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Daisy Chains and Dead Men Walking

 
^Omega^
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11/05/2007 10:09 AM
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Daisy Chains and Dead Men Walking
This will bore the classic woo woo's, however for those interested, I see real doom here.

[link to wallstreetexaminer.com]

Daisy Chains and Dead Men Walking
Monday, November 5th, 2007 at 3:07 AM

The false financial daisy chain that holds the credit leviathan together has suddenly flashed clear and present danger, BIG TIME! Credit default swaps (CDS) on a number of the big Pig Men themselves have rapidly swooned.The concept of credit derivatives was discussed in an Economist article and by Pimco. Lots of layers of various Cs are now in deep doo doo. Who would have thought that heads over heels JULS debt secured by declining collateral might actually default?



There are various events that cause these swaps to be triggered. One for example would be reworking the terms (debt restructuring) of toxic mortgages so that debtors “can keep their houses”. Little wonder this restructuring isn’t really happening, because it will be immediately disputed and disallowed by the CDS insurer. Imagine the hundreds of thousands (if not millions) of hours of manpower just negotiating and litigating the outcome and resolution of these convoluted deals. And rest assured that besides just the stupid, there are some hard core criminal types in the transaction mix as well, making fair and equitable solutions to these losses impossible. All this makes the regular weekend emergency meetings we see among the financial mucky mucks a farce. They would be nuts to trust the other. And these are issues hardly resolved by replacing one overpaid empty suit with another either. In reality it will be so much easier for the insurers, who are often fly by night hedge funds anyway to just turn out the lights and switch off the fax machines.


A run down of what’s been transpring lately:

Credit-default swaps on Merrill Lynch are now trading as if the company was rated below investment-grade, according to data from the credit strategy group at Moody’s Investors Service. Moody’s lowered its rating on Merrill Lynch one level on Oct. 24 to A1, which is six levels above the investment-grade threshold. Citigroup is trading as if it were rated Baa3, the lowest investment-grade rating, and eight levels below its actual senior unsecured debt ranking by Moody’s, the data show. Credit-default swaps tied to MBIA Inc., the world’s biggest bond insurer, rose 60 basis points to 480 basis points, the widest in at least three years, according to CMA Datavision in New York. Ambac Financial Group Inc., the second-biggest bond insurer, climbed 63 basis points to 689 basis points, CMA prices show.

Clearly what must be going on behind the scenes are that claims are being presented fast and furious to collect on the various real defaults and Milky Way tricks going on in the Ponzi system. Remember, even a deferral of a payment (agreed to between the creditor and debtor) is technically a debt restructuring, and will trigger demands for claims payments from credit insurers. The CP market seems just one likely suspect.

Banks worldwide have $891 billion at risk in asset-backed commercial paper facilities because of credit agreements that ensure investors are paid back when the short-term debt matures, Fitch Ratings said.” - Bloomberg, August 23, 2007

And if credit conditions in the market for the likes of Citigroup, MBIA, and Merill Lynch are getting dicey, what is the likelihood that obscure ABC hedge funds credit “insurers” in the Cayman Islands will even be there to answer the “pay up now” fax? You see, the whole idea for ABCs existence in the first place was as a scam to skim insurance premiums. The idea was certainly never to actually pay up for meaningful claims. That’s why in coherent and transparent financial systems there are regulators around who monitor insurance transactions. That “small detail” was just ignored and on a grand scale in the fee generation Ponzi scheme. Pig Men and their minions instead ran amok.

It was just more smoke and mirrors illusions that allows the negative selection “money managers” to claim that their asses are covered in a pinch.The idea was not to do the “right thing”, it’s more about having a defense when Aunt Millie sues when her investments and savings blow up under your watch. These “money manager” clerks will most certainly have to explain why they didn’t have a clue who the counter-parties were to a judge, but the dockets will be jammed with similar cases, and there will be nothing much to collect. The more serious counter-party criminals behind the facade have long ago stuffed their ill got gains into the rat lines. Doug Noland writes about the sheer scale of this farce, I mean “market”.

