612.3 billion during the month, down slightly from $615.2 billion previously. China, meanwhile, was a net seller of U.S. Treasuries for a third straight month. In June, China pared its U.S. Treasury holdings to $405.1 billion. Net foreign inflows to U.S. equities fell to $28.8 billion in June, from $42.0 billion the previous month. Net foreign purchases of U.S. corporate bonds slid to $25.9 billion during the month, from a record $72.6 billion in May.

Guest • August 15th, 2007 at 11:19 am

“In CA, the $417K conforming loan limit is too low. Even the townhouse that I rent costs more than that limit.” Fact is that to buy a 600K to 1 Mil home (the real average cost os SFR in SoCal), You would need to make about 250K a year (I think SoCal average is about 60K for a house hold). Anyone else see a problem here ???

Stratonovich calculus • August 15th, 2007 at 11:27 am

Nouriel, Because you raised the “million year” prediction about LTCM, I’d like to point out the “hundred year” prediction about the CDX implosion made just months before everything hit the fan. You can find it in this manuscript from UCLA, “An empirical analysis of the pricing of collateralized debt obligations“. Here’s the money quote, predicting an expected 763 year CDX implosion from early 2007: “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 15th, 2007 at 11:47 am

That is a good article. Nothing new going on here except for the scale maybe. That is , as usual people are fully invested and overleaveraged as a function of greed.Always as it been so ,all that changes is the variance in the time/price that it takes to arrive at this situation. I’m still reading so called respected experts stating no major problem ,the scale of this sub prime issue is only 200 Billion tops .Nothing to worry about. Normally they would be right ,but the big issue here is the 200 billion subprime will have in turn been leaveraged and we actually do not know to what extent ,or by whom. I’m guessing that by the time this works out people will be talking about mortgage debt without inserting any sub divisions and the issue of real estate as a must have part of the portfolio will be akin to discussing a dose of pox with nuns’s

Anonymous • August 15th, 2007 at 11:51 am

Ryskamp, My september CFC puts bore fruits finally although I still dont think CFC will go all the way to bankruptcy.

Guest • August 15th, 2007 at 12:10 pm

“,but the big issue here is the 200 billion subprime will have in turn been leaveraged and we actually do not know to what extent ,or by whom. “ The Big issue is that Even though 200 billion is a small number for the U.S.A as a hole, it was just enough to cause a housing price bubble of historic per portions, !! When that bubble deflates, that’s the problem !!

Red-red-rose • August 15th, 2007 at 12:14 pm

An excellent article, Dr. Roubini, concise and well informed. But the mechanisms you describe look very nefarious to me.

Guest • August 15th, 2007 at 12:15 pm

Do over, sorry I editor su*ks ”,but the big issue here is the 200 billion subprime will have in turn been leaveraged and we actually do not know to what extent ,or by whom. ” The Big issue is that Even though 200 billion is a small number for the U.S.A as a whole, it was just enough to cause a housing price bubble of historic proportions, !! When that bubble deflates, that’s the problem !!

Anonymous • August 15th, 2007 at 12:19 pm

Although the description of uncertainty built into the system generally seems accurate, I don’t see how regulation will help per se. It seems like an issue of excess leverage, not too little regulation. It’s not clear that regulators will even be familiar enough with the modern products and channels to actively manage it. Even if they could, it’s now clear how regulations (ie, laws) clearly distinguish between complex conduct. Finance is often about arbitrage, afterall, the anethema of laws. There is a good reason why many of the products are not accessible to the general public – structured finance is the realm of Qualified Institutional Buyers. Limiting access to leverage seems to be a more efficient way to avoid problems associated with complexity and uncertainty.

Guest • August 15th, 2007 at 12:27 pm

1:07 All 3 components of builders’ index fall to cyclical lows 1:07 ”No question’ subprime problems have spread: Home builders 1:07 U.S. Aug. home builders’ index lowest in 16 years 1:07 U.S. Aug. home builders index falls 2 points to 22

Anonymous ibid. • August 15th, 2007 at 12:28 pm

Nouriel, I think you ought to mention “political risk” as the real source of uncertainty. You made a very good point by identifying the problem as insolvency rather than illiquidity. Insolvency means that fiscal policy rather than monetary policy is indicated. Under the Rubin Treasury, the mortgage situation would be manageable: guarantee the mortgages for primary residences long enough to refinance, convert to a rental, or sell. We can reasonably estimate the cost. For each 1 million residences, if the government paid out $800/month, that’s 10 billion/year. The Rubin Treasury, of course, was operating in a fiscally responsible manner, such that at the peak of the economic cycle, it was in surplus. The current residents of the Executive branch have turned a $5T surplus into a like amount of debt, just as predicted. Any bailout they can arrange would be directed to the people who caused the crisis and would cost 10 times more than is actually required. To reduce uncertainty, the question investors need to ask themselves is, “Which governments will react sensibly to defaulting mortgages?” The one certainty we have is that the Bush Administration will not allow a sensible remediation of the problem. Germany, Japan, even Singapore– I have more confidence.

Guest • August 15th, 2007 at 12:32 pm

Thornburg COO says lender will survive Stock bounces back after exec says company is turning the corner By John Spence, MarketWatch Last Update: 1:18 PM ET Aug 15, 2007Print E-mail (MarketWatch) — Shares of mortgage lender Thornburg Mortgage Asset Corp. were in recovery mode Wednesday after a key executive’s televised comments. Chief Operating Officer Larry Goldstone said that although Thornburg (TMA:Thornburg Mortgage Asset Corp News, chart, profile, more Last: 11.14+3.53+46.39% 1:12pm 08/15/2007 Delayed quote dataAdd to portfolio Analyst Create alertInsider Discuss Financials Sponsored by: TMA11.14, +3.53, +46.4%) has faced an “extremely difficult” period recently, he feels that the company “began to turn the corner in a very positive way” Tuesday. ”I’m hopeful that by the end of this week we will be sort of completely out of this situation,” Goldstone said during an interview on business-news channel CNBC Wednesday morning. “Hopefully by next week, it’s going to be pretty much back to business as usual for us.”

Guest • August 15th, 2007 at 12:37 pm

You see you worry warts! Thornberg will survive, Goldman will survive, BS will survive, no panic redemptions in hedge funds today, all is well and we are imagining the rick here, stocks up on the day, so lets all stop worrying ;^)

Guest • August 15th, 2007 at 12:46 pm

Look at stocks go verticle now! THEY have done it again, forced the shorts to start covering by breaking the short-term down trend in the S&P Fraudhundred.

Guest • August 15th, 2007 at 12:57 pm

What a joke the CFC downgrade to sell was!! The stock peaked in Feb at $45 nad was $24.46 when they finally issued a sell!!! That sell advice came after teh stock fell 40% LOLOLOL. What a con game.

Guest • August 15th, 2007 at 12:57 pm

But there is no volume behind it and i think the market will close down no matter what they do. I don’t think there will be any follow through except on the down side. They just want the suckers in to bail them out.

Ryan Darwish • August 15th, 2007 at 12:59 pm

“Economists distinguish between “Risk” and “Uncertainty”: the former can be priced by financial markets while the latter cannot. The distinction between the two was made by the famous economist Frank H. Knight in his seminal book, Risk, Uncertainty, and Profit (1921). In brief, “Risk is present when future events occur with measurable probability” while “Uncertainty is present when the likelihood of future events is indefinite or incalculable”. “ Herein lies the seeds of the massive miscalculations leading to the tens of billions of dollars of losses being generated by the quants and their programmed trading models. The distinction of “risk” having a measurable probability as opposed to “uncertainty” being incalculable begs the question to defaulting to a model assumed to be accurate based upon limited empirical evidence. This provides the conceptual foundation for creating programs to exploit these probablistic expectations. While is might be lucrative for quite a while, especially to institutions able to harness the power of these models, reality periodically asserts itself to suggest that perhaps a different probablity distribution would have been more accurate. Additionally, The recursive nature of a human behaviorial feedback loop in all likelihood changes whatever probabilty distribution may have been assumed. Apart from the academic rhetoric and sophistry, the real pragmatic question is how much profitability mileage can be generated before from these models before they reach their limits. From geopolitical, economic, and social policy perspectives however, the consequences of amplifying the magnitude and opacity of financial bets based upon inherently defective models may be quite staggering in their destructive force. The economic question of whether or not creating massive concentrations of capital really promotes more efficient uses of capital resources would appear to be answered in the negative when viewing the resulting uses of these capital concentrations. For those who are starting to “wake up and smell the coffee” the likely global financial crisis unfolding might be a good prompt to reconsider what we are doing, why we are doing it, what are our basic assumptions about how things are, and what is our real relationship to these events. Ryan Darwish Author of The Emperor’s Clothes: Megatrends Affecting Your Financial and Investment Decisions Available at amazon.com

Guest • August 15th, 2007 at 1:03 pm

MARKETWATCH FIRST TAKE Merrill’s reversal on Countrywide is turning point Commentary: The mortgage market bubble is officially popped. Wither stocks? By MarketWatch Last Update: 1:57 PM ET Aug 15, 2007Print E-mail Subscribe to RSS Disable Live Quotes SAN FRANCISCO (MarketWatch) – Market sages often say that you can’t get to the bottom of a market until you see capitulation. The decision by a Merrill Lynch stock analyst Wednesday to reverse course on Countrywide Financial Corp. is among the most dramatic signs yet that that capitulation has begun. See full story. I’m not sure what Merrill’s Kenneth Bruce saw today (when he cut the No. 1 U.S. mortgage lender to sell) that he didn’t last Friday (when he reiterated a buy rating on the shares). See previous column. There were plenty of data points to choose from. One portent came today, when shares of KKR Financial Holdings dropped as much as 25% after the residential-mortgage specialist firm disclosed how much it lost as it sold off nearly half its portfolio. Take a close look at that story and you’ll see just how leveraged some of the players in the secondary-mortgage market are. See full story. If those firms can’t get credit, and no one is buying what they are selling, they will disappear very quickly. KKR Financial’s stock (KFN:kkr financial hldgs llc com News, chart, profile, more Last: 11.61-3.67-24.02% 1:42pm 08/15/2007 Delayed quote dataAdd to portfolio Analyst Create alertInsider Discuss Financials Sponsored by: KFN11.61, -3.67, -24.0%) has lost half its value in less than a month. It may have taken the Merrill analyst a few days to grok all that, but let’s applaud him for having the guts to reverse a call that lacked credibility, given that he was recommending retail investors buy Countrywide’s shares (CFC:Countrywide Financial Corp News, chart, profile, more Last: 22.65-1.81-7.40% 1:42pm 08/15/2007 Delayed quote dataAdd to portfolio Analyst Create alertInsider Discuss Financials Sponsored by: CFC22.65, -1.81, -7.4%) even as investment banks like the one he worked for had stopped buying its mortgages. Now that one of Wall Street’s biggest investment banks has thrown in the towel — on the biggest mortgage player– it’s safe to say that the mortgage bubble is officially popped. The home equity cash machine that has helped finance consumer spending for seven years will have far fewer bills to dispense. The question now for stock investors is how much of the financial services sector’s profits – and how much of U.S. economic growth – will be swept away by a credit market where assets are currently being priced at steep discounts.

Guest • August 15th, 2007 at 1:30 pm

More markets show home-price increases Existing-home sales, however, still down double digits over year By Amy Hoak, MarketWatch Last Update: 2:19 PM ET Aug 15, 2007Print E-mail (MarketWatch) — More metropolitan areas showed home price increases during the second quarter, the National Association of Realtors said on Wednesday. But existing-home sales during the same period remained below year-ago levels in most states.

JMa • August 15th, 2007 at 1:49 pm

Professor Roubini, So happy to see this shift from pointing out all of the problems, many of which you were first to identify, to addressing the solution side of this mess going forward. You will undoubtedly commandeer even more respect in Davos next year and you have nailed it with this post. There must be transparency. There must be liquidity for all instruments. • A market is a mechanism which allows people to trade, normally governed by the theory of supply and demand, so allocating resources through a price mechanism and bid and ask matching so that those willing to pay a price for something meet those willing to sell for it. -wikipedia.org/wiki/Market • A public place where goods and services are traded, purchased and sold. www.valic.com/valic2003/aigvalic.nsf/contents/edu_glossary-m the 2nd definition interestingly enough is off an AIG company web site. I am opposed to increased EXTENSIVE audits, regulation of hedge funds – the only thing required should be a thorough inventory marked to market matched against what is reported to the investors. Great Blog today !

