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Builders can't quit building they'll go out of business, once they do the job loss will start to really drag the economy and here's the rub, with our debt as it is the Fed can't lower bond rates, they can lower whatever short term rates they want but it won't lower our bond rates because that's based on the world market buying them.
This is a real pickle we're in here.
The U.S. must, without a doubt, begin with a balanced budget to raise the confidence level in bonds. But economies are so intermingled, someone will eventually buy those bonds and stem the bleeding because too many other economies are dependent on the U.S. remaining at least somewhat strong. If not China, it will be Japan or the Saudis or EU. Recessions are a normal part of the economic process, but a U.S. depression ultimately brings everyone down.
Remember, a strong U.S. economy = trade imbalance, because we are the No. 1 buyer of imported goods. If the money flow stops, we can't buy imported goods. All the countries mentioned above would suffer as well, and not even a strong EU dollar could subsidize a long-term U.S. economic fall.
God bless interdependence.
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The U.S. must, without a doubt, begin with a balanced budget to raise the confidence level in bonds. But economies are so intermingled, someone will eventually buy those bonds and stem the bleeding because too many other economies are dependent on the U.S. remaining at least somewhat strong. If not China, it will be Japan or the Saudis or EU. Recessions are a normal part of the economic process, but a U.S. depression ultimately brings everyone down.
Remember, a strong U.S. economy = trade imbalance, because we are the No. 1 buyer of imported goods. If the money flow stops, we can't buy imported goods. All the countries mentioned above would suffer as well, and not even a strong EU dollar could subsidize a long-term U.S. economic fall.
God bless interdependence.
It's really not that simple, the fact we're interdependent is actually bad, it's like one skier with a rope tied around him falling off the mountain.
There are lenghty reasons as to why they have stopped buying our treasuries, actually they haven't stopped but the can't keep up and not blow their own foot off for a lot of reasons, you'll see the rate on 10 year T bill climb and climb over the year to about 6.5% up from about 4.5% at previously normal levels.
This is just going to put the economy on a rack of pain.
Consider that the current national debt is $8.4 trillion dollars, which amounts to roughly $30,000 for every man, woman and child in the United States. In 2005 there were approximately 113,146,000 households, which means each household’s share of the national debt is $74,000.
In 2005, the median annual household income according to the US Census Bureau was determined to be $46,326, or just 62% of the total owed by each family.
While this does not seem daunting, the fact is that because of this ratio current income taxes collected by the IRS pay off only the interest on the debt owed. This is part of the reason that the government continually spends more than it receives – because tax receipts pay only interest owed on the debt.
However, if the US government were to follow GAAP accounting rules the net present value of future unfunded liabilities approaches $50 trillion dollars or $441,906 per household.
Now consider that the average household income is just 10% of each household’s share of the net present value of future unfunded liabilities. Therefore, at the rate that debt is increasing, eventually we'll reach a point where even if the government takes every penny of its citizens' income through taxation, it will still not collect enough to keep up with the interest payments.
__________________
At what point then is the approach of danger to be expected? I answer, if it ever reach us, it must spring up amongst us. It cannot come from abroad. If destruction be our lot, we must ourselves be its author and finisher. As a nation of freemen, we must live through all time, or die by suicide.
~Abraham Lincoln Lyceum Address
Last edited by conraddobler; June 21st, 2007 at 11:17 AM.
The big question is whether this now turns into a serious recession.
In a May report, Goldman Sachs economist Jan Hatzius called Florida the "Epicenter of the U.S. Housing Bust." Home prices are overvalued by 40 percent, with Florida also having the biggest glut of homes on the market in America.
Prices will drop over a few years, with the correction "likely to cause an outright recession."
Hatzius warned that "businesses with significant sales in Florida could encounter problems for an extended period of time."
There are some disturbing signs of bad times ahead.
Consumer confidence in Florida is falling, according to surveys by the University of Florida's Bureau of Economic and Business Research Office.
Residents are "growing much more pessimistic about the economy and their finances," says survey director Chris McCarty.
The gloom has spread from low-income workers, who take the biggest hit with rising gas prices, to those in the upper income levels. With a healthy stock market, McCarty blames the sour mood on housing.
