Meltdown (2)

cash may be king but what do you do with it?

whats important in this type of environment is capital preservation so you can be ready to reinvest again later when the real bargains appear.

silver tagging along behind at its usual 50:1 ration innit?

BOJ.

or now, as with JPMC picking up Bears for rock bottom...

NEW YORK - Angry Bear Stearns shareholders have wasted no time in bringing legal claims following the company's stunning stock collapse and US$2 ($2.53)-a-share fire sale to JPMorgan Chase & Co.

At least one federal lawsuit in New York seeking class- action status for alleged securities fraud was filed on Monday by an investor contending the company hid its true financial condition from shareholders.

Also filed was a lawsuit from a company worker who held Bear Stearns shares in his retirement portfolio and says the company failed to properly manage risks in the pension plan. That suit also seeks class-action status.

Other investors may bring cases challenging the company's pact to sell itself for a rock-bottom price, legal experts say. But courts are seen as unlikely to kill the buyout deal.

Even the most successful investors can get it horribly wrong, as reclusive British tycoon Joe Lewis has just found out.

The septuagenarian British billionaire currency trader last year built a stake approaching 10 per cent in Bear Stearns , a US investment bank weakened by the subprime crisis and widely seen as a takeover target.

The speculation was half right. JP Morgan set a deal to buy the stricken bank over the weekend, but at a knockdown US$2 ($2.53) a share, implying a loss for Lewis of more than US$1 billion.

Lewis on Monday called the takeover offer "derisory", according to US business news channel CNBC, and said he does not expect JP Morgan to be successful in closing the deal.

the problem for BS is that once your customers lose faith in your liquidity the deals just dry up. No deals no income.

Other investors may bring cases challenging the company's pact to sell itself for a rock-bottom price, legal experts say. But courts are seen as unlikely to kill the buyout deal.

That is because the venerable investment bank, which agreed to the emergency deal under pressure from the US Federal Reserve as the credit crunch widens, appears to have few other options short of filing for bankruptcy, legal experts say.

what I find a bit strange is quotes like the last line of that article

"It all adds up to one of the more painful moments in world economic history."

Yes theres a little bit of pain around but not that much really, in my opinion things can get so much worse. Remember banks failing is just a beginning.

Pain is %10 unemployment. Pain is people losing their houses (yes that is happening in USA - but not here)
Pain is mortgage interest rates in the high teens.

The officials described widespread opportunities for fraud in the industry, which can all be traced back to human greed, and to lax documentation in loan applications, which allowed for loans based on false values or income.

[It seems okay to privatise gains and socialise losses.

When the Federal Reserve stepped in to save Bear Stearns, most people had no idea what was at stake, writes Ambrose Evans-Pritchard

We may never know for sure whether the Federal Reserve's rescue of Bear Stearns averted a seizure of the $516 trillion derivatives system, the ultimate Chernobyl for global finance.

Investment bank Goldman Sachs estimates global credit losses stemming from market turmoil will reach US$1.2 trillion ($1.5 trillion), with Wall St companies bearing about $460 billion of that total.

US financial firms have reported writedowns of about US$120 billion, little over one quarter of the total Goldman estimates they will eventually suffer, suggesting there is much more pain to come before any respite.....

Westpac senior economist Doug Steel said Goldman Sachs' report was consistent with his bank's view. "We do think there is more bad news to come and these numbers would certainly back that up. We're certainly far from out of the woods yet."

but here's one along the same lines

http://www.economist.com/finance/displaystory.cfm?story_id=10881318[/quote]

^

I think its a little unfair to equate this outcome to the "inevitable consequence of the laissez-faire philosophy" as the article above stipulates.

It's more appropriate to blame Laissez-faire in conjunction with the fractional reserve banking system, quantity theory of money, fiat currency, monetary policy.

The two companies are so-called government-sponsored enterprises, created by Congress in 1938 (Fannie) and 1970 (Freddie) to help more Americans buy houses.
Their mandate is to maintain a market for mortgages - buying loans from banks, repackaging them as bonds, and selling those securities to investors with a guarantee that they will be paid.
This makes lending more tempting for banks because Fannie and Freddie take on risks like missed payments, defaults and swings in interest rates.