Guest • August 15th, 2007 at 1:53 pm

60+ mins left to go in todays markets S&P 500 is sitting at 1421. Currently lower than that Magic” retracement number at 1425. Market could close down – but who knows these days. Wall St and the Fed still aren’t grasping how big a gap they’ve got – between their point of view and the average American family on Main St. However, maybe they are so busy putting out fires right now in the financial system – that this bigger perspective just isn’t high on their priority list. Somebody out there needs to slow down and realize that these problems with risk and debt are symptomatic of a much bigger disconnect in America’s whole system. Pete, CA

Guest • August 15th, 2007 at 2:20 pm

From Reuters, Countrywide Financial in deep trouble with bankruptcy possible http://www.reuters.com/article/ousiv/idUSN1524031520070815?sp=true “Countrywide Financial Corp shares fell on Wednesday after the largest U.S. mortgage lender was downgraded to by a Merrill Lynch & Co. analyst, who said bankruptcy may be possible if liquidity worsens.” “‘If enough financial pressure is placed on Countrywide, or if the market loses confidence in its ability to function properly, then the model can break, leading to an effective insolvency,’ wrote analyst Kenneth Bruce, according to a person who has seen the report. ‘If liquidations occur in a weak market, then it is possible for Countrywide to go bankrupt.’”

Pete, CA • August 15th, 2007 at 2:23 pm

Heavier selling in the US market at the end of day now. This is going to be a very rough week for investors who chose to “hold” instead of “sell”. Looking at Yahoo, 56% of respondents said they were going to ride this market out. Bad move. Pete, CA

Guest • August 15th, 2007 at 2:38 pm

Dear Prof. Roubini, Could you look at the comment by Rokka76 in your story “The Moral Hazard Effects of Recent Central Banks’ Liquidity Injections”. Currently, it is the last comment of the story. I think it is worth reading and, most defenitely, it deserves your respond. Excellent piece of writing! I´m familiar with Rokka76´s writings and I can say, he knows a lot of stuff about macroeconomics. About 1-1,5 year ago, he argued that the US will be in some sort of recession (growth recession if I remember correctly) by Q3-2007..

John Ryskamp • August 15th, 2007 at 2:39 pm

BY THE WAY, I HAVE GOTTEN MY ANSWER AS TO WHY BEAR STEARNS HAS NOT YET FILED FOR BANKRUPTCY. ANSWER: THEY’RE LYING. WHO KNEW? Every once in a while, we Fools come across an example of Wall Street “Wisdom” so perfect in its hubristic idiocy that we choke each others email inboxes with missives of incredulity, contempt, and spray-the-keyboard-with-coffee amusement. The one we’ve got today comes straight from the CFO of Goldman Sachs (NYSE: GS), courtesy of a Monday article in the Financial Times. In it, David Viniar attempts to excuse the implosion of Goldman hedge funds by claiming, “We were seeing things that were 25-standard deviation moves, several days in a row.” Please. The sub-prime meltdown led to an Alt-A meltdown that led to credit tightening that has killed dozens of lenders such as American Home Mortgage; crippled survivors like Impac Mortgage Holdings (NYSE: IMH); busted funds at other braniac banks like BNP Paribas and Bear Stearns (NYSE: BSC); convinced consumers to stop buying so much at places like Wal-Mart (NYSE: WMT) and Home Depot (NYSE: HD); and therefore inflicts great havoc on the equities markets. These possibilities were so easy to see, for so long, that some of us Cassandras have, in fact, been calling them probabilities for some time now. But even if we could accurately describe what has happened as “unlikely,” could it be a 25-sigma event? My stats is a bit rusty, but here’s what I’ve got: On one side of a normal distribution, a one standard-deviation (or “sigma”) event occurs about 1 in 6 times. A two sigma event one in 44 times. A three sigma event? Try once every 741 chances. (As you can see, this isn’t a linear function.) I can’t actually find a calculator that will give me the numbers past 8 sigmas, which is 6.61 x 10 ^-16. Given the way that curve runs, a 25-sigma event is best described as something that is “impossible,” never going to happen, way, way, way beyond the fabled “black swan.” In fact, I feel 100% confident in saying (with apologies to Wayne and Garth) that we are far more likely to see a real black swan fly out of Mr. Viniar’s posterior than we (or he) are to see a single 25-sigma event, much less several of them in a row. (My colleague Bill Mann, who sent this quotation my way, figures the odds are just as good that he will catch an asteroid in his hand.) Clearly then, this is a ludicrous, ridiculous assertion. Why, would someone like Viniar make such a dumb statement? I am going to presume that he’s not a complete idiot. To my mind, that leaves only a couple of other explanations: He’s exaggerating (to the point of lying, in my opinion) to try and save his skin, and/or he’s too egotistical to believe that he and his Goldman team could have had their precious “quant” models wrong. My moneys’ on a big dose of both. Remember that the fate of Mr. Viniar’s paycheck, like the bonuses of all those other folks at record-setting Goldman, depends on record profits at Goldman, and those depend on keeping investors confident, so that the money-bags out there will keep their assets at Goldman, use Goldman’s trading desk, patronize its investment banking services, and otherwise keep its Wall Street wheels nice and greasy. The Financial Times quote indicate to me that Mr. Viniar will say anything to convince jittery investors that, contrary to the evidence, Goldman has everything under control. Current market conditions, therefore, must be once-in-the-universe rarities. Clearly, they’re not. That’s why Jittery Goldman investors should get even more jittery, because the other problem looks likely to be ego. The folks at Goldman have had it so good for so long, that Mr. Viniar is apparently convinced that their success couldn’t have anything to do with random chance. It must have been smarts all along, and wise decision-making. Otherwise, how could they have lost? Anything that breaks the winning streak, well, it would have to be an insane outlier — maybe a 25-sigma event! Better yet, 3, 4, or 5 in a row! If Mr. Viniar really believes this, it’s a typical, but pathetic and dangerous rookie mistake. Learning the difference between luck and skill is vital to real investors, and knowing the difference, plus talking straight about it, is the kind of thing we would expect to find at the highest level of Goldman Sachs’ management. Maybe Mr. Viniar’s lips moved before his brain could hit the kill switch. Maybe he knows better, but figures he can fool us Fools. Or, maybe he actually believes in what he said. If so, someone ought to sneak into his office, sweep away the black feathers, and put a copy of Nassim Taleb’s Fooled by Randomness on his desk chair. If he and his Goldman quants don’t recalibrate their understanding of black swans, the next few months are going to seem an awful lot like Hitchcock’s The Birds.

John Ryskamp • August 15th, 2007 at 2:40 pm

THE MARKET IS DESPERATE TO AVOID THIS, BECAUSE WHEN IT HAPPENS, THE DOW WILL SINK ABOUT 1200 POINTS: From Reuters, Countrywide Financial in deep trouble with bankruptcy possible http://www.reuters.com/article/ousiv/idUSN1524031520070815?sp=true “Countrywide Financial Corp shares fell on Wednesday after the largest U.S. mortgage lender was downgraded to by a Merrill Lynch & Co. analyst, who said bankruptcy may be possible if liquidity worsens.” “‘If enough financial pressure is placed on Countrywide, or if the market loses confidence in its ability to function properly, then the model can break, leading to an effective insolvency,’ wrote analyst Kenneth Bruce, according to a person who has seen the report. ‘If liquidations occur in a weak market, then it is possible for Countrywide to go bankrupt.’”

AFFG • August 15th, 2007 at 2:51 pm

CNBC: “S&P 500 Falls Into Negative Territory for Year, Dipping Below Last Year’s Close of 1,418.30″ Well Pete they tried but did not succeed. And now? I hope they understand now that this is SERIOUS! I can only repeat myself again and again. Everybody is liquidating everything to cover the positions. Banks are whistling the players back and telling them that it is time to go to bed. THOSE ARE THE FUNDAMENTALS! They couldn´t give more a damn about the fundamentals on/of main street.

Dave Chiang • August 15th, 2007 at 3:02 pm

I live here in New Jersey, USA. The construction of these huge 4000+ square feet houses everywhere, otherwise called McMansions, has been mind boggling. The property taxes on these monster McMansion houses is almost like a mortgage by itself. These new $800K+ houses have annual tax assessments of $20K+. The Housing frenzy is almost like a sickness with purchases based on the insane assumption that House prices always appreciate by double digits every year. How can this situation not end in a disaster when the Housing Bubble implodes? I honestly can’t see how the US avoids a severe recession/depression based on the massive misallocation of capital over the past decade.

Guest • August 15th, 2007 at 3:12 pm

Dave WOW ! New Jersey taxes must almost be double compared to California taxes.

Guest • August 15th, 2007 at 3:18 pm

what do you guys think is the reason for home prices going up in 2/3 of u.s. cities? mostly high-end luxury homes being sold?

AFFG • August 15th, 2007 at 3:19 pm

I pay 388 €/a. Maybe I should stop complaining.

Guest • August 15th, 2007 at 3:32 pm

I guess, now that the market has crossed the 13,000 barrier, it won’t be long before it drops below 12,000!

Anonymous • August 15th, 2007 at 3:34 pm

Why did it collapse like that in the last hour?

Anonymous • August 15th, 2007 at 3:38 pm

How will California municipal bonds e.g. BZF and AKP hold up to the pressure?

Guest • August 15th, 2007 at 3:39 pm

Freddie Mac loosens up To soothe market turmoil, Alt-A loans that typically fell short of Freddie’s stricter requirements will be a bigger part of the company’s activity. August 15 2007: 2:08 PM EDT http://money.cnn.com/2007/08/15/news/companies/freddie_alta.reut/index.htm?postversion=2007081514 Is this like allowing people with terrible driving history to drive because otherwise they won’t be able drive to the grocery store to buy groceries and hence will starve?

Guest • August 15th, 2007 at 3:41 pm

NR excellent post summarising the current state of intellectual play. It seems to me that 6 months ago there was a lot of knightian certainty about backed by a lot of leverage. Really the distinction is not well related to common use of language so confusing. The distinction it seems is based on the number of observations, e.g. any single event maybe indefinite but I can calculate a probability from observations around it. I can only measure what has been /is observeable. I can of course also assign an event a probability based on reasoned judgement and a group of these might be measurable but remain a measurable probability of judgments of events rather than of events themselves. But as you point out the distinction is spurious in this case another example of financial industry hyperbole, or of something more sinisterly opaque. If it was knightian uncertainty, the logic goes (ears prick up, heads nod, egos are stroked by conceptual recognition) it could not be priced into the deal!! We are helpless before the Knights who say uncertainty. Bail us out! At least of responsibility. Housing markets and their cycles every 10-15 years? Following on from stock market cycles quite frequently. Top to bottom house prices… plenty of data. Defaults etc loads of data etc etc. MBS some CDOs CDO2,CDO3 plenty on the way up… looks like we need some more. Knights who say uncertainty what do you want of us??? What are the characteristics of these secondary and tertiary instruments and markets that you have built on these assets? What are the characteristics of the primary markets for these assets? Why have you put so much money into them? How have you been funding yourselves? How much do you have on your books? Have you been marking up and down? Why have you not sufficiently collateralised? Why have you mispriced? Why do you not want to trade any more? Why do you not know what is going on? Knights who say uncertainty is not that your own problem? Knights who say uncertainty do you not need a good dose of Knightian uncertainty?

John Ryskamp • August 15th, 2007 at 3:49 pm

KEEP AN EYE ON THESE FIRMS. THEY ARE IN BIG TROUBLE: Merrill analysts downgraded Deutsche Bank (DB:deutsche bank ag namen ord News, chart, profile, more Last: 122.57-4.33-3.41% 4:19pm 08/15/2007 Delayed quote dataAdd to portfolio Analyst Create alertInsider Discuss Financials Sponsored by: DB122.57, -4.33, -3.4%) to neutral from buy, saying it’s no longer comfortable having two of its three European investment banks rated as buys. ”The markets have become more difficult than we thought even in early August. Moreover, the standstill in the asset-backed commercial paper markets shows that financial system stresses are significant,” analysts wrote. Credit Suisse downgraded UBS (UBS:UBS Ag News, chart, profile, more Last: 50.98-0.51-0.99% 4:16pm 08/15/2007 Delayed quote dataAdd to portfolio Analyst Create alertInsider Discuss Financials Sponsored by: UBS50.98, -0.51, -1.0%) to neutral from outperform and cut its target price to 75 Swiss francs ($62.48) from 91 francs, after its rival Swiss bank reported earnings on Tuesday. ”We had substantially underestimated the impact that the combined exposure of UBS investment bank to mortgage-backed securities and Dillon Read Capital Management to subprime and subsequent spillover would have on the fixed income revenues of UBS (19% of group revenue in 2006) going forward,” the broker said.

Anonymous • August 15th, 2007 at 3:52 pm

Here in Seattle my theory for the rising home prices is that the small and middle income folks are having a harder time getting financing, while the upper income people here are still loaded and price is no object really. The # of homes on the market has almost doubled, sales are down, but prices are up 9% yoy… I assume this is because the high end is now overrepresented? Also: The last few weeks we assumed it was the PPT that was jumping in the stock market and driving up prices – - albeit temporarily!? With Goldman Saxxx and other quant funds losing huge amounts just the last few weeks, doesn’t it appear that the stupid computer funds were triggering huge buys in the face of sell-offs and then losing it all in a matter of hours or days as they long overdue sell-off continued? Just wondering… Gordo in Seattle ps- My Goldman and Merrill puts are looking great! Looks like Goldman Saxxx are now the “Smartest Guys in the Room?”

