MBIA Bond Risk Soars on $8.1 Billion CDO Disclosure (Update2)  By Shannon D. Harrington and Christine Richard  Dec. 20 (Bloomberg) — MBIA Inc. tumbled the most since 1987, and the risk of default soared after the world’s biggest bond insurer revealed that it guarantees $8.1 billion of collateralized debt obligations repackaging other CDOs and securities linked to subprime mortgages.  Credit-default swaps tied to Armonk, New York-based MBIA’s bonds climbed 115 basis points to 595 basis points, the widest on record, according to CMA Datavision in London. MBIA shares plunged $6.90, or 26 percent, to $20.12 as of 10:27 a.m. in New York Stock Exchange composite trading.  MBIA posted a document on its Web site late yesterday showing it insured the so-called CDOs-squared, a potentially riskier form of security than what the company typically guarantees. Rising defaults on subprime mortgages packaged into securities have led to bond downgrades and threatened MBIA’s AAA guaranty rating.  “We are shocked management withheld this information for as long as it did,” Ken Zerbe, an analyst with Morgan Stanley in New York, wrote in a report yesterday. “MBIA simply did not disclose arguably the riskiest parts of its CDO portfolio to investors.”  The disclosure followed Standard & Poor’s decision yesterday to lower its outlook to negative for the AAA ratings of the bond insurance units of MBIA and Ambac Financial Group Inc. A telephone call to Elizabeth James, a MBIA spokeswoman, wasn’t immediately returned.  Shattered Confidence  “How is confidence expected to return to the capital markets when these types of surprises continue to pop up?” said Peter Plaut, an analyst at New York-based hedge fund manager Sanno Point Capital Management.  Credit-default swaps tied to MBIA’s bond insurer, MBIA Insurance Corp., climbed the most in at least a year. The five- year contracts, used to speculate on the company’s ability to repay its debt or hedge against the risk it doesn’t, rose 95 basis points to 340 basis points, CMA prices show. That means it would cost $340,000 a year to protect $10 million in MBIA Insurance bonds from default for five years.  Contracts tied to Ambac rose 30 basis points to 595 basis points, according to CMA.  The Markit CDX North America Investment Grade Index, a benchmark credit-default swap index linked to the bonds of 125 companies, including MBIA Insurance, rose 0.75 basis point to 78.25 basis points as of 9:54 a.m. in New York, according to Deutsche Bank AG. It fell to as low as 76.5 basis points earlier.  Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.  Merrill Lynch  MBIA’s disclosure explains why S&P and Moody’s Investors Service turned more negative on the industry in recent weeks, Zerbe said. Last month, Moody’s said MBIA was “unlikely” to fall below its target capital level for an AAA bond insurer despite downgrades of securities backed by subprime mortgages. Ambac had been flagged as “moderately” likely to need more capital.  “This disclosure completely changes our view of MBIA being a more conservative underwriter relative to Ambac,” Zerbe wrote.  Subprime mortgages are made to borrowers with poor or limited credit histories or high debt burdens.  CDOs have accounted for the biggest portion of the more than $70 billion in writedowns in the past two quarters at the world’s biggest banks. CDOs-squared have lost the most on a percentage basis among CDOs linked to subprime mortgages, New York-based Merrill Lynch & Co.’s third-quarter disclosures showed.  When announcing it would write down top classes of CDOs by $5.8 billion in the third quarter, Merrill cut the value of CDOs- squared by $800 million, leaving it with $600 million of “net exposure.”  Other securities firms including New York-based Citigroup Inc., Morgan Stanley and UBS AG have reported larger fourth- quarter CDO losses.  To contact the reporters on this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net ; Christine Richard in New York at crichard5@bloomberg.net .

As the world turns …

The Chicago Fed National Activity Index was −0.27 in November, up from −0.89 in October. Three of the four broad categories of indicators—employment, consumption and housing, and sales, orders, and inventories—made negative contributions to the index in November, while the production and income category made a slight positive contribution.

Basically the whole idea of ratings agencies would appear to be a farce and worse…in fact these agencies provide disinformation… a situation worse than no information. Bond issuers would require more transparency if there were no rating agencies as investors would be more careful. These rating agencies are a ruse to give investors false assurance so that true risk based cost of credit is lowered.

No bond issues, no new roads, bridges, schools, Huge mega stadium sports venues……etc……….

All of this credit trouble just means higher taxes for the US now. Muni issues will be at higher yields and thus the public tab will skyrocket because the US infrastructure is already 20 years outdated…Get out your bellbottoms and beeGee’s albums cause this is the ’70′s all over again…

Yep, 75% tax rates, $4 gas, stagflation, they all seem unavaoidable right now…

$92 oil? My relatives in Romania are telling me stories of people stripping their heaters from their apartments becasue with oil this high their heating bills are HIGHER than their rents/mortgages! Many ahve had their apt. repossesed and sold at auction because of liens that were put on becuase of high heating bills.  Their rental/property markets are local. Their energy markets are international. They are competing for oil with GS bankers and guess who can afford to pay more/ How do these people cope? Heat with wood. Heat on for 2hrs a day only. Completely seal windows.

