Super-Senior Tranches of CDOs are Worth Much Less than 22 Cents on the Dollar: Another Ponzi Scheme of “Selling” Toxic Garbage with More Leverage
Merrill Lynch decision to “sell” a good chunk of its remaining CDOs at 22 cents to the dollar has been widely praised as the firm finally recognizing the full extent of its losses on these toxic instruments. This batch of $30.6 billion of CDOs was already marked down to $11.1 billion. Now with the “sale” of it to Lone Star at a price of 6.7 billion Merrill Lynch is taking another $4.4 billion writedown and “selling” it at 22% of the original face value.
But is this a market-based “sale”? No way as calling this transaction a “sale” is a joke.
Let me explain next why…
First, note that the secondary market for CDOs is now extremely illiquid and Merrill will provide financing for 75% of the purchase price, or a financing of $5.055 billion. That implies that these CDOs are worth much less than 22 cents of the dollar. These type of “sales” transactions – broker dealers “selling” their toxic waste at a discount and providing hedge funds and private equity funds with heavily subsidized financing for it – has going on for a while. That discounted “sale” price often ends up being much higher than the true value of the assets (and the ensuing writedown of the assets is smaller than the correct one) because of three reasons:
- the selling broker dealer is providing most of the financing for the transaction as this market is totally illiquid and no one could dump $11.1 billions of toxic and illiquid CDOs in such a market;
- the interest rate at which the financing occurs is often significantly lower than the appropriate rate at which this risk financing will occur. Merrill has not announced what are the terms of its financing of this deal and this leaves the serious suspicion of a heavily subsidized transaction;
- the collateral for this risky financing is the same toxic waste that was sold to a fund. In the case of the Merrill transaction if the market value of this $11.1 tranche (now priced at $6.7 billion) falls another 25% the collateral for the 75% financing (that is non-recourse as it is secured only by the collateral) will be worth less than the underlying assets and thus additional losses will be incurred by Merrill. In other terms, as pointed out by Bloomberg since “the financing is secured only by the assets being sold, meaning Merrill would absorb any losses on the CDOs beyond $1.68 billion”. Thus, in a extreme scenario in which the CDOs actually end up being worth zero Merrill will end up having sold them to Lone Star for 5.5 cents on the dollar rather than 22 cents. I.e. leaving aside the first loss of 25% taken by Lone Star all of the remaining credit loss is borne by Merrill.
So, based on the above consideration, is this toxic junk worth 22 cents on the dollar? No way and one would have to assume that the true market value of this garbage is closer to zero than 22 cents. So the street is now arguing that 22 cents on the dollar sets a market benchmark for writing down CDOs (Citi is still carrying them at a value of 53 cents rather than the 22) and many other firms will now have to use this benchmark; but the reality is that this toxic garbage is worth much less than 22 cents. So the charade of pretending to mark down to market the value of this junk will continue for a few quarters with continued bleeding of earnings.
At this point it would be more honest for the financial firms to write down to zero the value of these assets (with possible positive revaluation if they turn out being worth more than zero) and keep them on balance sheet rather than pretending to “sell” them via greater debt that massively adds to the credit risk that these firms are taking at the time when they should be deleveraging rather than releveraging further.
What is the sense of taking on another $5 billion of risky debt that has toxic garbage as collateral? Is this sound financial balance sheet restructuring or another Ponzi scheme of a house of debt-upon-debt cards? Selling worthless junk and providing financing for it is not a “sale”; it is another accounting scam whose purpose is hiding the full extent of the losses on garbage, not coming clean on them. So beware of the cheerleading chorus of banking “analysts” praising Merrill and this transaction. The entire episode stinks with the Merrill CEO making a series of misleading statements on Q2 earnings and on no need for further capital and now coming out of the blue with this new surprise and a new large capital injection that will massively dilute current shareholders a few days after the dismal Q2 results were reported. Add to this charade the fact that what will be raised in this new round of recapitalization will be much less than the announced $8.5 billion once Temasek and other shareholders who participated in the previous recap will be compensated for the massive losses they incurred in that round of recapitalization of Merrill.
If this is the way to run the finances of one of the largest broker dealers in the most advanced financial system in the world it is not wonder that this system is totally broken. The smart and very savvy Mohamed El-Erian (co-CEO of Pimco) put it in polite terms when he recently said while commenting on this financial crisis: “What has suffered most is the credibility of the most sophisticated financial systems in the world.” Or as Bill King (a senior financial analyst) put it: “Eventually a critical mass of investors and traders will become cognizant of the obvious scheme and distrust of financial firms’ results, guidance and motives will increase substantially. John Thain’s credibility is now an issue”. It is both the credibility and viability of the most sophisticated financial system that is at stake now as most of this financial and banking system is on its way to substantial and formal insolvency and bankruptcy.
How Screwed are the Investment Banks?
A brief review of recent Merrill (MER) CEO statements:
1. We don’t need capital;
2. We could use some capital, but we won’t sell shares, we’ll just sell some assets;
3. We need to sell shares and raise capital right away;
Where is Ken* when you need him?
The financial firms obviously think investors are utter fools. And for a while, they were correct. They suckered people into buying into this mess the whole way down. Bottom calls each and every level — all of which failed. Some analysts even called iBanks a “Generational Buys” — 30% higher.
Only not so much.
Release earnings. Issue guidance. A few weeks later, lower earnings. A few weeks after that, take more write-downs. Raise more capital. Start it all over again next quarter. Rinse. Lather. Repeat.
The banks have adopted a Chinese water torture approach — dribbling out the bad news in small doses over time. Its been working up until now, but I doubt it will keep working much longer. Can they keep fooling people much longer? Merrill issued quarterly earnings on July 17th, and then dropped this bomb shell on July 28th? They must really think we are idiots, and that the SEC is in their backpockets to even attempt getting away with this crap.
213 Responses to “Super-Senior Tranches of CDOs are Worth Much Less than 22 Cents on the Dollar: Another Ponzi Scheme of “Selling” Toxic Garbage with More Leverage”
Just missed the new post, so am reposting:@ Guest: “WOoo hooooOOO. USA is doomed when it stop investing in education and just busy bailout unworthy wall-street firms.”Paulson and his Street cabal may have co-opted everything but the kitchen sink to make their scheme-to-steal keep on working — the president, the Congress, the SEC, the U.S. Treasury, private savers, the dollar, pensions, the PPT and Bernanke, their personal puppet. But in the end they can’t make it work because — THEY DON’T OWN THE ECONOMY. While they’re taking a commission from everybody’s labor, problems are building, big problems. Congress doesn’t have a blank check on the country’s resources to give to these bankers to use as their personal bank account.Congress sold Frank and Dodd and Fannie and Freddie on the basis of an emergency, not a permanency. Come January, when the Democrats flood into the Congress on Obama’s coattails, they’re going to want money to pay back their vote support. No action by a lame duck Congress, by a bank bully, is going to stop them from protecting the programs for their own – the non-producers and heavy-users and government employee unions.
Damn!NR you have really nailed it on this one! Thanks for calling a spade a spade!
One wonders what the Fed is lending against these types ‘Super Senior’ CDOs? Far more than 22% would be my guess…
Nouriel,You have been saying for some time that the "originate and distribute model" is dead. If this is true then what will the future world of mortgage finance look like and how far will house prices fall? I remember being told by a retired banker that in the early 1980s (before originate and distribute) a high risk mortgage for a bank was above 60% of the property’s value. I have also seen data that at the height of the housing bubble 75% of mortgages originated for more than 75% of the property’s value. If we are returning to the world pre-originate and distribute does this mean a return to the lending standards of the early 1980s? If so, the fall in house prices could well be more than 30%. Just a back of the envelope calculation: Assume the average down payment was 20% in the bubble (generous). If it now will have to be 40% under the post-originate and distribute regime then house prices would have to fall by 50% so that the average buyer could afford to buy.Alex Grey
What are these worth in a normal market? If they end up defaulting at less than a 78 cents on the dollar at the end of the day, $0.22 strikes me as fair value.
3rd, 5th, or whatever!Nouriel,Your posts are more strident now than ever. One supposes that as your predictions get more extreme, so is the margin of error. But I agree with you, that the false accounting and dissembling by financial kingpins is a real disgrace, on top of the hypocritical socialization of their losses. These great capitalists – Mr. Kudlow? – You have to keep in mind that MER was helping Enron out with Nigerian barge deals, and so it’s the same bunch of bums getting away with whatever they can to make money.
I NOTICED THE MEDIA ISN’T FLAUNTING LOW HOME MORTGAGE RATES ANYMOREI see from one bank, 30 yr fixed loans are like 6.4% now, with a caveat, more increases this month.And this new bailout bill will add $300B more interest rate spiking debt? This should worsen the house price collapse in my opinion.When will just leave it alone and let it play itself out on its own. Everything the government does at this point just pours gasoline on the fire in my opinion. The only good [bad?] thing about a bailout, it may cause a minor short term sucker’s stock market surge with false positive psychology. Maybe slowing the inevidable train wreck down a few seconds.
I love the expression "cockroach stocks" used to describe stocks with a big scandal, e.g. Worldcom. The meaning is that bad news (roaches) just keeps coming out as time goes on, so don’t buy the stock, thinking that one announcement is full story. The banks and broker dealers are now all coackroach stocks.