Treasury Secretary unveils increased credit line and plan for possible stock purchases of Fannie Mae and Freddie Mac

I'm beginning to think Ben is bringing out the helicopter. the end of the USD is just beginning.

a new report from the Center for Economic and Policy Research (CEPR) shows that, due to the collapse of the housing bubble, the vast majority of Americans have accumulated little or no wealth. This means that they will be almost completely reliant on Social Security and Medicare to support them in their retirement years.

The study, "The Impact of the Housing Crash on Family Wealth," analyzed the wealth holdings of families in all age cohorts in 2004 and projected the wealth of these families in 2009. The findings are presented by income quintile under three scenarios- real house prices remain at current levels, real house prices fall by an additional 10 percent, or real house prices fall by an additional 20 percent. In all three scenarios, the vast majority of these families will have little or no housing wealth in 2009.

"This extraordinary destruction of wealth will have tremendous implications for millions of families," said report co-author Dean Baker. "Coupled with a very low personal savings rate, this means that many people, especially those near retirement will only have Social Security and Medicare to rely on once they leave the workforce."

The report projects that if house prices stay the same through 2009, the median household headed by a person between the ages of 45 and 54, those in their prime earning years, will have 24.7 percent less wealth than did the median household in this age group in 2004. These households will have accumulated just $113,268 in net worth in 2009, barely $15,000 more than their counterparts in 1989, whose net worth totaled $97,600.

If real house prices fall 10 percent, the median household in the 45 to 54 cohort will see a 34.6 percent loss in wealth compared with the median in 2004 while families in the 18 to 34 cohort will lose of 67.6 percent. If prices fall by 20 percent, the most pessimistic scenario, families in the 55 to 64 cohort will experience a loss of 49.6 percent of their wealth compared to the same cohort in 2004.

This analysis should also prompt serious re-examination of policy proposals to cut Social Security and Medicare for near retirees. Baker commented, "policies that perhaps could have been justified at the peak of the housing bubble make much less sense now that tens of millions of near-retirees have just seen most of their wealth disappear."

In analyzing wealth holdings for these families, the authors used data from the Federal Reserve Board's 2004 Survey of Consumer Finance. The authors also used the S&P 500 and the Case-Shiller 20-City Composite Index to adjust for equity values and home price changes between 2004 and 2009.

So is it premature to worry oneself about the security of little old AA- KiwiBank?

But you know what? In the US your deposits with FDIC insured banks such as IndyMac are insured up to 100,000. And you can have several accounts with this much in them and they are all insured. Awesome plan for the country that considers itself the bastion of capitalism eh?

Time for comrade Paulson to pull the plug on the Fannie and Freddie charade

The United States of America is becoming less united by the day.

A 30-year gap now exists in the average life expectancy between Mississippi, in the Deep South, and Connecticut, in prosperous New England.

In the wake of the subprime mortgage and credit crisis in 2007, Greenspan admitted that there was a bubble in the US housing market, warning in 2007 of "large double digit declines" in home values "larger than most people expect." However, Greenspan also noted, “I really didn't get it until very late in 2005 and 2006.”

Greenspan admitted that the housing bubble was “fundamentally engendered by the decline in real long-term interest rates”, though he also claims that long-term interest rates are beyond the control of central banks because "the market value of global long-term securities is approaching $100 trillion" and thus these and other asset markets are large enough that they "now swamp the resources of central banks."

Following the September 11, 2001 attacks, the Federal Open Market Committee voted to reduce the federal funds rate from 3.5% to 3.0%. Then, after the accounting scandals of 2002, the Fed dropped the federal funds rate from then current 1.25% to 1.00%. Greenspan acknowledged that this drop in rates would have the effect of leading to a surge in home sales and refinancing.

"Besides sustaining the demand for new construction, mortgage markets have also been a powerful stabilizing force over the past two years of economic distress by facilitating the extraction of some of the equity that homeowners have built up over the years."