According to the Bank of International Settlements, the OTC market for Credit default swaps (CDS) jumped from $4.7 TN at the end of 2004 to $22.6 TN to end 2006. From the International Swaps and Derivatives Association we know that the total notional volume of credit derivatives jumped about 30% the past year to $45.5 TN. And from the Comptroller of the Currency, total U.S. commercial bank Credit derivative positions ballooned from $492bn to begin 2003 to $11.8 TN as of this past June. It today goes without saying that this explosion of Credit insurance occurred concurrently with the expansion of the riskiest mortgage (and other) lending imaginable. It’s got “counter-party fiasco” written all over it. The inability to hedge rising default risk has become and will remain a major systemic issue.
^Omega^ (OP)

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11/05/2007 10:27 AM
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[link to www.prudentbear.com]

Credit is Three-Dimensional
by Bob Hoye
November 3, 2007

Bob Hoye is a market historian and editor of Institutional Advisors, a provider of research to financial institutions, mining, and petroleum companies internationally at www.institutionaladvisors.com.

The Fed has little influence on the curve, or credit spreads, and the concept of a national credit market is nonsense.

Overview: The very old saying that "Credit is suspicion asleep" provided the most succinct explanation of pressures in the financial markets that concluded in severe turmoil in August. In a world considered to be made almost perfect by policymakers this was shocking. "Goldilocks" was the prevailing condition, financial panic rapidly became the new paradigm, but these events are not so new. Neither have been the ideas that were floated as the early signs of trouble appeared that it was "isolated", or could be "contained". Despite such comforts promised by the establishment the transition showed, yet again, that risk appraisal was indeed asleep.

Going as far back as Roman times history records many collapses in financial markets, and while the names of the credit instruments may change, the pattern has remained the same. A boom, with great confidence and a sudden change from exuberance to dismay and panic, has usually been followed by a cyclical contraction. Even the response by policymakers is so reliable as to be predictable.

Through a number of panics and contractions in the mortgage markets the "Genius" of the Emperor virtually created the New Deal in Old Rome, much as Roosevelt's "Brain Trust" created the New Deal in the US in the 1930s. It is ironical that the socialists who invented the New Deal were so ignorant of their own history that they didn't know that their counterparts had invented the same nonsense almost 2,000 years earlier. There is a comment by Cicero that problems in the credit markets in one part of the Empire inevitably would spread to all trading ports in the Mediterranean.

Various agencies created in Rome's long-running New Deal intended to help or bail out everyone from merchants to grain farmers to wine makers suggests that the hardships of a post-boom contraction hit virtually all classes in society. Particularly when out of a population of almost a million in the City almost half were on welfare.

Thus, the observation that credit markets are three-dimensional. One is that a credit contraction afflicts all classes of credit from low-grade to high-grade borrowers, as well as those who are wards of the state with no ability to borrow money to the state itself with the highest rating.

The next dimension is in time, whereby shorter-dated loans usually have a lower rate than longer-dated loans. Then in a boom the demand by speculators for near-term money increases short rates faster than long rates and the curve inverts. This is symptomatic of a boom but does not signal its demise. As with the experience in the summer, it is when the curve reverses to steepening that the most blatant speculations begin to fall apart.

It is worth noting that while the Fed can briefly influence short-dated market rates of interest it can't push long rates, so the policymakers have little influence on the curve. The curve as it reverses to steepening then becomes a sophisticated and impartial indicator of diminishing speculative demand for funds.

The next dimension of credit is the spread between low-grade and high-grade bonds, which in the final phase of a boom becomes very narrow. In so many words, in an over abundance of confidence investors buy risk to obtain a slightly higher yield.

The other historical aspect of credit is the third dimension of geography. Where the foundation of manipulative economics rests upon personal fantasies about a national economy the real world of credit has always been universal to wherever credit is used and created. Credit is global and policymaking is a parochial dream that can turn to a nightmare in the face of implacable market forces. A credit expansion is like a tide as it lifts all ships in all harbours – from the largest to the smallest. Contractions have been undeniable and do quite the opposite.

At the bottom of contraction it is typically real and cautious money rather than the borrowed kind that accumulates very unpopular stocks, corporate bonds, and commodities. Then, at the top inspired confidence leverages up on established price trends and participants enjoy the high life. In so many words, bull markets, like civilizations are born stoic and die epicurean.

Cicero's observations that financial distress in Tyre, with an unfavourable wind would inevitably be carried to Rome, has and will continue to be correct. Notions that credit markets are national will continue to be absurd.

These implacable forces, which by definition have always been well beyond the ambitions of even the most earnest of committees, have been cyclical. And the characteristics of change from contraction to expansion and back again have been methodical.