"I think a lot of people used home equity to fuel spending, and that is not there now," he says. "I don't think steady employment growth is enough to make up for that."
Hatzius' report backs this, citing numbers that show Florida residents fueled spending more with equity loans than did homeowners in the nation as a whole.
Sales-tax figures from the state show spending is falling fast.
Tax collections in April came in $43 million less than what was predicted. And the prediction was made in March.
In May, collections came in a whopping $70.3 million below the prediction.
The trend line is not good.
The meltdown scenario would be if reduced spending leads to layoffs, because the job market here has been our saving grace.
The soft-landing scenario is that jobs and income growth remain strong, allowing the market to absorb the huge inventory of homes without major price corrections. There are analysts who believe this will be the case and think fears of a Florida recession are greatly exaggerated.
This puts into perspective the insanity of trying to block Nemours from building its children's hospital here, helping kick-start a medical city at Lake Nona that could create thousands of high-paying jobs.
We will need every one.
Hatzius, at Goldman Sachs, says Florida won't get much of a bounce from an increase in international trade because we have so few manufacturing jobs. That's one reason why he is not predicting a national recession, just one here.
Home builders are cutting back because of the housing glut. Construction here accounts for 7 percent of the state's economy, compared with 4 percent nationally. And that doesn't include the army of real-estate agents and mortgage brokers that depends on home sales.
Florida's economy is addicted to growth. And there even is a hiccup in that, with a puzzling statewide decline in school enrollment this year.
"Is there a sea change going on in our state?" says Dominic Calabro, president of Florida TaxWatch. "Back in January we heard concerns, and they've only been more validated."
As for a recession, Calabro says, "I'm not ready to go there yet. We're seeing a yellow light. It's a great warning sign. We just can't sit on our laurels and assume we'll always have population growth and job growth as far as we can see."
During an enviroment of riduculous excess, riduculously low savings rates, ridiculously low manufacturing base, ridiculous debt public and private we threw in a match called Subprime Lending, not only did we do that, these geniuses derivatived it, resold it, leveraged it and made it a monster.
I was in the industry back in about 96 97 the last time Subprime blew up, it was a minor occurance to the real world, it was only about 3% of the market, some players died, no big deal, tons of my buddies had companies that went under because they leveraged it to maximize their money by getting Warehouse lines and such but were run over by lenders with buybacks when prepays were higher than anticipated, no defaults but these things had projected earnings dependent on how long the loan lasted.
The industry projected about 3 years the real average was 1 or so and so the premiums paid got marked to market as it were the market dried up and these guys with lines full of loans had to sell them not for 105% of face value as was norm but first 100 then 95 then 90 etc until the went under in short order.
This curiously birthed the 2/28, congress got mad at prepays, moves by states and Congress limited prepays on fixed rate loans and in their genius left a loophole for arms. The industry created 2/28's to take advantage of the right for higher prepayment penalties on them and the monster was born.
The low rates from the cheap money days had these things offering teaser rates down equal to conforming loan rates but with the arm blow up hidden in them and a prepay that held the borrower hostage to that point, the borrower comes to the end of the 2 year teaser, hopefully with cleaner credit and some equity and presto refied out of danger, but then values... gasp fell and the whole train fell off the track, borrower resets to rates way higher, value isn't enough to refi, they get behind and it's over, rinse and repeat at ridculous rates.
Now there wouldn't have been a problem but these things had EASIER GUIDELINES than conforming, no income, greater seller concessions, easier to get through and new loan officers sold these to everyone, it wouldn't have been bad if it was only subprime people that got them but they sold them to EVERYONE.
This caused the market share to explode from 5% to about 20 to 25 percent and Wall Street ate this up like idiots.
Now Bear has a fund based on this and it's tanking, BAD and they're flailing to save it.
The amount of money needed to even stave it off was apparent when Bear S. had to cough up 3.2 billion or a quarter of its net worth to save one fund .... for NOW....
To top all that off, these guys have to pray that the market improves which means they have to pray rates go down and home values go up, if they go the other way the situation is levered to blow them up in weeks.