John Ryskamp • August 15th, 2007 at 3:53 pm

How will California municipal bonds e.g. BZF and AKP hold up to the pressure? MAINLY THE CALIFORNIA BUDGET NEGOTIATIONS ARE BEING INFLUENCED BY THE COLLAPSING ECONOMY. THE REPUBLICANS WANT TO SERIOUSLY REWRITE THE DEAL BASED ON MUCH LOWERED EXPECTATIONS OF REVENUE. CALPERS LOOKS TO BE TEETERING ON THE BRINK OF SELLING EVERYTHING. THE INSTITUTIONAL INVESTORS ARE VERY CLOSE TO A UNIFORM SELL. Written by Anonymous on 2007-08-15 15:38:21Freddie Mac loosens up To soothe market turmoil, Alt-A loans that typically fell short of Freddie’s stricter requirements will be a bigger part of the company’s activity. August 15 2007: 2:08 PM EDT http://money.cnn.com/2007/08/15/news/companies/freddie_alta.reut/index.htm?postversion=2007081514 ALL THIS DOES IS TO PANIC PEOPLE. IT MAKES THE FED LOOK AS IF IT IS ABOUT TO BECOME A SECTION 8 LANDLORD. GEE, REAL PROSPEROUS SOCIETY THERE, AIN’T IT? INTERNAL AND EXTERNAL PRESSURE ON THE GOVERNMENT WILL MINIMIZE THIS MOVE. THIS IS WHY THE COUNTRY IS HEADING TOWARD A POLITICAL CRISIS. NO ONE IN THE POLITICAL SYSTEM HAS THE SLIGHTEST IDEA WHAT TO DO WITH 300 MILLION PEOPLE.

dude • August 15th, 2007 at 4:37 pm

Yes, Pete, I have been watching that Yahoo question for the past few days…. amazing how the percentages have NOT changed at all over the past few days, but the poll number has increased. Perhaps it is just an advertisement placed by BSC……

Anonymous • August 15th, 2007 at 4:50 pm

@Gordo in Seattle ”The last few weeks we assumed it was the PPT that was jumping in the stock market and driving up prices – - albeit temporarily!? With Goldman Saxxx and other quant funds losing huge amounts just the last few weeks, doesn’t it appear that the stupid computer funds were triggering huge buys in the face of sell-offs and then losing it all in a matter of hours or days as they long overdue sell-off continued?” The oracles of wallstreet underestimated the depth and conviction of the shorts. And the shorts have the fundamental wind on their back …game over. Now hand me the key to you house.

Guest • August 15th, 2007 at 5:01 pm

All this and oil moved UP today? Dont say hurricane because oil has been moving up anticipating a Gulf hurricane for 4 months now! Professor you have not said much about decoupling lately! $73 oil says the world economy has decoupled.

Guest • August 15th, 2007 at 5:05 pm

Any possibility that the Chinese central bank could sue for fraud in the US re the toxic waste it bought? It has very deep pockets so starting a, say, 200 billion $ lawsuit would give Wall Street and the Treasury as well something to think about. It would be difficult to shrug off such a suit.

budr • August 15th, 2007 at 5:09 pm

Good Blog NR. Kudlow was on CNBC this afternoon advocating that the fed buy sub-prime and alt-a paper to rescue the financials. “Greatest Story Never Told” or “Greatest Ruse Ever Sold”? By the way, Mr Ryskamp I enjoyed a couple your comments today. Such coments are much better than when you try to take over the blog with unnecessarily frequent and outlandish statements. budr

John Ryskamp • August 15th, 2007 at 5:42 pm

HERE’S ANOTHER OUTLANDISH STATEMENT: THIS IS THE DEATH KNELL: Marketwatch et al. The commercial paper market usually allows creditworthy companies to borrow money on a short-term basis efficiently. It’s easier than issuing other types of debt and can be a low-cost alternative to bank loans. Because of these attributes, the market has grown into one of the most important debt markets in the U.S. However, signs of problems in this crucial market have begun to emerge in recent days. Coventree, a Canadian company that sponsors and oversees roughly $16 billion of asset-backed commercial paper vehicles, said earlier this week that it couldn’t sell new debt to refinance $950 million of short-term loans, some of which were maturing. Coventree shares slumped more than 70% on Tuesday. The company said on Wednesday that it was able to sell roughly $600 million of asset-backed commercial paper, but it still had to extend the maturity on roughly $60 million of debt. Rating agency DRBS said that it had been told by a number of Canadian companies on Tuesday that disruptions in the asset-backed commercial paper market were continuing. By the end of Tuesday, 16 companies had claimed a so-called market disruption event and asked for funding for debt that was maturing that day, the agency noted. Merrill’s Rosenberg noted on Wednesday that more than half of the commercial paper market is backed by residential mortgages, credit card receivables, car loans and other bonds. ”Now the rating agencies have warned that they might downgrade several issuers of commercial paper,” he wrote.

artichoke • August 15th, 2007 at 5:51 pm

It’s important to separate the conventional CP market from the new Asset-Backed CP market. As far as I know, only the latter is in trouble. So companies can finance their operations in the conventional CP market as before. But banks cannot package and sell ABCP collateralized by toxic mortgage waste like the good old days of a couple weeks ago. This seems like a Wall Street problem but not a Main Street problem.

John Ryskamp • August 15th, 2007 at 7:22 pm

So companies can finance their operations in the conventional CP market as before. THIS IS NO LONGER TRUE.

artichoke • August 15th, 2007 at 7:34 pm

I haven’t seen evidence of real problems in the conventional CP market, John.

Newbie • August 15th, 2007 at 7:36 pm

@John Ryskamp: THIS IS THE DEATH KNELL: … The commercial paper market usually allows creditworthy companies to borrow money on a short-term basis efficiently. Why would a crisis on the CP market pose a problem? What I mean is, isn’t a company supposed to run on profit from its own operations? And if it does so, shouldn’t it have savings to weather temporary dips in economy?

LessorBee • August 15th, 2007 at 7:44 pm

Well it just goes to show why all these Hedge funds railed against any oversight: Since they only serve highly sophisticated investors (SayWhat?). Like Banks?? Glass-Stengal Act anyone? {First Glass Steagall Act of February 1932 This act allowed that government obligations as well as commercial paper can be used as reserve in banks. Therefore, banks were able to increase credit, and more money was in circulation.[citation needed] It was signed into law by President Herbert Hoover. [edit] Second Glass-Steagall Act (officially called: Banking Act of 1933) (June 16, 1933) This act introduced the separation of bank types according to their business (commercial and investment banking), and it founded the Federal Deposit Insurance Company for insuring bank deposits.[citation needed] Literature in economics usually refers to this Glass Steagall Act, since it had a stronger impact on US banking regulation.[citation needed] [edit] Repeal of the Acts On November 12, 1999, President Bill Clinton signed into law the Gramm-Leach-Bliley Act, which repealed the Glass-Steagall Act of 1933. One impact of this repeal is that certain advisory activities of the banks are now regulated by the Investment Advisers Act of 1940.} via wikipedia

artichoke • August 15th, 2007 at 7:46 pm

Newbie, on principle I agree with you but many companies do not do it that way. For one thing, the LBO and takeover booms have forced companies to lever up to (1) maximize returns and (2) make the capital structure inimical to further leverage by a raider. For another, non-banking companies are prone to the same sorts of moral hazard as financial companies and indeed are advised by investment bankers or even run by former bankers. Even 20 or 30 years ago, Treasury departments tried to optimize asset allocation by strategies that included borrowing. The conventional CP market is pretty important to Main Street as it is today. But I don’t see that market as being in trouble.

AG • August 15th, 2007 at 7:50 pm

“zombie corpses” regarding the now ‘dead in the water’ complexity of the CDO markets. Good term! As usual your blog delivers a clear understanding of the current turmoil in the markets, so much so the average simple investor would understand. Which is important. As far as the CDO, credit/debt markets being opaque. Absouletly. I suspect the big law firms are going to hammer some of the hedge funds and banks over this. It will be inetersting how much disclosure has actually gone on. We may see a severe wallop occur to the financial sector (not just financially, but legally), including financial advisor’s, investments banks and hedge funds. Secrecy in the markets is fine, if it’s your own money, but secrecy and half assed disclosure on risk (to clients: investors) is possible negligence. It will be interesting to see what their (Hedge Funds, Investments banks) defense will be.

Daniel • August 15th, 2007 at 7:53 pm

Dr, Roubini, you have been spot on in your forecasts. However, I disagree when you say residential homes will go down 10%. In high cost areas, I believe they will come down 50% or more. In Long Island, NY 75 year old 2500 sq. Ft. Homes selling depending on the neighborhood for $500,000 to $ 1 million. Property Taxes on these homes $12,000 to $20,000. Commutting and utility costs $1200 to $1500 per month. How many people can afford these homes?? California even worse. A few months ago, I saw a TV show entilled “Flip that House”. A group of investors outside San Francisco bought a 900 sq. ft. home in horrible condition for $550,000. The walls of the home were black. I thought they were painted black. It was not paint. It was mold that was allowed to fester. The investors had to wear hazmat suits to tear the walls down. The investors spent an additional $100,000 to make the home livable. They then sold it to someone for $720,000. This is insanity at it’s best. It is a prime example of the insane lending practices that occurred during this boom. This will end badly. Florida, Nevada, New England just as bad. The subprime losses are at least $500 billion or more. Severe recession coming. In fact last week, I actually heard one of Kudlow’s guests use the word depression. I hope to God he is wrong. However, cheap money was horribly abused. The price will be paid for this. The Federal Reserve is irrelevant at this point. Like you said, this is about insolvency and debt, not liquidity.

artichoke • August 15th, 2007 at 8:11 pm

I see the following problems right now, which are now somewhat independent although they all started from the housing boom: (1) The market for ABCP and other exotic mortgage trash has hit a brick wall (because house values went down a bit, and these securities are levered, 10, 20, 100, who knows how many times). This new problem will cause serious difficulty to many banks and hedgies. (2) Houses are unaffordable to many would-be solid middle class people. This is an old problem that hasn’t changed much in three or more years. Where there’s an overhang of supply, prices will have to come down a bit more and eventually the market will clear. (3) That does not mean that everyone will have a decent house; there may still be more people than good houses for them to live in. Also, many people in the retail mortgage industry are losing their jobs and some will have to seek employment outside the mortgage industry, probably at lower pay.

Seth Merrin • August 15th, 2007 at 8:11 pm

Dark liquidity is another source of opacity, ie a large volume of trading taking place in venues like Liquidnet without price discovery and opportunities for everyone to participate in a trade on an exchange. I’m surprised that the SEC is as permissive as it has been in with respect to these venues, which run counter to the public interest in open and transparent markets.

Anonymous • August 15th, 2007 at 9:19 pm

Another factor which will lead to defaults in prime mortgages and second homes: It is a well known fact among mortgage lenders that, in prime loans, the major predictor of whether a borrower will default is whether the borrower believes he has equity in his house. So long as the borrower believes he has equity to protect, he will continue to make his mortgage and property tax payments. However, once the borrower sees that houses in his neighborhood sell for less than his mortgage balance, and he does not see appreciation in the near future, he will stop making his mortgage payments. Instead, he will give his lender a deed-in-lieu-of-foreclosure, and will turn the house over to the lender. This fact applies even with affluent borrowers, who have high incomes (over $125,000) and money in savings. Americans simply do not expect to have to continue to make payments on houses which have declined in value. They know that the lender will never pursue them on the deficiency on their promissory note, so the note will be effectively “forgiven.” The only bad thing would be a bad mark on their credit report – however, these borrowers will simply blame their failure to pay on the lender’s truth-in-lending violations in making the loan. Affluent borrowers know that they can always get credit, based on their high income and assets. They would rather have a negative credit entry, rather than make payments when they are underwater, even though they are financial able to make the payments. Mortage lenders have always known about this, but the general public doesn’t know. I believe this will lead to many voluntary defaults by affluent people, and will cause a great repricing in some high-end new neighborhoods. I have experience in mortage lending and have seen this happen.

Ralph • August 15th, 2007 at 9:27 pm

There are a lot of funds moving back into USD at the moment. One assumes a big part of that is to keep afloat. For example- half of all the gains in the AUD from the last 15 MONTHS have been lost in the last three weeks.