A repost of a Christmas message retrieved from the morning mail.    ‘Tis the Season    Nouriel Roubini daily raises and deals with what is arguably one of the most critical topics in the world — the finances of the United States government — and allows open comment. This free market of argument faceting off his economic prowess has capsulized into one of today’s most invaluable worldwide forums.    As I depart for the Christmas holy day I want to give thanks to Dr. Roubini and all here for a most provocative and

Repost:  Sign of the times? Friends of mine went to exchange $1000 at Citibank subsidiary located in Germany. Guy said he could only exchange $500.    There was a sign on the counter, which said that withdrawals of more than 10.000 Euro had to be prepared 4 days in advance, but that might be normal procedure.

Rumours go that Goldman Sachs just started shorting its own stock…   Written by small investor on 2007-12-20 10:57:37   Great commentary yesterday in Barrons Online “Cancel the elections…..GS already runs everything anyway”……Ha Ha Ha.

“$244,000 for bee research in Texas”   Guest, don’t knock this funding. Bees are essential to the eco system. If you want to eat, gotta have bees.

@Citori:  Great commentary yesterday in Barrons Online “Cancel the elections…..GS already runs everything anyway”……Ha Ha Ha.   Written by Citori on 2007-12-20 11:22:12  Yes, I guess they sponsor them all, 100% chance for successs. Must be peanuts for them.  Democracy? 

I get frustrated with earmarks also, but beavers can actually cause a lot of expensive damage in water management infrastructure. Prevention is cheaper than the cure.  Likewise for bees, the colony collapse disorder going around has the potential of causing billions of dollars of loss in the agriculture business, not to mention damaging our food supply. It is very concerning actually.

“Prevention is cheaper than the cure”  LOL…this made me reflect on an idea of the seventies that said,”throw your garbage on the street or in the water you are creating jobs.   Just think of all those complex measurements in parts/billion – risk management and the effects of these molecules on determining life spans.

I am lucky to live in the NW, we have massive hydro plants which should offer more of a cushion for power rate increases. (that is, if we don’t share)

Bravo Nouriel!  Looking at some of the potential ripple effects of an MBIA type downgrade might include additional institutional losses arising out of derivative positions of impacted positions. Additionally, to compound matters, it is quite concievable of litigation against these insurers further damaging them. It would seem a reasonable case could be made that there is an implied agreement that the insurance being offered is of primary value only as long as the insurer maintains its rating. This could be construed as an implied contractual agreeement for the insurer to maintain prudent financial operating practices; in fact it is incumbent on then insurer to do so.  This appears to be a cascade into financial hell.  Ryan Darwish Author of The Emperor’s Clothes: MegaTrends Affecting Your Financial and Investment Decisions www.investmentmegatrends.com

RealThink  Thanks for recent posting on “possible” peak oil. I’ve looked at data from supporters of peak oil, and they have some good arguments. I have not had a chance to review the counterarguments yet.  But I think the main issue is this … it is NOT clear that Americans can count on a significant reduction in oil prices if we go into a recession. Not this time. With global decoupling still open to debate, the US dollar headed lower, and strong political forces working in the world of energy resources (Putin, Iran, Venezuela) – it’s not clear that the USA has the same control and domination over oil prices any more. Seems to me that $80-$90/BL oil could be a reality even if the US goes into recession, and triple digit oil can’t be ruled out. That will be a tough break on US consumers and American industry.  The energy bill that was just passed by Congress & the White House is a good step. But my take on it is that it’s a day late and a dollar short. No … make that a decade late and $100 billion short. The US needed to implement those reforms a long time ago. We need much bigger steps now.  This country is getting behind the curve in addressing its growing crisis in domestic energy sources. What worries me is that I don’t see any of our presidential candidates debating this topic seriously. They look like they’re too busy shaping their media images and election platforms. Bringing real solutions to the table in the middle of a recession could be a challenge that few (if any) of these candidates can handle.  PeteCA

No bond issues, no new roads, bridges, schools, Huge mega stadium sports venues……etc……….     No big loss. Maybe we’d spend where spending needs to be done, instead of having the bond market invent schemes with payola and paying a lot of moron fascist construction workers.

Roubini, Well said.     Indeed. It’s impossible to rationalize MBIA/AMBAC deserving the bullet-proof AAA rating at the same level as GE/IBM or any other super blue chips, especially when MBIA/AMBAC are struggling to raise capital.  

S&P ran a stress test to determine the losses bond insurers would take on securities backed by subprime mortgages, including CDOs. Losses were projected at $3.1 billion for MBIA, $1.8 billion for Ambac, and $2.2 billion for Financial Guaranty Insurance Co.   

Man suspected in gruesome sexual assault released from prison due to a clerical error, Baltimore Sun reports.