Once the sale happens of the first real block of this stuff everyone else will now have to revalue their portfolios based on that sale, the result will be like an atom bomb going off if it's low enough.
Bear was only postponing the inevitable because the alternative is that bad. When a firm risks one quarter of their entire net worth on a problem like this you should ask youself, jeez..... how important could this be? Why would they do that? They did it out of pure desperation and fear because I'm sure some heavy hitters are in the fund and will sue them if they don't but still 3.2 billion..... if you read between the lines that's the move of a drowning man, it's crazy.
Bear has to make the fund liquid so people can get back out again, redeptions are driving this and after this little gem everyone will redeem unless they are nuts, it's a bank run in effect and it feeds the panic, panic is the word of the day.
These guys are so screwed and so are all of us.
__________________
At what point then is the approach of danger to be expected? I answer, if it ever reach us, it must spring up amongst us. It cannot come from abroad. If destruction be our lot, we must ourselves be its author and finisher. As a nation of freemen, we must live through all time, or die by suicide.
~Abraham Lincoln Lyceum Address
Last edited by conraddobler; June 22nd, 2007 at 09:37 PM.
How much did the S&L fall out eventually cost? I must've spent half my life filling out HUD bids back then.
The S&L crisis was tame compared to this because Wall Street took that same phenom and repackaged it and sold it.
In effect S&L's had simply loan risk to deal with, they defaulted and so the loan balance was backed in most cases by over inflated assets.
This has that PLUS an added bonus that they used some complicated financing to up the returns by borrowing the money to fund them.
That's the leverage, a small amount of money can control huge amounts of returns that way and it's like gears on a bicyle, real high gears and when you're going down hill it's gravy, once you start uphill pain begins in earnest.
Now take all that and sell the pain to hedge funds that releverage the same thing by borrowing money to buy these things that are already leveraged and you begin to see the magnitude of the problem, it's like 20th gear and now a minor slope is like Mount Everest.
In those hedge funds are clients like public pensions, major money looking for high returns which demands high risk, a dash of stupid with a heapin helping of greed and some unscrupulous ratings agencies all brew one whale of a drink.
__________________
At what point then is the approach of danger to be expected? I answer, if it ever reach us, it must spring up amongst us. It cannot come from abroad. If destruction be our lot, we must ourselves be its author and finisher. As a nation of freemen, we must live through all time, or die by suicide.
~Abraham Lincoln Lyceum Address
Last edited by conraddobler; June 22nd, 2007 at 11:44 PM.
S & L collapse was devastating for many people. They traded their nest egg savings for a pop up toaster. Bye Bye nest egg. RTC was , so far, the bigger scam. Redistribution of assets, my ass. Felony theft is more like it. $10k got bunko artists an S & L charter and a license to steal. The drug money loved it. They bought foreclosed properties and and laundered their powdered money in one fell swoop.
__________________
In politics, nothing happens by accident. If it happens, you can bet it was planned that way.
Franklin D. Roosevelt
"Those who can make you believe absurdities can make you commit atrocities." --Voltaire
We put all our eggs into the housing market basket, at least a disproportionate amount.
Most times throughout our history, 10% or so of the jobs in America were directly tied to the housing market, at this point it's 30%.
You add to that the fact that Wall Street has a few atom bombs of misalocation leveraged and primed to explode due to the trend in that industry going from postitive to negative and what you have here is an old fashioned mess of biblical proportions.
The models they use for these hedge funds are computer models that are based on past performance of loan pools but that past performance was in an up market, the models are totally wrong when it comes to a down market which no one thought would ever happen apparently.
This means the stock market, jobs, our entire economy is teetering on the edge of going poof, not just parts of it, the whole enchilada.
Right now I bet the Federal Reserve is seeing the face of the devil, they are looking into the great nothingness and trying to figure out what to do, I would not be suprised to see them quitely buy up these hedge funds in total, in fact almost nothing is too far out for them to try because the alternative is too horrible to contemplate.
__________________
At what point then is the approach of danger to be expected? I answer, if it ever reach us, it must spring up amongst us. It cannot come from abroad. If destruction be our lot, we must ourselves be its author and finisher. As a nation of freemen, we must live through all time, or die by suicide.