Guest • August 15th, 2007 at 9:57 pm

John Ryskamp and Artichoke Maybe you can take a little more time to explain how the commerical paper (CP) market works. I’m certainly not familiar with the details. For example: 1) It appears that mortage-backed commercial paper (MBCP) is a viable product. This seems puzzling to a newcomer, since the mortgage-backed loans are typically long-duration, while CP is nomrally short-term debt isn’t it? I assume that some sort of clever securitization process takes place that allows mortgage loans to be bundled and sold in this way? 2) Is all asset-backed commerical paper (ABCP) in the same category? It appears from your comments that car loans and other types of loans may also have been bundled in these instruments. Are they all together? Maybe I’m naive, but I would think that there are different risks and default rates for the different loans. Incidentally, I’m guessing that the delinquency rates on car loans in the USA (and motorcycle loans) are probably increasing. Has anyone seen any data? Any insights would be appreciated. Thanks, Pete, CA

LessorBee • August 15th, 2007 at 10:17 pm

Translation help from FTalphaville.ft.com {How to speak ‘hedge fund’ Aug 15 16:35 by Gwen Robinson Comment In these days of market volatility, hedge-fund managers and executives at all types of money management firms have been forced to explain why their funds are shutting down, losing money hand over fist, More… In these days of market volatility, hedge-fund managers and executives at all types of money management firms have been forced to explain why their funds are shutting down, losing money hand over fist, and freezing investors’ funds, notes the prolific Daniel Gross on Slate.com. When they do so, however, they frequently lapse into a strange euphemistic dialect. And so, it may be helpful to provide a handy “Hedgie-English” glossary, says Gross, author of Pop! Why Bubbles Are Great for the Economy. Gross’s Hedgie-English glossary, for any occasion, with his full explanations on Slate.com: Hedge-Fund Phrase: Challenging Translation: Run for the hills! Hedge-fund managers never piss away money. They just face challenges, says Gross. Hedge-Fund Phrase: Unprecedented, unique circumstances Translation: Stuff happens. But we had no clue. Strangely, these same models failed to predict the once-in-10,000-year events that roiled the markets in 1997, 1998, 2001, and 2002. Hedge-Fund Phrase: Market volatility has produced unfair, unrealistic prices. Translation: The market is efficient only when it works in our favour. Several money managers blamed their temporary problems on investors’ irrational collective behaviour, he writes. Sentinel’s the latest to try this tack – but this has a fine heritage, right back to LTCM itself. Hedge-Fund Phrase: Our results were affected by the selling behaviour of other firms. Translation: We made the same dumb trades as everyone else. Hedge-Fund Phrase: We just want to protect investors. Translation: We just want to cover our butts. Hedge-Fund Phrase: This isn’t a rescue. Translation: THIS IS TOTALLY A RESCUE!!!!!!! If you believe those lines, I’ve got some subprime debt I’d like to sell you, says Gross.}

Anonymous • August 15th, 2007 at 10:24 pm

Bloodbath in the Asian markets – Korea down more than 7% today.

Guest • August 15th, 2007 at 10:26 pm

Asset-Backed Commercial Paper ABCP is short-term debt, generally limited to a tenor of no more than 270 days and issued either on an interestbearing or discount basis. Typically, ABCP is exempt from the registration requirements of the Securities Act of 1933 (the Act). The exemption may be based on Section 3(a)3 of the Act, which requires the proceeds of CP issuance, which cannot have a maturity exceeding nine months, to be used to finance current transactions, or 4(2) of the Act, which applies to CP that does not involve a public offering and is generally sold only to accredited investors. ABCP may also be exempt from registration if the CP is fully supported by a bank guarantee, as provided in Section 3(a)2 of the Act. ….etc http://pages.stern.nyu.edu/~igiddy/ABS/fitchabcp.pdf

Anonymous • August 15th, 2007 at 10:33 pm

The USD is higher, but Yen has even moved higher. Very deflationary. At some point the monetary inflationists the CB’s are, will have to drive currencies down to re-inflate the economy.

Anonymous • August 15th, 2007 at 10:38 pm

John Ryskamp— excellent posts today!

Anonymous • August 15th, 2007 at 10:41 pm

More bad stuff from a stronger dollar: weaker equities, more pressure on asset bubbles, business contraction. Strong dollar during times of credit busts is bad. The oppo of the late 90′s when the dollar was over 100 and the credit boom was fresh. During times of credit busts, we want a weak dollar to re-inflate. The mistake the supplyside credit debtors made after the dot.com bust that a credit bust was near. They devalued the USD 20-30% which led inflation to assets as the dollar fell, to completely unabstainable levels. Neo-Con backed supplyside debt credit orgy led to what is happening now. We will have to literally destroy the currency to re-inflate that sucker. I can’t see the Fed doing that. Instead, a modest deflationary recession on and off over the next 10-15 years, oh, you mean like Japan?

Gunther • August 15th, 2007 at 11:26 pm

If the blow-up of this Ponzi scheme ends in a hard landing it will be an incredible good outcome. In this Ponzi Scheme money gets created without the central bank. Once the scheme reverses, the money gets destroyed and creates spreading panic. The dynamic in such a system is well known in chemistry, a self-amplifying process, commonly known as explosion. A bad recession seems a more likely outcome to me.

Anonymous • August 15th, 2007 at 11:27 pm

Asian Stocks Drop, Set for Biggest Drop in 3 Years; Banks Falls By Patrick Rial and Chen Shiyin Enlarge Image A pedestrian walks past an electronic stocks board Aug. 16 (Bloomberg) — Asian stocks tumbled, extending a global rout with its biggest drop in three years, after Australia’s Rams Home Loans Group Ltd. said it was unable to refinance $5 billion of debt as a credit crunch deepens. South Korea’s Kospi index plunged 6.5 percent, heading for its largest loss since June 2002. Mizuho Financial Group Inc., Japan’s second-biggest bank which has lost a quarter of its value in the past three weeks, led a slide in financial stocks. Toyota Motor Corp. and Samsung Electronics Co. fell after reports showed U.S. home sales dropped to a four-year low and prices declined in a third of the nation’s cities. BHP Billiton Ltd., the world’s biggest mining company, slumped as concerns about slower global growth dragged commodities prices lower. “Blood is hitting the streets, everyone seems to be panicking, and there’s reason to panic,” said Patrick Chang, who helps manage $4.5 billion at CIMB-Principal Asset Management Bhd. in Kuala Lumpur. “There’s been so much blow-up, we don’t know when it’s going to end. Liquidity is drying up.” The Morgan Stanley Capital International Asia-Pacific Index lost 4 percent to 139.71 as of 12:56 p.m. in Tokyo, set for its biggest decline since May 2004 and wiping out gains for the year. About 20 stocks retreated for each that gained today as benchmarks slid across the region. Japan’s Nikkei 225 Stock Average dropped 3.5 percent to 15,900.49, poised for its lowest close since November. Sony Corp. led Japanese exporters lower after the yen strengthened to the highest against the dollar since March. South Korea’s Kospi plunged the most in five years following a one-day holiday yesterday when the MSCI Asia index lost 2.5 percent. Risk Averse The Standard & Poor’s 500 futures were 0.5 percent lower today. U.S. stocks fell yesterday on speculation Countrywide Financial Corp., the nation’s biggest mortgage lender, may be forced into bankruptcy. The S&P 500 Index erased its gains for the year, dropping 1.4 percent. Mizuho, Japan’s second-biggest bank, slumped 5.9 percent to 637,000 yen. Woori Finance Holdings Co., South Korea’s third- biggest financial services company by market value, dropped 4.6 percent to 21,000 won. National Australia Bank Ltd., the country’s No. 1 lender, fell 2.8 percent to A$37.30. Rams Home Loans Group said it was unable to refinance A$6.17 billion ($5 billion) of short-term U.S. loans because of a “lack of market liquidity” caused by a global credit rout. It plunged 42 percent to 79 Australian cents, 68 percent lower than the price at its initial share offering last month. The MSCI Asia-Pacific Financial Index dropped 3.6 percent today, taking its one-month loss to 15 percent, the worst performance among the broader measure’s 10 industry groups. Overreaction? Countrywide may go bankrupt if creditors force the company to sell assets at depressed prices or investors lose confidence in its ability to raise cash, Merrill Lynch & Co. said. KKR Financial Holdings LLC, a unit of Henry Kravis’s buyout firm Kohlberg Kravis Roberts & Co., said it may lose up to $290 million from a drop in the value of mortgage-backed bonds it owns. “Panic has been triggered by concern that the upward trend of the past three to four years has been broken,” said Park Seh Ick, who helps manage $1.3 billion at Hanwha Investment Trust Management Co. in Seoul. “People are overreacting.” Stocks also dropped on signs investors are fleeing equities for less risky assets. Two-year Treasury yields held near the lowest in 22 months as a global stocks slide fed demand for the relative safety of government debt. Fund managers are the most risk averse in a year, with 38 percent saying their willingness to take on investment risk is “lower than normal” because of the subprime crisis, a Merrill Lynch & Co. survey showed. Toyota, James Hardie Toyota, the world’s No. 1 automaker by value, slumped 4.1 percent to 6,570 yen. James Hardie Industries NV, the biggest supplier of home siding in the U.S., lost 4.8 percent to A$7.30 in Australia. Samsung Electronics, which gets more than 80 percent of its revenue overseas, fell 4.7 percent to 583,000 won. The National Association of Home Builders/Wells Fargo index of builder confidence slid to 22 from 24 in July, its sixth month of decline, the U.S. group said. A reading below 50 means most respondents view conditions as poor. A National Association of Realtors report said the median price for a single-family home fell in 50 of the 149 metropolitan areas it studied. Yen, Metals Sony, the maker of the Vaio computer and PlayStation game console, lost 3.6 percent to 5,320 yen. Honda Motor Co., Japan’s second-biggest automaker, slid 4.9 percent to 3,730 yen. The yen strengthened to as high as 116.25 to the dollar today, the highest since March 19. A stronger yen decreases the value of Japanese exporters’ dollar-denominated sales when converted into local currency. BHP declined 3.7 percent to A$31.97. Sumitomo Metal Mining Co., Japan’s No. 1 nickel producer, lost 4.7percent to 2,250 yen. Zinifex Ltd., dropped 4.2 percent to A$14.48 in Australia. A measure of six metals traded on the London Metal Exchange fell 1.5 percent yesterday to the lowest since March 9. Copper declined 1.4 percent, nickel fell 2.9 percent, and zinc lost 2 percent. So-called cyclical stocks, whose profit growth is leveraged on an expanding global economy, were among the hardest hit. Hyundai Heavy Industries Co., the world’s biggest shipbuilder, plunged 7.8 percent to 294,000. Nippon Steel Corp., the world’s No. 2 steelmaker by output, slid 5.5 percent to 779.

artichoke • August 16th, 2007 at 12:03 am

Pete, I don’t know exactly how ABCP works. Traditional commercial paper is short-term (up to 30 day) debt issued by a corporation, with recourse against the corporation. The new Asset-Backed version is issued by a bank, with no recourse against the issuing bank but instead collateralized by … some stuff. I don’t know what all stuff that might be, but apparently quite a few of them are collateralized by toxic mortgage junk. There might be others with better types of collateral, but we wouldn’t hear about them. In fact I’d never heard of ABCP until that market seized up a few days ago. Of course I had heard of traditional commercial paper. The securitization can just pledge the collateral in case of default on the ABCP by the issuer: if he doesn’t pay, you get the collateral. Now that collateral is no good, so it’s as if there’s no collateral. If he does pay, he keeps the collateral. There’s no reason the collateral has to be short-term even though the loan is short-term. After all, when you draw on a home-equity line of credit, the collateral (the house) is a long-term asset but the HELC loan is meant to be short-term. I hope I’ve answered at least some of your question. David

cashman • August 16th, 2007 at 12:23 am

Asia getting hammered. Yen at 116. Dow futures down more than 200. Tomorrow should be very interesting. Hope you guys are short.

Ralph • August 16th, 2007 at 1:55 am

Another carry trade currency, this time the NZD – down 3 cents today! Yen drops to 115.94 as we watch… so the unwind gather pace by the day at the moment. All these games; in the end we’ll all discover how much debt is gone. Bodies of this type do not stay buried. Through the dance of death is all laid bare, the thin veil is blown aside and the naked greed exposed.

london broker • August 16th, 2007 at 1:59 am

Ugly opening here this morning – Crossover widening out towards 400, $/Yen below 116 and European mkts indicated 2% lower at open. We are in the process of witnessing the implosion of the greatest credit bubble in history – I believe we will see a deflationary bust rather than an inflationary one – your best indicator of this is gold, it’s selling off instead of rallying as people lose faith in paper assets argues for deflationary depression.

AFFG • August 16th, 2007 at 2:02 am

http://www.handelsblatt.com/news/Boerse/Marktberichte/_pv/_p/200009/_t/ft/_b/1309514/default.aspx/kurssturz-beim-dax-erwartet.html It seems the DAX is going to OPEN almost 200 points down and START under the magical 200 day line.

