Sidetalk

Germany’s Federal Financial Services Authority is known as BaFin. According to information obtained by SPIEGEL, an internal BaFin report says that shortfalls at finance institutions worldwide could end up totalling $600 billion (€380 billion). The shortfall comes as a result of ill-advised speculation on the US subprime market and resulting jitters in markets worldwide. BaFin says that its prognosis is merely a worst-case scenario. “Given what we know about the current situation on the markets, we presume that a total of $430 billion is more probable,” the 16-page report says. (more…)

Click through to see New York Federal Reserve Bank’s March 2008 chart explaining TAF, TSLF, among many others including acceptable collateral for each type of lending:

forms_of_fed_lending.pdf

This is going to come as a very rude awakening to many investors.   

One of the world’s biggest brokers is about to force its clients to take a haircut on a type of securities that investors had believed to be safe as cash.

 UBS AG began on Friday to lower the values of so-called auction-rate securities held by its clients, a move that will be a jolt to customers who had been told they were investing in a “cash alternative.” The move is yet another way that the credit crunch that began with subprime mortgages has spread to unexpected places and upended conventional wisdom about the financial system.

The Swiss bank appears to be the first major firm to take this action and is expected to inform clients via their online statements shortly. The markdowns, which will be made using an internal computer model, will range from a few percentage points to more than 20%, a UBS broker said.

http://online.wsj.com/article/SB120672890827072299.html

The S&P/Case-Shiller home-price index dropped 10.7 percent from January 2007, after a 9 percent year-on-year decrease through December 2007. The gauge has fallen for 13 consecutive months.

Here’s an inflation-adjusted chart of the CSI:

http://calculatedrisk.blogspot.com/2008/03/real-case-shiller-house-price-index.html

http://www.oftwominds.com/blogmar08/financial-centipede.html?ref=patrick.net

I am certainly not the first to notice that something is going on here.  It is so unusual that it bears repeating.  In my opinion, and I’m not the first one to say this either, we should pay attention and act accordingly.  [Note that I do not offer financial or investment "advice" and you should not rely on my opinions.] The charts look as if the big market players have, and are, running for the hills.  The flight to safety is so remarkable that the repo auctions have been failing, and demand for 13 week Treasury bills is so high that the interest rate has plummeted to essentially zero.  This has not happened for something like 50 years.  Read it and decide what is it telling you?  (chart from March 20, 200

“Of course there are zillions more equally juicy lies floating around out there, but we reckon Peter Tasker, a Tokyo-based analyst and occasional author, has come up with some choice specimens - and just in time for a lighthearted, two-minute Easter read:

The top 16 big, fat lies de nos jours

1. Derivatives reduce volatility

2. The BRIC economies are decoupling

3. Inflation is 2 per cent

4. Greenspan was a maestro

5. The Chinese won’t let their market fall in Olympics year

6. (Junichiro) Koizumi reformed Japan

7. The Americans are devoted to free market solutions (more…)

It’s easy to find talking heads that say this stock market is a buying opportunity, and that some stocks are cheap.  Obviously opinions differ.  But looking at PE (Price/Earnings ratio), consider this from FT: ”[W] hile the rest of the corporate sector may not suffer as much as financials, current earnings forecasts suggest that it will not suffer at all. For 2008, the market expects S&P 500 earnings to grow 15.1 per cent compared with 2007. This is partly thanks to an expected 26.6 per cent increase for the financials (aided by a low base of comparison). But all sectors are forecast to grow at least 7.2 per cent.” (more…)

Citi says the “great unwind” has begun: We are now confronted by a broad bloodbath in the credit markets,” Citigroup said. ” The most leveraged paper is falling in value because it is leveraged, and now the least leveraged paper is also falling in value because it is owned by leveraged investors.”   Investors should also avoid hedge funds themselves, along with private equity, Citi added. Both types of investment rely at least partly on borrowed money to generate returns. <snip> Leveraged economies, like the U.S., should also be avoided, in favor of emerging market countries, which have reduced borrowing, the bank advised. “With less capital sloshing around the world, and the dollar falling, the U.S. may have to compete more to finance its deficits. http://www.marketwatch.com/news/story/great-unwind-has-started-avoid/story.aspx?guid=%7B1DC25DFD%2D3543%2D4CF4%2DBE26%2D74EA4B9C9330%7D&dist=hplatest