~Abraham Lincoln Lyceum Address
Last edited by conraddobler; June 24th, 2007 at 10:28 AM.
Bear Stearns Fund Collapse Sends Shock Through CDOs (Update2)
By Mark Pittman
June 21 (Bloomberg) -- Merrill Lynch & Co.'s threat to sell $800 million of mortgage securities seized from Bear Stearns Cos. hedge funds is sending shudders across Wall Street.
A sale would give banks, brokerages and investors the one thing they want to avoid: a real price on the bonds in the fund that could serve as a benchmark. The securities are known as collateralized debt obligations, which exceed $1 trillion and comprise the fastest-growing part of the bond market.
Because there is little trading in the securities, prices may not reflect the highest rate of mortgage delinquencies in 13 years. An auction that confirms concerns that CDOs are overvalued may spark a chain reaction of writedowns that causes billions of dollars in losses for everyone from hedge funds to pension funds to foreign banks. Bear Stearns, the second-biggest mortgage bond underwriter, also is the biggest broker to hedge funds.
``More than a Bear Stearns issue, it's an industry issue,'' said Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York. Hintz was chief financial officer of Lehman Brothers Holdings Inc., the largest mortgage underwriter, for three years before becoming an analyst in 2001. ``How many other hedge funds are holding similar, illiquid, esoteric securities? What are their true prices? What will happen if more blow up?''
Shares Fall
Shares of Bear Stearns, the fifth-biggest U.S. securities firm by market value, and Merrill, the third-largest, led a decline in financial company stocks yesterday, and the perceived risk of owning their bonds jumped on concerns losses related to subprime home loans may be bigger than initially thought. Both companies are based in New York.
The perceived risk of owning corporate bonds jumped to the highest in nine months today. Contracts based on $10 million of debt in the CDX North America Crossover Index rose as much as $10,000 in early trading today to $178,500, according to Deutsche Bank AG. They retraced to $171,500 at 8:28 a.m. in New York.
U.S. Securities and Exchange Commission Chairman Christopher Cox said yesterday that the agency's division of market regulation is tracking the turmoil at the Bear Stearns fund.
``Our concerns are with any potential systemic fallout,'' Cox said in an interview.
Bankers and money managers bundle securities into a CDO, dividing it into pieces with credit ratings as high as AAA. The riskiest parts have no rating because they are first in line for any losses. Investors in this so-called equity portion expect to generate returns of more than 10 percent.
Fivefold Increase
CDOs were created in 1987 by bankers at now-defunct Drexel Burnham Lambert Inc., the home of one-time junk-bond king Michael Milken. Sales reached $503 billion in 2006, a fivefold increase in three years. More than half of those issued last year contained mortgages made to people with poor credit, little loan history, or high debt, according to Moody's Investors Service.
New York-based Cohen & Co. was the biggest issuer of CDOs last year. It has formed 36 CDOs since 2001, including 15 worth a total of $14 billion in 2006, according to newsletter Asset- Backed Alert.
Not since 1994 have mortgages with past due payments been so high, according to first-quarter data compiled by the Federal Deposit Insurance Corp., the agency that insures deposits at 8,650 U.S. banks. Lehman analysts estimated in April that the collateral backing CDOs had fallen by $25 billion.
``The big question is whether these forced liquidations represent a tipping point in the market,'' said Carl Bell, who helps manage $63 billion in fixed-income assets as head of the structured-credit team at Boston-based Putnam Investments. It ``may put pressure on other hedge funds pursuing similar strategies'' as the Bear Stearns funds, he said.
Biggest Names
The Bear Stearns funds are run by senior managing director Ralph Cioffi. One of the funds, the 10-month old High-Grade Structured Credit Strategies Enhanced Leverage Fund, lost 20 percent this year, the New York Post reported. Officials at Bear Stearns and Merrill declined to disclose the losses.
The funds had borrowed at least $6 billion from the biggest names on Wall Street. Aside from Merrill, other creditors included Goldman Sachs Group Inc., Citigroup Inc., JPMorgan Chase & Co. and Bank of America Corp. All of the firms are based in New York, except Bank of America, which is based in Charlotte, North Carolina.