However, Greenspan's policies of adjusting interest rates to historic lows contributed to a housing bubble in the US. The Federal Reserve acknowledges the connection between lower interest rates, higher home values, and the increased liquidity the higher home values bring to the overall economy.

"Like other asset prices, house prices are influenced by interest rates, and in some countries, the housing market is a key channel of monetary policy transmission." —Board of Governors of the Federal Reserve System, September 2005.

In a speech in February 2004, Greenspan suggested that more homeowners should consider taking out Adjustable Rate Mortgages (ARMs) where the interest rate adjusts itself to the current interest in the market. The fed own funds rate was at an all-time-low of 1%. A few months after his recommendation, Greenspan began raising interest rate, in a series of rate hikes that would bring the funds rate to 5.25% about two years later. Hence, Greenspan's recommendation came at a time when interest rates bottomed out making it a particularly bad time to take out an ARM. A triggering factor in the 2007 subprime mortgage financial crisis is believed to be the many subprime ARMs that reset at much higher interest rates than what the borrower paid during the first few years of the mortgage.

In 2008, Greenspan expressed great frustration that his 23 February 2004 speech was used to criticize him on ARMs and the subprime mortgage crisis, and stated that he had made countervailing comments eight days after it that praised traditional fixed-rate mortgages.

In that speech on February 23, 2004, Greenspan had suggested that lenders should offer to home purchasers a greater variety of "mortgage product alternatives" other than traditional fixed-rate mortgages. Greenspan also praised the rise of the subprime mortgage industry and the tools with which it uses to assess credit-worthiness in an April 2005 speech:

"Innovation has brought about a multitude of new products, such as subprime loans and niche credit programs for immigrants. Such developments are representative of the market responses that have driven the financial services industry throughout the history of our country … With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers. … Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending; indeed, today subprime mortgages account for roughly 10 percent of the number of all mortgages outstanding, up from just 1 or 2 percent in the early 1990s."

The subprime mortgage industry collapsed in March 2007, with many of the largest lenders filing for bankruptcy protection in the face of spiraling foreclosure rates. For these reasons, Greenspan has been criticized for his role in the rise of the housing bubble and the subsequent problems in the mortgage industry,as well as "engineering" the housing bubble itself:

Effectively some risktakers are saved now by the taxpayers, whereas if they had succeeded the profits would have been retained in the private sector.

Totally agree peat - the fact that it's so blatant just astounds me.
THIS is why people should rail against US capitalism - because it genuinely has become "the wealthy elite have become the powerful and their wealth must be protected at all times". It goes well beyond intervention to smooth significant disruption...

Within hours of receiving complaints yesterday, the Commerce Commission took the unusual step of announcing an investigation into whether Hanover Finance had misled its investors and the public....

Conviction for misleading conduct can result in fines to a maximum $60,000 for individuals, or $200,000 for companies.

what did Keynes say?

“Capitalism is the extraordinary belief that the nastiest of men for the nastiest of motives will somehow work for the benefit of all?”

seems to be coming true

For my own part, I believe that there is social and psychological justification for significant inequalities of incomes and wealth, but not for such large disparities as exist to-day. There are valuable human activities which require the motive of money-making and the environment of private wealth-ownership for their full fruition. Moreover, dangerous human proclivities can be canalised into comparatively harmless channels by the existence of opportunities for money-making and private wealth, which, if they cannot be satisfied in this way, may find their outlet in cruelty, the reckless pursuit of personal power and authority, and other forms of self-aggrandisement. It is better that a man should tyrannise over his bank balance than over his fellow-citizens; and whilst the former is sometimes denounced as being but a means to the latter, sometimes at least it is an alternative. But it is not necessary for the stimulation of these activities and the satisfaction of these proclivities that the game should be played for such high stakes as at present. Much lower stakes will serve the purpose equally well, as soon as the players are accustomed to them. The task of transmuting human nature must not be confused with the task of managing it. Though in the ideal commonwealth men may have been taught or inspired or bred to take no interest in the stakes, it may still be wise and prudent statesmanship to allow the game to be played, subject to rules and limitations, so long as the average man, or even a significant section of the community, is in fact strongly addicted to the money-making passion.

