Imminent and severe market correction

[davo8]

My guess is that equity holders will be wiped out and bondholders will be made whole. Why? Because so much of the debt is owned by foreign governments and it was bought on the understanding that it had the implicit backing of the US government. The US would have some very pissed off foreign governments to contend with if they wiped out bond holders.

If you look at the losses coming down the pike the equity is already worthless. That means the current share price is simpy a call option on the future.

I think the Treasury will step in and issue some kind of preference shares with their dutiful citizens money and nationalize these farcical instituitions once and for all.

According to the spreads, anything other than the most senior bond holders are looking at at least a haircut.

I hear Pimco made a big bet on agency bonds. When all there is to catch is falling knives, even the best get hurt.

 

[davo8]

For some more dismal reading, Nouriel Roubini has been at it again.

http://www.rgemonitor.com/roubini-monitor/253378/the-worst-economic-and-financial-crisis-in-decades/

here below is a detailed summary of the reasons for my views – as presented in this blog in the last few months - that this will turn out to be the worst financial crisis since the Great Depression and the worst US recession in decades (hyperlinks to my relevant recent writings are provided for each argument):

* This is by far the worst financial crisis since the Great Depression, not as severe as the Great Depression but second only to it.
* At the end of the day this financial crisis will imply credit losses of at least $1 trillion and more likely $2 trillion. The financial and banking crisis will be severe and last several years leading to a severe and persistent liquidity and credit crunch.
* This is not just a subprime mortgage crisis; this is the crisis of an entire subprime financial system: losses are spreading from subprime to near prime and prime mortgages including hundreds of billions of dollars of home equity loans that are worth little; to commercial real estate; to unsecured consumer credit (credit cards, student loans, auto loans); to leveraged loans that financed reckless debt-laden LBOs; to muni bonds that will go bust as hundred of municipalities will go bust; to industrial and commercial loans; to corporate bonds whose default rate will jump from close to 0% to over 10%; to CDSs where $62 trillion of nominal protection sits on top an outstanding stock of only $6 trillion of bonds and where counterparty risk – and the collapse of many counterparties – will lead to a systemic collapse of this market.
* Hundreds of small banks with massive exposure to real estate (the average small bank has 67% of its assets in real estate) will go bust.
* Dozens of large regional/national banks (a’ la IndyMac) are also effectively insolvent given their extreme exposure to real estate and will also eventually go bust. Most of these regional banks – starting with Wachovia and Washington Mutual – look like walking zombies in the same way IndyMac was.
# Even some major money center banks are also semi-insolvent and while they are deemed too big to fail their rescue with FDIC money will be extremely costly. In 1990-91 at the height of that recession and banking crisis many major banks – in addition to 1000 plus S&L's that went bust – were effectively insolvent, including, as it was well known at that time, Citibank. At that time the Fed and regulators used instruments similar to those used today – easy money and steepening of the intermediation yield curve, aggressive forbearance, creative – i.e. liar – accounting, etc. – to rescue these major financial institutions from formal bankruptcy. But at that time the housing bust and the ensuing decline in home prices was much smaller than today: during that recession home prices – as measured by the Case-Shiller/S&P index – fell less than 5% from their peak. This time around instead such an index has already fallen 18% from its peak and it will most likely fall by a cumulative 30% before it bottoms sometime in 2010. If a 5% fall in home prices was enough to make Citi effectively insolvent in 1991 what will a 30% fall in home prices – and massive defaults on many other forms of credit (commercial real estate loans, credit cards, auto loans, student loans, home equity loans, leveraged loans, muni bonds, industrial and commercial loans, corporate bonds, CDS) - do to these financial institutions? It challenges the credulity of even spin masters to argue that financial firms are not in worse shape today than they were in 1990-91 when a significant number of major banks were technically insolvent. So, not only hundreds of small banks and a significant fraction of regional banks but also some major money center banks will become effectively insolvent during this crisis.
# In a few years time there will be no major independent broker dealers as their business model (securitization, slice & dice and transfer of toxic credit risk and piling fees upon fees rather than earning income from holding credit risk) is bust and the risk of a bank-like run on their very short term liquid liabilities is a fundamental flaw in their structure (i.e. the four remaining U.S. big brokers dealers will either go bust or will have to be merged with traditional commercial banks). Firms that borrow liquid and short, highly leverage themselves and lend in longer term and illiquid ways (i.e. most of the shadow banking system) cannot survive without formal deposit insurance and formal permanent lender of last resort support from the central bank.
# The FDIC will for sure run out of money as hundreds of banks will go bust and their depositors will have to be made whole given deposit insurance. With funds of only $53 billion, already up to 15% of such funds will be used to rescue the depositors of IndyMac alone. Thus, the FDIC is already requesting to Congress that the deposit insurance premia should be raised to compensate for this shortfall of funding. Too bad that this increase in insurance premia – that should be high enough in advance (not ex-post) to ensure that deposit insurance is incentive-compatible and not leading to gambling for redemption via risky lending in banks – is now too little and too late and is requested when the damage is already done as the biggest credit bubble in U.S. history is now going bust. Also the FDIC has done a mediocre job at identifying which banks are at risk. So far there are only about 90 banks on its watch list; and IndyMac was not put on that list until last month! So if the FDIC did not even identify IndyMac as in trouble until it was too late, how many other IndyMacs are out there that that the FDIC has not identified yet? Certainly a few hundred but such honest analysis of banks at risk is nowhere to be found.
# Fannie and Freddie are insolvent and the Treasury bailout plan (the mother of all moral hazard bailout) is socialism for the rich, the well connected and Wall Street; it is the continuation of a corrupt system where profits are privatized and losses are socialized. Instead of wiping out shareholders of the two GSEs, replacing corrupt and incompetent managers and forcing a haircut on the claims of the creditors/bondholders such a plan bails out shareholders, managers and creditors at a massive cost to U.S. taxpayers.
# Massive amount of creative accounting and other forms of balance sheet window dressing is occurring to prevent banks from recognizing their true losses. First, most financial institutions are putting increasing numbers of assets in the illiquid buckets of Level 2 and Level 3 assets. While FASB 157 should prevent manipulation of the valuation of such illiquid assets, forbearance by the SEC, the Fed and other regulators allows a massive amount of fudging. An insider told me that in a major financial institution the approach is as follows now: top management decide in advance what the announced writedowns should be and folks dealing with the toxic/illiquid assets come up with totally ad hoc assumptions to make sure that such illiquid assets are valued consistently with the decided-in-advance amount of writedowns and losses. This is not earnings smoothing; this is active manipulation and falsification of financial results aimed at creating even more obfuscation of the true state of financial institutions. This obfuscation is actively abetted by the SEC, the Fed and all other regulators that are now in forbearance crisis management stage where the objective is to avoid at any cost anything that may trigger a financial meltdown. Thus, most of these earnings reports are not worth the paper they are written off.