Of critical interest has been this year's changes in the credit markets. Typically in the late phase of a boom the action runs for some 12 to 16 months against an inverted curve and while this indicates developing strains in the financial markets it is not the killer, nor is the attendant rise in short-dated market rates of interest, such as treasury bills. The problem is that when the curve reverses to steepening the most blatant speculations begin to fall, with many of them failing.

The curve had reversed to steepening by the end of May, and June was the sixteenth month since inversion started in February, 2006. With this, our observation in July was that the contraction had started and that it would likely be the biggest train wreck in the history of credit markets.

The initial crisis came as a severe shock to market participants, policymakers and interventionist academics. Although the panic ran a brief course and ended later in August, the overall condition should not be considered as "fixable" or that the summer's turmoil was enough to naturally clear market imbalances.

An era of wild asset inflations, including stock and metal markets, matured in the summer of 1873 and following the initial panic, The Economist (October 4, 1873), wisely observed "The panic may be over, but the results of the panic are not over." The initial bear market lasted for five years and the business contraction lasted one year longer. The writer at The Economist offered appropriate advice on any shocking panic, especially as signaled by changes in the credit markets that started in May of this year.

Over most of the past two years the mantra has been that the Fed had again provided "Goldilocks" conditions and that within this "liquidity" was driving the markets up. In reality it was the usual leveraging up of all the hot games that provided the appearance of liquidity, and the health of the play depended upon rising prices. Of course, the threat to any impetuous boom is that any break in prices brings the margin clerk on to the stage.

The job descriptions of the central banker and the margin clerk are very different. The central banker's job is to get the accounts over-leveraged, and the latter is compelled to get and keep the accounts onside – no matter what! Seriously, it is ironical that the way it really works is that the world of policymaking has always fostered unsustainable speculation and then at the top hands the baton of power in the credit markets to Mr. Margin.

This contrasts with macroeconomics which considers that contractions are due to "exogenous" events, which essentially means that if you didn't put it in your computer model then it can't happen. The equivalent in investing has been quantitative modeling and one such "quant" described the credit shock as not just one "10,000" year event, but that there were 3 days of them.

Conventional wisdom holds that interventionist policymakers will "fix" the problems. A thorough review of history suggests that policymaking with its chronic accommodation is a large part of the problem and the contraction could be severe enough to "fix" interventionist meddling.

In the 1600s Amsterdam was the commercial and financial center of the world, and some Dutch terms for finance have meaning today. The term "easy" money still has the same connotation, and soon so will its opposite – "diseased" money. The October 20th edition of The Economist cover story was "Central banks have worked miracles for 30 years. Don't count on that continuing."

Well they got the last part right, but rather than calling the thirty years a miracle the practical Dutch would have called it "easy" money, and also had the vocabulary for its consequence.
^Omega^ (OP)

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11/05/2007 11:01 AM
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Re: Daisy Chains and Dead Men Walking
Game,set, and match.

EDIT. Citi is the dead man walking. Watch what happens next, LMFAO.


Citigroup Default Swaps Rise to Record on Writedowns (Update2)

By Hamish Risk and Shannon D. Harrington
Enlarge Image/Details

Nov. 5 (Bloomberg) -- The risk of Citigroup Inc. defaulting on its debt rose to a record after the biggest U.S. bank by assets said that subprime mortgages and related securities lost as much as $11 billion of their value in the past month.

Credit-default swaps on the New York-based lender opened 8 basis points higher at 80 basis points, according to prices from Lehman Brothers Holdings Inc. The contracts, which rise as perceptions of credit quality worsen, have increased from as little as 10 basis points in June and last traded at 73 basis points at 9:30 a.m. in New York.

The writedowns may wipe out half of the company's profit so far this year and add to almost $7 billion of costs for bad debt, bond and loan losses from the third quarter. Chief Executive Officer Charles O. ``Chuck'' Prince will step down immediately, the bank said yesterday.

``With a new CEO, there's always the chance of a new broom coming through and wiping the slate clean for the new financial year,'' said Corinne Cunningham, a credit analyst at Royal Bank of Scotland Plc in London. ``That leads to increased uncertainty in the short term.''

Royal Bank of Scotland has an ``underweight'' recommendation on Citigroup bonds, meaning investors should allocate a smaller proportion of their holdings than is reflected by benchmark indexes.

