Global financial system implosion begins

[A Dashing Blade]

Most CDS contracts only trigger when you hit 80/90% loss aginst par, with the govt Gtee at par, no default is triggered,

Beg to differ, the CDS is protection against the issuer suffering a credit event not the bond failing to be redeemed. Imo a credit event has occurred therefore (caveated by the small print) the CDS's should be honoured.

Anyway . . . it's one for the lawyers.

 

[hipipol]

Credit event Mr Blade?

Well that normally refers to situation which is an alternative to going totally bust - it would need not just a rating agency downgrade but chapter 11, voluntary resrtucuring of debt because of looming insolvency - so essentially in practice we are looking at pretty catastrophic failure on behalf of the reference entity (thank you ISDA for these bizarre terms!!!!) where there is an implied default without those actions.

As you correctly point out thses are OTC contracts with lots of intersting and tricky small print and weird definitions of what constitutes a credit event ( restucturing being specifically excluded from some high-yield (love that word, it fucking JUNK!!! - dnt bother trying to dress it up) CDS contracts I believe

However, definitions are great - bumps the lawyers fee up as they argue what it actually means - dontcha just wish you'r been a corporate lawyer??
Well actually no - I reckon my boredom threshold is way too low for that crap!!

 

[david dissadent]

Lehman Brothers now appears to be entering its final stages. It appears that potential buyers are tryingto get as much money out of the government as they can.
Washington Mutual is now in distress. It is planning to sell many of its depositors to raise money. link. It takes no genius to see how deep a bank is in trouble when it is selling depositors.
The difference between these two institutions needs to be highlighted. Lehaman is an investment bank (well sort of the Glass Stiegall act was dismantled). It buy and large makes its money working with bussiness'. WaMu is a depositor banks. This means it works more like an old high street bank. But its deposits are insured by FDIC, this means that in the event of failure the depositors should get money back up to $100 000. This is intended to prevent bank runs a la Nothern Rock.

Problem.
WaMu has $182 billion in deposits.
FDIC has about $45 billion in the kitty and other failures like Indie Mac to cover.

The rumour mill has Bank of America after Lehman and JP Morgan after WaMu, and the Fed really really strong arming for a buyer for WaMu.

 

[hipipol]

One can only assume that the rumour re BoA, and JP Morgan was started by someone with a VERY large short position to unwind

 

[hipipol]

BoA seem to be seen as front runners ref rescuers of Lehmans - though it seems rather a daft fit as BoA have pretty much abandoned any capital markets biz and secondary trading activities even selling their capital intensive but low risk synthetic prime brokerage biz to BNP Paribas earlier this year.
Reuters take on this

Equally Barcap have fought shy of a cash equity biz since it was formed from the ashes of BZW

Funnily BoA are hiring an exoctic EQ deriv team in London at the mo, given the supposed convergencve netween this area and PB seems all very odd

 

[david dissadent]

A PBS show from the states on the take over of Fannie and Freddie by the US government. Half an hour long and features Mohammed el Erian, head of PIMCO and the king of gloom Nouriel Roubini.
link

 

[david dissadent]

Sept. 14 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said the financial crisis that began with the collapse of the subprime-mortgage market last year ``is probably a once in a century event'' that will lead to the failure of more firms.

Link


He could at least beg us for forgiveness for his stewardship of the creation of this fiasco.

 

[greenman]

Song for the day -

They used to tell me I was building a dream, and so I followed the mob,
When there was earth to plow, or guns to bear, I was always there right on the job.
They used to tell me I was building a dream, with peace and glory ahead,
Why should I be standing in line, just waiting for bread?

Once I built a railroad, I made it run, made it race against time.
Once I built a railroad; now it's done. Brother, can you spare a dime?
Once I built a tower, up to the sun, brick, and rivet, and lime;
Once I built a tower, now it's done. Brother, can you spare a dime?

Once in khaki suits, gee we looked swell,
Full of that Yankee Doodly Dum,
Half a million boots went slogging through Hell,
And I was the kid with the drum!