Anonymous • August 16th, 2007 at 2:14 am

Bubbles always end ignominiously…….so will it be with the greatest debt bubble the world has ever seen.

German • August 16th, 2007 at 2:31 am

Ryskamp is a wizz

Gabor • August 16th, 2007 at 2:47 am

There was a huge spike in trade volumes on global exchanges in the past 2-3 weeks. Hedge funds unloading?

AFFG • August 16th, 2007 at 2:58 am

@london broker, Forget the deflation story. We have to get our mind around the “real problem”. I have been waiting for the ABCP to get into trouble. This is what is closing the circle. It is not a credit crisis we are witnessing (that comes with it). All problems appearing have one thing in common: DERIVATIVES. The worldwide derivative market is imploding. Now … in order to get our mind about that we have to know that the worldwide derivatives account to about: 500 Trillion $!!!!!!!!! Now if those 500 Trillion just evaporate. What do you think we are going to experience? A depression? This is going to destroy EVERYTHING!!!!!!!!!! Just to get our hands around 500 Trillion!!!!!! The world GPD was in 2006 : $46.66 trillion. OK? So if you ask me … RUN FOR GOLD … IT IS DIRT CHEAP!!!!! The only way out of this mess is monetization! http://en.wikipedia.org/wiki/Monetization Watch for attempts to allow the CBs to buy (!) CDs and other garbage!!!!! We believe Kudlow and Co. do not understand the problems. I do not quite believe we understand it either!!!!!!!

AFFG • August 16th, 2007 at 3:02 am

Bush, Paulson … and other leaders which are running on television explaining that everything is fine and the fundamentals are just great are going to go into history as THE GREATEST FOOLS ON EARTH OD THE ENTIRE HISTORY. You will not say “you´re as stupid as a lamb” … but “you´re as stupid as paulson”!!!

AFFG • August 16th, 2007 at 3:07 am

http://www.kitconet.com/charts/metals/leaserates/au_go_0030_lsb.gif LOOK AT THE ONE YEAR GOLD LEASE!!!!!!!!!!!!!!!!!!!!!!! IT IS LITTERLY SKYROCKETING!!!!!!!!!

Gabor • August 16th, 2007 at 3:10 am

500 trillion is the notional value of derivates, which are very highly leveraged. You may safely divide this number by 1000 or 10000 to get the real amount of money in these trades.

AFFG • August 16th, 2007 at 3:12 am

@Gabor, Does it make the situation that much better?

Anonymous • August 16th, 2007 at 3:35 am

I don’t see the big deal. We just are going to have our first real recession in 16 years. Yeah, it will blow for a few years, may be worst since the early 80′s, but you know what. I suspect 5 years from now, the worst will be behind us and we will be looking at a glorious recovery. I suspect 2015-19 will be the next boom.

AFFG • August 16th, 2007 at 3:40 am

Kudlow is starting to panic. ”I suspect 2015-19 will be the next boom.” So do I. But until then things are going to get worse then you think.

AFFG • August 16th, 2007 at 3:47 am

http://www.cnbc.com/id/15840232?video=470776355&play=1 Kudlow: Let the FED buy derivates!!! This is crazy!!! Buy Gold dudes … this is getting insane!!!! This is the path of the Weimar Republic!

Anonymous • August 16th, 2007 at 3:59 am

I say let China dump all its treasuries. We will withstand and except our correction and move on. Oh yeah, we will have 2 dozen regime changes in government and business, but things will rebound healthier than ever. But China, woooooooo, you don’t get voted out of office, you get dead. We saw what happened after the current PR toys flops, uh, they mysteriouly commit suicide er…ehehe.

Guest • August 16th, 2007 at 4:03 am

It was not you, it was not me It was that damned uncertainty He got it right Improbable Knight Way before 1930 What’s not been seen Cannot be With any degree of accuracy Black swans may honk All they are wont About my false ability I take my measure By this rule My figurings are only fooled By things that I do not include They fill unquantifiable space Until they hit you in the face Impossible to calculate At any reasonable rate But here’s some odds that you should know No matter how much you shall plea It’s a racing certainty That I’ll not touch your CDO, nor roll its ABCP

AFFG • August 16th, 2007 at 4:26 am

http://www.bloomberg.com/apps/news?pid=20601087&sid=afRK0oEFn10w&refer=home ”Rams Home Loans Fails to Refinance A$6 Billion Debt” It´s all contained. Economy is just doing fine.

AFFG • August 16th, 2007 at 4:28 am

http://www.bloomberg.com/apps/news?pid=20601087&sid=awakYl82IF3Y&refer=home ”William Poole, president of the St. Louis Federal Reserve Bank, said the subprime mortgage rout doesn’t threaten U.S. economic growth, and only a “calamity” would justify an interest-rate cut now.” Is he joking?

Gabor • August 16th, 2007 at 4:36 am

AFFG, more to that, derivatives are a zero sum game.participants are just winning money from each other. it does not affect the money supply at all. so it should be totally irrelevant for goldbugs.

AFFG • August 16th, 2007 at 4:45 am

@Gabor, ”so it should be totally irrelevant for goldbugs” You are right if you see Gold as an inflation hedge and the explosion of money supply as a sign of inflation. But Gold ain´t an inflation hedge. If it was so it should not gone down in the last 30 years to go back up in the last 7. Gold is a safe heaven. If things implode Gold will go up, when people seek to leave the banking system. The best place to be is short term bonds and Gold. Gold is holding well … in a heavy selling environment. Once the masses catch the train … the sellers will be crushed by the buyers … Does anyone see it different and if yes why? If Kudlow and his pals get what they want it is Hyperinflation you will get!

AFFG • August 16th, 2007 at 4:48 am

Just found that to make my point. http://www.howestreet.com/articles/index.php?article_id=4557 Shedlock is a deflashionist.

AFFG • August 16th, 2007 at 4:55 am

Here is another one: http://www.howestreet.com/articles/index.php?article_id=4555 I find that one a bit hard but there is a little truth in it.

Mr Bean • August 16th, 2007 at 4:59 am

See the problem with people on this blog is that they choose to listen to folks like Roubini. They should listen to the official government spokespeople like Poole. And read Bloomberg and Yahoo news. But not between the lines.

g Anton • August 16th, 2007 at 5:05 am

Currently, the most overused jargon word is “PANIC”. The somber truth is that the market is still much overpriced and very, very uncertain. A continuing major downward “adjustment” is certainly in order, and the sooner one gets out, the more he will take with him on his out-getting. Investor “self control” has be remarkable, due mainly, I think, to the fact that the investment community is slowly coming to the realization of how bad things really are (i.e. much of the community is still in a state of denial). Panic? Yes, PANIC in the FED, and PANIC in the the administration, both of whom who are spinning yarns farther and farther removed from reality and believability. Their PANIC is is exacerbated by their realization of just how far out of their control the market is.

AFFG • August 16th, 2007 at 5:10 am

“They should listen to the official government spokespeople like Poole.” Everybody did .. remember Greenspan and the ARMS ?

Guest • August 16th, 2007 at 5:16 am

@AFFG authorities will not let the banking system fail, you can take it for granted. if they do, it means society disintegrates, in that case gold won’t help you either, you have to buy weapons and land if you prepare for that situation. lets face the truth gold is just an inflated asset like houses, but gold has no inherent utility at all.

AFFG • August 16th, 2007 at 5:18 am

Front news of the FTD! ”Subprime-Krise führt zu Panik-Verkäufen” Translation: “Subprime crisis causes sell panic” http://www.ftd.de/boersen_maerkte/marktberichte/:Subprime%20Krise%20Panik%20Verk%E4ufen/239993.html

AFFG • August 16th, 2007 at 5:26 am

@Guest on 2007-08-16 05:16:51 Yes you are right! But currencies get destroyed. Gold doesn´t. Do not forget: You do not make “wealth” with Gold … you just make money. Devalued money. Gold preserves it´s purchasing power. If currencies go up in value the price of Gold will go down. If the currency goes down the nominal price of Gold will go up. If they are going to bail out the banks (which I agree with you they will) the currency will have to devalue. ”f they do, it means society disintegrates” Society is disintegrating! Banks are playing at the casino, inflating the hell out of the dollar and the blue collar jobs are sweating trying to keep up with living. It seems you have got the analytics right but not the conclusions. If the authorities want to save banks … THEY HAVE TO INFLATE!!!! That is the nature of the system! The big problem is that they might save the banks … but not the home owners. Ever thought of that? What do think will happen to society then?

Dr. Dan • August 16th, 2007 at 5:41 am

Can someone point me to DOW futures link ? I heard its down 500 points ? is that true ?

london broker • August 16th, 2007 at 5:50 am

BN 11:41 *CHICAGO MERCANTILE EXCHANGE SENDS MARGIN NOTICE TO MEMBERS BN 11:41 *CHICAGO MERC TO INCREASE MARGIN REQUIREMENTS FROM END OF TODAY yen 114.20, been as low as 113.50 – down futures down 140pts on my bloomberg

turchin • August 16th, 2007 at 5:50 am

http://money.cnn.com/data/premarket/ not so much

FF • August 16th, 2007 at 5:56 am

Any idea why $/Yen is 114.48 but Swiss Franc still 0.8212?

Guest • August 16th, 2007 at 5:59 am

No boom when oil is $72! When oil assumes its rightful place at $30-35 then we can talk rebound! I cannot believe with all the financial mess oil hanging in there at $72! US growth looking at 1%! We need a world depression with a US recession then we can have an old fashioned boom with oil back in $30. 1997 all over again!

Guest • August 16th, 2007 at 6:08 am

@london broker, what news site is BN? thx

Guest • August 16th, 2007 at 6:10 am

@london broker, what news site is BN? thx

london broker • August 16th, 2007 at 6:20 am

BN is Bloomberg news from a guy at hedge fund “serious buyer of protection in EM evryone there is panicking. traders in EM starting to see capitulation” – EM being emerging markets, we are seeing serious contamination / contagion

Rifat • August 16th, 2007 at 6:24 am

I find it very difficult to understand the current level of regulation on the hedge funds. I believe it is going to change soon. ”Hedge-Fund Guy Atones for His Subprime Bond Sins: Mark Gilbert Aug. 16 (Bloomberg) — Dear investor, we’d like to take this opportunity to update you on the recent performance of our hedge fund, Short-Term Capital Mismanagement LLP. As you know, market selection for the entire fund is guided by a proprietary investing tool we like to call “a dartboard.” Once the asset classes are decided, individual security selections are generated by digitizing our unique hexagonal cuboid models.”.. http://www.bloomberg.com/apps/news?pid=20601039&sid=aO_Nh8kt4JgQ&refer=home

Gabor • August 16th, 2007 at 6:35 am

Guest, oil production is flattening out but new consumers keep coming to the market as Asia and EMs develop. Oil production requires substantial investment before it can rise again, if at all. If Asia turns away from OECD financial markets, they will buy oil (not gold) on their huge $ reserves, because oil is what they need to increase the standards of living of their citizens not gold or T bonds. Prepare for high oil prices for your lifetime, Peak Oil is near.

AFFG • August 16th, 2007 at 6:49 am

@Gabor (Steingart?), You can not store foreign reserves in Oil and no government is going to allow Asia to buy Oil Assets. Remember Conoco? Sorry mate, your missing the point. The one holding Gold holds the trump … because CBs have Gold in their books but not in their vaults. So if you want to screw the CB you buy Gold, son. AND THE CHINESE KNOW THAT. History is my witness …

AFFG • August 16th, 2007 at 6:52 am

Ok … I think today could be national panic day. http://www.handelsblatt.com/news/Boerse/Marktberichte/_pv/_p/200009/_t/ft/_b/1309514/default.aspx/fonds-werfen-aktien-auf-den-markt.html ”Fonds werfen Aktien auf den Markt” -> “Fonds are throwing Shares on the Market” I think this has gone beyond the PPT … The volumes are absolutely crazy!!!!!!

Gabor • August 16th, 2007 at 7:17 am

lol, EMs cannot buy oil assets? things are changing, it is OECD who cannot buy oil assets any more. look at the statement of Exxon, they cannot increase production, because Russia, Venezuela, Iran all closed down for westerners. Nigeria is closing down as well, Sudan is China’s zone of influence now. Iraq can’t increase production, guess why? because Iran silently backed by China and Russia wont allow it to slip into US spheres of influence. about gold: nothing can preserve purchasing power if there is nothing to buy. only resources and producing capital are valuable as these are the instruments that produce utility not a dead yellow metal.

man in Hong Kong • August 16th, 2007 at 7:25 am

@ AFFG, ”Fonds are throwing Shares on the Market” Can you tell me more about this? what is Fonds? thanks ^_^

Guest • August 16th, 2007 at 7:31 am

Watch what happens to all those oil consumers in Asia if the US eneters a real bad recession. I mean GDP decline of about 2% or so! All those Indians lining up to fill up their tanks at $60 a pop when their salaries are 15K a year. And by the way oil runup started in 2004. It is almost 2008 now and I am tired of hearing excuses about investment in oil.It has been 4 yrs already. I thought at $60 oil alot of alternative anergies would kick in that would lower oil consumption. Who let Exxon buy Mobil? BP buy Amoco then Atlantic Richfield? The dumb Clintons! Seems like all the mergers in energy of the late 90s have curtailed the needed investment which is now casuing the high prices.