Despicable on both sides of the aisle. It’s long past time for us all to put aside our political differences and hold our representatives accountable for the fleecing of our country….WSJ editorial 7/29/08http://online.wsj.com/article/SB121728651034091275.html?mod=opinion_main_review_and_outlooks"President Bush is poised to sign the housing and Fannie Mae bailout bill, after the Senate passed it with 72 votes on the weekend. But an underreported part of this story is that Majority Leader Harry Reid refused to allow a vote on Republican Jim DeMint’s amendment to bar political donations and lobbying by Fannie and its sibling, Freddie Mac.This is a rare parliamentary move for a body in which even Senators in the minority party have long been able to force votes. The strong-arm play illustrates how politically powerful these government-sponsored enterprises remain even after going hat in hand to taxpayers. This has implications in the days ahead, because the Beltway battle now shifts to who will be the new regulator for the mortgage giants and how much political insulation he’ll have from Fannie and Freddie pressure.We believe in the right of individuals and businesses to lobby Congress. But with Fan and Fred now explicitly guaranteed by taxpayers, letting them ladle cash all over Washington amounts to using government-guaranteed profits to lobby for continued government protection. Congress sets the rules in favor of Fan and Fred, which then repay the Members with cash from their rigged profit stream. This is the government lobbying itself for more government.And, oh, what a stream of political cash it is. First, there are Fannie and Freddie’s political action committees, which have already distributed roughly $800,000 to U.S. House and Senate Members this election cycle. Nearly half of the Senators have received funds and almost all of the money is directed to incumbents. Fannie gave $10,000 to Speaker Nancy Pelosi, $10,000 to third-ranking House Democrat Rahm Emanuel, $5,000 to Barney Frank, $10,000 to Republican House whip Roy Blunt, $8,500 to Majority Leader Steny Hoyer and $7,500 to Minority Leader John Boehner and . . . you get the picture.Click here for a compendium of our recent Fannie and Freddie coverage.Then there are the "charitable" foundations. Freddie Mac’s foundation handed out $25 million to political groups, think tanks and other Beltway outfits in 2007 alone, more than any other foundation in the country, according to the Washington Business Journal. Guess which foundation ranked number two? Yep, Fannie Mae’s, which gave out $21 million. The foundations grew thanks to gifts of stock during the companies’ heyday before their accounting scandals and the housing bust. Last year, as political scrutiny increased, Fannie closed down its foundation and now runs its tax-deductible donations through the company itself.Most of this foundation money goes to charity groups uninvolved in politics and policy. But tens of millions of dollars find their way to policy advocacy groups on the left and even some on the right. (See nearby table.) Affiliates of Acorn, the left-wing activist group, have received multiple $100,000 grants for their "housing" activities.Jesse Jackson’s Citizenship Education Fund, an offshoot of his Rainbow/PUSH Coalition, has received more than $500,000 from Fannie and Freddie since 1996. A decade ago Mr. Jackson accused Fannie and Freddie of discriminatory lending practices. Those charges of racism went away once the grant money started flowing. Groups on the left complain about "corporate welfare" all the time, but curiously nary a one has opposed the Fannie and Freddie bailout — which amounts to one of the biggest corporate welfare gifts in U.S. history.Mr. DeMint has pledged to offer his amendment to end Fannie and Freddie lobbying to every Senate bill through Election Day. We wish him luck, but he’s up against the reality that Congressional leaders and the companies want to return as quickly as possible to the business of greasing each other’s palms. The companies are even hosting swanky receptions at the Republican and Democratic nominating conventions in a few weeks. Consider it a Fannie and Freddie "thank you" for their bailout."
A shopped out, maxxed out, but more confident consumer? I don’t think so. More downsizing as the consumer downsizes, from Bloomberg News:July, 29 (Bloomberg) — Starbucks Corp., the world’s largest chain of coffee shops, said it was cutting almost 1,000 jobs and making additional executive changes…Starbucks founder Howard Schultz resumed the position of chief executive officer in January to revitalize the chain’s cafes after U.S. customer visits declined and sales at existing locations slowed. Earlier this month, he announced plans to close 600 stores in the U.S. and eliminate as many as 12,000 positions, or 7 percent of the company’s workforce.Earlier today, the coffee-shop chain said it will shut three-fourths of its 84 stores in Australia within the next five days, backing away from a market it entered eight years ago.
1:53 p.m.Value of gifts accepted by Stevens more than $250,0001:52 p.m. Sen. Stevens accepted gifts from oil services companySee what the hell the average US citizen is competing against!!!!! Friggin scum!!!
Who the hell is going to buy this from these habitual liars??? SUCKERS!!!!!1:54 p.m.Merrill Lynch prices $8.55 bln offering at $22.50 a share
None of this fraud andoutright criminal activity matters, stocks have recoverd yesterday’s losses and that is all that will be reported to the sheeple tonight-gaurantee it!
From the Conference BoardConsumers’ appraisal of present-day conditions remained quite bleak in July. Those claiming business conditions are "bad" increased slightly to 32.8 percent from 31.9 percent, while those claiming business conditions are "good" rose to 13.1 percent from 11.5 percent last month. Consumers’ appraisal of the labor market remained negative. Those saying jobs are "hard to get" edged up to 30.3 percent from 29.7 percent in June, while those claiming jobs are "plentiful" declined to 13.5 percent from 14.1 percent.
So 22%*25% = 5.5%Yes the high end of the write-down is about 94.5%. Am I correct?MER is exibiting all symptoms of a drug addict: Take this golden Rolex watch and the $50 I stolen from my gramma, and take the TV too. Please give me a shot and I will not be back again.Sir, you said that last time, you will bring troubles to me and the cops are scoping.Don’t worry about the cops
“the financing is secured only by the assets being sold, meaning Merrill would absorb any losses on the CDOs beyond $1.68 billion”.I get this, but hasn’t MER limited it’s $6.7B of exposure to the toxic CDOs down to $3.78B? Lone star effectively bought $1.68B of the $6.7B outright, and then MER is on the hook if and only if the remaining $5.03B of CDOs goes down 75% or more, meaning their exposure is $3.78B.I’m no economist, so please point out what I’m missing. I think a lot of the news is pretending they got rid of all their exposure to these CDOs, which is ridiculous, but on the plus side, didn’t they nearly half their exposure?
I do not understand how this market can rally on this news! It is mind boggling to say the least!I fully expect a significant downturn before the weeks end unless we get more pump from TPTB
There seems to be an interesting correlation between oil price and financial stock prices (I saw this link somewhere), see: http://finance.yahoo.com/echarts?s=XLF#chart1:symbol=xlf;range=2y;compare=oil;indicator=volume+mfi+stochasticslow(31,1);charttype=line;crosshair=on;ohlcvalues=0;logscale=off;source=undefined
DID YOU HEAR THE ONE ABOUT…the banker who wanted to exchange back the treasuries he had borrowed from the Fed in return for his mortgage backed securities? With all the printing presses going at the Treasuty Department, he figured that his virtually worthless mortgage backed securites were going to be worth more than the treasuries.:)
@Big Carbon: "Majority Leader Harry Reid refused to allow a vote on Republican Jim DeMint’s amendment to bar political donations and lobbying by Fannie and its sibling, Freddie Mac.”What creature is this prowling Wall Street and the Treasury and the halls of Congress, devouring our money and our representatives, the vast majority who are in the clutches of its most powerful member – Henry Paulson? For some light on its omnipresence, here are the introductions to the first four chapters of “The Creature From Jekyll Island, A Second Look at the Federal Reserve” copyrighted 1994.The Journey to Jekyll Island – The secret meeting on Jekyll Island in Georgia at which the Federal Reserve was conceived; the birth of a banking cartel to protect its members from competition; the strategy of how to convince Congress and the public that this cartel was an agency of the United States government.The Name of the Game Is Bailout – The analogy of a spectator sporting event as a means of explaining the rules by which taxpayers are required to pick up the cost of bailing out the banks when their loans go sour.Protectors of the Public – The Game-Called-Bailout as it actually has been applied to specific cases including Penn Central, Lockheed, New York City, Chrysler, Commonwealth Bank of Detroit, First Pennsylvania Bank, Continental Illinois, and others.Home, Sweet Loan – The history of increasing government intervention in the housing industry; the stifling of free-market forces in residential real estate; the resulting crisis in the S&L industry; the bailout of that industry with money taken from the taxpayer…There are 26 chapters in all tracking this creature – and now, this.
Every day oil goes down, it is an immediate "tax" cut to the consumer. And that means they can go and BUY BUY BUY!! When are Americans going to relalize that living in debt + some is no way to live….
Dr.Roubini:What is your reaction to the comment of OPEC President Chakib Khelil’s remark yesterday- "If the dollar continues to strengthen and the political situation [with Iran] improves, then the long-term prices will be about $78 [a barrel],"Do you see this possible?
Let the witching hour begin! Dow up 400??
LOS ANGELES IS HIT BY 5.8-MAGNITUDE EARTHQUAKE
According to what I heard Marc Faber say on Bloomberg July 23:We are in a water torture bear market where one sector after another will get hit. Markets in the U.S. have become extremely oversold, he said. He said the S&P could hit 1350, but that the big bull is over for a long time to come. Faber noted that we can be in a trading range if Bernanke keeps the fed funds rate at 2%, which will support equity valuation to some extent but, at the same time, will cause inflation and interest rates to go up from market pressures. In the long run, as Nouriel Roubini puts it today: “It is both the credibility and viability of the most sophisticated financial system that is at stake now as most of this financial and banking system is on its way to substantial and formal insolvency and bankruptcy.”IMO, a new moral hazard is developing in the markets, for what outsider wants to play in a fixed crapshoot
The real reason stocks are up big today?July 29, 2008By Tom Moeller· Chain store sales were reported by the International Council of Shopping Centers to have surged last week. The 1.2% w/w jump was the strongest since early June. It lifted the level of sales to a record high and sales for most of this month by 0.5% versus June.· During the last ten years there has been a 45% correlation between the y/y change in chain store sales and the change in nonauto retail sales less gasoline.· The ICSC-UBS retail chain-store sales index is constructed using the same-store sales (stores open for one year) reported by 78 stores of seven retailers: Dayton Hudson, Federated, Kmart, May, J.C. Penney, Sears and Wal-Mart.· Showing weakness, however, was the leading indicator of chain store sales from ICSC-UBS which fell 0.9% (-4.0% y/y) after a 0.3% decline during the week prior.
"Chain store sales were reported by the International Council of Shopping Centers to have surged last week"Renters (who are now squatters) whose landlords have foreclosed and owners who have stopped paying moregages have some extra money to play with at the moment.In addition, IRS stimulus check are still being dispersed.
