Sidetalk

For curiosity’s sake, take a look at the historical dollar amount of borrowing by depository institutions (banks) from the Federal Reserve.  It is hard not to notice that what we have here is unprecedented over the last 100 years.  When you hear someone say the credit crisis is almost over, check this chart and think again.

Total Borrowings of Depository Institutions from Fed. Reserve 1910 - present (Billions $US)

None other than Barclays Capital warned Tuesday that roughly half of all subprime and Alt-A borrowers in the U.S. could soon owe more than their house is worth, or have extremely minimal equity left — a problem that is imperiling more homeowners in the States than mortgage rate resets, which have received far greater press coverage.  Continued price declines are likely to put as much as $800 billion worth of debt at risk. http://www.housingwire.com/2008/04/29/barclays-issues-warning-on-underwater-borrowers/

Among other issues, this 2/6/08 analysis addresses economists who claim that the decrease in the current account deficit is a good thing - and demonstrates they should be careful what they wish for.

→ blackswan020608.pdf

Here is a copy of Bill Ackman’s latest letter on the monoline mess, dated January 30, 2008,  to the New York State Insurance Department.  AMBAC exposed to $11.61 BILLION losses; MBIA loss exposure $11.65 BILLION.  A “must read.”  →     ackman131ltr.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…)

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. 

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This is the nightmare scenario:  pension funds invested in CDOs and/or other derivatives are swamped by the massive unwinding process underway.   Where then does the money come from to pay retirees? 

This great unwinding has potential consequences not only for U.S. pensioners, but certainly the U.K. and possibly beyond.  Here is a terrific and concise explanation of the relationship between CDO downgrades and U.K. pension funds by Ken Griffin and Jeff Moskowitz: (more…)

Update:  What About the Munis?  → good article:   http://wallstreetexaminer.com/blogs/winter/?p=1348

Is the current credit crisis and resulting loss of asset valuation having an impact on pensions and healthcare benefits?

Yes - see two preliminary reports below.

pew.pdf     ← The Pew Center on the States released a report in December 2007 highlighting the perilous footing of  the states’ funding of their long-term retiree benefits (both pension and nonpension).  Click through to full report.  

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A bit of comic relief during a rather nasty day of economic news

Minsky was an economist at the Levy Economics Institute and perhaps the most famous economist on credit crunches.  Here, the Institute argues that the current crisis differs from the traditional “Minsky Moment” and explains the reasons why it is different this time around.  Agree or disagree? 

The Minsky Moment