| | | Page 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 21, 22, 23, 24, 25, 26, 27, 28 | Watch, Its happening ,the global economic change.
| Anonymous Coward
User ID: 324798
11/11/2007 4:26 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
Bankruptcy Law Backfires as Foreclosures Offset Gains (Update1)
By Kathleen M. Howley
Enlarge Image/Details
Nov. 8 (Bloomberg) -- Washington Mutual Inc. got what it wanted in 2005: A revised bankruptcy code that no longer lets people walk away from credit card bills.
The largest U.S. savings and loan didn't count on a housing recession. The new bankruptcy laws are helping drive foreclosures to a record as homeowners default on mortgages and struggle to pay credit card debts that might have been wiped out under the old code, said Jay Westbrook, a professor of business law at the University of Texas Law School in Austin and a former adviser to the International Monetary Fund and the World Bank.
``Be careful what you wish for,'' Westbrook said. ``They wanted to make sure that people kept paying their credit cards, and what they're getting is more foreclosures.''
Washington Mutual, Bank of America Corp., JPMorgan Chase & Co. and Citigroup Inc. spent $25 million in 2004 and 2005 lobbying for a legislative agenda that included changes in bankruptcy laws to protect credit card profits, according to the Center for Responsive Politics, a non-partisan Washington group that tracks political donations.
The banks are still paying for that decision. The surge in foreclosures has cut the value of securities backed by mortgages and led to more than $40 billion of writedowns for U.S. financial institutions. It also reached to the top echelons of the financial services industry.
Prince Exits
Citigroup Chief Executive Officer Charles O. ``Chuck'' Prince III stepped down this week after the country's biggest bank by assets said it may have $11 billion of writedowns on top of more than $6 billion in the third quarter. Stan O'Neal was ousted as CEO of Merrill Lynch & Co., the world's largest brokerage, after an $8.4 billion writedown. Both firms are based in New York.
Morgan Stanley, the second-biggest securities firm, said in a statement today that subprime losses will cut fourth-quarter earnings by $2.5 billion. The New York-based bank said it lost $3.7 billion in the two months through Oct. 31 as prices for securities linked with home loans to risky borrowers sank further than traders expected.
Even as losses have mounted, banks have seen their credit card businesses improve. The amount of money owed on U.S. credit cards with payments more than 30 days late fell to $7.04 billion in the second quarter from $8.37 billion two years earlier, according to data compiled by Federal Deposit Insurance Corp.
In the same period, the dollar volume of repossessed homes owned by insured banks doubled to $4.2 billion, the federal agency said. New foreclosures rose to a record in the second quarter, led by defaults in subprime adjustable-rate mortgages, according to the Mortgage Bankers Association in Washington.
`Let the House Go'
People are putting their credit card payments ahead of their mortgages, said Richard Fairbank, chief executive officer of Capital One Financial Corp., the largest independent U.S. credit card issuer. Of customers who are at least three months late on their mortgage payments, 70 percent are current on their credit cards, he said.
``What we conclude is that people are saying, `Honey, let the house go,''' but keep the cards, Fairbank said Nov. 5 at a conference in New York sponsored by Lehman Brothers Holdings Inc.
The new bankruptcy code makes it harder for debtors to qualify for Chapter 7, the section that erases non-mortgage debt. It shifted people who get paychecks higher than the median income for their area to Chapter 13, giving them up to five years to pay off non-housing creditors.
No Help Left
The court-ordered payment plans fail to account for subprime loans with adjustable rates that can reset as often as every six months, said Henry Sommer, president of the National Association of Consumer Bankruptcy Attorneys. Two-thirds of debtors won't be able to complete their payback plans, according to the Center for Responsible Lending.
``We have people walking away from homes because they can't afford them even post bankruptcy,'' said Sommer, a Philadelphia- based bankruptcy attorney. ``Their mortgage rates are resetting at levels that are completely unaffordable, and there's nothing the bankruptcy process can do for them as it now stands.''
Four million subprime borrowers with limited or tainted credit histories will see their mortgage bills increase by an average 40 percent in the next 18 months, according to the National Association of Consumer Advocates in Washington. About 1.45 million of those will end up in foreclosure by the end of 2008, said Mark Zandi, chief economist at Moody's Economy.com, a research firm and unit of Moody's Corp. in New York.
Lenders began the process of seizing properties on 0.65 percent of U.S. mortgages in the second quarter, a record in a quarterly Mortgage Bankers study that goes back 35 years. The percentage of subprime borrowers making late payments increased to 14.82, a five-year high, from 13.77.
Bankruptcies Increase
Personal bankruptcies rose 48 percent to 391,105 in the first half of 2007 from a year earlier and Chapter 13 filings accounted for more than one-third of those, according to the American Bankruptcy Institute. In the first half of 2005, they were just 24 percent of the total.
Bad mortgages slashed Washington Mutual's profit by 72 percent in the third quarter from a year earlier, the Seattle-based thrift said Oct. 17. Income from credit card interest rose 8.8 percent to $689 million in the period, helping to offset a loss the bank warned on Oct. 5 would be 75 percent.
Washington Mutual shares tumbled the most in 20 years yesterday after New York Attorney General Andrew Cuomo said the thrift had pressured real estate appraisers to assign inflated values to properties. Its dividend yield fell to 11 percent and the company traded at 0.74 price-to-book value.
Citigroup's third-quarter earnings fell 57 percent on mortgage losses. Bank of America stopped so-called warehouse lending to mortgage brokers after its profit declined 32 percent in the same period.
`Unintended Consequence'
JPMorgan reported profit growth of 2.3 percent in the quarter, the smallest in more than two years, after reducing the value of leveraged loans and collateralized debt obligations, investment packages of mortgages, by $1.64 billion.
Washington Mutual spokeswoman Libby Hutchinson in Seattle, JPMorgan spokesman Thomas Kelly in New York and Bank of America spokesman Terry Francisco in Charlotte, North Carolina, declined to comment on the bankruptcy law.
``The law had an unintended consequence of taking away a relief valve that mortgage borrowers used to have,'' said Rod Dubitsky, head of asset-backed research for Credit Suisse Holdings USA Inc. in New York. ``It's bad for the mortgage borrowers and bad for subprime investors because it means more losses.''
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was the biggest overhaul to the code in more than a quarter of a century. The old law, the Bankruptcy Reform Act of 1978 that was signed by President Jimmy Carter, had loosened requirements for debt forgiveness.
Lobbying Effort
Financial companies began a coordinated lobbying campaign for bankruptcy reform in 1998 when the American Financial Services Association, a trade group representing credit card companies, joined the American Bankers Association to form the National Consumer Bankruptcy Coalition.
Campaign contributions from the coalition and its members totaled more than $8.2 million during the 2004 election that gave Bush his second term in office. Two-thirds of the donations were given to Republicans who supported the bankruptcy changes, according to the Center for Responsive Politics.
The group, later renamed the Coalition for Responsible Bankruptcy Laws, has since disbanded. Its members included Washington Mutual, JPMorgan, Bank of America, Citigroup, MasterCard Inc., and Morgan Stanley.
Ford Motor Co., General Motors and DaimlerChrysler also were members. They won provisions in the new code that changed the way car loans are treated in bankruptcy.
Reform the Reform
Congress may soon take action to ``reform the bankruptcy reform,'' Zandi said. The House Judiciary Committee is working on legislation to let bankruptcy judges restructure home loans by lowering interest rates and reducing mortgage balances to reflect current market value.
Banks including Washington Mutual, Citigroup and Wells Fargo & Co. sent a letter to the committee opposing the change, saying such restructurings should be done privately.
Countrywide Financial Corp., the largest U.S. lender, said last month that it will modify $16 billion worth of adjustable-rate mortgages. Washington Mutual said in April that it will spend $2 billion giving discounted rates to help customers with subprime loans refinance at better terms.
So far, most lenders have been reluctant to change loan agreements. About 1 percent of mortgages that reset in January, April and July were modified, according to a Sept. 21 Moody's Investors Service report that surveyed 16 subprime lenders that account for 80 percent of the market.
Congress probably will approve at least a limited measure to permit loan modifications, said Westbrook, the University of Texas law professor.
``They are going to have to figure out some way to address the problem,'' Westbrook said. ``I don't think our economy or our consciences can handle the number of foreclosures we'll see if they do nothing.''
To contact the reporter on this story: Kathleen M. Howley in Boston at kmhowley@bloomberg.net |
| Anonymous Coward
User ID: 324798
11/11/2007 12:33 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
So far, Citigroup's derivative investments have gotten the most attention, especially after its Chairman Chuck Prince was forced to resign earlier this week.
But, according to the lat est figures from the Of fice of the Comptroller of the Currency, JPMorgan Chase & Co. has the most ex posure to deriva tives, with $80 tril lion outstanding. The bank has total as sets of just $1.46 trillion.
By comparison, Citigroup had "just" $34.9 trillion in derivative exposure and total assets of $2.2 trillion.
Bank of America and Wachovia Corp. were a distant second and third in derivative holdings. Quoting: Anonymous Coward 324798 |
| Anonymous Coward
User ID: 327824
11/17/2007 6:07 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
A warning by Cheng Siwei, vice chairman of the National People's Congress, that China will invest in stronger currencies triggered a recent stampede out of the dollar. China doesn't have to dump dollars to depress the U.S. currency, economists at UBS AG say. Accumulating them at a slower pace will have the same effect. |
| Anonymous Coward
User ID: 327824
11/17/2007 6:40 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
[link to www.jonchristianryter.com]
Does the world economy really need USeconomy? Not as much as the disinfo agents in main steam make out, of course US sheeple guided ignorance are good excuse for action when it suits agenda(eg luisitania, gulf of tonkin etc).
[link to www.godlikeproductions.com]
Facts are it suits some to bring about the amero and Nth Am Union because it means a workforce who can then compete with China's demographic advantages that produce such great cost savings and economy of scale, it also will mean a way to end the US gov debt(but not the sheeples of course)
[link to www.timesonline.co.uk]
And in reality the banks behind the banks have had enough of exposure and so called accountability, as well as clarity into their internal workings, especially the way wars are financed and benefited from.
[link to guildinvestment.com] |
| Anonymous Coward
User ID: 329422
11/21/2007 11:01 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
Tag(s): Economics; Finance; Money
Add to My Group
November 18, 2007 at 11:03:33
Hey Buddy, Can You Spare $1,000 Trillion?
by sharon kayser Page 1 of 3 page(s)
[link to www.opednews.com]
Tell A Friend
I write each editorial under the impression that a major event is going to prevent me from drafting the next one. My fear almost came true. This one was scheduled to be released early October then delayed due to an avalanche of scary news unseen before in my lifetime. The threat of 'monetary terrorism' has only one remedy called 'financial detoxification'. However, thanks for taking the time to read this column, which could have easily been much longer. As you will read, nobody can stop this freight train.
The story of the upcoming world crash is hidden in plain sight. Even mayor Bloomberg has jumped in the gloom and doom bandwagon: a global economic downturn was looming, triggered by the "lunacy" of public debt, he declared last month. Meanwhile denial continues. Although nearly 70% of the Americans do fear a recession, the possibility of a major crisis is not considered. A crisis? Not in my backyard, most of them think. It all boils down to faith. To be fair, the 'empire mentality' was born with history. Eventually people wake up to the harsh reality that the empire lied to them. The only successful government programs are wars and economic crises. When two or three decades of prosperity end with a crash and geopolitical crisis, what does this mean - frankly? Once again, the numbers tell a very different story than that we are being told. Yes dear Readers, you're not hallucinating. There is currently at least a $1,000 trillion dollar black hole in the world economy. To get the full picture, please keep on reading.
We have 600 trillion in world liabilities plus more than a 400 trillion-derivatives neutron bomb, all of which will go off when the Westerners (from EU and US) will no longer be able to borrow. The credit crisis could be just beginning according to, the Calcutta-born Australian Satyajit Das , a derivatives specialist who speaks of nearly $500tn. Das doesn't chew his words:
... Defaulting middle-class U.S. homeowners are blamed, but they are merely a pawn in the game," he says. "Those loans were invented so that hedge funds would have high-yield debt to buy..."
In America, the clock is dangerously ticking for consumers: the party's over, they are are truly tapped out. While it is difficult to make sense of mega-digits such as 1,000 trillion, this amount doesn't include consumers' debts. Although it is kind of tricky to say when the credit soufflé will flatten, those grasping the dangers of a negative savings rate are already taking action. Well, the smartest and they are a strict minority at this stage. Some among the most 'cash-strapped' Americans are raiding their 401(k)s . Not knowing what is really going on, many might be prompted to turn to the 2 trillion already in pre-approved when times were booming, in the form of credit cards. To give you an idea of the dire situation, last May and June saw spikes in the amount of revolving debt, 12.2% and 8.4% respectively. The consumer credit 'is' the next bubble without a doubt. There are a growing number of debt-laden homeowners preferring to save plastic first.