Guest • August 16th, 2007 at 7:32 am

I just finished reading the John Kenneth Galbraith book “”The Great Crash of 1929″ The paragraphs that begin Here are two examples of how uncertainty and opacity has vastly increased in financial markets. First, you take a bunch of shaky and risky subprime mortgages and repackage them into residential mortgage backed securities (RMBS); then you repackage these RMBS in different (equity, mezzanine, senior) tranches of cash CDOs that receive a misleading—” reminded me of Galbraiths’ description of the since outlawed investment trusts and I saw yesterday that Goldman Sachs had put up 2 billion into one of its hedge funds , they also had an several investment trusts back in 1929. Am I right in seeing the similarity?

guest • August 16th, 2007 at 7:32 am

http://www.careerbuilder.com/monk-e-mail/Default.aspx?mid=229605 71&cbRecursionCnt=2&cbsid=3d7a2cf88e494f408f879d621e5c30b9-24049 4810-VI-4 Just to inject some humour but still sub prime related!

AFFG • August 16th, 2007 at 7:49 am

“EMs cannot buy oil assets?” I will grant you that one. ”nothing can preserve purchasing power if there is nothing to buy. only resources and producing capital are valuable as these are the instruments that produce utility not a dead yellow metal. “ You will be wrong with Gold. It has been like that for the last 5000 years and it won´t be different this time. China has announced that it is going to diversify from Dollars to Gold too. LOL!

AFFG • August 16th, 2007 at 8:01 am

The yen is going through the roof … dudes .. and the biggest German Gold Bulliondesk is not posting any prices for selling anymore. Oil Futures down with the rest. Something wrong?

AFFG • August 16th, 2007 at 8:27 am

“Dax: „Es herrscht Käuferstreik“” Translation: “Dax: ‘There is a buyers strike’” Why buy a BMW if you can possibly own the company next year … LOL!!!! They still haven´t got it. It ain´t the buyers the problem. They are buying .. believe me .. but the sellers HAVE to sell at any price. Once the buyers understand that .. they might just stop .. and then … ?

AC • August 16th, 2007 at 8:30 am

Re AFFG – “You will be wrong with Gold. It has been like that for the last 5000 years and it won´t be different this time. China has announced that it is going to diversify from Dollars to Gold too. LOL!” Then why is gold going down these days, not up?

Anonymous • August 16th, 2007 at 8:30 am

@Gabor, Watch that … 15% down for Chinese Oil Stocks expected. http://www.cnbc.com/id/15840232?video=471311398&play=1

AFFG • August 16th, 2007 at 8:39 am

“Then why is gold going down these days, not up? “ Either somebody is selling big or even better selling something he doesn´t have. Watch the leases. Wrong question. Why does it take the bullion desk almost 6 weeks to deliver your gold? Answer me that one. Can somebody in the US phone up and ask if they have gold?

Anonymous • August 16th, 2007 at 8:54 am

CNBC: ”The U.S. Federal Reserve said on Thursday it added $5 billion of temporary reserves to the banking system through 14-day repurchase agreements. The Fed said the collateral accepted on the overnight repurchase was made up of $250 million of Treasuries and $4.75 billion of mortgage-backed securities. A total of $77.05 billion in bids were submitted for the overnight repurchase.”

AFFG • August 16th, 2007 at 9:00 am

A “overnight repurchase” for 14 days?

Guest • August 16th, 2007 at 9:01 am

gold is a wealth preserver, very easy to sell when you NEED liquidity, unlike many forms of bonds at the present time… Chinese and Indian’s know that gold is the ultimate store of value, their rising incomes go hand in hand with rising gold consumption, What do you think the chinese will turn to when the shanghai market crashes with other indices? i always knew i was lucky to work within walking distance of the perth mint, if you dont know much about gold now is a good time to start reading up.

AFFG • August 16th, 2007 at 9:07 am

@Guest on 2007-08-16 09:01:49, I couldn´t agree more.

Guest • August 16th, 2007 at 9:08 am

That 14 day repo is a quasi-easing by the Fed. The wavg rate was 5%, 25 bps under the target rate. This will turn into a panicn quickly now…fasten your seat belt and trun off any electrical equipment that could interfere with the operation of the electronics….

AFFG • August 16th, 2007 at 9:12 am

Has somebody seen what is happening to all leases .. their collapsing … somebody stopped leasing … Run into Bonds guys .. that is where they all will go .. and going!

AFFG • August 16th, 2007 at 9:17 am

Somebody is dumping Gold like nuts … -10 $ in a crash like fall … somebody needs Cash … DESPERATLY

Anonymous • August 16th, 2007 at 9:29 am

“Fed Update The Fed announces a second operation $12B repo operation, with CNBC’s Steve Liesman” 12 Billion in MBSs. http://www.newyorkfed.org/markets/omo/dmm/temp.cfm

Guest • August 16th, 2007 at 9:29 am

PANIC! PANIC! PANIC! Paulson and Bush are IDIOTS!!!!

Gabor • August 16th, 2007 at 9:40 am

Watch the oil prices when US withdraws fro Iraq, and feeling the wind of change GCC countries unpeg from the dollar. Chinese shares are a bubble, it says nothing about the real purchasing power of China. As they are producing a lot of stuff oil producers need, but they are as of now buying T bonds on this money, what do you think they are going to buy (300 billion worth a year) if not raw materials once they got bored of importing the products of the US financial industry?

BARUCH • August 16th, 2007 at 9:45 am

Where is PPT? Anybody knows?…

Guest • August 16th, 2007 at 9:56 am

The death nell for Countrywide… 10:41[CFC] Moody’s may cut Countrywide ratings below investment grade

Guest • August 16th, 2007 at 9:58 am

Here come da dip buyers (PPT with $12Billion in their pockets). Lets see how long it lasts. The dow should close down 311 points today if the market is “FREE”

AFFG • August 16th, 2007 at 10:02 am

@Gabor, you are basically right. What you forget though, is that Chinas economical structure is as crazy as the US Economy. When China unleashes the Yuan .. China will become to expensive for most European and US companies as a production site for a lot of exports. That will trigger a recession which then will force the markets in all continents to “regionalise” more. When the ecoonomies bottom and start to rebound, investments in the US and Europe are going to take off and Chinas economy is going to grow domestically. While the economies rebalance the prices of raw materials are going to plunge …. then investment goods are going to take off and the global consumption is going to pickup.

Pete, CA • August 16th, 2007 at 10:05 am

“Where is PPT? Anybody knows?… “ Probably hiding under the bed in the Lincoln Room of the White House But seriously … you see those upwards movements on the Dow today? That is the PPT trying desperately to stabilize the situation. The whole world is SELLING right now. There are no buyers. It can only be the PPT that is doing that. But all they can do is damage control. Both the funds and individual investors will be unloading assets like crazy today. Nobody can stand in front of that kind of tidal wave. As the selling progresses today, the market will trigger even bigger “SELL” indicators. One would be the 200-day moving average on the Dow. Other people are following crossovers on certain exponential moving averages on the S&P 500. I would guess that all those signals are likely to be tripped – leading to even more selling. Take a look at USD/Yen and EUR/Yen. The unwinding of the carry trades has been tremendous over the last 24 hours. Many hedge funds will have to move to safe havens – or get slaughtered. This is a day the market will remember for a long time. Readers on this blog are probably safe … and can watch in awe. People who just didn’t listen are going to be stupefied. Special thanks to Prof. Roubini for providing this blog forum - and for encouraging an atmosphere of free and fair intellectual debate. You have done a service to all your readers today! Pete, CA

AFFG • August 16th, 2007 at 10:12 am

“Many hedge funds will have to move to safe havens – or get slaughtered. “ Which are?

Guest • August 16th, 2007 at 10:15 am

Moody’s, S&P Face EU Probe on Credit Crisis Response (Update3) http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ay.CotCvLnBk Did Moody’s and S&P play the same role now that the stock analysts did back in 2000-01?

Guest • August 16th, 2007 at 10:30 am

11:26[GM] Moody’s Ba1 rating is speculative grade, or junk, rating 11:26[GM] Moody’s cuts senior debt ratings of ResCap to Ba1 from Baa3

Guest • August 16th, 2007 at 10:32 am

The subprime sector is not small. It represented 30% of US housing finance from 2004-06. Besides, the real problem here is not the subprime borrowers, it’s the lenders using their subprime mortgage paper to over-leverage the rest of their portfolio. A US$1 loss on a $100 stock is insignificant – unless you’re margined in that position at 100 times cash; in that case, you’re wiped out.

Guest • August 16th, 2007 at 10:33 am

This is getting worse every 15 minutes!@!!!!!!

John Ryskamp • August 16th, 2007 at 10:59 am

Ryskamp is a wizz This is SO true. So anyway, the guts of the economy are currently being removed by the freeze in commercial paper. Keep an eye on how it is affecting apparel industry stocks. The apparel industry exists because of factoring. If you’re telling me no one will take this paper, then how are the clothing shelves supposed to be restocked in the stores. Any answers? Ban all housing evictions now. To be housed is to be human.

Lance • August 16th, 2007 at 11:05 am

Mr. R, Will you comment on the run on the 90day T bill is below 4% yield really the indicator it used to be or since these are unique circumstances 4% might not play out as in the past?

Guest • August 16th, 2007 at 11:08 am

I can shed a little light on the current money market turmoil, as I manage a large money market pool here in Canada and am witnessing first-hand the conduit meltdown you’re readin about on the Bloomie. The money market is very important for business who have intermittent short-term cash needs. The market is very large and most businesses in one way or another depend on it to optimally finance their activities, regardless of the internal cash flow dynamics of the firm. These debts are often purchased by money market funds, insurance companies, and pension funds. With corporate profitability booming, companies issued less and less debt into the money market. Investors, greedy for yield, were sated with the dealer community packaged and tranched other types of obligations into SPVs, or conduits, that were granted AAA ratings by the agencies due to model-based diversity scoring. This asset class, ABCP, has been around for a long time and originally centred on credit card debt, ato loans, inventory loans, and mortgages. Over time, the dealers infused corporate debt, bank lines, other ABSs, CDS, CDOs, CLOs, CMOs, CDO-squared, etc, etc, etc. The exotic ABCP portion of the overall ABCP market here is less than 15% (my best guess), and the lion’s share of conduits are still more than able to withstand a mark-to-market (95%) but is periods of extreme risk aversion that doesn’t matter. The good is being throw out with the bad. I am happy to relate that my funds don’t onwn any of this stuff and chuckle every time a dealers calls begging me to take “$100 million. Name your price”. The real issue is the culpability of the central bankers in all of this. We are now seeing that the non-sensical leveraged credit bets were not the problem. They were a symptom of the excess liquidity. We had many credit events over the past 4 years – Parmalat, the Autos, correlation trades, Katrina – but it was not until the liquidity drain plug was pulled (via risk aversion, before the lax CBs did anything about it) that the sediment in the sink came to light. Attaboy, Greenspan. This is your legacy.

Anonymous • August 16th, 2007 at 11:14 am

Ryskamp is indeed a wizz

Guest • August 16th, 2007 at 11:21 am

Philly Fed at 0, 8 points below estimates!! Here comes da recession to add to fears!!!@!!!!!!!!!!!!!

John Ryskamp • August 16th, 2007 at 11:30 am

To show you how thoroughly the United States is run by organized crime, why the hell isn’t Countrywide in bankruptcy now (and by the way, being investigated by the Justice Department)? I’ve been calling George Bush for days now, demanding that Countrywide be in bankruptcy–and he tells me he is more concerned about getting bottled water to his Crawford ranch!! What a guy!!! Oh, and another indication that we are Mafia-run: the Dow isn’t down 1200 points today. Is that organized crime or what? What an outfit!! By the way, don’t even think of buying Bank of America or, heaven forbid, WaMu. Are you nuts?

John Ryskamp • August 16th, 2007 at 11:34 am

And for heaven’s sake, no Bear Stearns or Goldman Sachs. Expect extraordinarily bad news from them very soon. UBS and Deutschebank are also in very great trouble.

Gordo • August 16th, 2007 at 11:39 am

Try logging onto the Charles Schwab site now: ”! This system is temporarily unavailable. Please try again later. For urgent trade-related matters, please call Schwab at 1-800-435-4000. (-9)” … That’s one way to slow down the selling!?