@ OsoteIt is MER who is financing 75% of the deal, meaning MER will be in the hook if the value of the $6.7B "sold" CDO’s go down UP tp 75% (that is MER is exposed to the first dime loss of the CDO’s, and Lone Stone will lose money only if the loss of CDO value is 75% or more)The initial discount/ write down: $30.6B – 6.7B = $23.9BMER’s additional exposure: $6.7B * 75% = $5.025BSo MER is effectively selling the CDO at a value anywhere between 22 cents and 5.5 cents on a dollar depending on the market. But I would go for the lower end.
3:22 p.m. Mervyn’s files for Chapter 11 bankruptcy protection
Miss America, any color on trading action? Looks like the S&P is ready to run 100 points higher…
Here is an old headline I had stored for a write-up LOLOLOLOL!Crude Oil Prices Surge to $30.00 per BarrelDecember 17, 2002
Sorry, I meant Lone Star not Lone Stone (it rhymes)@ Gloomy: "DID YOU HEAR THE ONE ABOUT…"That’s funny. Yes I heard the Fed is now accepting TBS (Treasury Backed Securities) in its TSLF program in exchange for toilet tissue. That created a bubble in toilet tissue and paper market. However, the Fed declared that the swap-window is a temporary program and banks will have to swap back toilet tissue and paper AFTER they finish using them.Fair trade I guess, and everything will go back to normal after this crisis is solved and our dollar will be backed by … well you have guessed.
WOOOOHOOOOOOOO!!! LOOK AT STOCKS GO!!!! BOTTOM IN PLACE!!!
why does this reminds me on the sale of Chrysler by Daimler?
Here come da lawsuits!3:41 p.m. Merrill share-sale plan contradicts CEO’s earlier statements
@AfaUsed TP…you have perfectly captured the essence of the situation!!
3:42 p.m. Merrill shares recover, turn positiveMarket forgot, you can’t short them!!!!lolololol
Reason for the rally today:FASB may delay off-balance sheet accounting changehttp://www.reuters.com/article/governmentFilingsNews/idUSN2849132320080728?sp=true
Thanks AfA. I’m still not sure I’m entirely clear on it, but that helps a little.I guess I was thinking 1) Lone Star bought 25% outright. This 25% will also be collateral for the financing. Thus, Lone Star would only default on the financing should the CDOs fall by more than 25% (theoretically, if Lone Star wasn’t paying any interest to MER).
@ Guest 2008-07-29 14:27:37My color is: "sell high"!As for the Merrill Lynch & "Loan" Star deal… What did I say on LB’s blog @ 2008-07-25 15:12:44"Where I’m at harkens back to a post of mine from many months ago. “Survivor Wall St.” I believe that since we moved to an “every man for themselves” scenario, it has become abundantly clear that all will lose in this scenario. (…and the “failed investment model” will be proven)With that said, I believe there will be an adjustment made on Wall St. I believe we will now see a move towards Hedge Funds and Brokerage houses joining up. Where unregulated HFs will become off balance sheets for bad debt. ….or something like that. (I’m working out the details for a future post.) Miss America"Written by MA on 2008-07-25 15:12:44
BANK INDEX UP 8.70% TODAY!!! Must have been relieved at MER’s great news!
This oughta add another 2% to the bank stocks tomorrow!!4:14 p.m. Lincoln Financial Q2 net income 48c vs $1.37 a share
MERRILL’S WOESWritedowns are only part of Merrill’s woes. Guess what? The brokerage business sucks in recessions, as interest in stocks wanes. It does even worse in depressions. Granted that Merrill had a great name. But so did Pan Am and Westinghouse Electric. Remember them?
Bloomberg says Stock up because Oil down, and that Dollar is up because Oil is down and (better than expected Confidence data). And Yahoo says Oil is down because Dollar is up (and demand worries)??? To be fair, the spike in dollar was prior to the decrease in oil prices and it was concurrent to the Confidence data release.So if we believe in all this BS called news, the markets are up because of "better than expected" Confidence data. One has to look into the gloomy outlook inside the report first.I want to sue the Conference Board for not using closed captioning or publish their reports in Braille characters – the market is blind: MER is writing down super senior CDO tranches by 95%, which means the same will happen to other banks. More losses that were not yet priced in? Cheers, let’s ride these stocks!That or the markets became highly ethically /philanthropy-concerned. They just want to help the poor banks.
Rallyettes? Flattening of the yield curve? Things have been "starting to keel over" now for almost a year.http://www.cnbc.com/id/15840232?video=807025916&play=1Nicole Elliott Mizuho.
Ah, never mind. I get it. If the price goes to $0, MER is still out $5.03B not $3.78B, minus whatever they’ve already collected in interest.
Written by Guest on 2008-07-29 15:09:40"I guess I was thinking 1) Lone Star bought 25% outright. This 25% will also be collateral for the financing. Thus, Lone Star would only default on the financing should the CDOs fall by more than 25% (theoretically, if Lone Star wasn’t paying any interest to MER)."Sorry I misread the details the first time, although it doesn’t change much of the exposure of MER. MER will be in the hook of the value of the CDO’s go down by 25% or more (if the CDO’s prove to be worthless, MER will lose 75% and Lone Star 25%). It is as if Lone Star is using MER to finance a 25% margin position with no margin call option.You are right about the interests, however, as noticed by Professor, since we don’t know and we can safely assume the rate is lower than the market rates, we can assume that, at best, they would cover transaction costs and processing fees (and paying for the "genius" who had the idea)
Yes, money that should be allocated to growing real enterprises are being instead plowed into financing off-balance sheet liabilities in order to firewall away "plague paper" AKA CDOs. How can the debt/equity holders of the major IBs and commercial banks not be screaming to high-heaven seeing their capitalization is being routed into even greater inefficiencies than homebuilding? Probably very few long-term holders left. Speculators are trading the entire stock in a weeks time, many times over in some cases. Gyrating casino with carousel sidelines. Have some cotton candy and Kool-aid?Theine & co. are convinced that by keeping digging they can excavate themselves out of peril. All they are buying is time, and bystanders are left scratching their heads. In the middle ages they’d be tar’n'feathered, run out of town on rails, and all goods seized and distributed. Haven’t we come a long way, baby? Since TPTB are intent on fleecing us, why not passively resist while making a statement. Maybe a GREAT ESCAPE a la Steve McQueen on a financial order is in order. After all the watchtowers and concertina wire has long been in place (if only in other forms), what to lose when they want ALL you have. Might makes right: And they have all might! Second thought, maybe the almighty should step in as referee. Nothing short will stop this nonsense.http://youtube.com/watch?v=69PXX3hps-QIf you’re gonna be sheared anyway, might as well enjoy it.
Caveat Emptor:"The financial firms obviously think investors are utter fools. And for a while, they were correct. They suckered people into buying into this mess the whole way down. Bottom calls each and every level — all of which failed. Some analysts even called iBanks a "Generational Buys" — 30% higher."@ RoubiniA sure sign of the last part of the cycle, that is the fascist mode, is when the investors and customers become victims.On the cool side of things, there is a new search engine built by the folks that were once at Google:http://www.cuil.com/ It is pronounced as "cool".Now the acceleration is seen in the "desperation" index.Ho humPeterJb
Talking about warm and embraced fascism – those happy and secure final moments:" Associated Press Writer / July 28, 2008WASHINGTON—Congressional investigators say businesses have failed to pay the IRS some $58 billion over the past decade in taxes they were supposed to have withheld from their employees’ paychecks and forwarded to the government.The Government Accountability Office says more than one and a half million businesses owed the supposedly withheld income, Social Security and Medicare taxes as of the end of September last year. Because the taxes weren’t paid, the government had to dip into its general fund to cover shortfalls in Social Security and Medicare.The GAO report faults the Internal Revenue Service for relying too much on voluntary compliance in the past, even with the worst payroll tax offenders.© Copyright 2008 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed."USD58b is a fair chunk of change even for a low-life politician and bureaucrat (not for a whanker though),Ho humPeterJB
STUPID STUPID STUPID merrill. 2 weeks ago they said that all was fine. now they announce $8bn+ write-offs, dilute existing shareholders by 37%, suprise most investors by having to pay singaporeans $2.5bn in compensation for having continued to f@ck up ———- AND THE STOCK PRICE IS UP????????@ AfA on 2008-07-29 14:19:29isnt it rather so that lone star takes the first losses up to 25% of the total transaction value, and merrill is on the hook only if losses exceed 25%? makes sense also given that they most likely pay a ridiculously low interest rate – and probably there are other strings attached to it too. who knows, maybe lone star can put the paper back to merrills at transaction value subject to certain conditions??? WHY is ml not announcing details? SOMETHING STINKS.Also, the RGE Monitor website has a reference to an article from april quoting Michael Klein, saying that investment banks that are able to raise financing in this environment are in a serious competitive advantage compared to their peers because they can now start to look at opportunities to acquire other businesses – HELLO????????????????????? THAT ARTICLE was written in APRIL. since then Michael Klein has left the sinking Citi ship with a $42 million payout. Good for him!
MOONSHOT1. The government is going to sell much more debt to finance bailouts in the coming months, especially as the recession/depression slows tax receipts.2. Emerging markets will buy much less US debt as the recession/depression dramatically slows purchases from these countries.So as supply of treasuries goes through the roof, demand will falter. Interest rates to the moon.
MYSTERY SOLVEDNR wondered where banks would get the capital they needed and he speculated it might come from SWF’s. Now Merrill has provided the real answer to this conundrum. Financial companies will just loan themselves the money. It’s really quite simple, isn’t it?