Delusions, survival and credit. People want to keep accessing credit when they cannot stretch it financially instead of cutting down spending drastically or do whatever it takes to find an extra job. Talking of jobs, did you know that in 1972, wages reached their peak. Today, real wages are nearly one-fifth lower - inflation adjusted!
Beyond the climax:
Now even an infusion of cash doesn't propel the market anymore. The Dow Jones behaves irrationally. Thanks to the PPT (Plunge Protection Team). The economy as a whole has been rather stagnant in the West. Major European economies are on life support. They cannot overcome their costly social programs and the flood of (clandestine) immigration which is as bad as in the U.S. In a Forbes article we read that France has been in chronic deficit for 15 years. In 2005, Standard & Poor's said it may downgrade the credit ratings of Germany and Italy, two of Europe's largest economies, unless their governments rein in spending and cut debt. In 2007, German unemployment remains stuck at 16.5% and in 2006 Berlin was reported as bankrupt. Further Italy was described as the real sick man of Europe by The Economist in 2005 whatsoever. The credit crunch has also taken hold in Australia where personal debt is worse than during Great Depression. The situation is equally dire in Britain, where house prices are even more overvalued (than in the US). A spectacular crash cannot be ruled out, the IMF warned last month.
It is going to get worse before it gets better: the latest report by Goldman Sachs makes it crystal clear, the global economy hits a 'crunch'. As if this weren't enough, the IMF spreads gloom on 2008 by confirming that impact would be worse in 2008. The IMF and Sachs were seconded by the US Treasury Secretary acknowledging that we must prepare for a prolonged turmoil. Debt deflation is a nasty beast.
Forget about the Dow 14,000 and ask yourself frankly if you feel today better off than last year, or two years ago. That consumers must now resort to their credit cards to pay their monthly bills while banks are tightening their standards is a bad omen. As to wonder why the heck they have preapproved two trillion in the first place? On one hand they try to appear wary about further credit deterioration, on the other hand they continue their reckless marketing tactics. Their brand new targets are minority homeowners on the brink of foreclosures and college students, which they recruit as credit-card pushers to circumvent the restrictions banning credit card solicitations on campuses. Meanwhile the sin of usury continues to bankroll Congress. the US Senate Panel okayed $850 billion debt increase, ignoring the remark of 'Bubble Man Greenspan' himself, when he said that the demand for U.S. debt may be at 'limit'. Cynicism knows no boundaries: the same man who warned Congress has in fact denied that regulators failed to foresee the problems which caused the global credit crunch. Though this didn't preventing him from applauding the performance of the housing market-bubble! On the top of that, and this is absolutely sickening, 'he' declared early October 07 that the fate of world economy lies with US housing... He should be jailed for the rest of his life. Period.
As foreclosures skyrocket across the US and threaten to bring down real estate prices by 50% in some cities according to Yale University professor Robert Shiller, more and more everywhere we read about the world credit-liquidity crisis unfolding. Truth to be told, central banks face a liquidity trap. Only some anchors and a minority of sound economists see the bad 'Omen' coming our way as Goldman announced this very week that to cut back their lending by as much as $2 trillion. We are so debt-inflated that such a move is going to contract and strangle the economy for good. We may thank the bankers for taking care of our wallets.
Just a question before I continue: did you hear about the British the Northern Rock-bank run by any chance? If you did you're lucky because it was not a major issue on any of the channels I am used to watching. Whether we'll be witnessing bank runs in America remains to be seen. As of 9/2/07, in the Financial Times the following headline could be read: The ongoing credit turmoil has the hallmarks of a bank run
The current turmoil in the financial markets
has all the characteristics of a classic banking crisis,
but one that is taking place outside the traditional banking
sector, Axel Weber, president of the Bundesbank, said at
the weekend... Some Federal Reserve policymakers also
privately see comparisons between the current distress
in credit markets and the bank runs of the 19th century,
in which savers lost confidence in banks and demanded
their money back, creating a spiraling liquidity crisis
for institutions that had invested this money in longer-
term assets... His comments came as Frederic Mishkin, a
Fed governor, argued for a rapid and aggressive monetary
policy response to any fall in house prices. His diagnosis
of the financial crisis was echoed by other experts...
Paul McCulley, managing director of Pimco, said there was
a “run on the shadow banking system”. He said the shadow
banking system held $1,300bn of assets that now had to be
put back onto the balance sheets of the banks...
Sorry but weren't we told the Federal Reserve was created in order to avoid that type of moral hazard? Where is the point now to go back to square one and find out that we're in worst shape than before the inception of the bank, in 1913. Yes back then panics were a reality, although the common man was unaware that they were linked to the competition between bankers and their reckless speculation. The same unethical behaviors occurring today on Wall Street, Danny Schechter exposes. Blaming the 'gold standard' was a myth invented for the ignorant masses, which embraced the Fed like a savior. What should have been implemented is putting Congress in charge of regulating the money supply, just as stipulated by the US Constitution. Inflate or die. There is no other choice, my friends. The Fed has pumped over $47 Billion into financial system several days ago.
Irrationality plagues debt-based economies since they are backed by consumers 'confidence. The willingness to take on debt goes along with the optimism that one will be able to repay. This explains why the moral hazards linked to paper money are enormous. Most of the people think that printing more money is the solution, and so are bailouts. But what the heck can a bailout achieve when the interbank lending business itself has broken down almost completely? In the Financial Times as of 9/04/09, we could read the scary headline: Sense of growing Crisis over interbanks deals.
Unicredit analysts say: 'The interbank lending business
has broken down almost completely.... it is a global phenomenon
and not restricted to just the euro and the dollar markets...
if this situation continues, it could potentially have very
serious implications...
Are those at the head of our monetary institutions a bunch of idiots or do they have a plan? Considering the state of global finance, which is pretty well documented on moneyfiles.org, it is indeed a difficult to make sense of the credit market shutdown. Here is a NYTimes excerpt, also published as of 9/04/09: |
| Anonymous Coward
User ID: 329422
11/21/2007 11:02 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
Hey Buddy, Can You Spare $1,000 Trillion?
by sharon kayser Page 2 of 3 page(s)
[link to www.opednews.com]
Tell A Friend
... Banks to test debt market this week: All summer,
bankers have sweated on Wall Street. Instead of spending time at
the golf course or at their summer houses, many found themselves
in the office trying to make sense of the credit market shutdown
that had left their companies responsible for the billions of
dollars used to finance leveraged buyouts, yet facing uncertain
prospects of getting investors to take some of the debt off their hands...
Flash back. In his 9/05/07 article, Stephen King, a HSBC banker and regular columnist at the independent.uk, mentions several ugly truths when admitting that in order to save the innocent, we may need to bail out the guilty. Rewards for failures is a typical elite thing. It is how the powers-that-be and their cheerleaders have always colluded. However, this sums it up pretty well. The bailout logic is borrowed from a collectivist concept that the government is the ultimate wealth creator. Though there is something faulty in this particular case: why can't the government just make sure that its citizens are provided with the adequate financial education instead, so the guilty can be prosecuted rightfully? This major failure raises another issue: should the state be in charge of the education? On Blomberg.com, the columnist Mark Gilbert takes a radical stance by arguing in favor of easing the money-market crisis by letting banks go bust. Bailouts merely postpone the outcomes while making it worse. 'Helicopter Ben' and his clique have thus chosen to completely implode the world economy. This is a super-duper bad-loan bailout scam, Bill Fleckenstein concludes. The truth is that Citigroup Inc. and JPMorgan Chase & Co., are just 'Enrons' waiting for their day of reckoning. And the game goes on and on. As the monetary scientists improve their old tricks to save 'them' from disgrace by raising more than $60 billion, some already wonder if the 'Banks’ Stabilization Fund' will work:
... “It is quickly being realized that it doesn’t really
solve the problems,” Joshua Rosner, a managing director at the
research firm Graham Fisher & Company who had been skeptical of
the proposal, told The Times. “The path they have taken of skimming
off the cream from the top doesn’t resolve the fact there is poison
at the bottom....”
Doomed profits:
What has happened over the last decades is that the world financial institutions have learned better to shift risks - they think. The result of this shortsighted assumption is that our security systems have remained dormant, allowing the 'easy money binge' to perpetuate the illusion of wealth.
Even Chinese investors are betting all they have on a dead cat bounce. They are so infatuated with their shares that they don't hear their own lawmakers sounding the alarm:
..."Although listed companies achieved rapid growth,
investors should still beware of hidden bubbles behind the
profit surge and invest in a prudent and rational manner,"
said the report released on Sunday. According to the report,
the interim profit figures relied too much on yield of investment
in the securities market and the prospects of a continued profit
increase is doubtful...
This insane credit expansion fuelled by unethical speculation will cost China dearly. Damages are already showing: rivers are so polluted that they are described as on the verge of collapse. In turn heavy pollution is blamed for soaring birth defects and disease englufs the country. This only on a human level. The economic fallout will be unprecedented.
All is a matter of psychology and perception whatsoever. And this will not prevent the world economy from falling off a cliff. Hard data always wins over in due time. One does not wipe off 1,000 trillion in world liabilities just like that, even if this is electronic or virtual money. Strangely, it is very rare to see 'super bulls' and 'perma-bears' converge: The bulls by calling for bailouts and the bear by nodding pessimistically. The profits of doom will be soon causing the next shocks to the broad market.
Those who are forecasting Armageddon in the hope that
the Fed will come to the rescue are, for the most part, stock-
market bulls. But, strangely, their views are shared by their
opposites, the so-called perma-bears. Perma-bears have long
argued that the American economy in general (and the housing
market in particular) represents an unsustainable bubble, inflated
by cheap credit and a dramatic mispricing of risk. Convinced
that the downturn they have forecast is finally here, they write
off as fantasy any signs that the rest of the economy might
weather the housing and financial-market storms.
Both groups now envision the perfect storm coming our way.
Now comes the nasty 1,000 dollar trillion question: what will credit agencies say after the demise, when an increasing scrutiny will point to them as the culprits responsible for coercive and perilous speculation?
Lethal Collusion Exposed:
In the FTimes last month again, one could read that credit rating agencies were being investigated for their symbiotic relationship with investment banks in the EU. Axel Weber, President of the Bundesbank, said: “What we are seeing is basically what we see underlying all banking crises.” In America the response has been less sharp but critical nonetheless, the same FTimes columnist reports. Of course the agencies deny any wrongdoing. This shouldn't come as a surprise. They have always done so. It became just more blatant during the subprime debacle. Now that the damages are done, the S.E.C is probing ratings agencies' subprime role. According to CBS, last September, the federal agency hasn't come to any conclusions about their explanations for unexpected losses on those assets. Remember Enron? How many people are currently jailed? And they will be asked again many questions when the consumer credit bubble pops. How does it come that they turned a blind eye to $1,000 trillion black hole, do you think?
Ellen Brown has probed a 300 year-old scheme maintained in place (despite the boom-bust cycles) with the complicity of the common man who views the government and central bankers as wealth managers. The cliques at the top, which have enjoyed the ignorance of the masses for centuries long, are now faced with a boomerang effect. For them too, chickens have come back home to roost.
Do you believe me now when I speak of 'financial detox' whose consequences may be as severe as the great depression? We didn't get there because of a lack of regulations but through products sold as exotic financial instruments (credit derivatives, commercial paper, hedge funds, CDOs, CDSs, SIVs, ABCP, etc), hence any astute way to recycle debts found its way through. I don't know how most of these instruments work, but in the Asia Times, James Cumes, describes this financial addiction quite well:
When everyone in the house is crazy, only the sane seem
like fools. So it was when the financial addiction spread everywhere.
Then everyone who was not taking his daily dose of heroin or cocaine
became the fringe-dweller, the oddball, the brake on progress, the
party-pooper at the greatest no-cash-down, how-to-spend-it shindig
that our planet has ever known. Debt piled on debt everywhere: in
households, corporations, public finances and international deficits,
in magnitudes that had never been even glimpsed in the most creative
imaginations before.
Back to the basics:
Pessimism doesn't encourage to pile on debt, and until the loan is spent, generally a feeling of invincibility can be experienced. Credit happiness is short-lived. Just as with drugs, there is a withdrawal. |
| Anonymous Coward
User ID: 329422
11/21/2007 11:05 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
Hey Buddy, Can You Spare $1,000 Trillion?
by sharon kayser Page 3 of 3 page(s)
[link to www.opednews.com]
Tell A Friend
Although consumer borrowing is a very important part of the equation, debt monetization (or recycling) between banks might be even more so. There are currently fears that lending between banks have ground to a halt. In the EU, we're talking of 100bn that should have been dealt with last August. In the UK it was a matter of 70bn over the next 10 days (in a article written in August). More alarmingly, ECB made 269-billion euro refi offer as market tensions persisted as of 09/12/07. Not only banks created a monster in the first place, now they also want us to believe that refinancing debt to pay debt is the safest bet on earth. The Bank of England Governor must be sweating heavily though. A few days ago he declared that markets are 20% overvalued and poised for severe fall.