Ratings Cut

Fitch Ratings cut Citigroup's credit rating one level today to AA, three below the highest grade, and said it may reduce further. Standard & Poor's put its AA ranking on CreditWatch with negative implications because of the writedowns and a potential ``period of strategic uncertainty'' after Prince's resignation.

Citigroup credit-default swaps have more than tripled in the past three weeks, prices from CMA Datavision in London show. The contracts are trading as if the company was rated Baa3 by Moody's Investors Service, one level above non-investment grade, or junk, according to data from Moody's credit strategy group on Nov. 2.

Citigroup has a higher default risk than Bank of America Corp., JPMorgan Chase & Co. or Wachovia Corp., based on credit- default swap prices from CMA. Contracts on Merrill Lynch & Co., where Stan O'Neal left as CEO last week because of more than $8 billion in writedowns, are higher at 125 basis points, according to Phoenix Partners.

The CDX North America Investment Grade Series 9 Index of 125 companies rose 3.5 basis points to 73 basis points today, according to Deutsche Bank AG. The index has climbed 12.5 basis points in the past three days.

A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

Credit-default swaps are financial instruments based on corporate bonds and loans that are used to speculate on a company's ability to repay debt.

To contact the reporter on this story: Hamish Risk in London hrisk@bloomberg.net
Last Updated: November 5, 2007 10:02 EST
askakido nli
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11/05/2007 01:41 PM
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Re: Daisy Chains and Dead Men Walking
Interesting stuff, Omega
^Omega^ (OP)

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11/05/2007 02:10 PM
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Re: Daisy Chains and Dead Men Walking
Interesting stuff, Omega
 Quoting: askakido nli 255950


Thanks. I am hearing the whisper number for Citi concerning toxic waste securities is to the tune of 100 Billion.

You heard that right. 100 billion.

Things are about to get very interesting.
^Omega^ (OP)

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11/05/2007 02:17 PM
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Re: Daisy Chains and Dead Men Walking
I stand corrected,lmao...........

key excerpt:

*derived valuations*

Bwhahahahahhahahahahahahahahahahah!!!!!!!!



Citigroup: $134.8 billion in 'level 3' assets

From MarketWatch: Citigroup reports $134.8 billion in 'level 3' assets

Citigroup Inc. ... said its so-called level 3 assets as of Sept. 30 were $134.84 billion.

Level 3 assets are holdings that are so illiquid, or trade so infrequently, that they have no reliable price, so their valuations are based on management's best guess.

From the Citi 10-Q:

Level 3—Model derived valuations in which one or more significant inputs or significant value drivers are unobservable.
^Omega^ (OP)

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11/05/2007 02:34 PM
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Re: Daisy Chains and Dead Men Walking
From the great Rasputin over at the prudentbear forum.


Citi Hides the Sausage rasputin

NEW 11/5/2007 4:09:16 AM


So, we see that since they are no longer able to cover the stench of its rotting sausage links, Citi is finally starting to ‘fess up to additional sub-prime "writedowns".

According to the WSJ article posted by QQQ below, the REAL “writedowns” will be from $8 billion to $11 billion instead of the $2 billion reported in the Q3 earnings report released just last month. (Translation of “writedown”: "We have no idea what these instruments of financial death are worth, but we'll just take a wild guess at their present value and hope nobody will question us, even though we have now admitted we were off by SIX TO NINE BILLION DOLLARS in our financial statements!!!.)

And these additional losses have supposedly come just since September 30, 2007. Yeah, right.

Furthermore, Citi claims that is has $55 billion in U.S. sub-prime related direct exposures in its Securities and Banking (S&B) business.

And, as stated above, Citi further claims that, SO FAR (translation: much more to come), the "reduction in revenues" (translation: default) of these "writedowns" translate to a decline in net income of approximately $5 billion to $7 billion on an after-tax basis.

Oh, and let us NOT forget that Citi us using the "New and Improved" FASB 157 three-tiered "fair value" accounting of it's sub-prime sausages and ONLY re-valued the rancid links AFTER a series of rating agency downgrades forced them to admit to the toxicity in their stash.

By the way, here is what Citi is claiming is mixed into their sausages:

-Approximately $11.7 billion of sub-prime related exposures in its lending and structuring business

-Approximately $43 billion of exposures in the most senior tranches ("Super Senior Tranches") of collateralized debt obligations which are collateralized by asset-backed securities (ABS CDOs).