Say, don't you remember, they called me Al; it was Al all the time.
Why don't you remember, I'm your pal? Buddy, can you spare a dime?

Once in khaki suits, gee we looked swell,
Full of that Yankee Doodly Dum,
Half a million boots went slogging through Hell,
And I was the kid with the drum!

Say, don't you remember, they called me Al; it was Al all the time.
Say, don't you remember, I'm your pal? Buddy, can you spare a dime?

 

[hipipol]

Dave D

You was right mate, down the plughole goes Lehmans

Expect the fire sale will damage many more........

 

[pinkychukkles]

A PBS show from the states on the take over of Fannie and Freddie by the US government. Half an hour long and features Mohammed el Erian, head of PIMCO and the king of gloom Nouriel Roubini.
link

Found that very illuminating, thanks for the posting the link. That Nouriel Roubini is a bit of a doom-monger but unfortunately, I agree with everything he said

 

[hipipol]

Trust -or rather lack of it!

As no one knows who holds the shit, banks wont lend either to each other, and cos they are panicked, to us
This is EXACTLY the same scenario that preceeded the Great Depression
I am feeling well gloomy

Suspect that the manufacturers of cheap booze will do well over the next few years......

 

[goldenecitrone]

The Credit-Crunch will be the same as the Y2K Bug, Bird-flu, paedophiles and the chances of being in a Terrorist Attack: handy stories with a nub of truth that generate scary headlines to sell papers...

Uncanny.

 

[david dissadent]

Link


Washington Mutual now cut to junk credit rating. Its not going to last long. This means that it will have to use more collateral to raise loans, while its share price is looking very very poor.

``On a more positive note, we recognize that WaMu's holding company liquidity position is currently solidly positioned to meet all of its fixed obligations through 2010,'' S&P said. ``The bank is operating with adequate capital positions from a regulatory perspective and has demonstrated funding resilience as the deposit franchise has remained stable.''

I really honestly believe that congress is going to have to step in and offer to top up FDIC to prevent a real old fashioned run on WaMu. But at this stage making statements like that is just shooting fish in a barrel and repeating what a load of other experts have been saying for a while now.

 

[gosub]

As no one knows who holds the shit, banks wont lend either to each other, and cos they are panicked, to us
This is EXACTLY the same scenario that preceeded the Great Depression
I am feeling well gloomy

Suspect that the manufacturers of cheap booze will do well over the next few years......

1929 An over inflated US stock market gets the jitters when they start passing a protectionist bill through senate and congress, and an attempted rally by buying steel stock at inflated prices burns thorugh all the liquidity in the participating banks.

Some similarities but not exactly like it yet - the bale out consortium is shaping up nicely and the markets are still trying to rally with their hedging built round unrealistic modeling.
The next move to make is Warren Buffett's who having not actually given all his money away like he PR'd he would, should really consider getting into the buy to let market in a BIG way (which might be sort of the same as giving all his money away)

 

[pinkychukkles]

I really honestly believe that congress is going to have to step in and offer to top up FDIC to prevent a real old fashioned run on WaMu.

Nouriel Roubini was saying exactly the same thing, that there was $1 trillion of savers deposits now at risk but only $50bn in the FDIC fund.

 

[Badgers]

I wish I had tried harder at learning.

 

[david dissadent]

The US government is planning to buy about $800 billion worth of the CDOs and MBS' that have done so much harm to the international banking system. Aside from wild exuberance by the equities market, Ive not seen to much reflection or anger on this. The authorities thew to the dogs a small number of short seller and on urban people were actively calling for the murder of these kind of traders. A day later Washington commits what may be the greatest single act of wealth appropriation of all time and there is barely a murmer. What is more is that it will be undeniably structured towards Wall Street. I could be wrong but for the moment this appears to be a nearly $1 trillion subsidy of the US finacial sector against its rivals in Hong Kong, Tokyo, London and Paris.