The question is, whether XL’s termination of 7 Merrill CDS will accelerate the big derivative unwind by bringing the problem to light and triggering a run for the exits.   http://business.smh.com.au/merrill-in-fresh-debt-tangle/20080320-20ll.html

→Here’s the Complaint:  xl_complaint.pdf

NEW YORK (Dow Jones)–A Merrill Lynch & Co. (MER) unit sued a unit of bond
insurer Security Capital Assurance (SCA) on Wednesday, alleging the company is
attempting to avoid its financial obligations of up to $3.1 billion under seven
credit default swaps. (more…)

I haven’t noticed this being discussed in the media yet.

“The Iranian military on Wednesday [March 19] shelled seven Iraqi border villages, causing no injuries or damage but terrifying residents, an Iraqi official said.

The shells were apparently aimed at bases of Kurdish rebel group Pejak (Party of Free Life of Kurdistan), said the mayor of Zarawah, a frontier town in northeastern Iraq.Pejak is accused by Tehran of launching deadly attacks on security forces in northwestern Iran.”

http://www.khaleejtimes.com/darticlen.asp?xfile=data/middleeast/2008/March/middleeast_March302.xml§ion=middleeast&col=

Also reported on March 19, while traveling in Oman, V.P. Cheney says that Iran may have restarted its nuclear weapons program.  http://www.breitbart.com/article.php?id=D8VGJH980&show_article=1

This writer takes a look at the big spike (click on image for larger version) and asks, ”Is this the new point of stress in the global financial system?”

“The 30-year, yen basis swap, after rising gradually away from zero since the beginning of the year, has suddenly spiked - and it seems likely that macro funds will be hurting.”

 Link:  http://ftalphaville.ft.com/blog/2008/03/18/11687/the-america-premium-this-could-hurt/

 Jim Rogers’ reaction to Fed moves on Bloomberg  

And now…..it’s down to $2.00 (sold to JP Morgan and ….the US taxpayers via Fed’s guarantee of BSC liabilities as part of the deal).  This is a 3 month chart.  Wondering how an investment bank worth almost $100 3 months ago is suddenly worth $30 last Friday, and $2 today?  Answer:  reality. 

Based on what is known, it’s widely believed that, using J.P. Morgan as the conduit, Bear Stearns swapped its bad assets (Alt-As) for U.S. Treasuries.  The Federal Reserve ends up with the BS bad assets; BS ends up with clean Treasuries.

This past December Bear Stearns increased the percentage of its revenues used to compensate its traders, executives, etc. to 57.6% of its revenues (up from 47.1% in prior year)?  Yes.  And guess what?  These same executives took $4.15 Billion out of BS as 2007 compensation.  http://dealbook.blogs.nytimes.com/2007/12/20/bear-stearnss-grim-bonus-math/

“The risk of losses on U.S. Treasury notes exceeded German bunds for the first time ever amid investor concern the subprime mortgage crisis is sapping government reserves, credit-default swaps prices show. <snip> The U.S. government is not immune from the consequences of the credit crisis,” said Fabrizio Capanna, BNP’s head of high-grade corporate trading in London. “Support for troubled financial institutions in the U.S. will be perceived as a weakening of U.S. sovereign credit.”’ http://www.bloomberg.com/apps/news?pid=20601087&sid=aVl4JGYmkX0M&refer=home

Ben what are you doing?

 hat tip for photo to fintag.com

The Federal Reserve has certain assets — about $800 Billion in Treasuries.  Once it lends away the additional $200 Billion announced today, and counting the TAFs (Term Auction Facilities), about one-half of the Fed’s reserve of Treasuries will be gone.  This chart shows the Fed’s reserves before this additional $200 billion is given out, so you’ll have to continue that line downwards to imagine what it’ll look like by the end of March:

If you thought the credit crunch was a financial phenomenon confined mainly to Wall Street, think again.  Among its real life effects is that college students are no longer able to get student loans.  Example, Pennsylvania’s Higher Education Assistance Agency has stopped giving student loans as a result of the frozen credit markets.  Normally, it would sell bonds to investors to finance the loans it gives to students for college.  Now the PHEAA has been unable to sell its bonds and has had to stop giving student loans.  Instead, it’s referring families to various private banks which may or may not lend the money.  This is a rolling problem cropping up in the states - not just Pennsylvania.  (E.g.: Michigan http://media.www.michigandaily.com/media/storage/paper851/news/2008/02/14/Government/Student.Lending.Woes.Worry.u.Officials-3210042.shtml) (more…)

Is it in our national interest to sit idly by while our manufacturing plants and equipment are being dismantled and sold to the highest bidders - sometimes for scrap? If we have any hope of revitalizing our “real” economy, we should conserve this plant and equipment capital. Instead it seems we are squandering, piece by piece, any potential we have in the future to recreate a manufacturing capacity. Decades of capital investment being auctioned to overseas bidders who will now be able to replicate our former manufacturing economy but without the vast amount of capital we had to invest originally.  

                                                                                                                                      Today’s story from The Detroit News by Louis Aguilar: ”Factories for sale: Machinery auctioned off to buyers around the globe” 

 ”Here on the factory floor of what used to be Synergis Technologies Group, the bidding for the Clearing 1,500-Ton 2-Point Straight Side Press soon becomes a global race. A starting offer of $16,000 for the 35-foot-high stamping press with baby-blue trim is placed by a local scrap dealer, one of 350 bidders who have showed up at Wednesday’s auction at this tool-and-die plant outside Grand Rapids. Within minutes, a representative for South Korean manufacturers chimes in for $20,000. Via the live Webcast — with some 170 participants from such faraway locales as Bursa, Turkey; Zagreb, Croatia; and Birmingham, Ala. — comes a bid from Hyderabad, India, for $40,000.” (more…)

For a possible payout of $3.00 per pound, people are hauling ladders out to highways and taking down the electrical wiring.  The highways then go dark.  The thieves sell the copper wiring to a recycler, if they survive.  This is a stark example of the true state of our economy:
“Freeways going dark as thieves steal wiring; one man is electrocuted”
Associated Press, March 6, 2008

A Highway Patrol officer urged the public today to report suspicious activity that could point to thieves removing copper wiring from lighting along Southland freeways. Wiring theft has become a plague hitting freeways on the average of once a week, CHP Officer Jennifer Hink said. “They’re blacking out our freeways.” (more…)

Click on the thumbnail and weep.  This chart is the latest, and was updated as of 2/22/08.  It’s dramatic. ↓

Now click on this thumbnail to see latest (as of 2/15/0 Fed chart for banks’ total borrowings from the Federal Reserve -  without precedent it would seem.  ↓

                      For an excellent discussion of the meaning of all of this, check out “Borrowed Reserves and Tinfoil Hats” from Mish’s blog:  http://globaleconomicanalysis.blogspot.com/2008/02/borrowed-reserves-and-tin-foil-hats.html

Although his brief answer without any further analysis is “Probably not,” the remainder of his opinion piece is devoted to quoting a Great Depression era text that shows “eerie” parallels to our current situation.  Excerpt (talking about the 1930s Great Depression):

a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.
Read Reich piece →http://robertreich.blogspot.com/2008/03/are-we-heading-for-another-great.html

Digested version:  bankers ignorant, reckless.  The Treasury committee of the Parliament has now issued its report after hearings conducted in 2007.  Readers’ Digest version:  bankers and credit rating agencies were ignorant, reckless.  As reported by the Telegraph, today’s report says that banks had not understood the financial products they were buying and selling.  “The committee singled out Lord Aldington, chairman of the Deutsche Bank’s London branch, who declined to explain the difference between a CDO and a CDO-squared when he appeared before them.”  The committee also lambasted the credit rating agencies for not responding earlier to the crisis in the US sub-prime mortgage market, and for alarming investors by making large downgrades at the height of the crisis.  Read the full report (pdf) here: 

parliamentbanks0308.pdf