The fall of ACA Financial has the first collateral damage: Credite Agricole.   Credit Agricole to Take Further Subprime Writedowns (Update3)  By Sebastian Boyd and Gregory Viscusi  Dec. 20 (Bloomberg) — Credit Agricole SA, France’s second- biggest bank by assets, will take an additional 2.5 billion euros ($3.6 billion) in writedowns as the U.S. subprime crash roils debt markets.  Credit Agricole, based in Paris, plans to write down investments in collateralized debt obligations, Credit Agricole to Take Further Subprime Writedowns (Update3)  By Sebastian Boyd and Gregory Viscusi  Dec. 20 (Bloomberg) — Credit Agricole SA, France’s second- biggest bank by assets, will take an additional 2.5 billion euros ($3.6 billion) in writedowns as the U.S. subprime crash roils debt markets.  Credit Agricole, based in Paris, plans to write down investments in collateralized debt obligations, securities created by bundling together bonds, by another 1.3 billion euros before taxes, and take 1.2 billion euros of provisions linked to a ratings downgrade of bond insurer ACA Financial Guaranty Corp. securities created by bundling together bonds, by another 1.3 billion euros before taxes, and take 1.2 billion euros of provisions linked to a ratings downgrade of bond insurer ACA Financial Guaranty Corp.  http://www.bloomberg.com/apps/news?pid=20601087&sid=azr4V6uKbIT8&refer=home

 @CanadianKB on 2007-12-19 23:07:59  ”For the love of money is a root of all sorts of evil, and some by longing for it have wandered away from the faith and pierced themselves with many griefs.”  Well, as long as we’re quoting the Bible – which is appropriate at this season, I suppose – there is also this (Ecclesiastes 10:19)  A feast is made for laughter, and wine makes life merry, but money is the answer for everything.   And this (Proverbs 10:22)  The blessing of the Lord brings wealth, and he adds no trouble to it.   And finally (Proverbs 10:2)  Ill-gotten treasures are of no value, but righteousness delivers from death.  

Unrelated, but I have been posting interesting data from the trenches.  1. Our November residential foreclosures are up 162% YOY (not 62%, which is what I heard on NPR yesterday). One thing to keep in mind, is that the foreclosures numbers for November, are for customers that quit paying the mortgage back in August. Despite the multiple call center warnings that suggest otherwise, We don’t legally move on the property, formally, until we are at least 90 days late, rolling. [on a personal note: I have yet to hear this point being made in MSM. The rogue wave, IMO, is gaining momentum]  To this point, There is a significantly higher spike in Oct and Nov (vs. Aug) in regards to late payments or, perhaps, we could say “foreclosures in que”. If these come to pass, it will be very significant downturn, indeed.  2. Safe deposit box rentals are up, in November, 328%. Prepaid.  3. Auto loans are starting to be worrisome. 30-59 day lates are up 144% YOY.  4. Oddly and sadly: we are still going after (with gusto) new credit card solicitations to new customers, including those with marginal to subprime credit histories. This is maddening.  4. Credit cards: Again, on-time payments are….IMPROVING. Available credit, however, is decreasing smartly. Line to limit (credit balance to credit limit) is up considerably. 38% to 74% Nov 07.   At this pace, the average customer will tap it all (100% LTL) in January.  Totally unsupported, but interesting, was a poll by national talk show that I heard this am driving in to work. One of questions asked to shoppers was “do you intend to pay the credit card bill when it comes due in Jan. 64% said no.

Albatros, at least be somewhat safe. Put your money in multiple banks covered by the FDIC. You can’t be srious about all in one bank!?

@albatros  I’m assuming you are new here. Most posters are dead serious.  You may find various investment ideas in previous threads. It’s not easy.  Counter-party risk is definitely something to take into account right now in planning how to best protect one’s savings. I cannot speak for others, my baseline scenario is that several smaller banks and most probably some big bank will fail. But not all of them and not tomorrow.  BTW: our two bankers have been discussing how to best stock canned food, as well.

Thank you Dr. Roubini for all your dedicated effort. You have courageously, consistently, & truthfully presented your views on the economy through this blog for the benefit of all. For that contribution we should all be very grateful! Have a great holiday!

Albatross -  Immediately start the process of moving your single deposit to multiple deposits in multiple banks that are under the amount and therefore covered by FDIC insurance. It is completely covered up to $100k, and may be completely covered up to $250k. Check http://www2.fdic.gov/edie/  No matter what you believe is coming down the economic pike, that is just good practice.  I wish I had your problem myself! 

Karl Denniger I love your website – http://market-ticker.denninger.net/  

Michael the banker on 2007-12-20 15:53:38  Excellent post, in particular the data on CC balance as % of credit limit, showing that in the absence of MEW they are tapping their credit at light speed.   Second A+ I give out. The other one went to DA Professor:-)

PeteCA on 2007-12-20 13:40:21  When thinking that price of crudes may not fall substantially with recession, are you taking account of the modern, futures determined, price regime that has much less to do with supply/demand of physical than the on and off exchanges trading in ‘paper barrels’. Put differently, a new price regime came into existance post-1986, and one which – particularly since 2001 – has become highly financialized, less connected to the real, more connected to the actions of very large traders.   Now, the common arguments, while admitting this, tend to both ad hominems (‘are you suggesting conspiracy?’) and true belief in the assumed efficiency of futures trade (an assumption that usually breaks down when it’s pointed out that it is based on theoretic presupposition, i.e. ‘proves’ what is already assumed). Apparently most folks are unaware that only a very small percentage of Nymex CL contracts ever go to delivery or that there is a tremendously large, and obscure, OTC market in crudes. Same time, most have not kept track of the growth in CTAs, commodity and energy specic hedgies, entrance of long only funds and ETFs, or even changes in open interest and volumes.  In 2005 Robert Mabro, now president of the Oxford Institute for Energy Studies, published a fairly short (25pp) yet complete, easily read paper on oil price regimes (“The International Oil Price Regime: Origins, Rationale and Assessment”), available here and, though not specific to speculative activities, is well worth the read: http://www.oxfordenergy.org/jelindex.php  I’ll add a quote from a 12/98 paper by Matt Simmons:  For all those that fervently believe price movement always reflects fundamental changes in physical markets, the discussion in this paper bears careful reading. Our work strongly suggests that large swings in the funds’ net position in oil contracts on the NYMEX have driven virtually every significant movement of crude oil since the MG position was unwound in early 1994. The single exception was a brief period in the fall of 1996 when physical tightness in the market itself set the price of oil. (Is Another “MG” At Work? (Or, What is Driving Down the Price of Oil?))   The point of this note? Simply what most commodity traders already know, that these markets – especially one so stretched as crude – can quickly become very fast and should not be expected to avoid developing financial stress.

