Global financial system implosion begins

[david dissadent]

http://blogs.ft.com/gapperblog/2008/09/a-700bn-shot-at-the-wrong-financial-target/

The FT is arguing that recapitalising would have been a better use of the $700 billion, i.e. that buying bank equity to inject cash into the banks rather than buying the so called unsellable assets.

I dont quite grasp the difference at the minute, other than it would be a far better buy for the taxpayer.

What I will also say is that there are people who would love to buy these 'distressed assets' or 'toxic waste' of off the banks. Bright people who can understand them can make a really good guess at the future of the housing market and would be happy to pay for these CDOs et al. Just not at the price the banks want to sell them for. If the banks accept market price for them then they are going to have to start huge write downs of the rest they have on there books as a market is created. I may be wrong but thats where I think the problem is. The taxpayer is not going to make a profit from these, they are going to buy them at a minimal mark down and the banks are laughing all the way to the errrrr, accounts department. Well for a while anyway.
I also wonder about how long this will be effective for? After all the federal reserve allowed banks to swap these assets for treasuries to the tune of several hundred billion dollars already. And still they were failing.

Clearly something very drastic needs to be done and Im not footing the bill, well not directly. Id rather see a swap of a couple of hundred billion dollars for assets as a loan to the banks for a couple of months and let a new administration work with the legislature and think long and hard about what they are going to do. Being bounced into something by the cunts in the Bush administration just sends me screaming for the hills.

 

[david dissadent]

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

The banks cant see what each others books are so they dont know who is running out of money. Some banks are funded in such a way they need to keep getting short term loans to keep "well capitalised". The safer ones dont want to lend to the not so safe ones incase the money does not come back.

They are also worried about sudden economic problems so need to keep there own money to cover against a big drop in house prices or something. That is what I think is the simple version of what is going on.

 

[ymu]

If I stole money from thousands of people, my assets would be seized and I'd go to prison. That's the bail-out sorted - they only need to seize the assets of the top few hundred board members, senior execs and hedge funders and the money is there. Hell, they could leave them with 100 million each to retire on and still pay for it easily.

 

[Talkie Toaster]

The banks cant see what each others books are so they dont know who is running out of money. Some banks are funded in such a way they need to keep getting short term loans to keep "well capitalised". The safer ones dont want to lend to the not so safe ones incase the money does not come back.

They are also worried about sudden economic problems so need to keep there own money to cover against a big drop in house prices or something. That is what I think is the simple version of what is going on.

Maybe if the whole system was much more open then banks wouldn't be tempted into the short term loans.

 

[elbows]

Well its still going wobbly poop out there, with politicians shouting at eachother and Washington Mutual siezed, closed and sold on.

 

[jiggajagga]

" Those that live by the sword shall die by the sword"
" Whatever you sow shall you reap"
" If you sow the wind you shall reap the whirlwind"

Never, in the history of humanity were truer words ever spoken nor more apt for today.

May they all crash and burn!!

 

[Barking_Mad]

Maybe if we all blow at once, the whole shabang will topple over?

1...2...3.....

 

[hipipol]

Hope yer tooled up proper like
You'll need decent weaponry to get yer dinner if the whoel fucking edifice does collapse

 

[Darios]

"It's not based on any particular data point ... We just wanted to choose a really large number."

-- US Treasury spokeswoman speaking to Forbes.com about the origin of that $700bn figure.

"the proposal is big and the reason it's big is because it's a big problem"

Dubya earlier.

 

[TomPaine]

"It's not based on any particular data point ... We just wanted to choose a really large number."

Bloomberg I believe suggested the figure closer to $5 Trillion and other sources I have heard recon even mroe then that.

Big bloody mess comes to mind.
TomPaine

 

[Kanda]

LTCM created a 3-5 Trill hole and that went by reasonably un-noticed...

 

[david dissadent]

LTCM created a 3-5 Trill hole and that went by reasonably un-noticed...

Can you explain how you get this figure. All I can find for the collapse of LTCM is abuoout $5 billion. I know it was concurrent with the Asian and Russian financial crisis of 1997...

 

[david dissadent]

Washington Mutual siezed by FDIC. Hats of too the feds, they were clever with this and sold WaMu's retail operation so the FDIC fund would not have to cover the deposits in there. It does though blow my theory that bank seizures happen on a Friday after close of bussiness.

Wachovia is now the last on the list of really well known big banks that would go down early in this crisis.

The begining phase of all of this now seems to be coming to an end. Everyone is pretty much now admitting there is a serious problem and the most vaulrable big names are mostly mopped up. Importantly people are now openly acknowledging that its not just a sub prime crisis but that the whole housing market in 2005, 06 and first half 07 was a state.

People are probibly pretty bored of this graph but here it is one more time.