On September 9, another HSBC executive endorsed 'the credit squeeze' on CBSMW but with a much gloomier tone. The worst is not over. According to him it is all about damaged confidence among the market players that needs to be restored. Confidence is broken and the outcome will be 'da' crash of the millennium Dr. Ravi Batra explains while remaining positive in the long run:
... we are now more overvalued than Japan was in 1990.
So certainly most American financiers know we are in a bubble
economy but they hate to admit it because they think that
they are one way or another responsible for it.... That could
lead to a political revolution, but I do not believe it will
lead to a dictatorship. I think we will see the rule of money
end and that we (the majority of Americans and citizens around
the world) will benefit by a tremendous revolution... Well
first there will be a lot of destruction of money.
Citizens and investors alike will learn the hard way that coercion is the root of all evils. Indeed, how coercive is forcing people to take on 401ks and IRAs to avoid taxation, not to mention taxation itself. This among other things: such as encouraging the use of credit cards to buy stocks by making plastic a way of life. What to think of super bonuses prompting CEOs to cook their books, all of which condone short-term gambling along with the pump and dump mentality. It is interesting to mention that an average CEO's salary was about 25 times more than the common worker in the 70's. By 2005 it shot up to 465 times more! The worst coercion is without a doubt cheap interest rates delivered by central banks directly and which rejoice people gravitating around the lending industry. Cheap interest rates go along with pervasive corruption and predatory lending.
In short, any type of coercion provokes an amoral speculative frenzy. And this looks very blatant when analyzing the story behind every boom and bust cycle. Such trends will go away the day the average investor will have understood that becoming a 'fat cat' in a short period of time is generally the result of a lack of discipline and ethics - at the expense of the gullible being lured into asking the government for more incoherent regulations that do not address the fundamentals.
Something fishy:
Every year and worldwide, thousands of college students in economics are recognized by their peers. A distinction they welcome proudly as the door to brilliant career opportunities open. If they have the right connection, all the better: many will end up working for big financial firms or even government or centrals banks. Although it surely is amazing that our fate lies in the hands of those prominent people, one does not need a PhD in economics to understand why the obsession with growth dominates all political debates, and why lawmakers make employment a high priority of theirs. To grasp the rhetoric behind the numbers, one has to take a look at the big picture to see why 'growth and GDP' are in fact a tale concealing one of the most blatant fallacies ever.
Although this is recurrent in the so-called rich countries, let's take the example of the USA. How does it come that the twin deficits are ever increasing, and the national debt just went past 9 trillion dollars. Finding items 'made in America' has become a tour de force - all this despite the boom! The problem is that the word 'economy'(and 'forest' alike) is an abstraction. Both do not exist. A forest is composed by trees and an economy sustained by humans.
Not only because people cannot sell and buy everything at the same pace, making theories and rules for the majority does not work. Basing the GDP on consumption is additionally fatal since it is impossible to live beyond one's means forever. If you want to find an explanation to the business cycles, here it is.
The End Of Conventional Wisdom:
The GDP fairy tale has been conventional wisdom for decades. Anyone having a good sense of logic can see the hoax of a model based on debt consumption and extreme consumerism. Spend or die is economic cannibalism. One does not need to be a rocket scientist to ponder the origins of our 1,000 trillion. To be fair there are other ingredients contributing to the mess we find ourselves in today but since economics is the only way to gauge 'Property Rights' and 'Freedom', for the sake of our survival we must reject doomed theories such as these. Let's cross our fingers very hard and take action, Dr. Ravi Batra may not be a dreamer after all.
1 | 2 | 3
[link to notodebtslavery.blogspot.com]
Libertarian Screenwriter, philosopher, owner of moneyfiles.org in support of The Gold Action Anti-Trust Committee (gata.org) and a hard currencies advocate. Currently involved in the promotion of the documentary by Danny Schechter "in Debt We Trust" (www.indebtwetrust.com/media.php). She is currently final polishing a screenplay titled "D.E.B.T" which exposes world economic serfdom. Seeking a producer! |
| Anonymous Coward
User ID: 296095
11/21/2007 11:05 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
so....this was posted three years ago. you are a false prophet FHL(C). |
| Anonymous Coward
User ID: 329422
11/21/2007 11:06 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
I wouldn't want to be a Japanese housewife, or a Chinaman, or, God forbid, someone living in Taiwan.
Europe will fare no better than us, and may fare worse. Their odds of getting embroiled in the mess over in Asia will be higher than ours, simply because of proximity, but if they can stay out of it they will be ok. If they get dragged into the mess, and there is a decent chance they will, then things will be bad over there too.
Quoting: Anonymous Coward 298368
Actually it is not going to be that bad for China and India etc, why? because they don't need the US economy anymore, and funnily enough they have massive resources as well and low wages already. Simplicity is, sell more for a bit less to India, trade with Africa, South America, Europe and the neighbors(barter is ok if need be) and keep away from war mongers, whilst maintaining regional stability, not that hard to do for the far east. Contrawise, the empire is stretched to financial unravel point, lines of supply are already breaking down, and biting the hands that now feed, clothe and supply , is spiteing your face by cutting of your own nose(re senate applying penalties to imports).
And its not a mess in Asia, its a mess in the middle east which will and is going to get worse, and that is but one , for the real growth areas of social unrest are yet to come home to roost, and westernized democracies that cant supply their nations needs and populations aspirations will be the number one growth areas for such things.
Anonymous Coward
User ID: 329465
11/21/2007 10:43 AM
Re: DOLLAR DROPS BELOW 75.0 WTF! Quote
the last nation with a great majority of dollars in their reserve is China
your leaders have already dumped the dollar
warren buffet has already dumped the dollar
the saudis have already dumped the dollar
the financial genius jews have already dumped the dollar
the last nation that hasn't done so yet, is China
if the Chinese converted their dollar reserves for Euros
your athletes would not be able to buy a plane ticket to the Olmpic games in 2008
and why aren't you people stopping Bush from borrowing trillions of dollars for the Iraq War which he awards to companies such as Haliburton, why isn't congress saying no more money!
unless your own leaders wish to see a weak and dead dollar! |
| .
User ID: 329422
11/21/2007 11:39 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
so....this was posted three years ago. you are a false prophet FHL(C). Quoting: Anonymous Coward 296095
And how do you work that out AC, you a government shill or a God hater? Noah preached the flood by the way for 100 years before there was ever rain or flood. I think the Op will say if it is prophesy or not, but it seems to be common sense , not divine revelation IMO. |
| Anonymous Coward
User ID: 295618
11/21/2007 9:43 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
 |
| Anonymous Coward
User ID: 329989
11/22/2007 11:07 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
"GOLD READIES FOR NEXT MOVE
Gold has completed much of the work necessary to consolidate. So much is happening in the gold market, that a quick summary is not practical. Foreign institutions have hedged their asset positions vulnerable to USDollar risk with purchases of gold. OPEC nations might smell the Petro-Dollar abandonment. The banking crisis begun in the US , exported globally, has encouraged more gold purchases. Basic diversification by nations benefiting from outsized trade surpluses is turning more toward gold. Simple supply problems are evident, as higher gold prices have not brought more gold output to market. This is clear-cut price inelasticity. The banking analyst community has finally begun to write openly about gold and the surge in prices coming soon, from both US$ risk and supply shortages to meet rising demand. This is not a jewelry demand phenomenon, centered in India, although their demand of the metal is at record levels.
On the technical chart side, the breakout is indisputable. Even shills on media networks are caught offguard, as minimal poopoo arguments are made. They wonder where the CPI high index would be if gold signals inflation, without bothering to check money supply growth figures. My preference is to cite the normal bull market retracement guidelines from a weekly close standpoint. The bigger picture breakout rose above 695 by 140 points to 835, using the recent critical resistance and ignoring the abnormal spike in 2006. A 3/8-ths retracement would mark 782 as the invisible support level. So far, that mark has held. After a couple more weeks or days of churning around here, the 800 handle will be a fixture as the push occurs toward 900, then 1000, urged by the next official rate cut. The USFed official rate cut will be a gigantic cattle prod for gold to resume its bull market stampede."
[link to www.financialsense.com]
In a similar vein is an article from several days ago by Chris Puplava titled Gold's Rise Goes Beyond the Dollar's Demise. It's pretty chart-heavy too, so I won't try to paste it here. The article can be found at
[link to www.gold-eagle.com]
www.jsmineset.com
www.lemetropolecafe.com |
| Anonymous Coward
User ID: 330499
11/23/2007 1:45 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
Posted On: Wednesday, November 21, 2007, 10:17:00 PM EST
Global Financial Debacle Accelerating. Are you Prepared?
Author: Jim Sinclair
Dear CIGAs,
My Thanksgiving gift to you is preparedness. Those of you who have or are taking the appropriate measures are acting in a positive manner meeting their personal, family, and business duty.
Rather than finding relief, the credit crisis is accelerating. When European Banks agree to suspend trading in mortgage debt there is good reason to accelerate your preparations. It tells you without any doubt that the mark to market that has developed the many billions of write- downs by financial institutions are still mark to computer models that are cartoons. How do you mark to market when in fact there has not been a market for a significant period of time? There is still so much financial pain coming and the domino effect has only just started.
The US dollar is in a free fall and has been since the USDX was above 120. Now it is headed to .7200, which could easily occur next week.
Face it, this is a meltdown and an implosion of the foundation of the world of finance called the credit market. The implication to business and life itself is dire.
Since we live in an “alarmless” society, a body economic that has no pain sense, it is still not obvious to the many. It is to you.
THIS IS IT!
Gold is headed to $1,050 faster than you can imagine. Expect a battle there, but only for a short period. After $1,050 gold will rocket to $1,650.
The US dollar at .7200 has always been only my first downside objective.
We are blessed to know this, why this is happening, what measures should be taken and most importantly what to avoid.
Don’t ship your gold and silver to some depository that you have no idea about. Do not assume because some gold guy suggests it, that it has to be good. Get out of the Internet financial entities. Be sure wherever you are that you get your paper certificate. Scams are popping up all over the gold field. Be very careful of those you do not know.
The precious metal shares will certainly perform, definitely those that have not invited the hedge fund short sellers to run large riskless short positions in their company by taking money from hedge funds. Hedge funds are not philanthropic. They demanded huge option and warrant positions plus deep discounts and prompt movement to freed and tradable shares.
This allowed them to be short without risk, and the hedge fund managers still are running those positions in many PM companies. That weakness has moved across the board, holding back the group. That weakness has very little life left in itself as gold running at $1,050 is going to bring new interest into the field, keying off technical buying and thence short covering.
Not only did the gold and silver mining geniuses screw up in short of gold and silver derivatives, but precious metals companies without any alternative took money from hedge funds (the devils) in the form of:
Private investment in public equities (PIPE)
Private equity deals in which major investors purchase substantial amounts of the stock of public corporations, generally at significant discounts to market prices. PIPEs are especially popular during periods when financial markets are difficult to tap for public funding.
Jim Sinclair's Commentary
The good news is that this is coming to an end.
A review of the news will push home the degree of the problem. Refer to the Formula and you will understand why .5600 remains a possibility for the US dollar.
I am giving thanks for being prepared where all my responsibilities are concerned.
Can you say the same? If not for heavens sake, WHY NOT?
Europe Suspends Mortgage Bond Trading Between Banks (Update3)
By Esteban Duarte and Steve Rothwell
Nov. 21 (Bloomberg) -- European banks agreed to suspend trading in the $2.8 trillion market for mortgage debt known as covered bonds to halt a slump that has closed the region's main source of financing for home lenders.
The European Covered Bond Council, an industry group that represents securities firms and borrowers, recommended banks withdraw from trades for the first time in its three-year history until Nov. 26. Banks are still obliged to provide prices to investors, according to the statement today.
Banks including Barclays Capital, HSBC Holdings Plc and UniCredit SpA took the step as investors shun bank debt on concern lenders face more mortgage-related losses than the $50 billion disclosed. Abbey National Plc, the U.K. lender owned by Banco Santander SA, became the third financial company to cancel a sale of covered bonds in a week as investors demanded banks pay the highest interest premiums on covered bonds in five years.
``We are in a deteriorating situation,'' Patrick Amat, chairman of the Brussels-based ECBC and chief financial officer of mortgage lender Credit Immobilier de France, said in a telephone interview. ``A single sale can be like a hot potato. If repeated, this can lead to an unacceptable spread widening and you end up with an absurd situation.''
More...