Octavio:  You’re right of course.  But here it may mean the opposite. The Fed doesn’t normally “redeem” Treasury securities, because it doesn’t issue them. I think it means the Fed will actually be “demand redemption” on them, from the Treasury.  Which means the Fed would actually be sucking cash out of the system, reducing liquidity.

Interesting, Giraf. So the Fed is transferring liquidity from the Treasury to the Banks, while leaving the total amount of liquidity about constant.

BTW Professor  Great post today!

FED is really working on the repo machine.  http://www.nowandfutures.com/articles/20060426M3b,_repos_&_Fed_watching.html

artichoke on 2007-12-20 18:20:37 and Giraf on 2007-12-20 18:22:08  Ups! You are right! in a redemption the FED’s balance sheet contracts (i.e., it no longer holds the securities) so liquidity is drained.  http://www.reuters.com/article/bondsNews/idUSN1346053220071213    However, the complete picture here is that the FED is doing this “to offset the extra reserves [i.e., extra liquidity] it plans to inject with other central banks to ease global credit conditions.” The objective here is trying to maintain the fed funds target rate.

@ST on 2007-12-20 18:37:06   My apologies. The last post to ST should have said written by Giraf.

@ST on 2007-12-20 18:37:06   Another point. You are correct in the statement that it is bank reserves that have an impact on money supply growth. However, the Fed controls the level of bank reserves through changes in its own balance sheet, so the two are interlinked.  Cheers. 

@ Giraf  You’ve convinced me: So the Fed found out today that the auction had a big effect on the money supply (effective federal funds rate yesterday = 3.99%). Today they mop up liquidity through open market operations.  On the 27th, they presumably plan to allow open market operations to stay more or less at the same level, but reduce the money supply through the back door by reducing holdings of Treasuries. That makes sense.

J.  Thanks for the link. I’ll be glad to read it.  Your point on oil price being strongly influenced by the futures market is well taken. Overall, the futures market for oil is a pretty big one, isn’t it (esp. with multiple intl futures markets covering this commodity)? So, it’s probably impossible for any one entity or player to influence the oil price too much (for too long). But of course, if enough people take speculative long positions then that will certainly drive up the oil price.   Do you feel that the current position of oil is still overbought – even after the news that the US is backing off its aggressive stance on Iran?  PeteCA

The big positions in oil markets are dominated by investors in long commodity indices (primarily funds, though some customer hedging too e.g. airlines). The ongoing cost of rolling positions from month to month has significantly offset the “headline” price gains and provided large profits to Wall Street, BP and Shell (other major oil cos. do not trade these markets extensively). The longs “must sell” prompt delivery every month, usually weakening their position – a feature that broke MG in 1994 who were never credibly going to take delivery. You can speculate who the major shorts are – clue: it’s not the oil majors (they are significantly hedged by high producer tax take).   Note that both initial and variation margin can be covered by government securities for cleared markets managed by NYMEX or ICE. Such high quality collateral could be suddenly more urgently required elsewhere.   Aside from the possibility of some other stupid hedge fund emulating Amaranth, I suspect that stress in oil markets will come from stress in Wall Street rather than being transmitted in the opposite direction. The collapse of Drexel caused a few ripples in oil markets back in 1987. Problems for e.g. Citigroup, Goldman, JP Morgan, Morgan Stanley, and even Bear Stearns or Merrill could cause some quickfire position liquidation, and would be much more serious.

The monetary base contracted $3.5 Billion this last week!

It is funny to see Wesbury call out others when they are dead wrong yet, here he was dead wrong about the Fed not lowering rates. I think he was also telling people to load up on Cisco in 2000 cause it was going to $1000! You coulda bought it again in ’04 for aroung $15… This is from August 23, 2007:  ”We are not arguing that the Federal Reserve should never respond to financial crises with rate cuts. If trades are having trouble clearing (think September 11, 2001), or if an overly tight monetary policy itself is the cause of financial problems (think 1929), cutting rates can be the right policy. But neither of these conditions applies today. We continue to expect the Federal Reserve to hold the line against rate cuts and think the economy will once again show surprising resilience. Just like the Energizer Bunny, it will keep on going…and going…and going.” Brian S. Wesbury, Chief Economist Robert Stein, Senior Economist Trevor Scott, Economic Research Analyst  http://www.firsttrustportfolios.com/Commentary/EconomicResearch/2007/8/23/The_Energizer_Bunny_Economy

@PeteCA  Pardon me for butting in but you can find the position data for crude oil futures at the following CFTC site:  http://www.cftc.gov/marketreports/commitmentsoftraders/cot_historical.html  As of last week (this week’s data published tomorrow afternoon)net non hedgers (specs?) were long about 2.8% of the open interest. This compares to a 2007 high of about 8% net long in July and a recent low of about 2% in late August. With the sort of run we’ve had and the apparent froth, I would have expected net longs to have been much, much higher. While there are a large amount of long positions, they are offset by a large amount of shorts. The conclusion that I came to is that IS NOT the specs driving the price.  Hope this helps. 