The losses on housing will carry on for a while yet as other loan tranches reset and people give up on trying to keep themselves in a house that is underwater (this is an American expression for negative equity). Obviously as the weakening economy spreads job losses other good housing loans will go bad. This will add to the loses and drive down the price of houses. The real problem is that once the drop in housing price means that houses are costing less than in 2005 homes that were bought before the worst excesses of the bubble years start falling into negative equity. This will see a surge in defaults and reposessions outside of the worst of the bubble era housing.

Predictions that the market will bottom out at 40-50% down from the 2006 hights have been around since early 2007. This will put even the most prudent banks and home owners at risk of losses. (others are currently suggesting just a 30% drop)

Another major factor is that the glut of repossesions has jammed the court system shut in some states like Florida and California where there is evidence that banks are not even issuing notices of default to many people because the whole system is now so clogged. People may stop paying mortguages simply because no one is enforcing non payment. And now the US government is the ultimate debtor to about half of the mortguages and has a giagantic $700 billion sweetie for the banking industry there is a wave of rebellious insurection amoung many American home owners. Collecting the mortguages is not going to be as straightforward for some banks at it should be.

The focus over the comming months will shift away from the high flighers of the boom years, Lehman, Bear, WaMu and so on, to the more secure big boys.
Bank of America, Citigroup, JP Morgan, Wells Fargo and so on, and how they will ride out the problem. Put it this way the boys with the pressed suites and polished sun glasses aint gonna be taking any of them over (FDIC). But they still have huge losses to come and a couple of them may fail. Citi is the popular pundits favourite. They are huge, very very huge but too big to be managed and have already had steep losses. They have had big injections of Arab money to recapitalise so may weather the storm better by being Suadi and other routes into buying up America. The other that is liable to really struggle to stay afloat will be Wells Fargo who so far have not had big writedowns but do have big big exposure to many of the soon to fail markets. These are the two big US banks that are liable to have big losses and possibly be sold on or broken up.

 

[jiggajagga]

Can someone tell me what is the difference between what the Enron boss did ( fraud ) and got 24 yrs for and what the CEOs of the banks have been doing for the last x number of years ( false accounting = fraud?)

If no one goes to jail over this the USA will become even more of a laughing stock!!

 

[ymu]

The worst 500 offenders could pay for the bail out with their personal wealth. Why, exactly, are the fat cats being allowed to hang on to the loot they stole whilst everyone else digs deep?

Rhetorical question, obv.

 

[zoltan]

Can someone tell me what is the difference between what the Enron boss did ( fraud ) and got 24 yrs for and what the CEOs of the banks have been doing for the last x number of years ( false accounting = fraud?)

If no one goes to jail over this the USA will become even more of a laughing stock!!

its not false accounting as such - just an inability to measure the worth of their illiquid / mrginal products

They ae still responsible though - maybe on at a criminal level

 

[ymu]

its not false accounting as such - just an inability to measure the worth of their illiquid / mrginal products

They ae still responsible though - maybe on at a criminal level

Rating bad mortgage debt as AAA creates phantom money that does not exist. Short-selling shares you do not own, with two parties showing the same shares simultaneously on the bottom line creates phantom money that does not exist. Claiming bonuses on the basis of phantom profits takes real money out of the system based on the phantom money that does not exist.

How can this not be fraud?

It's not like any of these guys can or should be trusted to run the companies again. Seize their assets, claw back their bonuses, and it's paid for. What the fuck are we waiting for?

 

[jiggajagga]

It's not like any of these guys can or should be trusted to run the companies again. Seize their assets, claw back their bonuses, and it's paid for. What the fuck are we waiting for?

Their friends invery high places to bail them out with tax payers money for a nice tax free backhander perhaps?

 

[elbows]

http://money.cnn.com/2008/09/26/new...lash.fortune/index.htm?postversion=2008092811

Main Street turns against Wall Street
A populist backlash is changing America's political climate. Inflamed by the financial crisis and bailouts, a form of class warfare could haunt business leaders for years to come.

Meanwhile it looks like Congress might manage a deal before markets start to open in Asia. Or maybe it will come unglued again, but there is at least a draft bill which has some concessions in it.

 

[Badgers]

Another one has just 'folded'

The Japanese Bank of Origami



(sorry)

 

[david dissadent]

For anyone who missed it in all the fuss, Wachovia hit the wall and got sold to Citibank.

It specificaly cited its Option ARM debts as a reason it could no longer run on its own.
Link

"Eating the seeds" is a phrase used when a group starts destroying what they depend on for the future to operate now. Earlier this year, in threads like this, there was a bit about how the drying up of the auction rated securities market was badly stifling funds to municiple and other public agencies. These have played a big role in the near bankruptcy of many parts of the US local government and the private sector entities that form the same functions as government would in the UK, things like Universities, Hospitals, municipal sewars, road building agencies and the like. Hard hit were universities that were struggeling to raise enough debts and securities the student debts they had already loaned out. This is and will cause a crunch in term of one stream of funding for US universities, especialy the poorest.