As the funds faltered, Merrill sought to protect itself by seizing the assets that were used as collateral for its loans. JPMorgan planned to sell assets linked to its credit lines before reaching agreement with Bear Stearns to unwind the loan, people with knowledge of the negotiations said yesterday.
Bear Stearns was still in talks late yesterday with creditors to the funds to rescue the funds, said the people, who declined to be identified because the negotiations are private.
Russell Sherman, a Bear Stearns spokesman, and Jessica Oppenheim, a spokeswoman for Merrill, declined to comment.
`Pretty Ugly'
Merrill's decision yesterday to accept bids on $800 million of bonds it took as collateral for its loans further stifled trading in CDO securities, said David Castillo, who trades asset- backed, commercial-mortgage and CDO bonds in San Francisco at Further Lane Securities.
``Nobody wants to look at the truth right now because the truth is pretty ugly,'' Castillo said. ``Where people are willing to bid and where people have them marked are two different places.''
The perceived risk of holding Bear Stearns bonds jumped to a three-month high, according to traders betting on the creditworthiness of companies in the credit-default swaps market.
Contracts based on $10 million of its bonds rose $5,800 to $45,500, according to composite prices from London-based CMA Datavision. An increase in the five-year contracts suggests deterioration in the perception of credit quality. Contracts on Merrill jumped $4,700 to $33,000, CMA prices show.
Long-Term Capital
Shares of Bear Stearns fell for a fourth day, declining 19 cents to $143.01 at 9:32 a.m. in New York Stock Exchange composite trading. The stock was down 12 percent this year before today, compared with the 0.4 percent advance of the Standard & Poor's 500 Financials Index. Merrill dropped 20 cents to $87.48 and Citigroup fell 13 cents to $53.31.
The reaction to the Bear Stearns situation is reminiscent of Long-Term Capital Management LP, which lost $4.6 billion in 1998.
Lenders including Merrill and Bear Stearns met and agreed to take a stake in the Greenwich, Connecticut-based fund and slowly sold the assets to limit the impact of its collapse.
``We're not surprised to find the principal circle of players is pretty interconnected,'' said Roy Smith, professor of finance at New York University Stern School of Business and former head of Goldman's London office. ``What we're looking for is whether the interconnection creates a negative domino effect: Whether Hedge Fund A creates a problem for other hedge funds, which in turn creates a problem for the prime brokers that are lending to them.''
To contact the reporter on this story: Mark Pittman in New York at mpittman@bloomberg.net .
Last Updated: June 21, 2007 09:35 EDT
Their valuations of some of these instruments are totally wrong because it was all based on computer models that used old data, when these things don't perform anywhere near that the whole thing becomes a rather ugly sham.
The situation is much worse though because that fund was leveraged 10 to1 which means someone lent them 10 times the underlying WRONG value of those bonds and that lender is the one that will get SQUASHED.
These guys are all inbred good ole boys, right now they're trying to figure out a way to sneak off into the night and deposit these things on someone stupid.
The Fed is also probably burning the midnight oil to try and figure out what to do, this should get really interesting, because the stupid people should now have seen the stories on this and there won't be so many of them, it looks like this is going to be funny and tragic at the same time.
When someone plays hardball then backs off like Merrill did, "the last I heard they withdrew it from bids" I think the somethings fishy signs should be blarring full blast.
__________________
At what point then is the approach of danger to be expected? I answer, if it ever reach us, it must spring up amongst us. It cannot come from abroad. If destruction be our lot, we must ourselves be its author and finisher. As a nation of freemen, we must live through all time, or die by suicide.
~Abraham Lincoln Lyceum Address
Last edited by conraddobler; June 24th, 2007 at 01:42 PM.
BEAR STEARNS & MBS HEDGE FUNDS:
What are the real risks today?
by Paul Tustain
BullionVault.com
June 23, 2007
"...What people don't fully appreciate is the extent to which our financial system has geared up over the last twenty years to finance the worldwide residential housing boom..."