PeteCA,  yeahh i know wat you mean.. prof roubini was just being slammed here just a few short weeks ago when the market rallied.. investor psychology and emotions are that way, but its still rather annoying to read their bitching abt their bad bets…   For me this is a place, where i can learn abt real finance and economics.. (not delta, gamma BS greeks) and get some ground/field knowledge abt the direction of the economy (bearing in mind the possible negative biases here)..   Having said that, I’m still skeptical abt the prof’s view that its a sucker’s rally.. Are soveign funds so irrational to misjudge values of these banks? Arabs and chinese are helping prop up the market.. the world is no longer like 10 years ago.. Besides, there arent that many sellers anymore.. as i commentor mentioned, the investor has been brainwashed to think the market always goes up and these dips are really “corrections”!..   what are your views abt this?    mrskeptical

M may get “transfusion” from Temasek   Dec. 21 (Bloomberg) — Merrill Lynch & Co. may get as much as a $5 billion cash infusion from Singaporean investment fund Temasek Holdings Pte., the Wall Street Journal reported, citing unidentified people familiar with the matter.   State-owned Temasek is in advanced talks with Merrill about an investment, the Journal said. Temasek’s board has given preliminary approval on the deal, although pricing, timing and regulatory issues need to be negotiated, the Journal reported.   http://www.bloomberg.com/apps/news?pid=20601087&sid=az40fV02MDnc&refer=home 

 @Stormrunner  “After 18 mo’s of parsing this blog I see a great deal with regards to the reasons why the system is failing and no practical solutions… The only thing on the table is Ron Paul’s parallel money initiative…”  You mean perusing, not parsing. I’ll pass on your Ron Paul initiative; maybe some of his fans will comment. Meanwhile let me put something on the table.  1. Restore Glass-Steagal and other such reforms that were established in the aftermath of the 1929-32 crash. This is the opposite of what Ron Paul wants to do. He wants banks to be even more unregulated than they are. I think they should be as regulated as they were in the 1950′s.  2. Raise taxes to the level that prevailed in the aftermath of WW2. Set up the tax system in such a way that income is redistibuted from the rich to the working class, so working class people can afford to buy the products they make.  3. Cut back on entitlements. I know this is politically difficult, but it will have to be done one way or another. Better to do it openly than through hyperinflation.  4. Shift from a financial economy to an industrial economy. Adopt a national economic policy, similar to what Japan did in the 1970′s and 80′s. They picked certain strategic industries and set out to be the leader in those industries. I would target nanotechnology, biotechnology, nuclear power (fission and fusion), and solar power. Companies engaged in these industries (Monsanto, for example) should be regulated, just like banks should be regulated. They should be forced to serve the public interest.  5. Spend the money raised in #2 on education. If things keep going on the present course, the country is bankrupt. The only way out is to increase productivity, and the only way to do that is to have a better educated workforce. Companies should be discouraged from dumbing down jobs, and encouraged to structure the workplace in such a way that employees are challenged to keep learning more complex skills. (I don’t know what form this “encouragement” would take. We need a deep cultural change, not bureaucratic directives.)  6. Teach people to be healthy without relying on “health care.”  7. Shift from a war-based economy to a cornucopian economy.  ———————   Merry Christmas to all, and to all a Good Night!   

Oh boy more fund freezes to protect investors and workers I bet : }.  Oh BTW they were also having a run on funds,   {Report: Friends Provident halts property fund redemptions By Steve Goldstein  LONDON (MarketWatch) — U.K. insurer Friends Provident (UK:FP.:  UK:FP. 154.90, 0.00, 0.0%) has froze its 1.2 billion pounds ($2.4 billion) flagship commercial property fund after a rush for the exit by investors over the past three weeks, The Times (of London) reported, citing a spokesman. Friends’ move affects up to 118,000 individual investors in its 24-year-old property fund, which invests in offices and retail developments in areas as diverse as Glasgow, Leadenhall Street in the City of London and Camden Wharf in North London. New Star Asset Management (UK:NSAM: UK:NSAM 198.25, 0.00, 0.0%) separately marked its property fund down by 8.2% last week, the report added. End of Story}  http://www.marketwatch.com/news/story/report-friends-provident-halts-property/story.aspx?guid=%7B20CCF7DB%2DEC3E%2D433E%2D8E67%2D1EF012C8190B%7D&dist=hplatest 

Personally I like to read the informed economic view and watch how it corresponds to numbers. I’ve discovered it’s an excellent way to discern who really knows his stuff and NR certainly does.   A casual glance at the markets shows everything to be ok, but a closer glance reveals indices that have lost as much as 50%, and quite a few stocks at multi-year lows.  Even with today’s advanced communications technology, numbers are aware of the news long before they are posted on a website…and average folks have been feeling the pain even longer.  So why’s are major indexes still offering a pretty picture? That’s anyone’s guess. All I know it’s a fake. Focus on the right numbers and you’ll find a rot so deep, you’ll wonder if it’s salvageable within the present structure.   It’s a great environment for day-trading but one must be always ready to jump ship in an instant. When the picture cracks it will happen out of the blue and from a rather unexpected source.