You see a gov’t that showed forebearance in the good times. Small cheats on taxes, failed filings, understated this-n-thats were winked at and overlooked–but probably carefully catalogued. Now as we enter the leanest of lean times, they will draw out their lists. They will assess and prosecute and demand every jot and tittle with penalties and interest. IRS may then recoup all lost revenue and JAM THE MAN with crushing penalties and fees. Studied oppression. Practiced confiscation.What you are seeing now is a quiet revolution. Tired of check-kiting, IOU legerdemain; the rabble and mob and suffering unwashed shore-strewn immigrant and children of immigrants are challenging the New World Order. They are defying the counter-physical trends and turns of a manipulated market. They are arraying in military-like line and preparing hard defenses. They are holding with eco-bayonet against all opposers, against every charge. Armed with the knowledge that finally "kicking the can down the road" cannot continue, they short a weakened foe. Garnering what little pittance from a gamed market to preserve against Kondrateyev’s Winter. The old order is being overturned and impoverished. Wouldn’t it be fitting to use the market mechanisms of THEIR own design against them?We’re witnessing "Battle of the Bulge" tactics. The war is over. They have lost. They know it. Short of a printing press or universal confiscations, socialization. But committed and enduring in their folly, they are throwing capital and co-minded men to plug the breach. Fill the gap with funny money. American capitalism in its final stages like its democracy will fail because the theory, while being closely perfected to bring about prosperity, cannot exist simultaneously with moral turpitude. Having gone to the dark side and serving a dark master, the high priests defiled the temple. And thereby broke the promise of protection and assistance from on high. Whitened sepulchres full of iniquity and putrification. Dying now to be absorbed by mother earth and to make way for a new generation.
@RedCreekYes you are right, and I corrected it in the previous post.And now that I know nobody is hurt:@ Guest "LOS ANGELES IS HIT BY 5.8-MAGNITUDE EARTHQUAKE"That is only the echo of falling house prices in the region hitting the first obstacle. Unless it is part of Housing Bailout Plan "Destroy forclosed houses to reduce supply". However, this frightenly reminds me of an article posted here some time ago about how the earthquake in California during the 1920′s was also a cause to the GDI.
@ GLOOMY on 2008-07-29 16:49:09And in the merrill case, ML is parking the crap somewhere else, basically swaps whatever there is left from future cash inflow on 100% of the assets for a very low interest rate on 22% of the assets, and in return gets off the hook for [22% * 25%] of the losses on the assets but remains "on" the hook for [ (22% * 75%) + (100% - 22% - previous written off amount) ] of the assets. Great deal. ML IS IN PANIC! and still the stock is up today…
@ AfaApologies, didnt see your correction. Been reading bit too fast.
Timeout now – let’s watch Cramer and have some fun! I just hear him saying that ML should have gone down today… OLE…
Cramer: "Thain (ML CEO) is the biggest over promiser and under deliverer of all times" (or so – not literally)
@OsoteThe way I interpret the deal is that for 1.675b lone star effectively got a call option with a strike of 5.025b.
MORE ON MERRILL FROM RITHOLZAn excerpt:"Actual Merrill CDO Sale: 5.47% on the Dollar• Merrill is providing 75% of the financing –- and MER’s only recourse in the event of default is to retake the CDO paper back from the buyer.• While Merrill hopes to be made whole, the reality is they still have potential exposure to these ABS CDOs via the financing;• Actual sale price = 5.47% on the dollarLess than five and half cents on the dollar? That’s an even cheaper sale than originally advertised. What this transaction actually accomplishes is getting the paper — but not the full liability — off of Merrill’s books. How very Enron-like !"http://bigpicture.typepad.com/comments/2008/07/merrill-writedo.html#comments
Ignatius / Osote – my humble interpretation if i may:Transaction value: 6.7 bnSources:Debt provided by ML: 75% of 6.7bn = 5.025 bnEquity provided by Lone Star: 25% of 6.7bn = 1.675 bnUses: Pay ML 6.7 bn to acquire 100% ownership of a pool of paper that is now valued at 22% of the original nominal amount.Going forward: – Lone Star will receive whatever cash flows generated by the assets. Theoretically this should be 22% of the originally projected cash flows. Nobody knows what the actual cash flows will be. Assuming that the market has overshot on the downside, the future cash flows on the Lone Star assets should be larger than 22% of the originally projected cash flows.- ML will receive NOT ANYMORE the cash flows generated by the assets (because they are now owned by Lone Star) but the interest payments Lone Star will make on the lone it has received from Merrill to buy the assets. NR assumes probably correctly that this interest rate is below market rate. Who knows, after deducting Merrill’s cost of funding, maybe Merrill’s net interest income on the loan is negative…RE OPTION COMPARISON:i would rather think that lone star bought a call option for 1.675 bn to acquire the future cash flows of the assets. the net present value of those future cash flows should theoretically be [6.7 bn - 1.675 bn = 5.025 bn].In reality, if markets recover somewhat, the Net present value of those assets could be anywhere between 6.7 bn and the original face value of 30 bn. So Lone Star effectively bought an "american style" call option for a 1.675bn premium with exercise price being whatever the assets are worth at the moment of exercise and lone star’s profits being the [asset sale price - 1.67bn - outstanding amount of the merrill loan].plse correct me if i am wrong – it is getting late in london.
FRAUD?As Ritholtz said, Merrill’s action seems Enron like. Enron’s actions were fradulent. Are Merrill’s?
@ Gloomy: "FRAUD?"Are you serious asking this question?5.5 cents on a dollar is what I got too, however, and to be fair this is only in the event these CDO’s prove to be completely worthless ($0.00).We can see that, if we assume that MER had any bargaining power (against itself, that is) by providing 75% financing and giving up any future benefits from CDO revaluation (one can always dream), it seems it is expecting an immediate and effective mark-to-market value of 16.50 cents on a dollar (or that the value of these CDO’s to drop by 25% or less). Therefore, we can say that MER is expecting the value of these CDO’s somewhere between 5.5 and 16.5 cents on a dollar (the average being 11 cents somewhat matching the writedown by NAB)On the other hand, my little finger is telling me that Covered Bonds fit in somewhere. Instead of this kind of highly dilutive, balance-sheet shrinking and onerous operations as executed by MER today, a covered bond would help banks expand their liabilities and balance sheets.I am asking more knowledgeable people here, wouldn’t it possible, with covered bonds, to put only 20% "down payment" on this "assets" and create bonds that it can sell to Lone Star or any other arm-length entities or swap’em against treasuries using Fed’s window? Investors will be on the hook for the remaining 80% (I know that the holders of these bonds are Super senior, but what if these assets are worth less). The question of course is one of traceability and demand for these bonds. Covered bonds were designed in Europe to increase visibility and transparency. However, given Wall Street’s heartfaintness and heartweakness for darkness and opaqueness I am afraid the Bonds’ reputation will be tarnished around the world.
And You ThoughtYou Could Quit Worrying About Freddie and Fannie For Now — from Naked Capitalismhttp://www.nakedcapitalism.com/2008/07/and-you-thought-you-could-quit-worrying.htmlJuly 29, 2008 — It would be nice if Fannie and Freddie would have the good taste to stay out of the spotlight, particularly since bad news is a sign of higher odds that Things Are Not Going Well, Especially for Bagholders Taxpayers.However, it looks like we may not be so lucky. Bloomberg’s Jonathan Weil did some digging into the GSE’s reports, and they are even less pretty than we thought. Remember Poole’s remark that Freddie is "technically insolvent’? That view is based on a reading of the GSE’s "fair value" report (the comparable figure for Fannie as of March 31 is a not very encouraging $12.2 billion). The GSEs of course maintain that these reports are irrelevant and misleading, yet that methodology is more comparable to the published financials of banks and investment banks than the presentation more commonly used.Weil tells us even those reports are overly rosy. From Bloomberg:Forget everything you’ve read about how woefully undercapitalized Fannie Mae and Freddie Mac are. The situation is much worse.Unlike other companies, the two government-chartered mortgage financiers publish quarterly fair-value balance sheets showing what the real-world values of their assets and liabilities supposedly are. By this measure, both companies’ net- asset values are much lower than what the government lets them show as capital, or what the accounting rules let them report as shareholder equity.The companies’ critics for years have pointed to the gaps between these figures as proof that the government’s capital requirements are a joke. What I hadn’t realized, until an astute reader tipped me off, is that the fair-value balance sheets overstate the companies’ asset values, too.The issue centers on the way Fannie and Freddie calculate their fair values for deferred-tax assets, which is really just a fancy term for deferred losses. If you believe the companies’ numbers, the more money they lose, the more their deferred taxes are worth.Deferred-tax assets consist of tax-deductible losses and expenses carried forward from prior periods, which companies can use to offset future tax bills. Under generally accepted accounting principles, they are valuable only to companies that are profitable and paying income taxes. To the extent a company doesn’t expect to have enough profits to use them, it’s supposed to record a valuation allowance on its GAAP balance sheet.Fannie and Freddie so far have recorded no such allowances. The two companies, of course, are so profitable right now that they’re on the verge of a government bailout.By the government’s main capital measure, Fannie had “core capital” of $42.7 billion on March 31, or $5.1 billion more than required, while Freddie had $38.3 billion, or a $6 billion surplus. Meanwhile, on a fair-value basis, Fannie said its net assets were worth $12.2 billion, while Freddie showed negative $5.2 billion.One reason the core-capital figures are so much higher is that the government lets Fannie and Freddie exclude tens of billions of dollars of pent-up losses on mortgage-related securities they’re holding for sale, solely because the companies have deemed the losses “temporary.”Another reason is that core capital includes deferred-tax assets. Commercial banks, by comparison, normally don’t get to count these in their capital, because they can’t be sold by themselves and, thus, can’t be used as a cushion against losses….Start with Fannie. As of March 31, it showed $17.8 billion of net deferred-tax assets on its GAAP balance sheet.Fannie’s fair-value balance sheet doesn’t show a separate line for deferred taxes. Instead, Fannie included them in an item called “other assets,” to which it assigned a GAAP carrying value of $45.5 billion and a fair value of $60.7 billion.Using the methodology described in Fannie’s footnotes, I was able to estimate that about $14.3 billion of that $15.2 billion differential came from adjustments to the company’s deferred-tax assets…Without that $14.3 billion of tax adjustments, the fair value of Fannie’s net assets would have been negative $2.1 billion, by my math. Exclude deferred-tax assets entirely, and it would have been negative $19.9 billion as of March 31. (Fannie raised $7.4 billion of additional capital in May.)As for Freddie, it showed $16.6 billion of net deferred-tax assets under GAAP as of March 31. Like Fannie, it put deferred taxes in “other assets” on its fair-value balance sheet.Freddie said its other assets had a GAAP carrying value of $31.6 billion and a $42.5 billion fair value. By my calculations, using the methodology in Freddie’s footnotes, it looks like Freddie wrote up the deferred-tax assets on its fair-value balance sheet by about $10.1 billion.So, take out the tax write-up, and Freddie’s net assets had a fair value of negative $15.3 billion. Exclude deferred-tax assets entirely, and that falls to negative $31.9 billion….In its latest quarterly report, Fannie said “we anticipate that it is more likely than not that our results of future operations will generate sufficient taxable income to allow us to realize our deferred tax assets.” Hence, no valuation allowance.Freddie gave a similar explanation in its July 18 registration statement with the Securities and Exchange Commission. The company also cautioned that “if future events differ from current forecasts, a valuation allowance may need to be established which could have a material adverse effect on our results of operations and capital position.”…Brace yourselves, taxpayers. Uncle Sam soon may have to write a very large check.