Now another big source of money to the unis is going to dry up for a while.
Link

Wachovia Corp. curbed access to a $9.3 billion investment fund used by more than 900 colleges to pay salaries, maintenance and other expenses and said it plans to sell the portfolio by the end of the year.

Colleges can redeem only 34 percent of their investments in the short-term Commonfund because of the ``liquidity squeeze,'' said Laura Fay, a spokeswoman for Charlotte, North Carolina- based Wachovia, in an interview. Earlier this week Wachovia, the trustee for the fund, had capped availability at 10 percent.

Wachovia's move sent colleges rushing to tap other accounts and worrying that they won't have enough cash to pay bills. Bethany College in Lindsborg, Kansas, had about $700,000 in the fund when access was restricted, had been planning to take out $400,000 in November, and now is assessing alternatives, said Edward Leonard, president of the school.

``It was really a sucker punch, you didn't know it was happening,'' Leonard said in a telephone interview today. The short-term fund isn't the only source of cash, he said, noting that the school has an endowment valued at $25 million at June 30. ``The one thing I don't want the college to do is to panic,'' he said.

Elon University in North Carolina, with $46 million in the short-term fund as of three days ago, also said Wachovia was forcing it to dip into other funds.

``We are going to use the liquidity we have elsewhere to supplement what redemptions we were able to get to pay the bills we need to pay for,'' said Gerald Whittington, vice president for business, finance and technology at Elon, in a telephone interview today. ``It's not going to slow us down, but it makes us have to do things we otherwise wouldn't have had to do.''

US Universitites are going to be facing a cash crisis. This will likely place more pressure on Sallie Mae (the US version of the Student Loan Company) to provide loans for student at a time when its access to debt markets is really shrinking and the prospect of graduates getting jobs and repaying loans dips.

The US is very heavily reliant on the ability of its students to raise money to attend university and it is very reliant on bright young innovative graduates entering the employment markets to keep its bussiness competative at all, let alone world leaders.

 

[david dissadent]

And now for the complicated and scary stuff. Today is the beginning of "auction season", when the International Swaps and Derivatives Association starts a series of auctions to settle who pays what to whom on a plethora of credit derivative contracts relating to businesses that have gone into default.

It's settlement time on those humungous insurance policies for corporate debt, called credit default swaps, which I've mentioned to you as being another potentially lethal flaw in the financial economy.

In the coming three weeks, payouts of hundreds of billions of dollars may be made - or at least demanded - to cover losses arising from the defaults on the debt of Fannie Mae, Freddie Mac, Lehman and Washington Mutual.

Sandy Chen, the analyst at Panmure who's been a smart predictor of credit-crunch accidents, estimates that payments on Lehman's battered bonds could be as much as $350bn.

Now the problem here is that for every beneficiary of these payments, there's an underwriter - those who provided the CDS insurance - which has to find the cash. And, as I've pointed out, this was a largely unregulated market, so the great fear in markets is that some underwriters have insufficient capital and will simply collapse when the claims are made.

That in turn would hurt financial institutions expecting to be paid out on their CDS contracts and damage others with separate exposure to the collapsed businesses. The shock to the system could be very severe.

To compound the current anxiety about all this, the CDS market is so opaque that it's impossible to know right now who is holding the radioactive baby.

Link

I needs a strong cup of tea.

 

[elbows]

Yeah I read that CDS stuff earlier - interesting weeks ahead then! Actually derivatives were the first potential cause of economic meltdown I ever read about, I guess in 2003, and since then they seem to have grown to even sillier levels. And Id not heard details about all the different flavours until recently. Here's a Time article from March where they were starting to wonder if CDS's would be the next thing to cause woe:

http://www.time.com/time/business/article/0,8599,1723152,00.html

So these are more unregulated bullshit that a child could of identified as flawed, even in the good times. My word its going to be a complex blame game once the dust settles. It would be easier to hunt for people who are totally blameless than identify all those who have failed. Its time for deregulated to become the dirty word rather than regulated.

 

[elbows]

Oh here's a WSJ article that sheds more light on the situation:

http://online.wsj.com/article/SB122291081371496791.html?mod=googlenews_wsj

Seems that in addition to fears about whether people can afford to pay out on the CDS's, the price of 'insuring' against default in this way has gone volatile and skyrocketed in some cases, and there are also arguments about how big payments on certain CDS's should be, potentially undermining the CDS market.

It doesnt look like any of this crap works at all once things start to turn downwards, it seems hard to imagine how a domino effect of epic proportions can be avoided. But maybe as there is so much bullshit out there, they can evaporate it or whack a few more layers of shit on top and get away with it, I dunno, its all crazy to me.