Bank Default Swaps at Highest on Record Amid Writedown Concern
By Steve Rothwell
Nov. 21 (Bloomberg) -- The risk of banks defaulting on their debt rose to the highest on record as losses by mortgage finance company Freddie Mac fueled concern that lenders will add to more than $50 billion of writedowns worldwide.
Credit-default swaps on the Markit iTraxx Financial Index, a benchmark for the cost of protecting the bonds of European banks and insurers, rose 6 basis points to 63.5, the highest since its start in 2004. Contracts on Merrill Lynch & Co., the world's biggest brokerage firm, increased 25 basis points to 170, and Citigroup Inc. climbed 5 to 101.5, according to Phoenix Partners.
Mitsubishi UFJ Financial Group Inc., Japan's biggest publicly traded bank, posted a 63 percent drop in second-quarter profit because of losses linked to credit cards and U.S. home loans. Mortgage finance company Freddie Mac may need to raise as much as $6 billion to boost capital because of the worst housing slump in at least 16 years, according to Fox-Pitt Kelton analyst Howard Shapiro.
``Everything is signaling that the market may switch to panic mode,'' Philip Gisdakis, a credit analyst at UniCredit SpA in Munich, said in an interview today. ``The news flow is so bad and there is no relief in sight.''
More...
U.S. Economy: Leading Index Fell More Than Forecast (Update2)
By Courtney Schlisserman and Joe Richter
Nov. 21 (Bloomberg) -- The U.S. economy may continue to slow into 2008, according to a measure of its performance over the next three to six months.
The Conference Board's index of leading economic indicators fell 0.5 percent in October after a 0.1 percent increase that was smaller than previously estimated, the New York-based group said today. A separate report showed consumer confidence weakened this month.
The figures, coming a day after the Federal Reserve lowered its growth forecast for next year, add to concern that the credit collapse is causing consumers and businesses to cut spending. The deepening housing recession will constrain the expansion again this quarter, slicing growth to about 1 percent, from around 5 percent in the previous three months, economists predict.
``There is a definite pattern of weakening here,'' said Edward McKelvey, a senior economist at Goldman Sachs Group Inc. in New York, who correctly forecast the decline in the leading index. ``It's all consistent with deceleration in the economy and that includes some deceleration in the labor market.''
More...
Fitch Lowers $30 Billion of Mortgage CDOs; S&P Cuts $5 Billion
By Jody Shenn
Nov. 21 (Bloomberg) -- Fitch Ratings downgraded $29.8 billion of collateralized debt obligations linked to residential mortgage bonds, while Standard & Poor's cut ratings on $5 billion of such assets.
Fitch lowered classes from 74 CDOs that hold structured- finance securities, the New York-based firm said in a statement today. S&P reduced ratings on classes from 28 CDOs, the unit of New York-based McGraw-Hill Cos. said in a release.
More...
GM Says It Has `No Further Obligation' to Fund GMAC (Update3)
By Jeff Green
Nov. 21 (Bloomberg) -- General Motors Corp. rose for the first time in six days after GMAC LLC said it may buy a ``non- U.S. mortgage unit'' and the automaker said it has ``no further obligation'' to inject capital into GMAC, its former finance arm.
GM's November 2006 agreement to sell 51 percent of GMAC to a group led by Cerberus Capital Management LP ended any requirement to fund GMAC beyond $1 billion injected in the first quarter, said Randy Arickx, GM's executive director of investor relations, in an interview today.
GMAC is ``closely monitoring'' its Residential Capital subsidiary and ``we do believe we have the right plan in place to address it,'' GMAC spokeswoman Gina Proia said. ResCap lost $2.3 billion on subprime mortgages in the third quarter.
GM gained as much 7 percent in New York after GMAC said it may make an acquisition to absorb ResCap. The shares had dropped as much as 6.8 percent earlier.
GMAC said it has made a non-binding expression of interest in the unnamed company and faces competition from other bidders. GMAC is also considering selling portions of ResCap.
More...
Jim Sinclair’s Commentary
Problems are compounding, not receding. There is no question, This Is It!
Freddie Mac May Raise $6 Billion to Stem Capital Drop
By James Tyson and Jody Shenn
Nov. 21 (Bloomberg) -- Freddie Mac, the second-largest U.S. mortgage-finance company, may need to raise as much as $6 billion to bolster its capital amid the worst housing slump in at least 16 years.
The government-chartered company yesterday said it would seek more reserves in a ``large transaction,'' after reporting its biggest quarterly loss. The amount may be $5.5 billion to $6 billion, according to Fox-Pitt Kelton analyst Howard Shapiro. Friedman Billings Ramsey analyst Paul Miller and Gary Gordon, an analyst at Portales Partners LLC in New York, predict $5 billion.
``It's not going to be a small number,'' said Gordon, who is advising investors to refrain from buying more of the company's shares.
Freddie Mac said it may slash its 50-cent-a-share quarterly dividend as rising mortgage losses erode reserves to within $1 billion of the minimum set by regulators. Freddie Mac and the larger Fannie Mae have lost $57 billion in market value since December as home-loan defaults and foreclosures rise to records.
The company may sell preferred stock, which ranks above common shares, said Jim Vogel, head of research into debt of government agencies such as Freddie Mac and Fannie Mae at FTN Financial in Memphis, Tennessee. Vogel said the company may issue $3 billion to $4 billion of the securities.
More… |
| Anonymous Coward
User ID: 330499
11/23/2007 1:58 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
Global Derivatives Market Expands to $516 Trillion (Update1)
By Kabir Chibber
Nov. 22 (Bloomberg) -- The market for derivatives grew at the fastest pace in at least nine years to $516 trillion in the first half of 2007, the Bank for International Settlements said.
Credit-default swaps, contracts designed to protect investors against default and used to speculate on credit quality, led the increase, expanding 49 percent to cover a notional $43 trillion of debt in the six months ended June 30, the BIS said in a report published late yesterday.
Derivatives of debt, currencies, commodities, stocks and interest rates rose 25 percent from the previous six months, the biggest jump since the Basel, Switzerland-based bank began compiling the data. Investors have been turning to credit derivatives as a way to speculate on a growing risk of defaults amid record U.S. mortgage foreclosures.
``The pace of increase in the credit segment outstripped the rises in other risk categories,'' Christian Upper, a BIS analyst in Basel, wrote in the report. Credit-default swaps are ``the dominant instrument,'' accounting for 88 percent of credit derivatives, the BIS said.
The money at risk through credit-default swaps increased 145 percent from last year to $721 billion, the report said. The amount at stake in the entire derivatives market is $11.1 trillion, according to the BIS, which was formed in 1930 to monitor financial markets and regulate banks.
Interest Rates
Derivatives are financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in interest rates or the weather. The report is based on contracts traded outside of exchanges in over-the- counter market.
Increased trading pushed ICAP Plc to a record this week as the world's largest broker of transactions between banks reported a 34 percent increase in net income to 80.1 million pounds ($164.4 million). The London-based company, which profits when prices fluctuate, handled a record amount of transactions as financial institutions bet on or hedged against losses linked to home loans.
The Markit CDX North American Index of credit-default swaps on 125 investment-grade rated companies has almost tripled since February to 90 basis points from 33.
Buyers of credit-default swaps receive the face value of underlying debt in the event of nonpayment, in return for the defaulted securities or cash equivalent. A basis point increase in the cost of a contract covering $10 million of debt is equivalent to $1,000 a year.
Interest Rates
Interest-rate derivatives remained the largest part of the market, gaining 19 percent to $347 trillion outstanding by June, the report said. Single currency interest-rate swaps made up 79 percent of the market.
Foreign exchange derivatives grew by 21 percent to $49 trillion as the dollar declined 2.5 percent against the euro in the first half. Contracts on the Swiss franc increased 32 percent, trailed by 27 percent increases in both the U.K. pound and the Canadian dollar contracts, the BIS said.
Equity market derivatives grew by 23 percent in the first half to $9 trillion. Growth was highest in Latin America equity derivatives at 43 percent and lowest in Japan at 6 percent. Japan's Nikkei 225 index rose 4.8 percent during the period while the MSCI Latin America index increased 25 percent.
To contact the reporter on this story: Kabir Chibber in London at kchibber@bloomberg.net |
| Anonymous Coward
User ID: 330499
11/24/2007 11:48 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
Japanese shift cash out of U.S. investments
By Martin Fackler
Published: November 22, 2007
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TOKYO: Many in Japan are starting to speak of "quitting America," but they are not talking about a rise in anti-American political fervor. Rather, they mean a move away from American investments that is altering global capital flows and helping to weaken the dollar.
The move is seen in decisions of individual investors like Daijo Okudaira, a 66-year-old clerk at a Tokyo consulting company. Like many Japanese, Okudaira had long limited his overseas investments to the relative safety of securities from developed countries, particularly the United States.
Starting late last year, however, Okudaira made drastic changes to his portfolio, putting $50,000 into mutual funds focusing on stocks in China and other emerging economies. He said he had been drawn to these countries because they seemed to hold much brighter growth prospects than the United States.
"People say the engine of the global economy is shifting from the United States to emerging countries," Okudaira said. "Emerging countries have growth and energy that America and Europe lack. They remind me of Japan 40 years ago."
Japan's legions of individual investors like Okudaira have emerged as a global financial force to be reckoned with, directing almost half a trillion dollars of their nation's $14 trillion in personal savings overseas in search of higher returns. Until recently, much of this huge outflow of cash, known as the yen-carry trade, had gone into United States stocks, bonds or currency, propping up the dollar's value.
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Japanese investment flows
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Now, however, Japanese individuals are diverting more and more of that money away from the United States and the dollar and into higher-yielding global investments, ranging from high-interest Australian government bonds to shares in fast-growing Indian construction companies. Partly this "quitting America" — called beikoku banare in Japanese — reflects an increasing sophistication of Japan's investors, who embraced mutual funds only a decade ago and are still learning to diversify. But it also offers one more sign that the world does not depend as much on the American economy as it once did.
Recent figures on mutual fund purchases suggest this trend has accelerated since August, when subprime problems shook Wall Street — and along with it, faith in the United States economy. Since early August, the dollar has fallen almost 8 percent against the yen, a decline many analysts here say offers another indication of Japan's waning appetite for dollar-denominated investments.
"One lesson of August was the failure of American markets to recover," said Akiyoshi Hirose, head of research at Daiwa Fund Consulting, a research company based in Tokyo specializing in mutual funds. "On the other hand, Asia's emerging countries did recover quickly. So money is flowing out of the United States and Europe and into these newer markets."
In October alone, Japanese individuals pulled 33.9 billion yen, or about $300 million, out of mutual funds that invested solely in North American stocks and bonds, according to Daiwa Fund. In the same month, it said, Japanese individuals put 175.2 billion yen, or $1.6 billion, into funds investing in stocks and bonds in emerging countries.
In the last 12 months, Japanese individuals invested 1.97 trillion yen, or $17.5 billion, into emerging market mutual funds, according to Daiwa Fund, and during the same period, they removed 447 billion yen, or $4 billion, from North America-only mutual funds.
Demand for emerging market funds has gone up so sharply that asset management companies added 48 such funds in the past year, bringing the total number to 183, the company said. Meanwhile, it said, the number of United States-focused funds rose by just 3, to 137.
To be sure, some analysts caution that the popularity of emerging markets may prove to be a fad, especially if stock markets in China or India start falling as quickly as they rose. Analysts also say the dollar's greater familiarity gives it an enduring appeal among many Japanese, who may return once the United States mortgage problems subside.
Some analysts predicted the eventual revival of short-term currency trading between the dollar and the yen, which had been an important support for the dollar's value before August's market turmoil.
"A lot of dollar-buyers are just sidelined now," said Tohru Sasaki, chief exchange strategist in the Tokyo office of JPMorgan Chase Bank. "They'll be back once currency markets settle down."
PCA Asset Management, a Japanese arm of a British firm, said that until last year, its most popular product was a United States bond fund. Now, the company says, 80 percent to 90 percent of the investment money it receives flows into its emerging-market funds, all focused on Asia. To meet demand, the company has added five new Asia-focused mutual funds since January 2006. The most popular, a fund investing in stocks of infrastructure-related companies in India, has grown to $1.4 billion in assets in just one year. |
| Anonymous Coward
User ID: 330499
11/24/2007 11:51 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
Japanese shift cash out of U.S. investments
By Martin Fackler
Published: November 22, 2007
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(Page 2 of 2)
Takashi Ishida, head of investment at PCA Asset, said the emerging-market funds have proved particularly popular with investors in their 50s and 60s, an age group that remembers Japan's period of high growth four decades ago. He said these Japanese now believe they recognize the same sort of heady growth in developing Asian countries like China, India and Vietnam.
"Asian emerging markets appear safe to invest in because they seem familiar to many Japanese," Ishida said.