The long term consaquencies of this will be difficult to work out for a while. Certainly the US state backing of US originated debt will have an impact on its percieved attractiveness. Also the interest for this debt will continue to pile up in the US governments books and it will come due in 2018. Given it has taken on the debts of Fannie and Freddie and that much of that ($500 billion and up) will go sour, the US may have a bill of monumental proportions coming along. The credit worthyness of the US state will increasingly be called into question and the attractiveness of T bills may fall. The dollar is sure to fall increasing inflation in the US again.

The return of liquidity to the banking sector will produce a return to lending by banks. It would not be impossible to see inflation return to the US housing sector. Looking down the line who know.... but we may be in a similar position again in another 5 years, less exposed in housing but with far far less in the locker to deal with the issues.

The one thing is clear. The root and branch reforms needed to ensure that banking, finance and the economy in general are returned to a more stable and sustainable paradigm will not be forthcoming.

This all presupposes that the huge surge in housing defaults in the US dont drag the US into a deep economic funk on there own, just at a slower pace and with the US government being up to its eyeballs in debt and not able to address the situation.

A couple of days ago institutions whos bussiness model was bankrupt i.e. there projected outgoings were significantly greater than there projected income, were going to the wall as liquidity and confidence in them dissapeared. These broken institutions have been let of the hook and rewarded in a guargantuan fashion.

 

[hipipol]

1929 An over inflated US stock market gets the jitters when they start passing a protectionist bill through senate and congress, and an attempted rally by buying steel stock at inflated prices burns thorugh all the liquidity in the participating banks.

Some similarities but not exactly like it yet - the bale out consortium is shaping up nicely and the markets are still trying to rally with their hedging built round unrealistic modeling.
The next move to make is Warren Buffett's who having not actually given all his money away like he PR'd he would, should really consider getting into the buy to let market in a BIG way (which might be sort of the same as giving all his money away)

Well actually I meant to refer to the political reaction to the 29 market crash which became ever more protectionist and to the total lack of credit as opposed to the specifics of what drove the market to its current situation - it will be inportant that the Fed/Govt bailout in the us works

DaveD - I can see what you're saying there but think in some ways you are overly pessimistic and in others overly optimistic
The model for the Govt Fill me up with your crap fund/corporation is that, Restitution whatever corp, that was set up after the savings and loan fuck up from the 80s - de-regulation had backfired then, just like reductions in banks statutory capital adequacy requirements and freedom to re-package at best dubious debt has cuased this - if they had something similar to the UK consumer Credit Act there may not have been all these daft debts to repackage - the banks may have been greedy but USmortgage and loand brokers really have to carry a fair share of the blame - it was encumbent on them to ensure that the customer for the loans/mortgages fitted reasonable credit criteria - was the asset worth it, could it be repaid?
The really odd part of this is...
Total value of sub-prime mortgages in the US at the end of 07, $1.2 trillion.
If they'd just taken it all in then at 80c in the $ they would have saved around $400 billion and all the banks involved would have cheered their tits off!!!
Oddly enough it would actullay have been a winner for the US State - not all of these will default, the price of US housing would have dropped more slowly so they could hace realised something back from those that had forclosed and not all of these debts will fail. People are prepared to go thru a lot to save where they live from being ripped away from them.
Its been reactive all the way thru this. I do see this as a failure of Governence - the insurance/mortgage salesman is more or less fixed in most minds as being pretty shark-like - how comes they were able to sell high interest finance to people with no chance of paying? Where were the regulators then?
There has been a failure at all levels of regulatory control that needs sorting, otherwaise all that'll happen is that more shit debt will be created and passed on

 

[gosub]

Dave D a fair analysis, though I would quibble the US$800 billion, as that has been reported as minimum figure by the main stream media, especially as when the BBC figure faded out at 1.6trillion. I was going to link to Soros's website, where he last time I looked you could download the whole of "Introduction to The New Paradigm for Financial Markets – The Credit Crisis of 2008 and What it Means." this is no longer available for whatever reason. The estimate he puts forward within that book is substantially higher.