He called it early and he called it right. Definitely worth a read.

 

[Kauri]

The Wall Street Journal website reports that Freddie Big Mac and fried was forced to offer unusually rich terms to investors in a $3bn auction of its fries yesterday, fuelling concerns about a possible bailout for the mortgage giant and its sibling, Fannie Mae.

Cheers
..........Kauri

Wall Street Journal"s claim that Freddie Mac officials are due to meet US Treasury officials today is being touted as the catalyst for today"s Freddie and Fannie share price slump.
Cheers
............kauri

 

[explod]

For some more dismal reading, Nouriel Roubini has been at it again.

http://www.rgemonitor.com/roubini-monitor/253378/the-worst-economic-and-financial-crisis-in-decades/



He called it early and he called it right. Definitely worth a read.

Many called and referred to many of us as whank..s when we tried to point these matters out 12 months ago.

And I still disagree with one point. The sufferring and destitution of many people across the globe will be greater than the great depression. But of course the financial industry dont' count the human costs, only the bottom lines.

 

[Kauri]

I thunk there is one more major bank in the good ole us of a that will fail!!!... not too far away neither.... and after the inevitable reaction... the yank tank may get the inside running in the G1. International Recovery Stakes.. aaahhh.. maybe more lemmings to the slaughter???.. now... who to short..

mmm :drink:...

Slainte
..............Kauri

More leemings to the slaughter... down 10% in todays trading already...
and I also wonder if Fred and Fan will go the way of Northern Rock????

Cheers
.............Kauri

Yep.... possibly more leemings to the slaughter.. .. turned out a nice short..

Cheers
............Kauri

Now before anyones get the wrong impression and I get an "enquiry" from the powers that be... this is all rumour.. if you act on it don't set the hounds onto me... my own personal reading has the forex $ crosses reacting by...
:arsch:

Cheers
..............Kauri

The FT-reported news Lehman Brothers held secret talks to sell up to 50% of its shares to South Korean or Chinese parties in the first week of August but failed to reach agreement with either is being touted as a factor in USD weakness. The Wall Street Journal website reports that the Fed quietly called Credit Suisse last month to see if it had pulled a line of credit from Lehman Brothers in response to a rumour.

 

[davo8]

Many called and referred to many of us as whank..s when we tried to point these matters out 12 months ago.

And I still disagree with one point. The sufferring and destitution of many people across the globe will be greater than the great depression. But of course the financial industry dont' count the human costs, only the bottom lines.

Do you have a basis for that view? The GD hit Australia hard, and in Europe was a major factor in triggering WW II. If people are hungry enough, even being a soldier can sound like a good idea.