Many individual investors agree, citing vague impressions of cultural affinity in explaining their optimism in Asian emerging markets. Okiko Ebata, one of a half-dozen individuals gathered on a recent afternoon for an investing seminar in Tokyo, said she had invested in overseas stocks for the first time late last year, choosing a mutual fund that focused on Vietnam. She acknowledged it was a riskier choice than United States or European stocks, but said she felt comfortable.
"I've heard people in Vietnam resemble Japanese," said Ebata, 59, as the rest of the group nodded in agreement. Two others also said they had invested in the last year in mutual funds focused on India or Southeast Asia.
In a separate interview, Okudaira, the clerk, said his China fund had doubled in value in less than a year. But even if Chinese investments cannot keep up such rates of return, he said, he and other Japanese will continue to diversify where they put their savings.
"I now have money invested in America, Europe, as well as in Asia," Okudaira said. "Japanese are learning to how to reduce risk." |
| FHL(C)
User ID: 333031
11/29/2007 2:18 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
FU&FW
[link to www.gold-eagle.com]
However, the big economic news stories of November 26th, 2007 is not the delusional ranting of former guvumit officials, as surrealistic as these rantings are. No, there are two major economic happenings of profound importance for the USA. One, received mass news coverage and is credited with saving Wall Street from the abyss. The other, received scant news coverage and had little impact on Wall Street. I will deal with the official one first. I find it interesting the announcement of an Arab investment firm buying a stake in CitiGroup fails to elicit the same rabid response the Dubai Port announcement did. I can make the argument this bank deal is the final blow killing off American economic freedom. I can also make the argument it shows just how truly desperate the mutant elite running America is. It is a pathetic stock market indeed which grasps at such a feeble straw as this to avoid a several hundred point drop. The amount of 7 billion dollars and change is meaningless in the context of the trillions in debt exposure. Desperate, pathetic and ludicrous is how I would describe both the "deal" and its "salvation" effect on Wall Street. The Arabs have just bought a stake in the Federal Reserve and the economic implications of that were not even mentioned at all. Let the Fire Sale begin. What is all this nonsense about an Independent Nation anyway. Region 10 and the AMERO here we come. If America is going to become an economic whore offering her favors to the highest bidders, at least we should admit it. Instead of pretending like we are still an Imperial Power.
The second news story is the more immediately profound of the two, although allowing foreign ownership of the Fed will have long lasting effects. In a word, the American people's economic consumer confidence collapsed. It did not fall. It didn't shrink. It didn't recede. It collapsed. More than the economic eggheads who have lied so long thought it would. More than the politicians, the corporate and the media elite thought it would. It seems the faked numbers on inflation, minus energy and food, are actually around 25 to 50% a year. It seems the $100 oil, along with the heating oil, the natural gas, the propane, the gasoline; the diesel are all having inflationary effects. It seems the fiat dollar collapse, record lows, day after day, are all having an economic effect out there in the real world. That's the one beyond Sodom on the Potomac called Washington, D.C. in case you didn't know. It seems the long suffering American Sheeple have figured out the 25% housing price collapse Mr. Summers alluded to is only the beginning. It seems the "robust crowds" on Black Friday were merely taking a last wistful look before the economic hurricane hits. Let's see, 5% more people spend 4% less money? I would call that a negative sales event wouldn't you? It looks like 2008 is going to be one hell of an economic year.
[link to freewordofgod.yuku.com] |
| Anonymous Coward
User ID: 334055
12/1/2007 8:53 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
Stephen King: When banking is in crisis, no one wants to be parted from their cash
The hoarding of money points to a banking system in crisis ... Without money, our economies will simply grind to a halt
Published: 26 November 2007
Imagine you're in Starbucks buying your café latte. As you hand over your coins, the barista tells you the money you're giving him is unacceptable. What do you do? You might politely point out that your coins are universally exchangeable, and thus he is a fool to refuse your attempted payment. If that fails, you might resort to some good old-fashioned Anglo-Saxon phraseology. If you're in a particularly aggressive mood, you might lean across the counter, grab the barista by his apron strings and nut him.
If, though, you were an economist, you might gently remind the barista that your coins are backed by the Bank of England. They will always, therefore, be acceptable because the Bank of England, through its inflation target, has made a public commitment to safeguarding the value of money.
This is true, but only up to a point. Notes and coins are generally acceptable unless there's either an enormous counterfeiting problem or a major difficulty with inflation.
In the Weimar Republic, under the twin strains of reparations and macroeconomic incompetence, inflation swiftly became hyperinflation and people had to wheel their near-worthless notes and coins around in wheelbarrows.
In some parts of Germany, notes and coins were replaced by other currencies. Cigarettes, for example, became increasingly acceptable as a means of exchange. Cigarettes, though, were not produced by the central bank, nor were they in any sense normal "money". They were good enough, though, to serve as both a medium of exchange and, within limits, a store of value, and therefore they had, for a while, the properties we commonly associate with money.
This little story should be enough to convince you that money can exist independently of central banks, an observation that sometimes seems to be forgotten. It's easy to prove historically, of course, because we know of societies whose monies ranged from shells to jewellery to animal teeth. But it's also the case that money today can easily be created – and destroyed – without the involvement of the central banks and their printing presses.
In the UK, for example, the value of notes and coins in circulation is a little short of £50bn whereas M4 – a broad measure of money supply which includes all sorts of interest-bearing deposits – is well over £1trn.
Economics textbooks try to tie these narrow and broad definitions of money together using the so-called deposit multiplier. The attraction of this device is its arithmetical elegance. Sadly, though, it's not connected with reality. But the idea behind the deposit multiplier,is straightforward and does demonstrate something about the creation of money at the stroke of a pen (or, these days, at the touch of a keyboard).
Suppose I walk into a bank with a suitcase of money. Assuming that the bank has no suspicions about money laundering, its manager will take my money and perhaps put it on deposit. The bank then loans 60 per cent of my money to another customer by creating a deposit in that customer's name. The customer then spends some of his money which then is deposited by the recipient in another bank which can now also create new loans. It's not long before the value of deposits far outstrips the amount of notes and coins in circulation. Put another way, if everyone simultaneously tried to withdraw funds from banks, the system would topple over. There simply aren't enough notes and coins to go round.
So how does the system work? Ultimately, it works through trust. We trust banks to look after our money to ensure that we will always be able to get access to our funds on demand.
So long as we don't all demand access to our funds at the same time, the system works well. If, though, there's a panic, and everyone wants their money at once, all sorts of horrible things can happen as the depositors and now the shareholders of Northern Rock have discovered.
In a modern banking system, money is created via collateral. When you go to your bank to ask for a top up mortgage to fund next year's holiday, the friendly manager may give you a loan but the loan, in turn, has been secured on the value of your house. Imagine you bought your house five years ago on a 100 per cent mortgage. In the intervening period, perhaps the value of your house has doubled. Now with only a 50 per cent mortgage, the bank may feel more confident lending you the money. When house prices rise, money is created. When house prices fall, driving down the collateral against which loans are made, money is destroyed. Loans are called in, credit lines are shut off, and monetary conditions tighten up.
Within the banking system, the collateral value against which loans are made was rising rapidly earlier in the decade. Much of this collateral was tied up in products which, now, have turned sour. Up until the summer, most banks were happy to accept as collateral the full range of increasingly exotic products ultimately linked, at least in part, to the now rapidly deteriorating US housing market.
Now, though, mortgage-backed securities, asset- backed collateralised debt obligations and the full paraphernalia of structured products are no longer regarded as safe collateral. In many cases, there is no longer a market price.
In the absence of collateral and, hence, in the absence of money creation, there's a perceived shortage of money. And, with a shortage of money, banks hoard whatever money they can get their hands on. Each bank eyes other banks warily. Banks will still lend to each other, but only at penalty rates. As a result, interbank rates remain well above official interest rates in the US, UK and eurozone (it's also why banks are now offering higher deposit rates – your bank needs your money.)
The effects of this monetary "shortage" are already seeping out into the broader economy. One way this is visible is through the financial market reaction to the US interest rate cuts seen so far. Outside the housing market, there's not much sign of the US economy weakening at the moment.
One might have thought, therefore, that rate cuts would be greeted well by equity investors (lower rates are good for growth) and not so well by government bond investors (in the absence of economic weakness, lower rates might lead to inflationary risks).
And, for a fleeting moment, that's exactly what happened. Following the Federal Reserve's decisions to cut policy rates in August and September, equities rallied and bonds sold off. But the initial reaction didn't last. More recently, equity prices have plunged to levels last seen before the initial rate cuts while bonds have shown an explosive rally, with yields dropping like a stone.
Why is this? Basically, any asset that looks a bit like money has become very attractive. Ten-year government bonds aren't entirely like money – try buying your café latte with one of those – but they're a lot closer to money than equities, which ultimately give you exposure to only one company at a time.
The hoarding of money – and near-money substitutes – points to a banking system in crisis. Central banks may still be hopeful that 2008 will be a reasonable year for economic growth. If, though, there's any hope of achieving a reasonable outcome, our policymakers will have to work a lot harder to get the monetary system working again, whether through rate cuts or through an increase in acceptable assets against which central banks can supply money to the banking system as a whole.
Money is, after all, the lubricant that allows our modern economic systems to function. Without it, our economies will simply grind to a halt.
Stephen King is managing director of economics at HSBC |
| Anonymous Coward
User ID: 334055
12/1/2007 8:57 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
The Last Days of the United States Dollar
James Howard Kunstler
November 27, 2007
Author of The Long Emergency
Kunstler.com
kunstler@aol.com
The great debate among those of us on the Economy Deathwatch seems to be whether the debacle we observe around us will resolve as a crash or a slow-motion financial train wreck. It seems to me that at every layer of the system, we're susceptible to both -- in tradable paper, institutional legitimacy, individual solvency, productive activity, real employment, "consumer" behavior, and energy resources. Some things are crashing as I write.
The dollar is losing about a cent every three weeks against other currencies. A penny doesn't seem like much, but keep that pace up for another year and the world's "reserve currency" becomes the world's reserve toilet paper. Oil prices are poised to enter the triple-digit realm, the psychological effect of which may be jarring to 200 million not-so-happy motorists. The value of chipboard-and-vinyl houses is tanking beyond question. Of course, the government's consumer price inflation figures and employment numbers are dismissed broadly as lacking credence. But anybody who has bought a bag of onions and a jar of jam lately knows that things are way up in the supermarket aisles, and so many illegal Mexican migrants were employed in the Sunbelt housing boom, that their absence in the bust won't register on any chart.
It's hard to describe what constitutes the bulk of the stuff moving through the world's financial markets for the simple reason that it was purposely-designed to be so abstruse and provisional that traders would be too intimidated to ask what it represents -- and the growing terrified suspicion is that it's mostly worthless. By this I refer to the global freak show of derivatives, concocted "plays" on hypothetical "positions," credit default swaps, arbitrages in imagined "differentials," nifty equations, hedges, promises, algorithms executed by robots, and "off-book" wishes chartered in the Cayman Islands. Probably all of them, in one way or another, are just scams, since they are unaffiliated with productive activity.
At a more fundamental level, these mutant "investments" were derived from a very tangible trade in loans and mortgages made to flesh-and-blood chumps, but even those are only the last in a long spiral of serial "bubbles," or market frenzies based on unreal expectations. And this leads into the very real realm of poor choices, fiscal and fiduciary irresponsibility, deliberately deceptive policy, criminal malfeasance, and the broad abandonment of standards in acceptable behavior by people in authority. A lot of observers attribute this to the Gordon Gecko ethos -- the discovery back in the 1980s that "greed is good," which was meant to trump a previous ethos that life is tragic.
Anyway, the trade in mutant investment entities appears to be collapsing now as their worthlessness in market terms (as opposed to theoretical terms) becomes manifest. The major holders of this dreck are losing the ability to conceal their losses, but suspicion now reigns that the losses are far greater than even the massive multiple billions reported so far by the likes of Merrill Lynch, Citicorp, and others. I suppose that what we've been seeing lately is a desperate attempt to hold things together just long enough to cut those Christmas bonus checks so that when the pink slips do finally fly in 2008, at least some Big Boyz will walk away with enough cash to cover a hacienda in Uruguay and the salaries of a half-dozen private security goons to guard it.
But I must say, at the risk once again of sounding extreme, that the structural and systemic sickness in the finance realm is now so severe that it is hard to imagine we will get through the month of December without some major trauma in the markets. In fact, I'd go so far as to predict a thousand-point drop (or more) in the Dow just in this week after Thanksgiving. Real wealth "out there" is evaporating like popsicles dropped on the floor of Hell's fifth circle. It is coming out of the system whether the Big Boyz or anybody else likes it or not, and its absence will assert itself.