 

[Kaka Tim]

Cirsis predicted a year ago -

"The West (US,EU, Canada) is in the midst of a gigantic and spreading credit crisis that may well to lead it into a depression, if it is not fixed soon. So far, Central bank infusions (Over $1trillion worth in a few months since July!) have been the only thing that has stopped a massive bank liquidity crisis from shutting down commerce. But the damage to credit markets thus far is so huge, and worsening rapidly, that a very bad outcome seems assured. Gregory Peters of Morgan Stanley said there is a better than 50% chance of a systemic banking crisis that will hammer credit markets at this time.

So far, equity markets have barely reflected this turmoil to the degree it should. That is going to rapidly change. Central banks have been doing backflips to stem the crisis, and I think, things are rapidly spinning out of control."

Publised in Nov 2007 by Christopher Laid (no idea who he is or represents/works for)


http://www.financialsense.com/fsu/editorials/laird/2007/1114.html

Whats clear is that people could see this storm coming and that those in positions of power were too blind, cowardly, corrupt and incompetant too take action.

 

[newbie]

Whats clear is that people could see this storm coming and that those in positions of power were too blind, cowardly, corrupt and incompetant too take action.

what action should they have taken? Given that the whole market economy is based on confidence rather than anything tangible, any attempt to pre-empt eg a bank collapse would simply precipitate it.

As someone on the radio said the other day, we the general public cannot be told which financial institutions are most at risk because if we knew we'd immediately shift our business elsewhere and they'd fall over. The authorities are explicitly keeping us in the dark: history will decide whether that's fear, corruption or rabbit in the headlights incompetence.



anyway, people have been predicting the failure of capitalist gambling under the weight of its own contradictions for a lot longer than a year.

 

[Kaka Tim]

what action should they have taken? Given that the whole market economy is based on confidence rather than anything tangible, any attempt to pre-empt eg a bank collapse would simply precipitate it.

As someone on the radio said the other day, we the general public cannot be told which financial institutions are most at risk because if we knew we'd immediately shift our business elsewhere and they'd fall over. The authorities are explicitly keeping us in the dark: history will decide whether that's fear, corruption or rabbit in the headlights incompetence.



anyway, people have been predicting the failure of capitalist gambling under the weight of its own contradictions for a lot longer than a year.

Im not an economist but I'm pretty sure that 'doing nothing and hoping for the best' would not - and has not - been the best option.

It looks to me more like an emperors new clothes scenario, with politicians covering their ears going 'la la la la la'. Ever since oil hit $100 a barrel its pretty clear what would happen. We need to face up to reality - not blithely carrying on as if this is all some sort of blip.

I'm a communty worker I'm seenig the same thing at local authority level - Im at meetings and people are talking about planned spending and income streams as if nothings changed. when I point our that lots of the fudning they are banking on probably won't be there in 12 months time I just get blank looks. I imagine the situation's no different further up the chain.

 

[elbows]

No, I think people at all evels have been starting to 'think the unthinkable' in the last year and especially in the last few weeks. It may only be the beginning, they may have a long way to travel to reach the stark conclusions about our future, but the process of reality biting has certainly begun.

 

[newbie]

The Irish have taken a gamble that if they guarantee all their bank deposits they'll draw in sufficient funds (mostly from Brits) to insulate their banking sector from whatever comes next. If they're wrong the Irish taxpayers could find themselves bailing out people who are even now transferring huge sums into what is, apparently, just about the safest haven around (ie those for whom the British £35k savings limit isn't sufficient).

Is that the sort of risk that you think politicians should be taking- to guarantee to help the very rich, come what may?

 

[Kaka Tim]

The Irish have taken a gamble that if they guarantee all their bank deposits they'll draw in sufficient funds (mostly from Brits) to insulate their banking sector from whatever comes next. If they're wrong the Irish taxpayers could find themselves bailing out people who are even now transferring huge sums into what is, apparently, just about the safest haven around (ie those for whom the British £35k savings limit isn't sufficient).

Is that the sort of risk that you think politicians should be taking- to guarantee to help the very rich, come what may?

Obviously not.

But whats happened over the past year seems to me to clearly demonstrate that the global economic/political systems are totally beholden to the whims of the market and are therefore incapable of anything beyond narrowscoped, short term planning when clear headed long term planning and emergency crisis management is what is urgently required.

Surely it would have been better to attempt to regulate and damp down markets in order to mitigate the effects a year ago when all this was in the pipeline rather than ineffective firefighting when its probably too late.

Its looks like headless chickens out there. How long before we have a serious run on the banks and thousands of companies and governments find they cant pay their staff?

As far as I know there is no law saying this wont happen jsut becasue people dont want it too.

The global economy has been living in a fools paradise - which worked as long as everyone kept dancing to the neo-liberal tune - but now the music has stopped.

Our political leaders should be strangled with the entrails of dead bankers.