R • August 16th, 2007 at 11:43 am

@Lance on 2007-08-16 11:05:47: Mr. R, Will you comment on the run on the 90day T bill… hmmmm…careful, Ryskamp might think Mr R refers to him…

AC • August 16th, 2007 at 11:45 am

USD/YEN=112.6 full-blown carry trade unwinding

Guest • August 16th, 2007 at 11:48 am

News Alert ! Philly Fed factory activity stagnates in August Thursday August 16, 12:37 pm ET NEW YORK (Reuters) – Factory activity in the Mid-Atlantic region stagnated in August, with a measure of growth falling to its weakest level this year, a survey showed on Thursday. The Philadelphia Federal Reserve Bank said its business activity index was at 0.0 in August, its weakest in since December 2006, versus 9.2 in July. Economists polled by Reuters had forecast a reading of 9.0.

Ryan Darwish • August 16th, 2007 at 11:48 am

We are presently only witnessing the first wave. Consider the cascading effects on hedge fund’s other positions, multiplied by the leveraged, unintended consequences of these forced liquidations. We are staring into a precipice for which we whenever we believe we might see the bottom, it turns out to be merely a mirage, a downward death spiral of probably epic proportions.

Guest • August 16th, 2007 at 11:51 am

This whole real estate industry is crooked. Starting with the nasty ass perfume soaked realtors whose only job is to ride your ass around in their BMW’s trying to get you to buy a house so they can make their 6 percent commission for doing absolutely nothing other than being a taxi service. I have yet to see a realtor who has any marketable value.

Guest • August 16th, 2007 at 11:55 am

Liquidity Crisis for Countrywide Mortgage ! Countrywide Borrows $11.5B From 40 Banks to Fund New Loans As Industry Faces Credit Crunch NEW YORK (AP) — The nation’s largest mortgage lender borrowed $11.5 billion from a group of 40 banks to fund loans, in a move that shows just how deep the lending crisis has become. Countrywide Financial Corp. said Thursday it made the move amid a credit crunch that has driven a number of its smaller peers to bankruptcy. Shares opened down more than 12 percent.

Jason B • August 16th, 2007 at 11:55 am

Dont take your eyes off the gulf – Hurricane Dean, projected to grow to a Cat 4. If that hits a populated area or oil rigs, it could…. http://www.sfwmd.gov/org/omd/ops/weather/plots/storm_04.gif

John Ryskamp • August 16th, 2007 at 12:07 pm

@Lance on 2007-08-16 11:05:47: Mr. R, Will you comment on the run on the 90day T bill… hmmmm…careful, Ryskamp might think Mr R refers to him… LISTEN, I’LL BE GLAD TO COMMENT ON IT PLACE OF NOURIEL. DON’T WORRY ABOUT IT. SOON THE TREASURY WILL REDEEM ALL NOTES. REMEMBER, THE FEDERAL GOVERNMENT IS GOING OUT OF BUSINESS. Y’ALL CAN HAVE YUR MUNY BACK. WE AIN’T BORROWIN’ NO MO’. NOW WHAT? YOU SEE, I’M FROM THE SOUTH, AND THAT’S WHERE THE FEDERAL GOVERNMENT’S FROM. WE THINK ALIKE–AND WE’RE GOING OUT OF BUSINESS. SEE Y’ALL LATER.

dude • August 16th, 2007 at 12:17 pm

Hey Pete, do not worry, the Yahoo poll still reads the EXACT same percentage of 56% are holding tight to their stocks…. Again, that percentage has NEVER changed over these past days…..

Guest • August 16th, 2007 at 12:20 pm

curbs are in, should see bounce…

John Ryskamp • August 16th, 2007 at 12:31 pm

And can you believe it? Calpers isn’t even THINKING of bailing. Pension funds are all as corrupt as they can possibly be, hence sclerotic, hence their pensioners will lose every last time. Idiot!

Guest • August 16th, 2007 at 12:31 pm

Moody’s Warns of Potential LTCM-Scale Fund Collapse (Update2) By John Glover Aug. 16 (Bloomberg) — Moody’s Investors Service warned that the global credit rout may cause a major hedge fund collapse on the same scale as Long-Term Capital Management LP in 1998.

Anonymous • August 16th, 2007 at 12:44 pm

The first program structure is referred to as “single seller,” in which the program sponsor is the sole originator of the financed assets. The program sponsor of a single-seller program principally uses the conduit as an alternative source of funding for its own business activities. The second program structure is referred to as “multiseller,” in which the program sponsor is generally a financial institution seeking to provide financing alternatives to its clients. The multiseller structure provides the flexibility to purchase a variety of assets from many different sellers. A variation of the multiseller structure is a loan-backed program that makes short-term, unsecured loans to the sponsor’s corporate clients. The third program structure is called “securities backed,” in which the program sponsor is a financial institution seeking arbitrage opportunities or capital relief associated with moving assets off balance sheet. Securities-backed programs invest in securities, including rated assetbacked, mortgage-backed, and corporate securities. These programs may be cash flow structures that employ a buyand- hold strategy or market value structures that are designed for more active trading. so with asbp you are referring to the third structure? so these off balance sheet cash/for stock options =cook stock up or buy your own stock back at a cheaper price? what does bankrucpty remote mean? and what purpose is serve by the conduits to be undisclosed? the caisse and some bank wrote notes to cover coventree does this mean the debt gets extended for 365 days? Excuse my learning curve i am a student and i read that these types of off balance sheet deals were either used for options=cook stock up or buy your own stock back at cheaper price and tax harbours.

AFFG • August 16th, 2007 at 12:47 pm

HAHAHAHAHAHHA …. I can´t believe. LOL!!! I am … I am staggered … I just do not know what to say. The freaking FED has been inflating the hell out of the dollar for the last 4 years and could not see inflation. NOW we have an imploding Credit Market, collapsing Real Estate Market, Commercial Paper Interest rates skyrocketing, Commodity prices plunging, world assets falling like a rock and Billyboy (William Poole) sees INFLATION Risks!!!! LOL!!!! They are not getting it, are they!!!!!????

Guest • August 16th, 2007 at 12:54 pm

1:41 First Magnus says it’s no longer funding mortgages 1:41 First Magnus says it no longer taking mortgage applications

Guest • August 16th, 2007 at 12:55 pm

PPT in the market again, dow loss cut in half! CROOKS!!!!!

AFFG • August 16th, 2007 at 12:57 pm

What is to be said for Germany? Here it is a simple but absolute BLOODBATH. L-DAX -3,57 L-TechDax -8,21 L-MDAX -6,67 L-SDAX -6,40 and falling … Dispair on the floor at Frankfurt.

Guest • August 16th, 2007 at 12:57 pm

Is there reason to believe that many of the securities manufactured out of subprime loans are worse? http://www.bbc.co.uk/blogs/thereporters/robertpeston/2007/08/us_exports_poison_1.html I’m afraid so. Here are just three reasons: 1) As the FT pointed out this morning, many of the underlying subprime loans were taken out by fraudsters and will therefore never be repaid in full. 2) When repackaged as mortgage-backed bonds, they were given ratings by the credit rating agencies based on delinquency experience during the benign conditions of the past few years – which almost certainly means that the ratings flattered their innate (poor) quality. Or to put it another way, investors have bought the financial equivalent of poisoned mutton dressed as prime lamb. 3) Hundreds of billions of dollars of these mortgage backed bonds have been re-engineered as collateralised debt obligations. These CDOs are customised bonds of varying quality and varying yields. There is nothing intrinsically noxious about them. However there are CDOs made out of other CDOs, called CDOs squared, which are marketed as high quality investments – and they’ve been bought by the “one-born-every-minute” brigade. What’s more, there’s accumulating evidence that even the simpler CDOs have been bought by naïve investors, who had no idea what they were buying. It is wonderfully ironic that a disproportionate share of losses from America’s dodgy mortgages should be borne by financial institutions in France and Germany – and that the European Central Bank is pumping cash into the banking system to avert a possible crisis. The incongruity is that the Anglo-American model of financial markets is despised in many European capitals; it is droll that their banks were seduced by Wall Street. But although I allow myself a chuckle, it is a hollow one. I fear there’ll be plenty more damage to come from America’s exports of subprime poison.

AFFG • August 16th, 2007 at 1:01 pm

And we are not even “officially” in a recession. LOL! This is getting better … from minute to minute. Everybody on Wall Street is still on the “fundamentals are great” story. Wait till the news comes in that things could get tricky with the “world economy is going to save us” crap.

Guest • August 16th, 2007 at 1:03 pm

“This market is going down like free beer. … I would say if there had been a day when we’re trying to price in a worst-case scenario, this might be it.” — Art Hogan, Jefferies & Co.

John Ryskamp • August 16th, 2007 at 1:13 pm

THIS, OF COURSE, IS SIMPLY A LIE. BY THE WAY, WHAT IS SOROS DOING BUYING RALPH LAUREN? U.S. brokers ‘well funded’ and can absorb losses, Fitch says By David Weidner Last Update: 2:03 PM ET Aug 16, 2007Print Subscribe to RSS Disable Live Quotes NEW YORK (MarketWatch) — U.S. brokerage firms are well funded and have sufficient capacity to absorb losses from marking their assets to market, a report by Fitch said Thursday. The ratings firm said Bear Stearns Cos. (BSC:The Bear Stearns Companies Inc News, chart, profile, more Last: 106.50+3.35+3.25% 1:52pm 08/16/2007 Delayed quote dataAdd to portfolio Analyst Create alertInsider Discuss Financials Sponsored by: BSC106.50, +3.35, +3.2%) , Goldman Sachs Group Inc. (GS:Goldman Sachs Group, Inc News, chart, profile, more Last: 164.13-0.77-0.47% 1:52pm 08/16/2007 Delayed quote dataAdd to portfolio Analyst Create alertInsider Discuss Financials Sponsored by: GS164.13, -0.77, -0.5%) , Lehman Brothers Holdings Inc. (LEH:Lehman Brothers Holdings Inc News, chart, profile, more Last: 52.12+0.55+1.07% 1:52pm 08/16/2007 Delayed quote dataAdd to portfolio Analyst Create alertInsider Discuss Financials Sponsored by: LEH52.12, +0.55, +1.1%) , Merrill Lynch & Co. (MER:Merrill Lynch & Co., Inc News, chart, profile, more Last: 69.68+0.74+1.07% 1:52pm 08/16/2007 Delayed quote dataAdd to portfolio Analyst Create alertInsider Discuss Financials Sponsored by: MER69.68, +0.74, +1.1%) and Morgan Stanley (MS:morgan stanley com new News, chart, profile, more Last: 57.50+0.87+1.54% 1:52pm 08/16/2007 Delayed quote dataAdd to portfolio Analyst Create alertInsider Discuss Financials Sponsored by: MS57.50, +0.87, +1.5%) had “unencumbered securities and cash…maintained at levels that avoid the need to access short term markets under stress. This has been a standard practice for securities firms.” Fitch also said it did not expect brokers to inject much capital into their hedge funds. Cash infusions will be “low and related to operational risks.”

Guest • August 16th, 2007 at 1:17 pm

Here go the CROOKS!!! They are gonna close this pig green!! Criminal. Countrywide credit downgraded to A- from A, ratings agency. Probably under orders from the corrupt body politic to keep them above junk status. How much of the truth do we just not know here???

Guest • August 16th, 2007 at 1:25 pm

Anonymous Student, Those are a lot of questions. I’ll be as brief as possible. Single-, multi-, and securities-based are all asset-backed conduits. Those words describe the nature of the underlying assets in each trust. Single-seller contains only one kind of asset – say, all Citibank credit card receivables. Multi-seller contains many types of differentiated assets. Securities-backed contains debt issued by other conduits. I’m not sure where the “balance sheet cash/for stock options” quote came from. Essentially, these conduits allowed banks and dealers to sell asset on their balance sheets (loans, mortgages, bank lines, whatever) to the conduits, recusing themselves of any liability or recourse. The highly-rated conduits are arms’ length and are the counterparty to the CP debt. In the event of default, the originators of the debt are not-liable, or “bankruptcy remote”. The opacity of the structures serves only to obscure the internals to the end investors so they cannot make the appropriate risk-return judgements. The Caisse, PSP, and the rest of the Fellowship Of The Ring(-fenced) held CP with term of less than one year that will be extended into bonds with maturities matching the duration of the assets within each pool.

Guest • August 16th, 2007 at 1:57 pm

merci, for your english help with regard to asbp – oh la la mon dieu!!!! the legal teams are also part of the fellowships? What are set-off rights?