hipipol : you reffed 29, I said you were going early....
I've also said on other thread marks end of Reaganomics and Thatcherism -check out John Redwood's blog. Agree systematic regulatory failure. First on my hit list would be Credit Rating. Though not sure this is over

 

[david dissadent]

DaveD - I can see what you're saying there but think in some ways you are overly pessimistic and in others overly optimistic

No worries I doubt my initial reaction will be anywhere near the way it pans out anyway. Ill keep reading around and see what others are also saying. Luckily for me though I dont have any money riding on my opinions.

In other news:
However the bail out legislation is sending the liberatarians heading for there gun cupoards. Most specificaly this paragraph....

8. Review. Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

Link

No reveiw by any court? The phrase "no taxation without representation" is the most fundamental to the founding of the republic. Its what turned all those wealthy slave owning land owners into revolutionaries in the first place. Perhaps there is a more prosaic explanation for this....

 

[Darios]

Extra-judicial financial dictatorship.

 

[gosub]

Not taking a punt either Dave D, but still reckon you got the trend right.

Think the funk has moved, and next point of interest will be US T bonds and the US interest rate. Soros' analysis was done in the slightly more clear headed times of what March/April and widely circulated. The patch will only set if the Sovereign wealth funds consider now to be bargain basement time...and they are under increasing pressure not to piss their nations savings away. The other side of that is that this is the bale out that burns through the liquidity...

 

[rich!]

No reveiw by any court? The phrase "no taxation without representation" is the most fundamental to the founding of the republic. Its what turned all those wealthy slave owning land owners into revolutionaries in the first place. Perhaps there is a more prosaic explanation for this....

"look, we've been trying to revert to a trad. english feudalism, and this is our big opportunity. this is our big time to decouple the state from the people, and do you know what - we're going to."

 

[gosub]

Actually reading the morning papers there is another way this can be a 29, the rescue package gets swamped in protectionism due to bulking at the size of the commitment, "why should we bale out Deutsche Bank and Credit Swisse" type argument already started in Washington, making the Sovereign Wealth funds (and anyone else non US) reluctant to invest in the great US fire sale. What value has liquidity then?

 

[g force]

Actually reading the morning papers there is another way this can be a 29, the rescue package gets swamped in protectionism due to bulking at the size of the commitment, "why should we bale out Deutsche Bank and Credit Swisse" type argument already started in Washington, making the Sovereign Wealth funds (and anyone else non US) reluctant to invest in the great US fire sale. What value has liquidity then?

True to an extent....but the US has, to a larger degree, realised that this is a mess of it's own making. It can either accept money from foreign sources with an aim of keeping a semblance of power, or it can watch as it's banks struggle while HSBC, Bank of China, DB and others all move forward.

The real villains who have got away with murder are the ratings agencies.

 

[gosub]

It isn't an issue of whether the US accepts money, its more: Do those still with cash to spend, want to spend it on America

 

[elbows]

Well today the Japanese banks are getting in on the act, apparently taking a share of Morgan Stanley, and now negotiating for whats left of Lehman's Europe, with Barclays pulling out again.

Meanwhile the gloss seems to have worn off the bailout plan already, although this could just be due to politicians posturing so that it doesnt look like they are giving welfare for the rich too easily/without stroking their chins about it for a while.

 

[Talkie Toaster]

Just on the news they were talking about: the UK banks are hoarding cash and not lending to each other. Why is this a problem? If the banks just keep the cash they have and stop fucking about with it on the "money markets" won't that be ok?

 

[pinkychukkles]

No, because this is the main role of banks - the flow of capital to wherever it is most needed. Thus those weaker banks that need to borrow cash could be more vulnerable because taps of credit from other financial institutions have been turned off - banks are still lending, just at alot higher rates and this means that mortgage cost could go up as well.

 

[Talkie Toaster]

but isn't the weaker banks lending much more than their capital base part of the problem at the moment?