CNBC videos do not play on my computer. why?

ABN Amro sold its important art collection for a symbolic €1 to the ABN Amro Art Collection Foundation, just prior to the bank being taken over, the Telegraaf reports on Friday…  …’This is the biggest art theft of the century,’ one ABN Amro insider told the paper. ‘This art was bought along with the company and with shareholders’ cash.’  http://www.dutchnews.nl/news/archives/2007/12/abn_amro_sells_its_art_for_1.php  Naughty, fraudy bankers…

@Quesso “When the picture cracks, it will happen out of the blue and from a rather unexpected source”   Stay focused, watch it like a hawk (or a dove). Try to ignore all of those manipulated fundamentals, they’re pretty much useless. IMO anyway.  Hellasious is right about the Indexes. That’s what Joe Zombie sees when he gets home from his rat race day…..DOW, S&P, NASD all holding up, not too bad, everything must be O.K. Right? Oh Boy, ‘Dancing with the Stars’ is on tonight. Wow!  Anyway, they can hide this mess from the zombies, but once the ‘picture cracks’, they won’t be able to hide it from “Bid”, and they won’t be able to hide it from “Ask”.  Happy Holidays

Dec. 21 (Bloomberg) — Merrill Lynch & Co. rose in German trading after the Wall Street Journal reported that the world’s biggest brokerage firm may receive a cash infusion of as much as $5 billion from Singapore’s state-owned Temasek Holdings Pte.   RECESSION? NO WAY!!

@Bernard  Sorry not to be able to reply to you earlier but have had things going on.  Do I think that there is massive collusion propping up the stock market? No. The Chinese and the Arabs are awash in U.S. cash which is awaiting to be deployed. Stricken banks seem a good enough buy at the moment. In terms of the cash reserves that these countries have, the the capital injections have really been small change. I imaging the Chinese could probably find a spare 10 billion if they looked for some loose change that had fallen into the back of the couch(sofa).  I think the financial markets are being propped up, but not in any concerted effort. I think all of the important people in the know see the danger of the market collapsing and are trying to do their best to stop it from nosediving. If I were a central banker–even with my super conservative tendencies–I would try to keep the market afloat. Remember a lot of those worthless securities are owned by pension funds which were planning to keep little old ladies well housed and cared for. I think it is a combination of mutual interest by the powers that be and stupidity by many perma-bulls that are supporting the market. Stupidity will pay the price.  More worrying once again is this, from Paul Krugman.  http://krugman.blogs.nytimes.com/2007/12/20/search-for-security/  As I see it U.S tresury bonds are the safest–though I don’t think so–on the market; effectively pseudo-gold. The yeilds are dropping because people are rushing to safety. It appears to me that smart money is leaving the market.  Secondly is this;  http://www.ft.com/cms/s/0/c065bd1a-af51-11dc-880f-0000779fd2ac.html  a run of record-breaking losses and bailouts in banking has hedge funds re-examining how much they can be hurt by a bank collapse.  To me, it would imply that the hedge funds seem to think that at least some banks are at the risk of collapsing. Once again, solvency not liquidity.  As for the ratings of the bond insurers, “the market” should remember that the evaluation of a particular financial entity by a ratings agency is only an opinion. Given Wall St’s past history of probity, honesty and incorruptibility it is an opinion that can be swayed. The consensus opinion of the ratings agencies is at the moment, in my view, at odds with the facts. Investors should rely on their own thinking and not rely on others. The ratings agencies could give MBIA a rating of super duper AAA with gold plating and diamonds and I would still think it a pig. Investors should not moan of loss when Wall St does the thinking for them.  

give me a break bears… You never learn!

i love the usa in which you will be finding no recession forever!

the banks are getting bailed out by oil states and the asians. US govt. is smiling on it so no one can call it a govt. bailout. This money is coming in based on the self interest of states that want to keep the US system functioning and thus their own economies from getting blasted. Is this a de facto IMF for “a country that still thinks its rich”?

10:02 UMich Dec. sentiment above 74.5 forecast 10:02 UMich Dec. sentiment revised up to 75.5 vs 74.5 

Well there you have it, sentiment up, spending up, stocks up, Fed to auction money forever. We have eliminated recessions in the US for eternity!! Get long sheeple, get long!!!

Hey, Dow up 400 points today…why stop there, lets go for 500 points to really make people feel rich so they can continue to spend 3X more than they make! Lets have the Dow up to 17,000 by years’ end, that will really make Nouriel et al. look bad!

 Funny you should mention voodoo black magic, because that’s exactly the sort of nonsense the power brokers of this world actually believe.  http://youtube.com/watch?v=sZD3WT3Vqa8  

Santa Clause rally!!!! Wow, no recession!!!!

“Hmmm…Pimco says US already in Recessin”  Where did you see this?

wow, $VIX, $VXN, $GOLD all at pivotal point. We might be able to see the outcome today or sometime next week. in the mean time, enjoy the Santa Clause rally!!!! Wow!!!!