Professor and/or anyone else interested in responding:"…So the street is now arguing that 22 cents on the dollar sets a market benchmark for writing down CDOs (Cit is still carrying them at a value of 53 cents rather than the 22) and many other firms will now have to use this benchmark; but the reality is that this toxic garbage is worth much less than 22 cents…"1)If $0.22 is going to be the benchmark for industry-wide firm writedowns, what implications does this benchmark valuation have for the $29 billion of Bear Stearns toxic assets on the FED’s balance sheet ?2)Had Bear Stearns been left to its own demise, would a bankruptcy court Judge have arrived at $0.22 for the valuation of toxic assets, and would that valuation have been the benchmark for future writedowns??
@AfAYes, I mean fraud. That is if you are representing that you have sold assets, but it is really just a shell game as you still have the liability and you have funded the sale, doesn’t this seem like accounting fraud?
@ Gloomy:) I know. I mean you sound "surprised" or not really sure asking the question. The Fraud stinks thousands of miles away, although with all used TP stinks around, one’s senses get blurred and it is difficult to say exactly how many variations, who strong and where all the stinking comes from.Even my country-side uncle told me "it doesn’t smell good ’round here"
Professor:Do you have any information to confirm that Investment Banks that have been borrowing from the FED have been using that money to go long on oil and thus help drive up the cost? Looks like they are starting to take profits.
i overheard people wanna see a chart that shows movement/trend similar to (during/before/after) GD,well here it is— debt vs DDP –the chart is up to March, well before fannie/freddie’s fracasenjoy, try beating that JLC.. http://bp3.blogger.com/_rWY3qGfe6gc/SI1dtCRoXGI/AAAAAAAAA5o/FCp7-0EiyKI/s1600-h/Picture+1.png
Debt VS GDPdduuuhh
Can someone tell me why Merrills CDO’s are worth so little. From what I read there are underlying assets in all these CDO’s how can they be worth almost nothing. Has the assets fallen that much or were they over inflated to begin with. A little help please…
“What Our Officials Most Fear,” writes Michael S. Rozeff on LewRockwell.com today, is fear itself, fear of the public’s loss of confidence – in the dollar, the bankers and officials themselves, the financial and monetary system, and the government at a whole. It is a fine piece. Here are some short takes: Our officials are worried about a loss in confidence, and they are trying to stem it by shoring up institutions like Fannie Mae. The loss in confidence is coming from one basic source, which is the banking system’s over issue of fiduciary media. This has had the effects of a large volume of bad loans and asset price bubbles. It may lead into the further effect of a flight into real-valued assets.The damage to bank assets is system-wide. If the lion’s share of the banks and other lenders have made bad loans or made loans that have gone bad, then the amounts become unmanageably large for taxpayers and their government to handle. There is, in fact, no action that government can devise that will not make the situation worse. Bailouts are bad. Nationalization is bad. Inflation is bad.A loss in confidence in the system is justified because the system is faulty to begin with.There is nothing for it but to end legal tender laws and go to fully free markets in banking and money. There is no need to legislate that gold, silver, or anything else serve as money. People acting in free markets can decide that on their own. The answer is free banking…Michael S. Rozeff is a retired Professor of Finance living in East Amherst, New York.http://www.lewrockwell.com/rozeff/rozeff212.html
@GloomyYou’re right, if you claim to have sold assets but retain the risk of ownership, that’s a crime. Remember Enron and the barges they "sold"?But the purpose of Enron and the slaughter of energy companies was to allow the banks to buy them cheap. The government was helping. Now the banks, whom the government is trying to help, are caught playing the same games. Hm, let’s see if the full force of the law is brought to bear.Some state attorney general, at great personal risk, could be a real hero here by pursuing these prosecutions. Not sure I’d have the guts if I were a state attorney general.
Covered bonds, another toxic waste scheme by paulson and helicopter Ben? when will they ever stop?
You all are right and wrong. The system is rigged and you can not outright beat them. The government is comprised of duplicitous liars working with special interests, it is called social fascism. Most in this once great country are too busy trying to pay bills to even comprehend the level of malfeasance that exists within the government. Think about it this way, your government is willing to burn women and children alive, thousands of miles away to allegedly protect your freedom while the government’s friends and family makes 100s of billions in war profits. You can not stop them but you can still beat them, short the dollar and play the bounces.
@anon-Not sure I’d have the guts if I were a state attorney general.Harvey Dent got guts,look what happened to himand that is in comic booksanyway somebody here posted"the world is vampire, set to drain.." smashing pumpkins maaan cant believe someone from the grunge era is heerei think pearl jam "black" suits the mood right nowRocckk oN -hip hop is dead-(in times of depression who the heck will put on bling,bling)
"Chain store sales were reported by the International Council of Shopping Centers to have surged last week"And? Sales don’t equal profits. In my area there is heavy advertising and deep discounting. Summer Clearance 75% Off! New Fall Fashions 40% Off! Save and extra 15% with store coupon! And Back To School sales should be starting to show up. I read that for big clothing retailers BTS is second only to Christmas.
Look what happened to Elliot Spitzer. Look what happened to the FBI and SEC files in WTC7 (the one that imploded into its own footprint hours later without being hit or being on fire). It will be a very brave public servant that goes up against TPTB running the show.
Yes, Nouriel, the whole thing stinks. What even stinks more is the fact that MER rallied today on this deal! Rallied. Smells to high heaven it does.
uuhhh US won the cold war.. right??, No??statement of intent??http://www.globalresearch.ca/index.php?context=va&aid=9704U.S. is on brink of survival crisis, according to MoscowGlobal Research, July 29, 2008 Inferfax: MOSCOW. July 29 (Interfax) – Moscow thinks that the United States could face a serious domestic crisis in the near future. "The U.S. is on the brink of a mass crisis of surviving," a source with the Russian Foreign Ministry told journalists on Tuesday. "The U.S. is on the track of drastic and painful changes," he said. "At first, they have to learn to live within their means," the diplomat added. Speaking about relations between Moscow and Washington, the source said that less interdependency in Russian-U.S. relations would be useful."We can in the future reach the moment when we will be able to stop discussing only the issues the U.S. side is interested in," he said. "We are not enemies with the U.S., and unfortunately we are still not friends, but we are depending on each other less and less," the diplomat said.
@ Guest on 2008-07-29 21:10:21Interesting chart on total debt to GDP in that it shows debt continuing to expand strongly post-1929 markets collapse and well into mid-1930s, probably driven by the same government efforts to shore up aligned Wall Street interests under Hoover.Even more interesting to reflect on the historical political parallels. The Wall Street plot to overthrow FDR in a fascist coup in 1934 only failed when betrayed by General Smedley Butler to the House UnAmerican Activities Committee. He had previously reported it to the Treasury and Secret Service, but they had declined to investigate any of the principals – a Who’s Who of American banking and business which included Prescott Bush (later indicted for financing and fronting for the Nazis but even later cleared to become a powerful Senator who shaped the CIA his son later ran before that son and a grandson became presidents). The fascist government, including a paramilitary transition phase, would have been in planning and development while debt was still expanding.http://coat.ncf.ca/our_magazine/links/53/butler03-by_schmidt.htmlThe link above is full of historical goodies from General Butler, including revelations of a "Gold Cabal" on Wall Street, but I like the following excerpt:The 1937 sinking of a US gunboat on the Yangtze in company with three Standard Oil tankers was proof that American forces were posted where they had no business being: "Why don’t those damned oil companies fly their own flags on their personal property- maybe a flag with a gas pump on it." Marines, soldiers, and gunboats in China should all be brought home. "United States citizens should get the hell out of China and stay out. … let the financial interests who are crying over there run up their own flags and fight their own baffles." The United States must abandon the Philippines, Hawaii, Alaska, and Puerto Rico, to which he now added the Panama Canal, rather than war for them.
Stratfor is reporting that they feel that China is a "Government in Crisis".I agree. Ho humPeterJB
On non recourse financed asset sales:If you sell an asset but finance non recourse you have bought a PUT at the sale price and sold a PUT at the LTV. The amount of protection you have bought is then dependant on how much you have paid for that PUT spread. Which in turn is a function of the finance rate and the asset yield.Take an example where you finance at L+150 bp.Since the CDO SS asset will be yielding something in the region of L+2250 at a price of 22, its possible to estimate the upfront risky PV paid for the PUT spread by comparing the two yields of the financing. The amount of premium paid in PV terms relative to the strike differential of the PUT spread will tell you how much risk was really removed.If the PV of the risky premium flows is the same or greather than the PUT spread, MER would have actually increased its risk.The devil will be in the detail.