MOST SIGNIFICANT MARKET EVENTS cause an immediate and substantial price reaction, which makes it hard to profit from them. But sometimes there's a sort of slumber, when the market gazes sleepily about itself not quite sure what to do.
We may be experiencing one of them now.
This week a major American investment bank called Bear Stearns was reported as having some serious trouble with a couple of hedge funds. It is difficult to be clear exactly what is going on, because this story involves lots of people and banks who have a vested interest in not being very open. I have been trying to find out the details.
It starts with the humble mortgage. Lots of people in the United States who have no money – they are called sub-prime borrowers – borrowed 100% of the value of a house right at the top of a housing market which has since fallen sharply.
The lenders, however, did not have to worry very much about the risk of default, because they rolled these mortgages into packages called Mortgage-Backed Securities, which they then sold. They got to be off-risk within a few weeks, because by then these MBS belonged to other financial organizations.
But it is not always easy to sell a package of these Mortgage-Backed Securities (MBS). The process of selling such a device demands that the credit quality is assessed – and because the underlying lender is marketing to sub-prime borrowers, the package of debt in the MBS is heavily composed of mortgages quite likely to go into default. So a credit ratings agency will give it a low credit score.
This makes it difficult to sell, which is where a bunch of smart investment bankers join in.
The investment bankers slice the MBS into several chunks or "tranches". These are known as Collateralized Debt Obligations, or CDOs for short. The idea is to create some higher risk assets and some much safer ones, slicing up the MBS into what are called equity, mezzanine and investment-grade bonds.
The equity takes the higher risk, and so it earns the higher return if things go well. But if things start to go wrong, the equity is lost first...and then the mezzanine. However, even if there's quite a high rate of failure in the higher risk end, the investment-grade bonds still get fully paid out. This persuades the credit ratings agencies to give them a respectable stamp of approval, thereby creating out of low-quality mortgages a respectable amount of highly-rated bonds.
In this way the bankers might, for example, convert a large package of MBS into perhaps 70% investment grade bonds, 15% mezzanine, and 15% equity. The original mortgage lender is in a hurry to get the whole MBS off its book, remember, selling the MBS into the financial markets. That way he replenishes his cash and can go out marketing more mortgages to more sub-prime borrowers.
The investment bank is well motivated to slice up the MBS, and it had better be good at selling all this debt on. It won't want to keep much – if any – of the newly created CDO tranches, since the bank earns its money primarily by distributing the MBS, rather than by taking risks with the chance of subprime mortgage borrowers not making their repayments on time.
It is relatively easy to sell the high-grade investment bonds. Stamped with an investment-grade rating, these bonds are sold off to mostly respectable investment institutions. But the mezzanine, and particularly the equity, are less easy to dispose of.
In effect the 30% of the mortgages in the original MBS which were deemed on a statistical basis to be likely to fail, are concentrated into what investment insiders call "Toxic Waste". How can these bonds be sold off?
Enter the hedge fund. Somehow, and possibly even using some its own money, a bank sets up a hedge fund whose objective is to trade in the high-risk CDO equity and mezzanine instruments. Let's say the bank puts up the first $10 million. The hedge fund then buys the equity tranche of the CDO from the bank.
With a bit of luck, and this is what happened over recent years, the housing market goes up. Now the equity is floating higher in the water, because there's a cushion of higher house prices preventing those original sub-prime borrowers from defaulting. This rather obscure equity instrument, which is not traded anywhere and is not liquid, appears to be worth more than it was at issue. It gets marked up in value, and much faster than the underlying houses, because all the price volatility is concentrated in this thin slice of CDO equity.
The hedge fund is now a performer! And that means it will be rewarded by further investment from outside. So what started as a vehicle with a little investment bank money can grow the funds it manages under its own steam – and that can make its managers very rich.
Next, and this is what hedge funds are all about, it will leverage its risk, too. The hedge fund goes out to a lending bank, holding its high-performing but illiquid toxic waste in its hand, and it asks to borrow money using the waste as collateral. The bank has access, whether directly or indirectly, to cheap money from Japan – where interest rates remain at just 0.5% – and so it has the prospect of lending for spectacular profits.