Until the overreaching debtors feet are held to the fire with significant foreclosures, credit defaults, repossessions etc. AND until the numbers become significant and pervasive enough, people are going to spend, spend, spend. Americans have not had discipline imposed for so long that they have irrational future expectations. Cultural imperatives are deep from years of brainwashing. All virtue must be shown by spending. Love, Joy, Charity, Compassion etc. demonstrated only by money. Hard to have a recession until that back is broken. But there is always a little more to tap in home equity, a little more in credit cards, a little more from the various “pawn brokers”. American consumer is going to die suddenly in the traces…maybe years from now.

Maybe the real and shadow banking group, being the evil geniuses that they are, always knew that their fractional reserves were being compromised by overlending and overly lax standards. These sovereign wealth funds rushing to the rescue may not be ad hoc arrangements, but the design of the money men as the last and ultimate buttress of reserves. Also a convenient way to weave global interests into the national cloth.

Signs of Recession in 2007?  I’m going to offer a few thoughts and data today before I travel for the holidays.  Here’s one. Back in Q1 and Q2 of this year some people (esp. here) were already beginning to seriously question whether the USA was headed for a recession. Prof. Roubini deserves a lot of credit for making this argument and holding his ground. So does Mike Shedlock on his blog. They took enormous criticism from the so-called “perma-bulls” who appeared to accept that a downturn was even possible.  At times it very tough to make an independent judgment on where the American economy was headed. I decided to use a simple rule-of-thumb that went like this: If BOTH housing and the auto industry get into serious trouble in the USA then we’re probably headed for a significant downturn. There were three reasons that I could see: 1) Both housing and auto are major industries that are vital to the economy and stimulate a lot of consumer income and spending. A downturn would eventually generate a lot of unemployment from these industries. 2) Both housing & auto have a lot of knock-on industries and manufacturing that also produce strong contributions to the US economy. (3) A downturn in housing and auto would cause a recession in the states of Florida, California, Nevada, Ohio, Texas and Colordao (affected strongly by subprime and foreclosures), and Michigan, Indiana, Ohio (affected by a lot of auto-based industry and suppliers). The US economy would be unlikely to sustain growth with downturns spreading out of these diverse geographic regions.  So the premise was simple: * Watch the ABX indices to see how mortgage-related securities were doing * Watch the stock values of Ford and GM as indicators for the auto industry  This approach gave a pretty clear indication of “coming trouble” by the start of Q3 (2007) in the USA.  PeteCA

That’s the fundamental problem, professor, the whole business doesn’t make sense except as a ratings arb/scam.  Suppose you have a AAA rating.  A banker comes to you and says, I have these complex bonds, I can sell them today at AAA + 100bp, but why don’t you guarantee them for 50bp and I’ll sell them with AAA ratings, we’ll split the profits.  Why wouldn’t you say, yes, those bonds look tasty, I’ll issue AAA debt and buy them from you at AAA +100bp?  The only way the guarantee transaction makes sense is if you can’t issue AAA debt to buy this stuff.   (more precisely, if the agencies let you guarantee more than twice as much as they would let you issue and keep the AAA rating – even though you’re taking the same default risk when you guarantee it)  Guaranteeing taxable debt is no different from trading credit. There’s no reason you should be able to consistently make a profit, except as a ratings scam.  (The same doesn’t apply to tax-free munis… an investor who can only buy munis tax-free in one municipality might very well pay a premium for someone to guarantee them, effectively buying the benefits of diversification him while owning just the one municipality. There it’s a tax arb instead of a ratings arb) 

WHY THE TITANIC WAS ACTUALLY A SECURITIZATION INSTRUMENT (humor)  I’m going to send a couple of posts to the blog today to summarize all the data I’ve accummulated on CDO’s. Before I send the serious data, though, I want to offer a humorous piece.   Thanks to the people in the financial industry who took time to help me with this data, especially: * Vinod Kathari at his Web site on securitization * The folks at JPM who sent me some top-level charts on CDO’s * The folks at SIFMA – who have provided an excellent Web resource. PIMCO also has some well-written background articles on their Web site.  Now for the humor. I found this piece on Vinod Kathari’s Web site. It’s good to see that – even in the middle of the CDO disaster – people in the financial industry can still take time to laugh …  ———————————————  10 Reasons As To Why The Titanic Was Actually A Securitisation Instrument  1) The downside was not immediately apparent.   2) It went underwater rapidly despite assurances it was unsinkable.   3) Only a few wealthy people got out in time.   4) The structure appeared iron-clad.   5) Nobody really understood the risk.   6) The disaster happened overnight London time.   7) Nobody spent any time monitoring the risk.   8) People spent a lot trying to lift it out of the water.   9) People who actually made money were not in original deal.   10) Despite the disaster, people still went on other ships.   PeteCA

