Mike Morgan says FL on the edge of a depression

One of the most astute commentators on the economy in Florida and real estate particularly is Mike Morgan. His latest piece is fascinating but makes for a none so cheerful read. He thinks as goes FL goes the rest of the U.S. Is Florida a crystal ball we should all be looking into?

Excerpt: “I was going to call this “Banks March Us Into Depression,” or maybe more fitting is . . . “Complete Collapse of US Banking System.” Folks, that is what we are looking at. I don’t see any way around it. What we’re seeing here in Florida, is your crystal ball. And what happens here, is coming to a town near you . . . soon. This past week I didn’t write anything, because what I am seeing unravel is disturbing to the point I had to question what I was seeing and hearing. So I decided to take as much time as I needed to digest it all, and then put something together for you. So here goes . . .

I could prepare volumes of spread sheets with Bernankesque numbers. I could talk about commodity prices and oil and third world politics and a dozen other metrics that all lead to the same conclusion. But let me give you a ground zero look. That’s what I do best. I will leave the manipulation of the numbers to the folks on Wall Street that do it best. The same folks that have created the precipice they will soon push us off.

I spend a great deal of time dealing with Asset Managers hired by banks stuck with REOs. So as not to re-hash the events leading to the housing crisis, I will not discuss the free-money policies of the past, and I will not discuss the absolute lack of accountability in making the bad loans of the past. Let’s just deal with how the banks are attempting to recover.

Unfortunately, banks are not making a realistic effort to address the crisis. That may be because they cannot. As the banks and builders have announced write down after write down, my mantra has been . . . and continues to be . . . NOT ENOUGH – NOT ENOUGH – NOT ENOUGH. I still believe that. The builders and the banks have underestimated the magnitude of the problem, and they continue to do so. Analysts continue to look at the rear-view mirror and attempt to manipulate numbers based misguided historical assumptions.” Full article floridacrystalball

Latest from Satyajit Das: inflation may be the better solution?

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

 

Flight to safety in the market

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, 2008)

Citigroup: It’s now too dangerous to invest in U.S. economy

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

Credit crunch hits small businesses where it hurts; had depended on HELOCs for funding

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.

Fear of Buyout Debt – Asset firesales to come?

Homeowners aren’t alone in experiencing buyers’ remorse in today’s troubled marketplace. Private-equity firms, too, are finding out their recent investments might not be worth what they paid for them.  Gone are the days when buyout shops could purchase a company, pile on debt for an initial fat payout for themselves and then quickly flip it for a big profit. The credit crisis has put a freeze on debt-laden dealmaking and is causing bond investors to shun the risky debt used to finance the takeovers.
That could jeopardize the returns seen on some deals — which isn’t just the buyout firms’ problem. Investors from pension funds to endowments to financial institutions have plunged big money into private-equity funds.  It’s also a problem for the banks that are stuck with billions of dollars in loans clogging their books that they’ve been unable to sell.

Newest and gloomier IMF report: worsening global financial markets

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

Central banks cannot prevent unraveling of global economy?

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/

Future of monolines irreparably destroyed? Ackman to Moodys: How do you justify giving Triple A ratings?

From Goode Value Investing  http://www.goodevalue.com/2008/01/22/bill-ackmans-letter-to-rating-agencies-regarding-bond-insurers/:  Bill Ackman is apparently asking the ratings companies the questions we all want answered.  It’s an excellent letter with a concise explanation of the facts, and the consequences of the facts.  The letter observes it is unlikely that MBIA, Ambac and other insurers will be able to continue as going concerns. Finally, the letter asks the ultimate question:  When the rating companies look at themselves in the mirror, how can they possibly say that MBIA and others deserve their highest (Triple A) rating? 

Here is text of the letter: 
January 18, 2008

Mr. Raymond McDaniel Mr. Stephen Joynt
Executive Chairman and CEO CEO and President
Moody’s Corp. Fitch Ratings
99 Church St. One State Street Plaza
New York, NY 10007 New York, NY 10004

Mr. Deven Sharma
President
Standard & Poor’s
55 Water Street
New York, NY 10041

Re: Bond Insurer Ratings

Ladies and Gentlemen:

As a Nationally Recognized Statistical Rating Organization, Moody’s, S&P, and Fitch
have been granted a level of authority that capital market participants and Federal and
State regulators have historically relied upon in evaluating the safety and soundness of
corporations, regulated financial institutions, and structured finance securities. To state
the obvious, because of your critical role in the capital markets, it is essential that the
ratings you publish are the result of comprehensive and accurate analysis.

Greedy monolines knew what they were doing – who should bail them out for playing with fire?

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. 

$45,464 Billion credit default swaps outstanding in 2007; 59% were collateralized?

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.