Sidetalk

The other alternative perhaps being a 1929 style crash. 

A DERIVATIVES expert who two years ago warned of a potential meltdown in global credit markets has cautioned that the crisis is far from over, and has endorsed recent calls to relax controls on inflation and allow higher prices to help markets trade their way out of their problems.  Longtime critic of derivatives markets, Satyajit Das, says those who believe the US sub-prime loans crisis, and the drought in credit markets it triggered, are nearly over are wrong.

Full article:  das0508

CHICAGO (Reuters) - The credit crunch driven by the U.S. housing crisis appears to have hit another engine of the American economy — small businesses. After years of fast and loose lending, major banks have begun tightening standards for loans to small businesses — often described as the backbone of the jobs market. (more…)

We all know the monolines (bond insurers) are a huge mess.  Although they insure massive amounts of debt, they themselves appear to lack the assets to honor those obligations. How best to fix this mess? 

Bill Ackman’s recent presentation is highly recommended reading.  It has an A to Z analysis of how the bond insurers do business, financial condition, and — go to page 134 of his analysis — a very cogent outline of how the scenario will play out.  Spoiler:  he says downgrades, bankruptcy, receivership.

Here it is:  howtosavethebondinsurers.pdf

You scratch my back; I’ll scratch yours.  The Securities & Exchange Commission has announced it is changing the rules for the banks’ reporting of bad/questionable debt instruments.  As Bloomberg reports, this amounts to letting banks out of certain arcane accounting rules with the result that they do not have to reflect the full extent of the damaged credit on their balance sheets:  http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_weil&sid=aPSScH5rRBLM  (more…)

Today IMF released its latest report on global financial markets (well worth a read - see link).  Financial markets have worsened as evidenced by pressure on bank balance sheets, and problems will broaden as credit deterioration widens.  IMF recommends transnational stabilization efforts.  Direct link to report:

    imf01292008.pdf

Satyajit Das opines that the tools available to central banks are inadequate to address the scope of the global economic problems we face.  The black box or shadow economy may involve the unwinding of “innovative” financial products/derivatives such that monetary and fiscal policy simply will not work this time. 

http://www.boston.com/bostonglobe/ideas/articles/2008/01/27/the_black_box_economy/

Clayton Holdings, the largest provider of due diligence review of mortgages for the major mortgage bankers, has been given immunity by NY Attorney General Cuomo.  It appears from this news that the mortgage bankers wanted the due diligence reviews to find fewer “lending exceptions” in the subprime loans than actually existed.  It is suggested that the actual figure is 50%-80% of the loans had lending exceptions.  The due diligence reviews may have been limited to small numbers of loans within the portfolios, so that when the loans were bundled and securitized they would appear to be higher quality credits than they actually were. 

This is interesting for a number of reasons, including the question of the rating agencies’ culpability and the monolines’ liability.  Read the NY Times  story here: (more…)

It’s no secret anymore that the monolines really don’t have the wherewithal to properly “insure” credit derivatives such as CDOs.  And the first hand evidence is piling in that the monolines apparently knew all along what they were doing — and kept right on “insuring” CDOs and other junky derivatives.  Why?  Profit, of course.  Where did all that money go?  Wherever it went, it’s high time for someone to go and get it back. 

My idea:  let the ratings companies (Fitch, Standard & Poors, et al.) who bestowed AAA ratings to this mess.  Perhaps they should disgorge all the revenue they collected as a result.  Seems as if they were unjustly enriched at the expense of …. all of us?

So - who spilled the beans?  Well, for one, former ACA Capital honcho (now literally put out to pasture?) as quoted at length in Bloomberg:

“Municipal bond insurers such as MBIA Inc. and Ambac Financial Group Inc. had a good thing going.  For years, they earned some of the highest profit margins in any industry — by writing coverage for securities sold by states and cities to build roads, schools and firehouses. 

(more…)

As we try and get our arms around the ultimate scope and outcome of whatever deleveraging is underway, here is a  ISDA generated document showing the notional amounts outstanding of derivative transactions (note that they’ve already adjusted these figures to avoid double-counting) beginning in 1997: 

 isda-market-survey-historical-data.pdf

 In ISDA’s 2007 survey of collateral, they found that 59% of derivative transactions were secured by collateral agreements, and that 59% of mark-to-market credit exposures were covered by collateral agreements.