I can’t beleieve the ADP jobs number at +9K jobs!!!!! June’s Avg weekly jobless claims were running 6% above May’s average and 17% above January’s number and they are looking for jobs GROWTH???? This is just criminal!! But hey, that number shoudl be worth another couple hundred dow points today-frigging FRAUD!!!
08:57 am : S&P futures vs fair value: +5.0. Nasdaq futures vs fair value: +5.2. Futures climb higher. The Fed is extending its Term Securities Lending Facility program through Jan. 30 and is introducing longer terms to maturity in its Term Auction Facility. The facilities were implemented to improve liquidity during the recent credit market turmoil. The Fed’s move comes "in light of continued fragile" markets.
They are just making sure that in the end the US and world economy will be worse than it would otherwise have been.
"Those plans include raising $27 billion by selling a new 10-year note and a new 30-year bond at the regularly scheduled quarterly auctions to be held next week. The government needs to borrow $171 billion during the current July-September quarter, the second highest quarterly borrowing total on record."record deficit and record borrowing and record monetary pumping. and 10 and 30 years yield still hoovering around 4%? this is nuts. never heard serious slowdown in lowest interest rate time.
Ban on so-called naked shorting in Fannie, Freddie and other high-profile financials is extended through Aug. 12.
Nouriel, This is one of your very bests. Congratulations
who the %&*$ is buying all this US worthless debt??? IDIOTS!!!!!!!
WOHOOOOOO!!! Positive job growth, positive GDP, positive stocks…why the hell is everyone so gloomy???? WOHOOOOOOOO!!! Go spend 10X’s more than you make, party, party,party….ALL IS WELL, CAN"T YOU SEE THAT!!
lovely bears,I have told you it is just a matter of money…
Ha ha ha ha ha ha ha!!!APGovernment announces plans to borrow $27 billionWednesday July 30, 9:37 am ET By Martin Crutsinger, AP Economics Writer Bush plans $27 billion in borrowing next week as part of effort to handle soaring deficits WASHINGTON (AP) — The Bush administration gave details Wednesday on how it plans to borrow the billions of dollars it will need to cope with the soaring budget deficits.Those plans include raising $27 billion by selling a new 10-year note and a new 30-year bond at the regularly scheduled quarterly auctions to be held next week. The government needs to borrow $171 billion during the current July-September quarter, the second highest quarterly borrowing total on record.The increased borrowing needs reflect the exploding federal budget deficit which is projected to more than double in size this year and to hit an all-time high of $482 billion in the 2009 budget year.The administration released the new deficit forecasts on Monday. It blamed the surge on the sagging economy and the effort to keep the country from falling into a deep recession by mailing out 130 million economic stimulus payments.
Looks like JEffrey Rosenberg is reading this blog. He has changed his views. I say BOA should pay a bonus to the Professor.http://www.bloomberg.com/apps/news?pid=20601087&sid=aLLivAgM7KDM&refer=homeA drop in the value of the CDOs by about a further 5 cents would wipe out the equity from Lone Star and “leave Merrill back on the hook for the exposure,” said the analysts, led by Jeffrey Rosenberg in New York. Lone Star bought “the upside of the underlying subprime assets in the CDO pools” while Merrill retained “most of the downside,” they wrote.
Dow going up 300 points today-looks like this was a suckers selloff, and the this rally is the real deal.
The jobs numbe on Friday SHOULD show a loss of over 100K jobs-if it comes out poistive, I am filing a lawsuit against the Bureau of Labor Statistics for fraud…
"Zimbabwe will drop 10 zeros from its hyper-inflated currency — turning 10 billion dollars into one "http://news.yahoo.com/s/ap/20080730/ap_on_re_af/zimbabwewhat???? this move is just nut. may be helicopter Ben and Treasury Paulson are thinking about the same. Lets inflate dollar supply and start add zero. and then at some later time, lets drop all zero and turn 10 billion dollars into one!!! wooo HOO sinister plan.
My research shows that July is the worst performing new jobs month. There is NO WAY ADP’s estimate can be right.
10 billion Zimbabwe dollar is worthless. are USA dollars and dollar denominated debt (Treasury Note or Bond, or mortgage bond) heading same direction as dollars become worthless from oversupply? this is nut, printing dollars and issuing more debts are just not a right direction, USA is doomed.
is this the proper way to fight credit crunch? guess moral hazard really doesn’t matter to helicopter Ben and Treasury Paulson. everything to keep stock market rally. issue more public debt and pump more money into risky bet. woo HOOOO!!!!http://biz.yahoo.com/ap/080730/fed_credit_crunch.html"The Fed said it was taking these steps "in light of continued fragile circumstances in financial markets." The Fed said that the emergency borrowing program for investment houses and the program that lets investment firms temporarily borrow Treasury securities would be withdrawn should the Fed determine that conditions in financial markets are "no longer unusual and exigent"
Would anyone have a comment on this…$625,000 house on a street wrecked by subprime loans?http://www.ocregister.com/articles/camile-house-mortgage-2104411-fargo-wellsPrices are plunging on Santa Ana’s Camile St. But a few troubling exceptions are emerging.It seems like a rare bright spot in a dark real estate market.A year ago, the house at 920 W. Camile St. in Santa Ana was bank-owned, deserted and tagged with gang graffiti, a symbol of how the subprime lending bonanza had blighted a city block.In October, the house sold at auction for $304,500, little more than half what a buyer using 100-percent subprime financing paid in 2006.Today, 920 W. Camile has been renovated, repainted and floored with faux marble. It resold in January for $625,000, according to county records – a $125,000 down payment and a $500,000 mortgage from Wells Fargo Bank.The owners and residents are Mario and Paula Gomez, both garment workers at St. John Knits in Irvine and parents of three sons. The Gomezes also own 922 W. Camile, a home they bought in a 1998 foreclosure sale for $109,600. They are now landlords, and have staked their financial faith and future on Camile Street."We wanted a place with three bedrooms," Mario Gomez, 48, said in Spanish.But why would the price of a troubled property on a blighted street double between October and January?At a time when America’s biggest financial institutions are reporting billions of dollars in losses from bad bets on risky mortgages, why would a blue-chip bank like Wells Fargo extend so much credit on a street where comparable homes are selling for $300,000?"It suggests to me that not all the problems have been wrung out of the mortgage market today," said Paul Leonard, director of the Center for Responsible Lending in Oakland, a watchdog group. "You would expect an institution like that to have systems in place to look out for those kinds of deals."……Rafael Zambrano, owner of 930 W. Camile since 1988, is a rare optimist. He used his accumulated equity to take out a $334,000 second mortgage with Wachovia last September, money he used to buy a retirement home in Arizona."A lot of people are losing their house because they take the money to buy a new car or go on a vacation," said Zambrano, a father of four and owner of a restaurant in Orange. "My plan is different. I wait till one house is almost finished paying off and I get equity and buy another."’No money, no problem’Zambrano built up his equity over 20 years. That’s what makes the Gomezes’ house such a red flag. How could a property in such a distressed neighborhood, at a time of tight credit and falling real estate prices, double in value in a few months?People involved in the transaction denied personal wrongdoing while raising questions about the conduct of others in the chain that stretches through the seller, appraiser, broker, escrow officer, banker and buyer.……What is actually interesting are the comments at the end of the article. One of the says:Great article John!!! You may have brought something to the attention of the country’s tax payers of grave importance. Great responses too. Those of you guessing that Wells Fargo did this to set up saddling Fannie/Freddie with over-appraised foreclosure workouts are spot on IMHO. If banks do a few of these kinds of bogus sales in towns/nieghborhoods then they can create artificially high comps, comps which are a stumbling block to passing the garbage onto Fannie (we tax payers). Maybe the Fed is party to this? Anyone who has been hoping for affordable housing needs to get involved in stopping this. Take just a few minutes and send a quick note to your Representatives in Government here:http://capwiz.com/ascd/dbq/officials/Let them know we want this stopped and Wells should be investigated.Another one writes:This story is just unbelievable! Too much to write in a comment, so I’ve posted on it on my blog… just crazy! John, please keep us updated on this one.http://blog.redfin.com/orangecounty/2008/07/whose_got_the_lower_iq_wells_fargo_or_these_And a third one:The scam goes on, this kind of real estate deal has been done in the last few years in OC and LA counties.Read the newspapers in the Vietnamese or Chinese communities about the ads to look for someone with a good credit history to be a buyer in RE transaction. The advertiser is willing to pay 20K per house, and it will be done with Countrywide Mortgage. Now CFC has gone down with Bank of American acquisition, hence, someone at Wells Fargo is cooking the deals.No wonder US is in the mess of the sub-prime, and everything goes down. So far, the foreigners who bought the mortgage-backed bonds have been burned.Next, it will be Wells Fargo Bank!