At the risk of sounding even more extreme, I would be hard put to believe any reports that "consumer" spending in the days following Thanksgiving will match the hopes and wishes of economic officialdom. My own hunch is that average Americans are so maxed out on debt that they don't know whether to shit or go blind. Perhaps lot of them are willing to take a last step into fatal insolvency in order to put a plasma TV screen under the Christmas tree and appear as heroes to their families. If that's the case, it would only imply a greater bloodbath in credit card default thundering through the system in February and March, which would only deepen the carnage in collateralized debt instruments further up the food chain.
That stuff probably has a long way to unwind, even as the "train" of losses hits the immovable obstacle of reality and the "boxcars" of consequence fly off the rails. The slow-motion train wreck could sweep away an awful lot of familiar things in its path -- banks, companies, government-sponsored enterprises, whole industries, whole economies, nations, up to and including the prospects for civilized existence, if severe hardship leads to war, which it often does.
To some extent, the speed and severity of the financial train wreck will occur in a mutually reinforcing relation to what happens in the oil markets. The rise in price is only the mildest symptom of growing instability for the system that allocates the world's most critical resource. Even in the face of "demand destruction," weird changes are occurring in the way that the oil producers do business. The decline in export rates and the new spirit of "oil nationalism" will take center stage now, even if the US economy seizes up. These phenomena will represent a new cycle in world affairs: the global contest for remaining fossil fuel resources.
Sooner rather than later, the next symptom will appear: spot shortages around the US and hoarding behavior. This is what will finally wake the American public out of its long sleepwalk (and Matthew Simmons said this first, by the way) -- when the lines form at the gas stations and the tempers flare and the handguns come out of the glove compartments. In the financial markets and the economies of nations, it's not a case of either / or. It's a matter of either / and.
James Howard Kunstler
November 27, 2007
Author of The Long Emergency
Kunstler.com |
| Anonymous Coward
User ID: 334055
12/1/2007 9:03 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
As credit dries up in U.S., concerns mount about recession
By Peter S. Goodman
Published: November 28, 2007
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NEW YORK: Credit flowing to American companies is drying up at a pace not seen in decades, threatening the creation of new jobs and the expansion of businesses, while intensifying worries that the economy may be headed for recession.
The combined value of two major sources of credit - outstanding commercial and industrial bank loans, and short-term loans known as commercial paper - peaked at about $3.3 trillion in August, according to data from the Federal Reserve. By mid-November, such credit was down to $3 trillion, a drop of nearly 9 percent.
Not once in the years since the Fed began tracking such numbers in 1973 have these arteries of finance constricted so rapidly. Smaller declines preceded three recessions going back to 1975.
"This is a very big deal," said Andrew Tilton, a senior economist in the U.S. Economic Research Group at Goldman Sachs. "You're basically crimping the growth of the more vulnerable companies. If they can't borrow the money, their options are much more limited. They'd have to have less ambitious hiring plans, buy less machinery and cancel projects."
When credit to business slows significantly, a drop-off in investment by businesses has generally followed closely, Tilton added, suggesting that the tightening increases the prospect of recession.
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Because it has the world's largest economy, any recession in the United States would probably have a ripple effect across the globe because U.S. consumers would be buying fewer goods from abroad. Europe, so far at least, has not been subjected to a similar tightening of credit that would prompt a broader economic contraction, though available statistics provide an incomplete picture, analysts said.
Anecdotal evidence suggests that sectors depending heavily on the free flow of credit, notably construction, no longer have ready access to the cash that seemed plentiful just a year ago. Like in the United States, big leveraged buyouts are now harder to finance.
But household borrowing in the 13 nations that use the euro has kept growing at about the same levels as before the onset of the credit crisis in August. And bank lending to nonfinancial corporations has actually increased since August, according to the European Central Bank, a fact that reflects the peculiarities of this credit crisis.
Back in the United States, some of the drying up of credit reflects the end of a run of mergers financed by free-flowing credit. Some can be explained by what many economists view as a healthy return to the skeptical scrutinizing of balance sheets by banks. But lenders and borrowers from the suburbs of northern Virginia to communities in southern Arizona confirm that the tightening has already begun to affect the operations of some businesses.
A survey of bank loan officers conducted by the Fed in October found that about one-fifth of lenders had over the three previous months tightened lending requirements for commercial and industrial loans for large and mid-sized businesses. A slightly smaller proportion had tightened lending to small companies.
By themselves, commercial bank loans have actually surged: Large companies have tapped prearranged lines of credit to weather the financial chaos that has accompanied the unraveling of the American real estate market. But this source of finance has been nowhere near enough to compensate for the veritable shutdown of the short-term commercial paper market. Much of this debt is pledged against the value of mortgages, making them effectively radioactive in markets around the globe.
In recent years, much commercial lending was inspired by an upward spiral of enrichment: Banks made new loans, then swiftly sold them off for profit, using the proceeds to extend still more. But with much of the financial world spooked by the mortgage meltdown, buyers for commercial loans are scarce, removing a reason for banks to lend in the first place.
What loans are being extended are going primarily to companies with long-standing relationships with banks. Lenders are reluctant to bet their increasingly scarce capital on riskier, less-established companies in a time of economic anxiety. That leaves many companies - smaller firms in particular - scrambling to get hold of finance.
"Small businesses are just inherently more risky, and banks are going to be more conservative in protecting their assets," said Jody Keenan, who heads the board of the Association of Small Business Development Centers in Burke, Virginia. "We're starting to see a tightening already, particularly for very small companies. We're talking about real impacts in local communities."
A slowdown among smaller companies could be especially costly to the economy in terms of jobs. More than half of U.S. jobs are at companies with fewer than 100 workers, according to Moody's Economy.com. |
| Anonymous Coward
User ID: 334055
12/1/2007 9:04 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
As credit dries up in U.S., concerns mount about recession
By Peter S. Goodman
Published: November 28, 2007
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(Page 2 of 2)
In recent months, smaller companies have been adding jobs even as larger firms have been shedding workers, according to the ADP National Employment Report. Between May and October, 276,000 of the 378,000 jobs added to the U.S. economy sprung up at companies of fewer than 50 employees, the report found.
To be sure, the strongest companies with property to put up as collateral and years of profits they can point to are still able to borrow, often at highly favorable terms.
The downturn in the housing market has made banks reluctant to sink money into anything related to real estate, from title companies to bathroom tile manufacturers, but lenders have sought refuge in more vibrant areas - notably agriculture, which has benefited from the boom in ethanol production.
Other parts of the economy, notably the auto industry, have seen access to credit tighten considerably, as banks steer their limited capital away from companies with declining sales.
A year ago, when he needed new machinery, Doyle Hayes, president and chief executive of Pyper Products, an auto parts maker in Battle Creek, Michigan, went back to the local branch of Comerica bank, where he has been doing business for years. He borrowed $300,000. Last week, when Hayes needed $140,000 for a new robot, he did not even bother to inquire at the bank.
"We knew what the answer was going to be," he said. "When the auto industry goes down, anything that has four wheels becomes suspect."
Still, Hayes did not put off the purchase. "You can't save yourself into prosperity," he said. He managed to borrow the money instead from Battle Creek Unlimited, a nonprofit economic development arm of the city.
Even so, credit remains tight, so much so that Hayes is delaying payments to the companies that sell him plastic resin, his primary raw material.
"I've got to try not to answer the phone," Hayes said. "Everybody wants money. We stretch people out."
Carter Dougherty contributed reporting from Frankfurt. Floyd Norris and Eric Dash contributed from New York. |
| Anonymous Coward
User ID: 334536
12/2/2007 10:06 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
[link to www.safehaven.com]
November 30, 2007
TedBits
by Ty Andros
The Fingers of Instability, Part XIII
In This Issue
Breaking the Buck!
Look at the Actions, Not the Words!
Showdown at the O.K. Corral!
Dear Readers, first I must apologize for my absence the last two weeks, I have been to Europe to meet with some institutional investors who want solutions to their investing conundrums and I had to prepare for a week then do the travel. It has been heartwarming to get the emails asking for their Tedbits. This week I will be brief and give you "three" fingers, but next week we will be back to the deep insights you expect from TedBits.
Better late then never I say and the bombs are a bursting all over the street: Dow Theory sell signals, new lows below August lows in everything but the S&P 500 and the NASDAQ. Freddie Mac and Fannie Mae meltdowns of over 30%, expect government bailouts shortly. But the plunge protection team has worked overtime to keep things alive and, as this morning 's GDP numbers of 4.9% suggest, the Government statisticians have kept their pencils very sharp to keep the illusions of growth and low inflation in front of the masses. The wolf wave illustrated in previous fingers of instability is becoming reality as the S&P earnings are DOWN about 7 % year over year and are headed a lot lower. You have to wonder why stocks are not joining the parade in a more emphatic manner as profits are headed lower, while stocks are a lot higher than they were a year ago.
Breaking the Buck!
In the last two weeks more than three money market funds had to be recapitalized by their banking parents as the securities they held had been downgraded to junk. If they had not injected capital they would have "broken the buck" and returned less than had been deposited in the supposedly ultra safe parking places. But today took the cake as we discovered a new area in which government has tread in search of revenue and public and civil servants demonstrated their expertise in the world of finance.
In the State of Florida a money market fund run by local and state government has had a "RUN ON THE BANK" as it has been disclosed that over 8 billion dollars, which equaled 30% of its assets, had been withdrawn by local government depositors after they learned that over 700 million dollars of the securities they had held are in default. When redemptions hit 15 billion Thursday afternoon Florida Governor, Charlie Christ, closed the doors in FAIRNESS to the depositors who had not gotten wind of the "foul" smelling investments the fund had been holding, and would not be left holding a completely empty bag.
The real finger of instability is brought to our attention by Bill King of the King Reports. This is not something we can expect to hear the end of any time soon:
Thousands of school, fire, water and other local districts across the U.S. keep their cash in state- and county-run pools. These public accounts, modeled after private money market funds, are supposed to invest in safe, liquid, short-term debt such as U.S. Treasuries and certificates of deposit. [link to www.howestreet.com]
Mason, who has studied the history of bank failures, understands the rush by Florida municipalities to pull their money from the pool.
``The first people in the withdrawal line get 100 percent of their money,'' he said. ``The loss is suffered by the people behind them in line. Since nobody wants to be at the end, you get a run on the pool.'' [link to www.irnnews.com]
More runs on the bank and government-run pools are set to begin. It 's off to the races as more of these funds than you can imagine hold this BAD paper. I can hear someone yelling FIRE in a theatre. It 's a race for the door. Can anyone say "qualitative due diligence?" Yields on AAA paper that are too good to be true? Can you say "Roach Motels"? Dominoes anyone?
Look at the Actions, Not the Words!
When I write Tedbits and offer insights, it 's quite often just as simple as ignoring the press reports and looking at the actions. And there is only one message you can take from the Dubai PIPE deal (private investment in public equity) in the world 's biggest bank. It is a walking dead man, it is too big to fail and that is the only reason anyone would pay almost $8 Billion IN EXCHANGE for this equity injection. Citigroup 's balance sheet is far worse then being disclosed, they had to give an interest rate 7% above 2-year treasuries. These are rates for which the junkiest of junk corporations are currently paying funds. These are not the rates at which the biggest bank in the world should be raising money. The maximum should be 2-3% above treasuries. The amount they are paying SAYS IT ALL: Their balance sheet is in tatters and the buyers are just buying it waiting for the bail out of the bank that is "too big to fail!"
Showdown at the O.K. Corral!
After the most recent Federal Reserve open market committee meeting in October, the statement was fairly explicit: NO MORE RATE CUTS for a while. Up until about a week ago, several Federal Reserve governors were sounding fairly firm in this belief. The Market has had a .25% basis rate cut as a 100% probability and, as I write this, is pricing in a 60% chance of a .50% basis rate cut. In light of today 's 4.9% GDP report how can they cut? But, Donald Kohn, aka "Greenspans" righthand man, made an about face speech several days ago so now the stage is set. Will they bow to the market or will they bend it to their will and prudent central banking. Can you say "they will print the money"?
In conclusion: It 's been a wild several weeks and the "fingers" I have outlined in this series are all FINALLY unfolding. They are in their infancy after impulse waves signaled their launch. These are opportunities! HUGE ONES! Have you captured them? The credit markets of the G7 have basically turned to toast, Libor is skyrocketing again and the Junk bond markets are basically SHUT DOWN. The G7 central banks are throwing money into the money markets like sailors on shore leave after a night of drinking. 10 's and 100 's of Billions of them. The Printing presses at the ECB (European Central Bank) and the Federal Reserve must be running overtime and they probably have spare computer keyboards at the ready as they have to run keystroke on top of keystroke to replace and print the cash that is VAPORIZING! Jean Claude Trichet 's and Ben 's helicopters then spend the night dropping them into the blast holes in the financial systems to cover them up. It 's INFLATE OR DIE and I don 't see them preparing a funeral yet. Volatility is opportunity for the prepared investor.