Ernst • August 16th, 2007 at 2:12 pm

Fed has, in fact, already lowered rates: http://blogs.wsj.com/marketbeat/category/federal-reserve/ Ernst

DebtFree • August 16th, 2007 at 2:20 pm

I took such pains not to keep my money in the house, but to put it out of reach of burglars by buying stock, and had no guess that I was putting it into the hands of these very burglars now grown wiser and standing dressed as Railway Directors. Ralph Waldo Emerson There are old traders and bold traders around, but there are no old, bold traders around. Bob Dinda What will ultimately frighten the markets? It could be the upcoming recession. Maybe the Washington scandals. Or maybe something as simple as someone saying, “Boo!” John Cridele More people get killed chasing after a higher yield than looking down the barrel of a gun. William LeFevre If an abnormal return is promised, there must be an abnormal risk. Hubert Rowen When countries have had a string of boom years, megalomania sets in and their governments and large investors come to feel that ordinary economic rules that apply to others do not apply to them. Lester C. Thorow October. This is one of the peculiarly dangerous months to speculate in stocks. The others are: July, January, September, April, November, May, March, June, December, August and February. Mark Twain

Anonymous • August 16th, 2007 at 2:20 pm

floating-rate notes. These notes would mature only when the underlying financial assets mature. that plugs that leak Signatories to the agreement include ABN AMRO, Barclays Capital, the Caisse de dépôt et placement du Québec, Desjardins Group, Deutsche Bank, HSBC, PSP Investments, Merrill Lynch, National Bank and UBS. The institutional investors said they have the support of investors who hold at least two-thirds of all outstanding third-party asset-backed commercial paper. Continue Article The signatories said they expect other market participants to sign on to the agreement “within the next few hours.” Under the plan, the institutions said they had agreed to convert short-term, third-party, asset-backed commercial paper into floating-rate notes. These notes would mature only when the underlying financial assets mature. ”Existing liquidity facilities will therefore not be necessary and will be cancelled, and all outstanding liquidity calls will be revoked,” the agreement said.

Guest • August 16th, 2007 at 2:30 pm

made a run for new lows for the day but magically, it could not be done, line of futures buyers under 12,600 on Dow, criminals are pulling out all the stops today…

Guest • August 16th, 2007 at 2:37 pm

S&P back above 1400!! gonna close her green and rally 300 point tomorrow, all will be well for the weekend. Crooks

Guest • August 16th, 2007 at 2:55 pm

I told you!!! 300 point loss wiped out, Dow, s&p green!! They are gonna burn the shorts again tomorrow! Crooks.

Anonymous • August 16th, 2007 at 2:55 pm

It´s going GREEN!!!! CROOKS!

Guest • August 16th, 2007 at 3:01 pm

PPT is alive and well. They could not have this close down 300+ today and then collapse tomorrow leaving people jumping out windows over the weekend. If they burn enough shorts they all die and we will have a nother 5 year rally without a 2% correction. How do I get a job with these crooks???

Guest • August 16th, 2007 at 3:04 pm

Man, you will need a puke bucket to watch idiot larry and wench maria on CNBC today. They will brag that the free market has spoken today!!!

Gordo • August 16th, 2007 at 3:26 pm

I watched the drop today pissed that I didn’t pull the trigger on another set of shorts; MCO, MER, more Goldman Saxxx… So now I am happy that they intervened and ran it up and will gladly buy some shorts (Dec07 and Jan08) tomorrow! There’s only so much they can do and this “correction” will come in around 20-30% one way or another. >> Moody’s was down 10% today and finished up!? BS…

Guest • August 16th, 2007 at 3:28 pm

How quaint, the dow battled back to close just 9 points above its 200 dma-crooks!

Guest23 • August 16th, 2007 at 3:45 pm

see tommorow and be ready for the black monday

Anonymous • August 16th, 2007 at 4:09 pm

@Guest: ”If they burn enough shorts they all die ..” We’ve been hearing about the short covering rally since last March. Yet the shorts seems to be growing every months up to July record (if shorts in NYSE is good indication. http://www.safehaven.com/article-8182.htm

Guest • August 16th, 2007 at 4:25 pm

Confirmation of Desperation: I have just received a confirmation that the “fix” by the PPT is now what one would call a “global conspiracy”. This also confirms the desperation of those “leaders and knights of industry”. This also confirms that the global economy is now in its Chaos Moment and its plunge into the abyss, will not be abated. DOW 8000 first rest… There is no need to say more!

Guest • August 16th, 2007 at 4:32 pm

Can we please have a http://www.rgemonitor.com/ryskamp? He is just superb.

John Ryskamp • August 16th, 2007 at 4:44 pm

GOODBYE COUNTRYWIDE Aug. 16 (Bloomberg) — Countrywide Financial Corp., the biggest U.S. mortgage lender, borrowed the entire $11.5 billion available in a bank credit line as the global financial crisis curbed access to short-term financing. Countrywide turned to the emerge

John Ryskamp • August 16th, 2007 at 4:48 pm

NOW THIS OTHER SHOE WILL DROP, WITH BANKS AND INVESTMENT FIRMS HAVING TO HONOR THESE CREDIT LINES. WHO HAS THEM? HOW MUCH? OR WILL THE BANKS ANALOGIZE THEM TO REDEMPTIONS AND HALT SUCH ‘REDEMPTIONS?’ WHERE OH WHERE IS THE INIMITABLE DR. SCHACHT? I THOUGHT I SAW HIM WALKING UPON A HILL, WITH ABRAHAM, MARTIN AND JOHN: A group of 40 of the world’s largest banks lent Countrywide Financial Corp. (CFC:CFC News, chart, profile, more Last: Delayed quote dataAdd to portfolio Analyst Create alertInsider Discuss Financials Sponsored by: , , ) $11.5 billion this week under credit agreements that they committed to as far back as 2006. The loans may help relieve a credit market squeeze on the nation’s largest provider of home mortgages. But they come at a tough time for the banks involved. Countrywide didn’t disclose which banks lent the money and a spokeswoman didn’t immediately respond to a request for a list of lenders. However, regulatory filings that Countrywide had provided the Securities and Exchange Commission show that J.P. Morgan Chase (JPM:JPM News, chart, profile, more Last: Delayed quote dataAdd to portfolio Analyst Create alertInsider Discuss Financials Sponsored by: , , ) , Bank of America (BAC:BAC News, chart, profile, more Last: Delayed quote dataAdd to portfolio Analyst Create alertInsider Discuss Financials Sponsored by: , , ) , Citigroup Inc. (C:C News, chart, profile, more Last: Delayed quote dataAdd to portfolio Analyst Create alertInsider Discuss Financials Sponsored by: , , ) , Lehman Brothers (LEH:LEH News, chart, profile, more Last: Delayed quote dataAdd to portfolio Analyst Create alertInsider Discuss Financials Sponsored by: , , ) , Merrill Lynch (MER:MER News, chart, profile, more Last: Delayed quote dataAdd to portfolio Analyst Create alertInsider Discuss Financials Sponsored by: , , ) and Morgan Stanley (MS:MS News, chart, profile, more Last: Delayed quote dataAdd to portfolio Analyst Create alertInsider Discuss Financials Sponsored by: , , ) were among the banks that signed up to the loan commitments. Because these were so-called committed credit facilities, the banks couldn’t back out of the loans, as long as Countrywide complied with all the conditions of the agreements, Christopher Wolfe, an analyst at Fitch Ratings, said in an interview on Thursday. Countrywide met these conditions, so the loans went through. But if the lending agreements hadn’t been committed, the banks probably wouldn’t have lent the money, Wolfe said.

Jason B • August 16th, 2007 at 5:12 pm

http://www.financialarmageddon.com/2007/08/quantitative-lo.html

Guest • August 16th, 2007 at 5:20 pm

Moody’s Investors Service said on Thursday that it downgraded 691 mortgage-backed securities because of “dramatically poor overall performance.” These residential mortgage securities were originated in 2006 and backed by closed-end, second-lien home loans, Moody’s said. A closed-end second lien mortgage loan is a loan secured by a second priority mortgage lien on residential real estate, the rating agency explained. When closed simultaneously with a first-lien mortgage loan to purchase a home, these loans are often known as “piggyback loans,” Moody’s noted. The downgraded securities had an original face value of $19.4 billion, representing 76% of the dollar volume of securities rated by Moody’s in 2006 that were backed by subprime closed-end second lien loans, the agency said. Another 14 could be downgraded later, Moody’s added. “The actions reflect the extremely poor performance of closed-end second lien subprime mortgage loans securitized in 2006,” Moody’s said. “These loans are defaulting at a rate materially higher than original expectations.

Guest • August 16th, 2007 at 5:22 pm

@ Written by John Ryskamp on 2007-08-16 16:48:11 This is Moral Hazard which is now in full swing. The Regulators and the Large Investors / Brokers et al know that the global economy is in free-fall. What to do but make the Political Correct noises (about the fundamentals being sound) while saving what you can – pumping and dumping – (for self and cronies) onto the unaware investors and then flee. US Treasury accepts Toxic Waste CDO’s as security: And why would Mr Investor / Regulator who knows he is going bankrupt anyway just want to redeem his waste in exchange for prime cash – (that is, take the trash back after he received the cash) – better to flee to that island in the sun and let the lawyers fight it out for the next 20 years after all there is a lot of legal fees of 3 to 10 (x) billion. The question that remains is just how long can the Treasury and the Fed keep the punters coming in to offer their tributes to the Gods of Chance so that they may run with full pockets? Will people be thrown onto the streets by the Banks (Law)? – Yes, until that time that “Policy” is shifted and that will not happen while the US remains in its current state of collective mind and with its current leadership and Knights of Industry. Moral Hazard… Risk went in December 2006 / with the arrival of Uncertainty and Chaos arrived July 2007. The US went into recession December 2006… the rest is sophistry (being kind).

The Dane • August 16th, 2007 at 6:00 pm

I do not see why people with short positions should be in any trouble like other people are saying. What if those investors are making spreadbettings with a short position in US stocks and a long position in foreign stocks? Or what if they are hedging a part of their portfolio? Or if they have 90% treasuries and 10% short position? Are they really under preauser then? The Dane P.S. sorry for my english, hope you understand.

The Dane • August 16th, 2007 at 6:04 pm

Ups, last question is “are they really under pressure then?” The Dane

Guest • August 16th, 2007 at 6:05 pm

The european housing markets will go next.

Mark Reed • August 16th, 2007 at 11:45 pm

The Hang Seng is down 3% into the lunch break. No short rally in the Asian markets. HSBC, the rock of the market is down 5% now in the last week.

Ralph • August 17th, 2007 at 12:32 am

What is that awful sucking noise I can hear??? Oh yes, it’s the noise of the all the world’s liquidity rushing out the plug hole! Yen 112.47 and falling… I fear the PPT is under enormous pressure now. 500 Billion dollars injected into world liquidity by central bankers and they hardly dented the trendline. I think it might be important to see when the FED does it’s first permanent repo issue; all to date have been temporary. When thet start issuing permanent repo’s we are into a whole new phase in the game. If it takes a while then some control is being excerted, if it happens sooner then events are heating up and the river of momentum is starting to carry the FED away. Thankyou Ernst for the FED easing link.

AFFG • August 17th, 2007 at 2:25 am

“The european housing markets will go next.” House prices in Germany are just starting to go up. They might go down, but not here. The Netincome/Houseprice ratio is good in Germany. It is about where it should be. We have had our housing deflation. Spain, Greece, Portugal, UK and some poorer part of France are certainly going to get hit!

AFFG • August 17th, 2007 at 2:26 am

http://www.handelsblatt.com/news/Politik/International/_pv/_p/200051/_t/ft/_b/1309935/default.aspx/finanzkrise-alarmiert-staatschefs.html Politicians starting to panic. The “R” word is being used.

AFFG • August 17th, 2007 at 2:32 am

http://www.handelsblatt.com/news/Unternehmen/Banken-Versicherungen/_pv/_p/200039/_t/ft/_b/1310088/default.aspx/first-magnus-stellt-geschaefte-ein.html Fannie Mae in trouble. Massive write offs expected.

Guest from France • August 17th, 2007 at 3:55 am

@AFFG: Housing will go next in most of Europe except Germany and Switzerland. Italy is already cracking, Spain as well, France prices have been stagnating for 1 year now, with unsold homes stock gradually building up. We don’t have suprime ARMs but we have 100% financing with 30 years loans at variable rates, and our NAR in France is still boasting about prices going up because they use a 2 years moving average.

Nel Fazel • August 19th, 2007 at 1:24 pm

The Goldman Sachs CFO refers to the 30% drop in the fund’s value as a 25 standard deviation event that should happen once every million years. Not true. A back of the envelop calculation for the probability of a 25 std event using a normal distribution, would show that it should happen once every 10 billion years. Almost the age of the universe.

Anonymous • August 20th, 2007 at 2:38 pm

Today again Dow was up as much as 100 points, before the Sentinel lawsuit news spooked Wall St. into giving up some of its gains. So Dubya must be frantically working those phone lines to his sheik-buddies, not to mention the Japs and the Chinese. I guess that explains the Dow’s wiping off a 300 point deficit last week– the so called PPT in action…

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