Oh yeah, this doesn’t matter, stocks are up bigtime! 12:14 Chrysler reportedly faces major cash crunch

http://www.safehaven.com/article-9079.htm  To summarize: The media conglomerates constantly fill our brains with mush to distract us from reality, while politicians pass legislation to take away our rights, spend like drunken sailors, devalue our currency, outsource our jobs, increase our debt, take away our sovereignty (e.g. North American Union), ignore our immigration concerns, create booms, bubbles and busts, etc and the masses could care less, because American Idol is on tonight.  I’m sure you know I’m being facetious with the above statement, but also hope I successfully made my point — the majority are oblivious, ignorant and happy and the powers that be like it that way…  As I stated in a previous post (3rd World America): American society has made it an accepted norm to be caught up in trivial things (fashion, keeping up with the Jones’, reality TV, the latest unsolved murder mystery, sports, shopping, Hollywood, petty lawsuits, material things, etc), and the truly important things in life (family, values, education, hard work, social courtesies, respect, religion, caring for others, etc) have fallen by the wayside. Each and every day our brains are filled with mush and we become far too ignorant to realize that the things that once made us a great nation are slipping away.  Well, our once great nation is now collapsing before our eyes. Foreigners own HUGE PORTIONS of US Domestic Industries, Banks are failing (soon we’ll have banking runs), millions of families are going to lose their homes, inflation is raging, the dollar is tanking, Government spending is out of control, outsourcing continues, the North American Union plan continues while immigration issues are ignored, etc, yet we fail to open our eyes to see what is happening. It’s quite appalling that we’ve sunken this far and unless the masses pull their heads out of the sand quickly, we are doomed.  

Issuance Data For Asset-Backed Securities and CDO’s  This first posting shows the growth of the total asset-backed securities (ABS) market, and also the CDO market (a subset of the ABS), over the past few years. The explosion in these sophisticated finance products is obvious from the data. For a brief (but good) introduction to what these securities really are, see my previous posting with the articles written by PIMCO.   O.K., here we go. These are total securities (or CDO’s) with values measured in billions of US dollars. In later postings I provide some information on how these markets break down, in terms of how much of the funds is in residential mortgages, credit cards etc.  By the way, it was not totally easy to come by some reliable figures for these numbers. It took some digging. I don’t think that people are hiding anything – it’s just that most people don’t look at the securities from a top-level perspective (i.e. they are too entrenched in their own small investment world).  —————————————————————————— Total Asset-Backed Securities Issued (Billions of Dollars, Each Year)  1994 $78 billion 1995 $113 billion 1996 $165 billion 1997 $192 billion 1998 $224 billion 1999 $240 billion 2000 $272 billion 2001 $330 billion 2002 $402 billion 2003 $500 billion 2004 $704 billion 2005 $870 billion 2006 $886 billion 2007 * $575 billion  The figure for 2007 is a projected figure, since Q4 data are not released yet. It should be pretty close. ———————————————————————————– Total CDO’s Issued (Billions of Dollars, Each Year)  Part of the Asset-Backed Securities Market was the “notorious” world of CDO’s. These securities provided a great way for the investment banks to package products (esp. risky mortgages), but without much clarity on the real risks of the investments.  These issuance figures are just for 2005 through 2007. They are broken down by quarters.  2005 Q1 $49.6 billion 2005 Q2 $71.4 billion 2005 Q3 $52 billion 2005 Q4 $98.7 billion TOTAL 2005 $271.8 billion  2006 Q1 $108 billion 2006 Q2 $125.1 billion 2006 Q3 $138.7 billion 2006 Q4 $177.4 billion TOTAL 2006 $549.3 billion  2007 Q1 $173.7 billion 2007 Q2 $175.6 billion 2007 Q3 $63.0 billion 2007 Q4 Not Available (but small) TOTAL 2007 Probably about $420 billion  The figure for Q4 2007 is not available yet, but is expected to be very small. Issuance of CDO’s declined rapidly as the Credit Crisis developed in mid-2007.  If you add up the CDO’s over 2005-2007 you get a total figure of about $1241 billion. ———————————————————————————– PeteCA

Dec. 21 (Bloomberg) — State and local borrowers are discovering that buying municipal bond insurance from MBIA Inc. and Ambac Financial Group Inc. is a waste of money.   http://www.bloomberg.com/apps/news?pid=20602007&sid=aUinEIdJ4QBo&refer=rates

@ Nouriel and all the blog buddies here  I’m about to log off for the holidays – mostly. Thanks all for making a place for me here among you as we document in real time the inflection point of economic history that will obsess generations of bankers, economists and regulators as yet unborn. These are interesting times, but not unique.   As a holiday gift, click through to this cartoon from the London Spectator, 1908. It says it all. Happy holidays!  The Present Condition

NR, you got it wrong. No recession!!! Look for long term yield to start climbing to norm again. No recession!!!

Mark on 2007-12-21 06:02:27,  Thank you for adding some details — way too often people look only at the aggregates and erroneously confuse the overall with internals. I try looking at both along with real econ fundamentals. Assuming you may trade commodities, two questions:  - Have you noticed the role of, not ‘gut feelings’ but development of a synthesizing intuition? - Somewhat related to the first, cross-asset class trading which, like so many other things these days, it seems nobody knowns size only that techniques have improved and it’s been increasing. No doubt there have been some recent correlation studies but I’ve not seen them…?  Any case,  have a good holidays

@ Magnus Pym on 2007-12-21 08:12:10,  Well, yes, but as a form of unequal exchange, it is not sustainable…or sustainable only at ever greater cost to the global real economy, i.e. theoretically sustainable. Try: http://michael-hudson.com/