10:46 a.m. Sealed Air takes profit hit, will cut 5% of work force
I know one business right-wing nutjob associate who calls credit card payments his "honey hole." So it just goes to show that in times of financial stress, even TPTB will eat their young.Credit Card Transactions to be Reported to the IRS – in Foreclose Prevention Act of 2008 – Posted (db) in General on July-24-2008 – In the House Amendments to the Senate Amendment to H.R. 3221 – Foreclosure Prevention Act of 2008Payment Card and Third Party Network Information Reporting.The proposal requires information reporting on payment card and third party network transactions. Payment settlement entities, including merchant acquiring banks and third party settlement organizations, or third party payment facilitators acting on their behalf, will be required to report the annual gross amount of reportable transactions to the IRS and to the participating payee. Reportable transactions include any payment card transaction and any third party network transaction.Participating payees include persons who accept a payment card as payment and third party networks who accept payment from a third party settlement organization in settlement of transactions. A payment card means any card issued pursuant to an agreement or arrangement whichprovides for standards and mechanisms for settling the transactions. Use of an account number or other indicia associated with a payment card will be treated in the same manner as a payment card. A deminimis exception for transactions of $10,000 or less and 200 transactions or less applies to payments by third party settlement organizations. The proposal applies to returns for calendar years beginning after December 31, 2010. Back-up withholding provisions apply to amounts paid after December 31, 2011. This proposal is estimated to raise $9.802 billion over ten years.See Page 11 and 12 here:http://www.paymentsystemsblog.com/2008/07/24/credit-card-transactions-to-be-reported-to-the-irs-in-foreclose-prevention-act-of-2008/
AND BUSH JUST SIGNED THE HOUSING BILL: THE DAGGER IN THE DYING PATIENT’S HEARTRather than blog on and on with supporting rationale for my title, here’s a great URL to read that sums it the mess we’re in all up:http://www.oftwominds.com/blogjuly08/empire-debt7-08.htmlA great opinion blog the above URL is, but I disagree or would clarify with one fundamental flaw [in my opinion] it states in part:"….4. pension and entitlement programs designed for 10 workers for every retiree are now facing 3-to-1 or even lower worker-retiree ratios…."The thirst for more pension growth [recent American overpopulation growth since 1990, i.e.] has made it far worse and in my opinion [excluding the preditory lenders] is the root cause for the credit crisis housing panic demand to "buy too much now, before its too late" we’re experiencing today. The article clearly excludes this root cause explanation.Kudos for it on this excerpt:"….6. stagnant/declining wages and rising unemployment are the inevitable result of reduced borrowing/spending by consumers and government alike…."The American addiction to continuous population growth to mysteriously prop up future pensions is a pipe dream. Our wages collapse faster and as more bailout debt is incurred with world recession banks tightening credit in unison, I predict $100K average priced homes in America needing 30 year fixed 20% down and a minimum $100K household incomes [with no debt] to qualfy soon at a theater near you soon, if uncontrolled growth [overpopulation] continues on the reckless path it’s been on since 1990.Correct me, if you think I’m wrong.
GLOOMY on 2008-07-29 16:49:09MYSTERY SOLVEDNR wondered where banks would get the capital they needed and he speculated it might come from SWF’s. Now Merrill has provided the real answer to this conundrum. Financial companies will just loan themselves the money. It’s really quite simple, isn’t it?Of course! Just as they can supposedly add numbers to their accounting books when lending money to customers (according to e.g. the book "Web of Debt: The Shocking Truth About Our Money System…").In fact it would be surprising if they did not simply add numbers to their own books and then use these to lend to themselves. Of course you need an amount of money (or credit somewhere) in order to play this sort of a game, and it is risky. But then again, if you are big enough, the government might just soften your landing.But in other words it is not just the Fed that is inflating the money supply. It is the U.S. financial institutions themselves. All because of a desire for profits that they could not otherwise have…i.e. greed?Unless I am wrong with what I am writing here, USA looks like a system that is destroying its own self.
Geee, go figure, more wall thief fraud…NAAAAAAHHHHHHH!11:03 a.m. E-Trade neither admits nor denies charges in settlement11:03 a.m. SEC says E-Trade failed to document some practices
Money laundering on wall thief??? NAAAAHHHHHHH!11:03 a.m. SEC orders E-Trade to comply with anti-money laundering rule
Guest, the BLS number should be alot worse because of the Birth/Death Adjustment model. I am not sure how ADP does it.
Okay, three camps are forming 1. Global Stagflation 2. Inflationary Recession leading to Hyperinflationary depression and 3. Debt-deflation (stable or unstable). Lets explore 3: We certainly have over indebtedness, some distressed selling housing and MER cdos, a credit crunch preventing taking on more debt or buying assets. But its the Price of assets rather than the quanitity of money (Austrians)that drives deflation. We have not (yet) witnessed a broad (enough)distressed selling of assets that would truly define a debt deflation. However, if interest rates were to rise, affecting recasting of existing debt, then this would be the deflationary event that would cause people to sell assets to payoff debt, lowering asset prices in a negative feed back loop. And that is why the Fed will be on the side line for some time. Can someone elaborate more on the probability between 1, 2 and 3. All i know is as a consumer i am spent out and trying to buy needs instead of wants.Like this comment? [yes] [no] (Score: 0 by 0)
There is an inordinate amount of time spent here discussing how this or that financial institution is doing this or that to try and trick the public and each other. All these antics are humorous and futile in the big picture because under the hood, Joe Public has his name on all the guarantees. This is all based on Dick, Joe, Jane and Sue paying increased taxes along with the debts they took on themselves which they ultimately couldn’t afford along with paying increased costs because corporations took on huge amounts of debt that went to maintain illusionary stock prices and executive pay and privilege. The upside of monetary inflation is wonderful for most participants. It is the consequences that no one likes. The more monetary inflation, the bigger the consequences. Boy are we in trouble!This cycle is ending because Dick, Joe, Jane and Sue are all being squeezed harder each day with declining assets, rising prices due to all the previous monetary expansion and now lower incomes on average due to lost jobs and lower incomes from a reduced velocity of money or deflation because there has been a huge reduction of credit creation to Dick, Joe, Jane and Sue. Deflation where it counts, at ground Zero, for those ultimately responsible to pay. Dick, Joe, Jane and Sue are the engine and everything depends on them (us). Those at the top are so disconnected to this simple fact. They didn’t forget, they just never realized the significance or importance of “We the People”! They are so disconnected, they have always believed it is them. They are the ones. The only ones. The ones that deserve. Except they aren’t ultimately the ones. It is all the people who have families and went on vacations and bought vehicles and washer and dryers and …….. Not them! The equation worked on the upside, when Dick, Joe, Jane and Sue could pretend that they could make the payments or hoped they could make the payments, but they really didn’t realize or understand that the government and many large corporations were on the same merry-go-round of increasing debts with their corresponding increases in servicing costs too. Now that we have passed Zero Hour, where income from any and all sources is insufficient to maintain our standard of living and service the debts, the opposite side of inflationary monetary policies have taken hold. There really is NOTHING that the big institutions can do to save themselves. All they can do is try and postpone the inevitable. I will be surprised if they all don’t go down as this most recent “Golden Age of Glitter” has been extremely egregious. Arrogance, indifference to their fellow man, obfuscation and selfishness were all taken to extremes. My advice to the CEO’s is to take what you can and retire because of family obligations and get as far away from the mess you created as you can. The cycle has turned against you and there is NO Way to prevent gravity from reasserting itself. The laws of natural events has taken over. As to where we are in this mess, the majority are still in denial. We have a ways to go to get to fear I think. That might come if and when this year’s harvest is less than a record and we find out we have even sold off our own food supply as a means of maintaining the illusion of prosperity and power.
Thanks Nouriel! Great analysis and exposition.Ryan Darwish
"No way and one would have to assume that the true market value of this garbage is closer to zero than 22 cents"The buyer obviously values them at greater the 16.5 cents (22 minus 5.5), because anything less, even with the cheap financing will generate a loss.
@Guest: “Would anyone have a comment on this… At a time when America’s biggest financial institutions are reporting billions of dollars in losses from bad bets on risky mortgages, why would a blue-chip bank like Wells Fargo extend so much credit on a street where comparable homes are selling for $300,000?”You can compare this to Katrina. When the federal government decides to do rescue, what it really does is to use the victims as the excuse to transfer money to its friends. It doesn’t matter whether these victims are like some of the New Orleans people who were hit in the hurricane and ended up staying in hotels and spending luxuriously because it was “fed money” or whether they are “housing victims” who ended up buying two and three houses without much down and at high risk of default.It doesn’t matter because the real path of the money goes from the federal treasury, right through these victims, to the government’s friends. In other words, the Gomezes got an overly-priced $625,000 house with doubtful value on a blighted street and at high risk based on garment workers’ salaries, but the real winner here was Wells Fargo. It was Wells Fargo that came out before with subprime. And now it can start again.And why write to “your” congresspersons? Didn’t they just dun you for Goldman’s and Wells’ and Merrill’s and Lehman Brothers’ and Freddie’s and Fannie’s past graft? Save your breath, Taxpayer: it’s your job to bail.
http://www.guardian.co.uk/business/feedarticle/7689278FASB votes to delay off-balance sheet rule change
curious on 2008-07-30 10:10:09 – Okay, three camps are forming 1. Global Stagflation 2. Inflationary Recession leading to Hyperinflationary depression and 3. Debt-deflation (stable or unstable).I do not see a decoupling from the ROTW, but rather a lag with the US going into stagflation first and the rest following us. I understand deflation, but I cannot see it on the horizon. Here is a nice summary of what we are facing [the emphasis is mine]…JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS – FLASH UPDATE – July 30, 2008 – Systemic Instability ContinuesLarge price swings with high volatility have been seen in recent weeks for oil and gold prices, as well as for the U.S. dollar and domestic equities. It is not likely that we have seen the near-term high in oil prices, and neither has gold topped nor the dollar bottomed. All factors considered, the broad outlook remains the same: further intensification of the inflationary recession and a deepening systemic and banking solvency crisis. Near-term market recognition of the issues and risks for unstable market conditions are intensifying, albeit erratically.Over the shorter term, negative major market displacements likely will follow or be accompanied by intense, broad selling of the U.S. dollar. An increasing flight-to-safety outside of the U.S. dollar also should include flight-to-safety into gold. Despite the ongoing volatility in oil prices, current levels remain highly inflationary. The gold and currency markets also remain subject to extreme near-term volatility, jawboning and both covert and overt central bank intervention. Over the longer term, U.S. equities, bonds and the greenback should suffer terribly, while gold and silver prices should boom.http://www.shadowstats.com/article/332
instead of killing somoen and printing money, what is the major function of the us government?who can tell me?
thanks ptm. I did consider Mr. Williams’ paper before posting, as well as summaries of Fisher and Minsky. My interim conclusion is that the Fed cannot raise rates, because that would spark a more widespread asset sale (securities) further exacerbating deflationary pressures. But the Fed can lower rates further if need be. Any thoughts on lower rates?