“Capitalism is the extraordinary belief that the nastiest of men for the nastiest of motives will somehow work for the benefit of all?”

Investment industry figures who are sick of seeing retail investors duped have made up their minds.

They believe Watson and Hotchin should either put up - to the tune of $100 million or more - or shut up.

Most believe the pair, with their Hanover-funded property empire in tatters, don't have the cash and should make way for the receivers.

you're right about that burning it call, I've got a diesel heater and at 1.33/ liter it's a judgment call as to which is more heat producing the money or the oil

The scariest news of the week comes from down-under, where the National Australia Bank (NAB) announced it would "slash a £400m bond sale by two thirds. The retreat comes days after the Melbourne lender shocked the markets by announcing a 90pc write-down on its £550m holdings of US mortgage debt, an admission that it AAA-rated securities are virtually worthless....The decision by National Australia Bank to make drastic provisions on its US mortgage debt could have ramifications in the US itself. It opted for a 100pc write-off on a clutch of "senior strips" of collateralized debt obligations (CDO) worth £450m - even though they were all rated AAA. (Ambrose Evans Pritchard, "Australia faces worse crisis than America", UK Telegraph)

This is a huge story with grave implications for America's struggling banking system. No wonder the establishment media is avoiding it like the plague. If AAA rated CDOs are worthless, then some of the biggest financial institutions in the country will be packed off to the boneyard feet-first.


The original article appeared in the Business Spectator and was titled "NAB will shock Wall Street", by Robert Gottliebsen. "Shock" is an understatement. This is more like a meat cleaver crashing down on a butcher block. Schwook! This is a must-read for anyone who is following the meltdown in the financial markets. Here is an extended excerpt from Gottliebsen's article:

"The National Australia Bank's decision to write off 90 per cent of its US conduit loans will have dramatic repercussions around the world. Wall Street will be deeply shocked when they understand the repercussions of what NAB has done. It is clear global banks have nowhere near provided for their exposures to US housing loans which in the words of John Stewart are experiencing a “meltdown”.

We are now way beyond sub-prime. NAB says that it is suffering a 55 per cent loss on American housing loans – an event that has never happened in the history of a developed country in recent memory. This is an unprecedented event and means that the cost of bailing out the US financial system is now far beyond the highest estimates. A US recession is now locked in, but more alarmingly, 55 per cent loan losses point to the possibility of a depression.

WASHINGTON - The Bush administration has seized control of troubled mortgage giants Fannie Mae and Freddie Mac, aiming to stabilize the housing market turmoil that is threatening financial markets and the overall economy.

Treasury Secretary Henry Paulson is betting that providing fresh capital to the two firms will eventually lead to lower mortgage rates, spur homebuying demand and slow the plunge in home prices that has ravaged many areas of the country.

Interest Rates (being set well below the market level)

It follows that an increase in the quantity of money will have no effect whatever on prices, so long as there is any unemployment, and that employment will increase in exact proportion to any increase in effective demand brought about by the increase in the quantity of money; whilst as soon as full employment is reached, it will thenceforward be the wage-unit and prices which will increase in exact proportion to the increase in effective demand.

Prices perform three functions in organizing economic activity: first, they transmit information; second they provide an incentive to adopt those methods of production that are least costly and thereby use available resources for the most highly valued purposes: third, they determine who gets how much of the product-the distribution of income. These three functions are closely interrelated.

Prices represent a very important signaling mechanism to help resources go to where they are most valued, not to mention they send a signal for producers to increase supplies and/or consumers to reduce demand.

When we manipulate the money supply with low interest rates, we effect prices and muddle their reliability indicators of shortages, surpluses, or consumer preferences.

Big Hits! Massive volatility!
The Dow down over 500 points last night.

Eg do you think that NZ should have let the BNZ fail back years ago when it was rescued by the government

how could that sort of system be implimented Rival - I would imagine it could take months of work to decide which is the badly run banks and which are simply victims of bad decisions