Now the MBS wheel is fully in motion. The hedge fund loses no time in marking up the value of its equity CDOs on the basis of rising house prices. There is an overwhelming pressure to do so, since the hedge fund's managers are rewarded based on performance – a figure which is far too easy to manipulate if your investments are illiquid and hard to value in the absence of an open market price.
The toxic waste gets marked up without the waste itself getting tested on an open market.
The lending bank sees the equity floating higher and higher in the water, and lends more and more cash against it to the hedge fund. Naturally – as with all collateral – it claims the right to sell if the underlying debt gets into trouble, but it certainly doesn't look like a real danger at this stage. The money lent by the bank against the equity goes back to the hedge fund, which buys more CDO equity from the investment bank, which buys more MBS from the mortgage lender, which provides more money to sub-prime borrowers, who then buy more houses, pushing prices higher again.
This appears to be the background to the Bear Stearns hedge fund problem today. Recently, US house prices have turned sharply down, so now the lending banks have asked for their money back and the hedge funds haven't got it. So the collateral needs to be sold. No problem, surely. It's in the books at a few billion dollars after all.
But with its concentration of risk, the equity slice has been hemorrhaging value. No-one is bidding. But that's not the full extent of the problem. There are so many similar hedge fund loans backed by questionable and illiquid securities at marked-up prices – untested by dealing on the open market – that the lending banks have stopped trying to sell for fear it will accelerate and exacerbate the problem into a full-grown systemic disaster, forcing every similar hedge fund out there to own up, catastrophically, to significant overvaluations in their CDO equity portfolios, too.
There is currently no market for this toxic waste. Everyone is taking a breather. All this came to light Thursday – and amazingly the US stock market went up. But it really could turn very nasty. Everyone with a hedge fund holding in any similar market is powerfully motivated to sell today.
What people don't fully appreciate is the extent to which our financial system has geared up over the last twenty years to finance the worldwide residential housing boom. Banks used to have to work quite hard finding profitable businesses to put their money into. But for twenty years now, those banks which concentrated on financing housing have left everyone else in their wake.
I was chatting to a senior financier recently from AIG – the biggest insurance company in the world. Even his business has come to be all about finding and assessing risk in housing finance. Everyone is up to their nostrils in this market.
What might happen? I expect the recent rises in bond rates are related to this developing problem. People better informed than me are starting to gather in cash, rather than lend it out. This could accelerate. The banking sector – whose profits have surfed this business and turned the banks into the pillars of the stock market indices – are going to be hit with some monster bad debts. Barclays bank has already owned up, but the debts it's admitting to are mushrooming, with early reports of $300m being replaced with ones later in the week suggesting more than $1 billion of losses. That hits the stock market with a double whammy - of falling bank stock prices and higher rates for everyone.
The quick deal might be to short Wall Street, which seemed to be wholly in a state of irrational denial as this story hit this week. If you do that today, and things start looking bad next week, consider sending some money to BullionVault to buy gold, too. Few places are better able to ride out the credit squeeze which could result than physical gold bullion owned outright – with no risk of default – in your name alone.
But on the other hand do not underestimate the skill of people including Ben Bernanke at the US Federal Reserve in underpinning the financial system at a time like this. They seem so often to get away with it. It would be interesting to know if Dr. Bernanke has chosen to cancel his social engagements this weekend.
This guys explains in pretty good detail what's going on here if you notice how they sliced up these pools then leveraged it in hedge funds it explains a lot.
__________________
At what point then is the approach of danger to be expected? I answer, if it ever reach us, it must spring up amongst us. It cannot come from abroad. If destruction be our lot, we must ourselves be its author and finisher. As a nation of freemen, we must live through all time, or die by suicide.
I expect this one to slumber, left to fester while they hope for better times, they'll bury it and it'll get worse and rear it's head over time and probably pop at the worst possible moment in time, as these type of ugly secrets are want to do.
Today home sales lowest in 4 years and the stock market bounces up on the news...... hmmmm sniff sniff... what's that smell..... greed, oh they got a good case of it this time, gonna run right off that cliff.
Where's the cliff?
It's where the very first greedy stupid person turns the light on and sees the monsters in the cave.