Great article for all of you "Bush lied, people died" kooks…..http://www.commentarymagazine.com/viewarticle.cfm/why-iraq-was-inevitable-11456
curious on 2008-07-30 12:07:25 – Any thoughts on lower rates?I think the Federal Reserve has tipped scale and entered the "liquidity trap." [http://en.wikipedia.org/wiki/Liquidity_trap] So lowering interest rates will not have the intended effect, but rather simply add to inflationary pressure.
ptm on 2008-07-30 11:59:08What is being missed in the analysis is where the money is going. Sure they are still creating it and that creation and past creations affects gold, oil and food but the guy on the street is the one who is responsible for the entire debts created and they are already underwater so to speak. So it doesn’t matter in the long run that there is still additional debt created because the existing debts already can’t be serviced. Denial! And obfuscation are what is happening, not anything that will affect the outcome which is deflation. Hyperinflation won’t work unless they get the money in the hands of the population and what they are doing diminishes that flow. Less money to fund programs both federal and state and less money being lent because the ability to repay is also diminishing along with the basic asset used to create all this, the American Dream > the HOME!
@Guest: “The Fed said it was taking these steps ‘in light of continued fragile circumstances in financial markets’… that the emergency borrowing program for investment houses and the program that lets investment firms temporarily borrow Treasury securities would be withdrawn should the Fed determine that conditions in financial markets are "no longer unusual and exigent"When Bernanke says he’s not as worried about bank failures now as he is that credit is tight and people can’t get credit, translate that into: I’m not so worried about the economy as I am that my friends can’t get as much flow of the money as they have been getting.When government officials begin saying they need to open the faucets for credit what they’re really saying is the Fed’s unbilically attached investors need greater and more high-volume access to the U.S. Treasury.The Dow is not the economy. The economy is not something you push up. It has to grow itself. Hank and Paulson can’t do that, but they can help their friends fleece people. And that’s exactly what they’re doing – while Congress holds down the opposition.
If you want to get money into peoples hands who will spend it, cut payroll taxes.The best way to do that is cut the rate on the lowest tax bracket and increase it on the highest, and to abandon the cap on Social Security Taxes and lower the percentage accordingly. At the local level school taxes and (here in NY) Medicaid are the largest percentages. Consolidating school districts and eliminating administrative overhead in schools may help. Medical costs can be brought under control with a national single payer system that can negotiate for pharmaceutical prices. But none of this will help the wealthy and connected. Do you really think anything is going to change? I don’tI just think the wealthy and powerful are locking the doors to steerage and sneaking to the lifeboats
A must watch video-enjoy the laughs!http://bigpicture.typepad.com/
Jason, it will never change because the Americna people don’t force the change. They believe the political rhetoric that is the election and once officials are elected, words are soon forgoten. I see a day once again, sooner than most realize, where protest and violence will be the only message heard and responded to by US politicians and lawmakers…
Setbacks at Ground ZeroBy Poonkulali ThangaveluJul 24, 2008 4:48 PMThe rebuilding of Ground Zero has met with setbacks, from building delays to losing a major tenant. Indeed, brokerage giant Merrill Lynch recently ended discussions to take up space at Tower 3. The financial services company occupies roughly 2.5 million sq. ft. of space at its current downtown location. A Merrill Lynch spokeswoman said that the financial services company has a lease running up to 2013 at its current site and is reviewing options. On the other side, Janno Lieber, president of Silverstein Properties affiliate World Trade Center Properties, said, “We wish Merrill Lynch great success and hope they decide to keep their headquarters in lower Manhattan, their historic home, for many years.” http://nreionline.com/news/setbacks_ground_zero_0724/
Written by Anonymous on 2008-07-30 11:01:47"The buyer obviously values them at greater the 16.5 cents (22 minus 5.5), because anything less, even with the cheap financing will generate a loss."That if you assume the buyer is truly an independent investor not an arm-length entity. Lehman did it a couple of months ago. And now it’s Merrill’s turn. MER is only trying to embellish their books while trying to price the CDOs as high as possible (22% reported or the 16.5% you said) because otherwise it would have nefarious consequences on MER et al.But even if you consider it is a sale, MER would not have been motivated to arrange for the sale if it thought the price of the CDO’s is any where higher than 16.5% (if the value of the CDO’s prove to be totally worthless ($0), MER would have sold them at a "profit" of 5.5 cents on a dollar)
US fraud markets off and running again.
You wanna seeanother ream job to the US citizens by the idiots who run this country?!!! You must go to http://www.marketwatch.com and read "Beware the tax devils in Congress’ details". Then call your senator or congressman and tell them to "F" off!!!
ML maintaning its quarterly dividend!!!! Funny, isn’t it?
A revealing book by a former California legislator once coined the famous phrase, “What makes you think we read the bills!” This thought was remembered after the one-party incumbent-protecting lobbyist-rewarding lame-duck-celebrating Congress swiftly pulled the pin on the Big Housing Bill grenade.Why indeed would any congressman want to read through Paulson’s update on FDR’s New Deal? What’s a congressman going to do, pick apart some little something in this banking “Big Rock Candy Mountain”? This deal had to pass. It’s an election year, for crying out loud! Is this any time to bring up details like the requirement for all credit card transactions to go to the IRS?“Hey, Congressman,” says his campaign man. “You wanna lose your bank backing next election?” Like the crisis legislation of the 1930s, the devil is in the details. And this, as usual, speeds our quickening slide into dictatorship government.What could happen next? Well, consider, for example, a report this morning on National Public Radio, from China. Even though China’s so-called capitalism is a growing phenomenon, tourism is down! It seems China is worried about “security and protests” (translation – “criticism”) as the world watches the Olympics through the eyes of the international media.Reports NPR: tourism is down because of a substantial crackdown on applications for visitor visas. One woman interviewed explained the difficult procedure for getting visas for her family for a two-week vacation visit in China. First, all round trip tickets had to be purchased and evidence provided.Second, each night’s destination had not only to be provided but each hotel’s confirmation was required.In addition, evidence of bank balances was required including a bank balance for the woman’s daughter, showing at least $3,500.To top if off, China required a signed note from the woman’ employer that she is leaving for the two weeks but is coming back to and will have her job when she returns.You ask where America’s government is headed in the future? Stay tuned.
Oil up 5$, but no downside correlation on stockmarket anymore,… unless the Dow was supposed to be up 500 points today…
http://bigpicture.typepad.com/photos/uncategorized/2008/07/29/go_again.gifEver'body havin’ fun yet? Some’s lookin’ a bit greenish! No worries, it’s all priced in, baked in the cake, efficiently discovered already by our forward-looking investors. There are going to be some chapter rewrites in a eco/finance textbooks…a study in the ulterior motives, obfuscation, criminality in organized capital asset allocation. We have currency risk, sovereign risk, nationalisation risk, arbitrage risk, natural disaster risk, and now CRIMINALIZATION RISK.
The 2:00 fairies show up right on time once again…
3:02 p.m.House rejects bill curbing commodity trading
@ptm I must challenge your post that a liquidity trap coupled with the lowering of rates is "inflationary". I would submit that it indeed may lead to deflation. A major aspect of a liquidity trap is the money is not distributed from lenders to consumers because no one wants to,or can qualify to borrow for consumption, (or lenders do not want to lend) resulting is a decline in the velocity of money and inadvertantly adding to recessionary pressures. Subsequently, distressed sale of assets to relieve debt service leads to the decline is asset values and is the hallmark of debt-deflation. The contraction in the supply of money and velocity is evident when debt is repaid (even cents on the dollar)via those distressed asset sales, not to be loaned out again. What do you think?"In monetary economics, a liquidity trap occurs when the nominal interest rate is close or equal to zero, and the monetary authority is unable to stimulate the economy with traditional monetary policy tools. In this kind of situation, people do not expect high returns on physical or financial investments, so they keep assets in short-term cash bank accounts or hoards rather than making long-term investments. This makes the recession even more severe, and can contribute to deflation.Source: Wikipedia -"In normal times, the monetary authority (usually a central bank or finance ministry) can stimulate the economy by lowering interest rate targets or increasing the monetary base. Either action should increase borrowing and lending, consumption, and fixed investment (although Austrian economists tend to believe this is simply a nominal illusion – real consumption and investment levels can only change if production and savings rates change ). When the relevant interest rate is already at or near zero, the monetary authority cannot lower it to stimulate the economy. The monetary authority can increase the overall quantity of money available to the economy, but traditional monetary policy tools do not inject new money directly into the economy. Rather, the new liquidity created must be injected into the real economy by way of financial intermediaries such as banks. In a liquidity trap environment, banks are unwilling to lend, so the central bank’s newly-created liquidity is trapped behind unwilling lenders.The liquidity trap theory applies to monetary policy in non-inflationary depressions.
WHAT A MIRACULOUS RECOVERY IN THE INDEXES!
Look at the buying fairies go! Up 100 points in 33 seconds-free market my ass!
RGE Monitor is doing a real public service by exposing what is happening behind the curtain.When you have bailout after bailout, and regulators ignore Enron like accounting to hide problems, and a lame-duck president rolls over along with most of the members of his party to back a bill that I am sure very few have even read, and the bailouts are not limited to the U.S. Federal Reserve, but all Central Banks.You must assume that problems are much worse that the bulk of the public thinks.Desperate people take desperate actions.I think a lot of feces will hit the fan after the first Tuesday in November.
I may be mistaken but this conversion of illiquid assets to 22% of their value (or even 25% of 22%) may be needed to keep ML in business. That is, if securities regulators require a certain amount of assets to participate in various markets (like SEC shorting rules), this modest little lie may be needed to continue doing business – or may open larger opportunities to ML for the business they are in – managing other people’s money. In that event, such fibbing makes good business sense. On the other hand, I am glad these folks aren’t managing my money.
What are Super Senior CDOs worth?Assuming these are 06/07 vintages for High Grade and Mezz CDOs, all subprime assets in these deals are worthless. The value left in these deals would therefore be whatever these deals have in non-subprime buckets. These would typically be CLOs, CMBS, AAA Alt A/Jumbo mortgages. The combined size of these buckets could be in the range of 5% – 25%. While these non-subprime assets are also in distressed, I would argue that there are some value left in them.
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