Do you have a factual basis for believing that this will be worse?

 

[dhukka]

According to the spreads, anything other than the most senior bond holders are looking at at least a haircut.

I hear Pimco made a big bet on agency bonds. When all there is to catch is falling knives, even the best get hurt.

Looks like you're right davo, even the bond gurus looks like they may have gotten this one wrong.

 

[dhukka]

For some more dismal reading, Nouriel Roubini has been at it again.

http://www.rgemonitor.com/roubini-monitor/253378/the-worst-economic-and-financial-crisis-in-decades/



He called it early and he called it right. Definitely worth a read.

Yes he did call it right. I enjoy reading Nouriel Roubini's stuff, however he is starting to get a little bit over top isn't he? It's almost as though he feels like he has to out do himself everytime he writes something by coming up with and even gloomier outlook.

for example:

In a few years time there will be no major independent broker dealers as their business model (securitization, slice & dice and transfer of toxic credit risk and piling fees upon fees rather than earning income from holding credit risk) is bust and the risk of a bank-like run on their very short term liquid liabilities is a fundamental flaw in their structure (i.e. the four remaining U.S. big brokers dealers will either go bust or will have to be merged with traditional commercial banks)

Goldman Sachs will merge just to survive? Big call.

This financial crisis signals the beginning of the decline of the American Empire; over time the relative economic, financial, military, geostrategic power of the US and reserve role of the US dollar will significantly decline.

Actually I think the decline of the American Empire probably started a few decades earlier, a bit of overstatement to pin the beginning on the current crisis. That said, I agree with most of what he said although I think his moment in the sun may have to his head.

 

[dhukka]

Now before anyones get the wrong impression and I get an "enquiry" from the powers that be... this is all rumour.. if you act on it don't set the hounds onto me... my own personal reading has the forex $ crosses reacting by...
:arsch:

Cheers
..............Kauri

The FT-reported news Lehman Brothers held secret talks to sell up to 50% of its shares to South Korean or Chinese parties in the first week of August but failed to reach agreement with either is being touted as a factor in USD weakness. The Wall Street Journal website reports that the Fed quietly called Credit Suisse last month to see if it had pulled a line of credit from Lehman Brothers in response to a rumour.

Got a link for us Kauri?

 

[explod]

Do you have a basis for that view? The GD hit Australia hard, and in Europe was a major factor in triggering WW II. If people are hungry enough, even being a soldier can sound like a good idea.

Do you have a factual basis for believing that this will be worse?

Sociological observation only. The current generation have had it good and were spoon fed. Prior to the great depression people mainly lived off the land, young for example worked the UK coal mines and we could go on.

This generation of the developed world are ill equipped for what is developing and is why they will be the last to beleive the unfolding and so will suffer beyond imagination.

Little has been done in the US for the victims of cyclone Katrina for instance. Rousources for recovery on many fronts for deteriorating situations are becoming non-existent.

The financial side you well know and the true horror of its emergence is now even on the pages of the news in the last few weeks.

But just my take for the debate.
Facts, how does one quantify the breadth of what is occurring.

 

[Kauri]

Got a link for us Kauri?

Hard tom link rumours...
butt..
you could try here..
and here..
Cheers
............Kauri

 

[Kauri]

I thunk there is one more major bank in the good ole us of a that will fail!!!... not too far away neither.... and after the inevitable reaction... the yank tank may get the inside running in the G1. International Recovery Stakes.. aaahhh.. maybe more lemmings to the slaughter???.. now... who to short..

mmm :drink:...

Slainte
..............Kauri

The Wall Street Journal website reports that Freddie Big Mac and fried was forced to offer unusually rich terms to investors in a $3bn auction of its fries yesterday, fuelling concerns about a possible bailout for the mortgage giant and its sibling, Fannie Mae.

Cheers
..........Kauri

Having run a short on the leemings and tickled the Fannies shorts, and Fred as well.. oops , there is one outstanding short USwise tonight to bring it all off... butt... the Powers that be.... butt....ahhh.. you picked a fine to leave me loose heel Kenny Rogers was herd to otter as he picked himself up from the arsephalt....

beers
...........Kauri

 

[dhukka]

Hard tom link rumours...
butt..
you could try here..
and here..
Cheers
............Kauri

Well spotted, I take it you aren't a wsj subscriber?

 

[Kauri]

Lone Star PE moving in on floundering Jerry Bank???
Kreditanstalt für Wiederaufbau??
IKB Deutsche Industriebank??

Mayhaps..

Cheers
............Gauri

 

[CanOz]

More from Jim Rodgers.....

http://seekingalpha.com/article/91641-interview-with-jim-rogers-part-i-bigger-financial-shocks-loom

 

[Kauri]

Well spotted, I take it you aren't a wsj subscriber?