The markets are rocking: precious metals, stock indexes, commodities, raw materials, energy, interest rates, foreign currencies, the dollar and more are providing opportunities, up and down, to the prepared investor. The tsunami of money and credit creation required to underpin the asset backed economies of the G7are providing opportunities as far as the eye can see. And the massive sterilization of this same money printing by the emerging world is stoking runaway inflation to surface in every area of the globe and signaling the unfolding "Crack up Boom" (see Tedbits archives at www.TraderView.com).
Thank you for your patience as I have been away. I will return next week with something special for you.
__________________ |
| Anonymous Coward
User ID: 335443
12/4/2007 7:37 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
PATHOLOGY OF DEBT
PART 5: Off-balance-sheet debt
By Henry C K Liu
(PART 1: Banks as vulture investors
PART 2: Commercial paper and pesky SIVs
PART 3: The credit guns of August
PART 4: Lessons unlearned)
Conduits and special investment vehicles (SIVs) allow companies and banks to take on off-balance-sheet debt. These vehicles
usually hold highly rated, short-term debt that offers a higher yielding alternative to ultra-safe Treasury debt. Banks use the low-cost proceeds to buy longer-term debt such as auto-loans, credit card loans, or mortgages to profit from their high cash flow. Banks that have stakes in the conduits have provided ''liquidity back-stops'', promises that the vehicles’ debts will be paid by the banks when they come due even if the vehicles are not able to pay them.
Banks are reluctant to consolidate the distressed vehicles because it would have to put the liabilities on bank balance sheets, thus restricting lending. Also, allowing conduits or SIVs to fail could damage a bank's reputation and might even create financial systemic risk if investors should lose faith and stop purchasing commercial paper altogether. This creates possible scenarios where banks must lend the distressed vehicles money in the hope of riding out a storm or take substantial immediate losses.
The trillion dollar commercial paper (CP) market that raises funds for the purchase of assets ranging from home mortgages to car loans seized up in August this year just as more than half of that amount was coming due. Unless the issuers continue to find new buyers to roll over the maturing debt, hundreds of hedge funds and home-loan companies will be forced to draw on bank loans or sell some US$75 billion of debt at fire sale prices every 90 days, which would drive prices further down in a market where investors have already lost $44 billion. That would hurt the 40 million individual and institutional investors in money market funds, the biggest owners of CP. The money comes predominantly from retirement funds. Let that be a warning to those who advocate the privatization of social security.
Ottimo Funding Ltd, whose name means ''excellent'' in Italian, started selling its $2.8 billion of mortgage bonds at the end of October after failing to roll over financing in the CP market. Many of Ottimo’s securities were backed by option adjustable-rate mortgages (ARMs). Borrowers with option ARMs are permitted to make low initial interest payments for the first few years, causing loan balances to grow. Monthly payments can later more than double.
The securities auctioned were rated AAA and backed by Alt-A mortgages, a credit class above subprime made to borrowers with good credit scores who opt for unusual terms, such as reduced income documentation or delayed principal repayment, without enough visible assets to offset the risk, such as sufficient cash in the bank. The sale of Ottimo securities did not generate enough cash to fully repay investors who had bought short-term debt from the fund that was now maturing.
Ottimo, created six months earlier by Stamford, Connecticut-based $20 billion hedge fund manager Aladdin Capital Management, extended the maturity of its asset-backed commercial paper (ABCP) in August after being unable to roll over the debt. Investors in short-term CP issued by Ottimo and similar funds fled to safety in US government bonds after losses linked to subprime home loans began to spread. S&P in August cut Ottimo's credit rating to C, the second-lowest ranking, from AAA.
The threat of a fire sale of assets by investors that also rely on the shrinking market for ABCP prompted US Treasury Secretary Henry Paulson to broker talks that may lead to the creation of a $80-100 billion fund by Citigroup Inc, JP Morgan Chase & Co and Bank of America Corp.
The fund would buy securities from so-called structured investment vehicles, or SIVs, to prevent them from dumping their $320 billion of holdings and further roiling credit markets.
But Ottimo is not considered a SIV. Its bonds are backed by mortgages to people with credit scores of 708 and higher, compared with scores for subprime loans that average less than 620. The company's CP has an A1+ rating from S&P and P1 from Moody's Investors Service, the highest available.
Aladdin was not forced to immediately shutter Ottimo because the company exercised an option to extend the maturities on its CP, providing 30 to 45 more days to find buyers. No issuer had extended maturities in the 12-year history of the asset-backed market until Ottimo. Two other issuers, Luminent and a unit of Melville, New York-based American Home Mortgage Investment Corporation did so in the last two weeks of October. More than $100 billion of extendible CP is still outstanding.
The laws of finance may be bent but cannot be denied by obscuring the unwinding of obligations through manipulation to postpone the day of reckoning by adding more obligations. Ponzi schemes of paying early creditors with money from new creditors eventually will fail, with the final bill increasing in size as time goes on. The reckoning of the debt cancer presents a choice of facing the music honestly by excising the invasive malignancy now or letting it metastasize through the entire financial system over the painful course of several quarters and even years and decades. Until October, investors were willing to buy extendible CP because it offered higher interest rates than standard ABCP. Since then, as Wall Street carnival barkers continue to urge investor to take advantage of buying opportunities, it has been time to sell.
Financial panic
Short-term corporate debt yielded 5.75% to 5.95% on average on August 8, compared with 5.45% for non-extendable ABCP and 5.25% to 5.30% for corporate commercial paper. Since then, ABCP with a maturity of 30 days or less are yielding above 6% on average if a buyer can be found, and corporate borrowers pay about 5.2%, while three-month LIBOR, or London Inter-Bank Offer Rate, the interest rate that the banks charge each other for loans, hovers around 4.89%. Extendible commercial paper has no market.
Wall Street is gripped by financial panic and has stopped funding mortgage bonds, even those that are AAA rated and backed by prime home loans. Even the Fed's decision on August 17 to cut the discount rate 50 basis points to 5.75%, its September 18 decision to cut the same rate another 50 basis points to 5.25% and the Fed Funds rate target 50 basis points to 4.5%, failed to revive demand for ABCP. Its October 31 decision to cut the discount rate another 25 basis points to 5% and the Fed Funds rate target another 25 basis points to 4.5% still failed to revive demand. The rate for overnight borrowing in the asset-backed commercial paper market soared 0.39 percentage points, the biggest rise since the September 11 terrorist attacks. Overnight yields fell 2 basis points to 6.01% while 30-day paper widened 9 basis points to 6.09%. A basis point is 0.01 percentage point.
The distinction between asset-backed securities and asset-backed commercial paper is primarily one of the tenure of the paper - commercial paper by definition is short-term funding and is therefore mostly used for short-term assets such as trade receivables.
ABCP is a device used by banks to get operating assets such as trade receivables funded by issuance of securities. Traditionally, banks devised ABCP conduits as a device to put their current asset credits off their balance sheets and yet provide liquidity support to clients whose working capital needs are funded by the bank. If the bank wants to release the regulatory capital that is locked in this credit asset, the bank can set up a conduit, essentially a special purpose vehicle that issues commercial paper. The conduit will buy the receivables of the client and get the same funded by issuance of commercial paper. The bank will be required to provide some liquidity support to the conduit, as it is practically impossible to match the maturities of the CP to the realization of trade receivables. Thus, the credit asset is moved off the balance sheet, giving the bank a regulatory relief.
So depending upon whether the bank provides full or partial liquidity support to the conduit, ABCP can be either fully supported or partly supported. ABCP conduits are virtual subsets of the parent bank. If the bank provides full liquidity support to the conduit, for regulatory purposes, the liquidity support given by the bank may be treated as a direct credit substitute in which case the assets held by the conduit are aggregated with those of the bank.
Non-bank entities also set up ABCP conduits. ABCP conduits can be single originator or multiple originator conduits. In the latter case, the credit enhancements (and/or liquidity enhancements) are found both at the level of transfer by each originator (originator-level enhancement) and at the program level.
The ABCP market
Bank-sponsored ABCP conduits are the oldest and largest segment of the asset-backed commercial paper market. As of |
| Anonymous Coward
User ID: 335443
12/4/2007 7:38 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
Page 2 of 4
PATHOLOGY OF DEBT
PART 5: Off-balance-sheet debt
By Henry C K Liu
June 30, 2007, there were over 200 such conduits worldwide, with approximately $900 billion of ABCP outstanding, comprising two-thirds of the outstanding ABCP rated by Moody’s. On June 30, 2000, ABCP outstanding was $570 billion. By the end of year 2001, it had reached $745 billion, up from $641 billion at year-end 2000.
Unlike the bank-sponsored conduits in the US and Europe, the
bank-sponsored ABCP market in Japan had been reported by Moody's as largely unaffected by the recent market turmoil. But the Tokyo stock market suffered its sixth straight loss on Friday, November 9, amid persisting nervousness about the impact of the subprime mortgage crisis. Selling accelerated late in the day on November 9 following a news report that Mizuho Securities might have lost as much as 100 billion yen (US$8.7 billion) due to the turmoil stemming from problems in the subprime mortgage market. Moody’s also rates 20 bank-sponsored ABCP conduits in Australia and Asia with $39 billion outstanding.
Some of the notable administrators of ABCP in the US market are: Citigroup NA, ABN-AMRO Bank NV, Banc One NA, JP Morgan Chase; General Electric Capital; Westdeutsche Landesbank Girozentrale; Rabobank Nederland; Liberty Hampshire Co LLC; Societe Generale; Bank of America National Trust & Savings Association; Canadian Imperial Bank of Commerce; Barclay's Bank PLC; Credit Suisse First Boston; First Union National Bank, Charlotte; Bayerische Landesbank Girozentrale; General Motors Acceptance Corporation; Firstar Bank NA and Dresdner Bank AG.
Back in an unusually heavily attended 2002 annual Bond Market Association meeting in New York featuring then treasury secretary Paul O'Neill, Securities and Exchange Committee chairman Harvey Pitt, and former Fed chairman Paul Volcker, a swarm of reporters, looking for the next Enron, turned up to ask questions about special-purpose entities (SPEs) and other means of moving risk off corporate balance sheets. One association member asked Pitt how the market could distinguish between how SPEs now were different from those used by Enron, which had been deemed legally fraudulent. Pitt had no ready answer. The off-balance-sheet genie had been let out of the bottle, and there was no easy way to put it back in.
New accounting rules
The Financial Accounting Standards Board (FASB) adopted new rules for consolidating SPEs and disclosing off-balance-sheet activities. SPEs can no longer be all-purpose entities, especially not the kind of debt-hiding entities that Enron used and abused to puff up its profits. Interpretation No. 46, "Consolidation of Variable Interest Entities", expands on existing rules to more precisely specify under what conditions a parent company must consolidate an off-balance-sheet SPE. Now, the question of consolidation is a matter of who takes the risks and who reaps the rewards of the enterprise.
Hundreds of US companies keep trillions of dollars in debt in off-balance-sheet subsidiaries and partnerships, skirting the consolidation rules of FASB 94, FASB 125 and FASB 140. If a company creates an SPE, a legal structure, with a 3% minimal equity infusion, is does not have to consolidate the transaction under SEC and FASB rules. Banks arrange many of the devices and are big users themselves. JP Morgan revealed in the Enron bankruptcy that it had nearly $1 billion in potential liabilities stemming from a single 49%-owned Channel Islands entity called Mahonia that traded with Enron. Dell Computer had a joint venture with Tyco called Dell Financial Services (DFS) that originated $2.5 billion in customer financing, mentioned only as a footnote to Dell's accounts. Dell owned 70% of DFS, but did not control it and therefore could keep DFS debts off its own balance sheet.
To move assets off its books, a company typically sells them to an SPE, funding the purchase by borrowing cash from institutional investors. As a sweetener to protect investors, many SPEs incorporate triggers that require the parent to repay loans or give them new securities if its stock falls below a certain price or credit-rating agencies downgrade its debt or other triggering events. However, the International Accounting Standards Board (IASB) resisted this type of treatment. Under pending European Union legislation, all listed companies in the EU had to report under IASB by 2005, except those that report under US GAAP, which would have to move to IASB by 2007.
Moving debt off the balance sheet is more difficult in Europe than in the US under IASB rules, which use the standard of whether a company participates in the risks and rewards attached to that debt in deciding whether debt can be off-balance-sheet. By contrast, US GAAP uses the standard of what legal form such an entity takes. In the post-Enron world, the rules on off-balance-sheet debt have tightened up, but new loopholes have been exploited. Under existing accounting rules, the assets of SPEs must be consolidated when outside investors' stakes are protected in that fashion. Yet some 42% of off-balance-sheet debt provides guarantees for outside investors in indirect ways to get around the rules.