Whoa, stop right there. "Super Senior Tranches?" Whew,THAT sounds pretty safe, right?

Wrong. For, in this Brave New World of Orwellian Financial Speak, the "Super Senior Tranches" are WHATEVER THE ISSUER SAYS THEY ARE!!!

Here is what Janet Tavakoli, the undisputed Structured Finance Diva, has to say about "Super Senior Tranches":

"For banks and insurance companies that invest in super senior tranches, it is important to note there is no market standard definition of super senior risk. There is also no standard means of pricing super senior risk."

Link to Janet's discussion:
Janet knows the score on the scam

So much for “Super Senior Tranches” seeming safe.

Moving forward, let's focus on the $11.7 billion of sub-prime related exposure that Citi SAYS that it is stuck with. Citi claims that this number includes:

-$2.7 billion of CDO "warehouse inventory" (Translation: They couldn't move these tainted links and they are now rotting away in the "warehouse") and other unsold tranches of ABS CDOs

-Approx. $4.2 billion of "actively managed" sub-prime loans purchased for resale or securitization at a discount to par primarily in the last six months (translation: “We are desperately calling every sucker in the Rolodex, but we can't find anyone stupid enough anymore to buy this junk”), and:

-Approximately $4.8 billion of financing transactions with customers secured by sub-prime collateral (Translation of “Prime Collateral: CDS).

Once again, please keep in mind that these numbers reflect "fair value" based on "observable transactions and other market data" ("Level Two" FASB accounting, if I am interpreting this statement correctly.)

Now, we'll take a look at the ABS CDO “Super Senior” exposures.

Citi claims that the $43 billion in ABS CDO super senior exposures is backed primarily by sub-prime RMBS collateral. These exposures include:

-Approximately $25 billion in commercial paper principally secured by super senior tranches of high grade ABS CDOs, and:

-Approximately $18 billion of super senior tranches of ABS CDOs, consisting of:
-approx. $10 billion of "high grade" ABS CDOs,
-approx. $8 billion of mezzanine ABS CDOs, and:
- approx. $0.2 billion of ABS CDO-squared transactions.


Furthermore, Citi claims that even though the principal collateral underlying these “Super Senior Tranches is U.S. sub-prime RMBS, these exposures consist the most "senior tranches" (See Tavakoli explanation above) of the capital structure of the ABS CDOs.



Now, here's the rub: These “Super Senior Tranches are NOT subject to valuation based on “observable market transactions” (which means Citi is using"Level Three" FASB rules, if I am interpreting this correctly). Therefore, the "fair value" of these super senior exposures is based on estimates of many factors, including:

-“Future housing prices to predict estimated cash flows”.


(Gee, THAT should be no problem to predict, eh?)

And let us not forget that these numbers and losses are only those to which Citi is admitting. Who really knows what ADDITIONAL carnage is deteriorating in SIV dungeons? Finally, take these numbers, multiply them across the entire universe of banking, and you will have some idea of the state of our financial system. (Hint: Think “Hindenburg”.)

(Ras Analysis and Conclusion): The hits just keep on coming, folks. If this isn't a classic case of “Trickle Out the Bad Financial Data” theory, I don't know what is. The losses are probably far, far larger based on my research of the underlying MBS/subprime mortgages, found here:
Yesterday's sausage analysis available again today

(Conclusion): Expect the total, aggregate losses across all banks, pension funds, mutual funds, money market funds, hedge funds, credit insurance providers and other players to total in the TRILLIONS as this all plays out in the weeks and months ahead, especially if the housing bust continues to grow and more and more homedebtors default on their payments. Think about it. Just a month or so ago, Citi was reported to be sitting on $80-$100 billion in “off-balance sheet”/SIV junk, so it's difficult to believe that this latest admission is accurate.

This is “Maximum Scroomage” territory, gang. It is becoming increasingly difficult to hide the losses that these Financial Fruitcakes are now experiencing and will experience going forward.

Take proper precautions that you believe necessary to protect your wealth and yourself.
Anonymous Coward
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11/05/2007 02:44 PM
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Re: Daisy Chains and Dead Men Walking
You are the best Omega...
Hold the Phone

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11/05/2007 03:07 PM
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Re: Daisy Chains and Dead Men Walking
bump
Anonymous Coward
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11/05/2007 10:00 PM
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Re: Daisy Chains and Dead Men Walking
bump For the late nighters...

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