No... I have a ((*)) that subscribes to all manner of media... and I get a feed of what is relevant.. in return for my input... and that service is... aah how best to describe her((*)) ...a quintessential aquaintance??..
Cheers
..............Lauri

 

[Kauri]

Just pondering.. Fred and Fannie up agin it, leeming doing it hard, and the MEDIA touted US int. cuts not as close as some ass ume... and .. well.. does this maybe make this the $US oversold correction/consolidation/pause we had to have.. or has it actually got legs... my money is NOT on the sidelines for the move I THINK is coming... in the NEAR term... does anyone else see anytink.. or nott... afore it happens that is..

Cheers
.................Kauri

 

[nunthewiser]

bugga the yank banks worry about our own , check the story!

While much of today's chatter will be over the solvency or otherwise of Babcock & Brown, perhaps a more important question is the terrible impact the Babcock crisis could have on our banks.

If the chief executives of Westpac, Commonwealth, NAB and ANZ are doing their job, this week they will have called for a 'total exposure' statement for Babcock & Brown. I'm not privy to any such statement, but my guess is that one or two of the CEOs will have been shocked because their bank had been happily treating various parts of the Babcock group as separate clients and not understanding that it was one group. Exposures may have risen beyond what would have been prudent for one borrower.

On my rough sums, the Babcock group owes banks and financiers in the vicinity of $50 billion. Never in Australia’s history have we had a group of this size in difficulty. Thankfully, the bulk of that amount is owed to overseas banks but our big four, led by the normally conservative Westpac, hopped in for their slice of parent debt. The odds are they have been lending big sums to some of the satellite operations and that the Babcock group will be among their biggest exposures. It is a serious matter for the Australian banking industry.

The stock market is saying that the listed satellites have only token equity. Those listed vehicles have debt of about $28 billion. The non-listed vehicles are just as large as the listed vehicles and take total debt beyond $50 billion. Babcock would claim that the stock market is wrong in the equity valuations and that the assets are generating sufficient cash to cover their loan requirements. But that won't stop bank CEOs with big exposures from feeling nervous.

The Babcock group may be solvent, but it is in crisis. All the various entities have been borrowing on a non-recourse basis, so there are few if any cross-guarantees. What every bank now has to do is look at whether the assets over which they have security have a realistic worth that is greater than the loans in the satellite.

In many cases they will be fine and the bank CEOs will gain great comfort. But in other cases they will find that the real value of the asset has fallen sharply. Babcock had a habit of paying top prices for assets and convincing bankers that it was all blue sky ahead. The great salespeople at Babcock will disappear and will be replaced by people who will count the real numbers and we will then find out what the position is.

Among the highly leveraged assets under management is about $7 billion in aircraft leases. Last night I flew on an interstate scheduled 737 flight that had just nine passengers, requiring us to sit in selected positions to spread the weight. It was yet another reminder that while the market for aircraft leases is currently strong, that industry has a very volatile history. I will never forget the joint TNT-News Corp aircraft leasing operation in the 1980s that gave big book profits to News Corp when they were badly needed by Rupert Murdoch. Later, the profits evaporated as the aircraft value cycle turned.

The world economy is slowing down and capital is short. Many asset purchase decisions made in the boom will look silly. The Babcock situation must now be looked at very carefully and we must all keep our fingers crossed that the stock market is wrong and there is real equity in the satellites – and that we are not on the brink of a set of serious banking losses.


Robert Gottliebsen

http://www.businessspectator.com.au...-in-Babcocks-hands-HQ2JF?OpenDocument&src=spb

 

[Kauri]

.

Last night I flew on an interstate scheduled 737 flight that had just nine passengers, requiring us to sit in selected positions to spread the weight.

BOLLOCKS!!!

Wake up Australia... these idiots who call temselfs journalists need a reality check.. or will we keep sucking AND swallowing whatever they dish uP!!!
Apologies of course if you(the Journo) happen to be grossly, excessively, even obscenely, overweight...

Incredulous
................Krakatoa

 

[Trembling Hand]

.

BOLLOCKS!!!

Wake up Australia... these idiots who call temselfs journalists need a reality check.. or will we keep sucking AND swallowing whatever they dish uP!!!
Apologies of course if you(the Journo) happen to be grossly, excessively, even obscenely, overweight...

Incredulous
................Krakatoa

This guy is a shame. Start of the year he was trumping another 20% gain for our market while pimping subscription bull market cow pads. Then during the meltdown it was all predatory, manipulators destroying good companies and value with naked shorts. Now his woken up and..

Many asset purchase decisions made in the boom will look silly.

But when will people wake up to how silly this goose is?