Synthetic leases
Synthetic leases allow a company to own financial instruments that would give it the tax benefits of ownership without the accounting burdens of ownership. Synthetic leases are designed under current accounting rules to achieve off-balance sheet treatment of both assets and liabilities by classifying lease payments as operating expenses. Return on assets (ROA), return on equity (ROE), interest-coverage ratios and leveraging ratios (debt to equity) are improved relative to standard on-balance sheet treatment.
Synthetic transactions qualify for off-balance sheet status if the lease does not: (1) transfer ownership of the property at the end of the lease term; (2) does not contain an option to purchase at a bargain price; (3) the non-cancelable lease term is not equal to or greater than 75% of the estimated economic life of the property; and (4) the present value of rents and other minimum lease payments does not equal or exceed 90% of the fair market value of the property.
Generally, the ownership transfer and bargain purchase criteria are structured to provide a fixed, market-rate purchase price at the end of the lease term. The non-cancelable lease term is structured so that the non-cancelable portion of the lease term is short-term.
Under a synthetic lease, the lessee retains the tax advantages of ownership since the transaction places significant benefits, burdens and control of ownership with the corporate user, who is regarded as the tax owner of the property and is eligible for the accelerated depreciation and interest deductions contained in the lease payments.
Several factors determine if synthetic leases are beneficial to a company: (1) the value of the asset is expected to appreciate over time; (2) the cash tied up in the asset can be better utilized and (3) 100% financing allows the company faster more cost-effective growth. In most cases, 100% financing is available, thus creating a structure with an ''all in'' cost that may be substantially lower than traditional financing programs.
Synthetic leases are used for financing equipment integrated into industrial buildings, corporate headquarters, hospitals, single-tenant offices, movie theaters, hotels, retail branches, call centers and data centers. Under a synthetic transaction, a capital source provides funding for the construction or acquisition of equipment to be utilized by and leased to a corporate user. If the equipment is purchased by the user upon the expiration of the lease, a predetermined purchase price is paid to the lessor. Funding sources for synthetic leases are commercial paper on a floating-rate or fixed-rate basis through interest-rate swaps, private placement, bank debt or other sources.
Leases can be structured such that funds are provided on a drawn basis usually with spreads over bankers’ acceptances, or an undrawn basis where funds are raised in the commercial paper market by a major funding source using a funding conduit.
In a typical synthetic transaction, the borrower would have two options at the expiration of the lease term. One is to purchase the property from the lessor (or owner) for the balance due. Because this amount cannot be a bargain purchase, an appraisal is required at the lease inception stating that the amount is not a bargain price. The other option is to sell the property on the last day of the lease term to a buyer unaffiliated with the borrower and guarantee the lessor any deficiency in the sale proceeds up to a specified amount with any excess payable to the lessee. Through a fixed-price purchase option available at any time, lessees may benefit from any appreciation in the underlying value of the leased asset(s) even though such assets are not owned for GAAP accounting purposes. Alternately, lessees have the right to ''return'' such leased assets at the lease maturity upon making a |
| Anonymous Coward
User ID: 335443
12/4/2007 7:39 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
Page 2 of 4
PATHOLOGY OF DEBT
PART 5: Off-balance-sheet debt
By Henry C K Liu
June 30, 2007, there were over 200 such conduits worldwide, with approximately $900 billion of ABCP outstanding, comprising two-thirds of the outstanding ABCP rated by Moody’s. On June 30, 2000, ABCP outstanding was $570 billion. By the end of year 2001, it had reached $745 billion, up from $641 billion at year-end 2000.
Unlike the bank-sponsored conduits in the US and Europe, the
bank-sponsored ABCP market in Japan had been reported by Moody's as largely unaffected by the recent market turmoil. But the Tokyo stock market suffered its sixth straight loss on Friday, November 9, amid persisting nervousness about the impact of the subprime mortgage crisis. Selling accelerated late in the day on November 9 following a news report that Mizuho Securities might have lost as much as 100 billion yen (US$8.7 billion) due to the turmoil stemming from problems in the subprime mortgage market. Moody’s also rates 20 bank-sponsored ABCP conduits in Australia and Asia with $39 billion outstanding.
Some of the notable administrators of ABCP in the US market are: Citigroup NA, ABN-AMRO Bank NV, Banc One NA, JP Morgan Chase; General Electric Capital; Westdeutsche Landesbank Girozentrale; Rabobank Nederland; Liberty Hampshire Co LLC; Societe Generale; Bank of America National Trust & Savings Association; Canadian Imperial Bank of Commerce; Barclay's Bank PLC; Credit Suisse First Boston; First Union National Bank, Charlotte; Bayerische Landesbank Girozentrale; General Motors Acceptance Corporation; Firstar Bank NA and Dresdner Bank AG.
Back in an unusually heavily attended 2002 annual Bond Market Association meeting in New York featuring then treasury secretary Paul O'Neill, Securities and Exchange Committee chairman Harvey Pitt, and former Fed chairman Paul Volcker, a swarm of reporters, looking for the next Enron, turned up to ask questions about special-purpose entities (SPEs) and other means of moving risk off corporate balance sheets. One association member asked Pitt how the market could distinguish between how SPEs now were different from those used by Enron, which had been deemed legally fraudulent. Pitt had no ready answer. The off-balance-sheet genie had been let out of the bottle, and there was no easy way to put it back in.
New accounting rules
The Financial Accounting Standards Board (FASB) adopted new rules for consolidating SPEs and disclosing off-balance-sheet activities. SPEs can no longer be all-purpose entities, especially not the kind of debt-hiding entities that Enron used and abused to puff up its profits. Interpretation No. 46, "Consolidation of Variable Interest Entities", expands on existing rules to more precisely specify under what conditions a parent company must consolidate an off-balance-sheet SPE. Now, the question of consolidation is a matter of who takes the risks and who reaps the rewards of the enterprise.
Hundreds of US companies keep trillions of dollars in debt in off-balance-sheet subsidiaries and partnerships, skirting the consolidation rules of FASB 94, FASB 125 and FASB 140. If a company creates an SPE, a legal structure, with a 3% minimal equity infusion, is does not have to consolidate the transaction under SEC and FASB rules. Banks arrange many of the devices and are big users themselves. JP Morgan revealed in the Enron bankruptcy that it had nearly $1 billion in potential liabilities stemming from a single 49%-owned Channel Islands entity called Mahonia that traded with Enron. Dell Computer had a joint venture with Tyco called Dell Financial Services (DFS) that originated $2.5 billion in customer financing, mentioned only as a footnote to Dell's accounts. Dell owned 70% of DFS, but did not control it and therefore could keep DFS debts off its own balance sheet.
To move assets off its books, a company typically sells them to an SPE, funding the purchase by borrowing cash from institutional investors. As a sweetener to protect investors, many SPEs incorporate triggers that require the parent to repay loans or give them new securities if its stock falls below a certain price or credit-rating agencies downgrade its debt or other triggering events. However, the International Accounting Standards Board (IASB) resisted this type of treatment. Under pending European Union legislation, all listed companies in the EU had to report under IASB by 2005, except those that report under US GAAP, which would have to move to IASB by 2007.
Moving debt off the balance sheet is more difficult in Europe than in the US under IASB rules, which use the standard of whether a company participates in the risks and rewards attached to that debt in deciding whether debt can be off-balance-sheet. By contrast, US GAAP uses the standard of what legal form such an entity takes. In the post-Enron world, the rules on off-balance-sheet debt have tightened up, but new loopholes have been exploited. Under existing accounting rules, the assets of SPEs must be consolidated when outside investors' stakes are protected in that fashion. Yet some 42% of off-balance-sheet debt provides guarantees for outside investors in indirect ways to get around the rules.
Synthetic leases
Synthetic leases allow a company to own financial instruments that would give it the tax benefits of ownership without the accounting burdens of ownership. Synthetic leases are designed under current accounting rules to achieve off-balance sheet treatment of both assets and liabilities by classifying lease payments as operating expenses. Return on assets (ROA), return on equity (ROE), interest-coverage ratios and leveraging ratios (debt to equity) are improved relative to standard on-balance sheet treatment.
Synthetic transactions qualify for off-balance sheet status if the lease does not: (1) transfer ownership of the property at the end of the lease term; (2) does not contain an option to purchase at a bargain price; (3) the non-cancelable lease term is not equal to or greater than 75% of the estimated economic life of the property; and (4) the present value of rents and other minimum lease payments does not equal or exceed 90% of the fair market value of the property.
Generally, the ownership transfer and bargain purchase criteria are structured to provide a fixed, market-rate purchase price at the end of the lease term. The non-cancelable lease term is structured so that the non-cancelable portion of the lease term is short-term.
Under a synthetic lease, the lessee retains the tax advantages of ownership since the transaction places significant benefits, burdens and control of ownership with the corporate user, who is regarded as the tax owner of the property and is eligible for the accelerated depreciation and interest deductions contained in the lease payments.
Several factors determine if synthetic leases are beneficial to a company: (1) the value of the asset is expected to appreciate over time; (2) the cash tied up in the asset can be better utilized and (3) 100% financing allows the company faster more cost-effective growth. In most cases, 100% financing is available, thus creating a structure with an ''all in'' cost that may be substantially lower than traditional financing programs.
Synthetic leases are used for financing equipment integrated into industrial buildings, corporate headquarters, hospitals, single-tenant offices, movie theaters, hotels, retail branches, call centers and data centers. Under a synthetic transaction, a capital source provides funding for the construction or acquisition of equipment to be utilized by and leased to a corporate user. If the equipment is purchased by the user upon the expiration of the lease, a predetermined purchase price is paid to the lessor. Funding sources for synthetic leases are commercial paper on a floating-rate or fixed-rate basis through interest-rate swaps, private placement, bank debt or other sources.
Leases can be structured such that funds are provided on a drawn basis usually with spreads over bankers’ acceptances, or an undrawn basis where funds are raised in the commercial paper market by a major funding source using a funding conduit.
In a typical synthetic transaction, the borrower would have two options at the expiration of the lease term. One is to purchase the property from the lessor (or owner) for the balance due. Because this amount cannot be a bargain purchase, an appraisal is required at the lease inception stating that the amount is not a bargain price. The other option is to sell the property on the last day of the lease term to a buyer unaffiliated with the borrower and guarantee the lessor any deficiency in the sale proceeds up to a specified amount with any excess payable to the lessee. Through a fixed-price purchase option available at any time, lessees may benefit from any appreciation in the underlying value of the leased asset(s) even though such assets are not owned for GAAP accounting purposes. Alternately, lessees have the right to ''return'' such leased assets at the lease maturity upon making a |
| Anonymous Coward
User ID: 335443
12/4/2007 7:40 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
Page 3 of 4
PATHOLOGY OF DEBT
PART 5: Off-balance-sheet debt
By Henry C K Liu
residual payment, assuming there is no event of default and certain return provisions have been satisfied.
Implementing synthetic leases has led to unique and bleeding-edge structures (beta testing), which are highly influenced by accounting and tax rules. FASB new rules regarding SPEs, including those involving synthetic leases, would make it much harder, if not impossible, to make use of such arrangements when
they involve SPEs. Some companies such as Symantec Corporation continued to use synthetic leases to keep real estate financing off their balance sheets. Symantec defended its practices by pointing out that the arrangements met new accounting rules because its synthetic leases did not involve SPEs. But most lenders have to get a regulatory exemption to offer such leases without the use of SPEs, and only a handful have done so.
While the debt reflected by Symantec's synthetic leases is kept off the balance sheet, the amounts involved are footnoted on the balance sheet under "restricted cash". Krispy Kreme Doughnuts Inc unwound a non-SPE synthetic lease that was slated to finance a new mixing plant in Illinois, and instead carried some $33 million to $35 million of the debt on its balance sheet. Cisco Systems Inc also decided to abandon its use of synthetic leases, announcing that it would unwind all the leases it had used to finance its San Jose, California, headquarters and several manufacturing facilities in California and New England. Cisco consolidated roughly $1.6 billion in real estate assets by the end of the last fiscal year, betting that it was better to have investors see a bigger balance sheet than suspect that it was hiding debt.
When Sears returned $8 billion in credit card receivables from an SPE to its balance sheet in early 2001, the company's ROA dropped from 3.6% in 2000 to 1.6% in 2001. Even so, Sears's stock soared by almost 70% as a result of the change toward more transparency.
Skepticism about General Electric lingers. Toronto-based credit-rating agency Dominion Bond Rating Service figured that if all of GE Capital's off-balance-sheet securitizations were added back to the debt it consolidated as of year-end 2001, the finance subsidiary's leverage ratio would rise from 13.5 times tangible assets to closer to 16 times.
The activities conducted through SPEs in the asset-backed securities market now raise the same issues of disclosure and hidden risk as did the Enron disaster. More than a trillion dollars of assets were taken off corporate balance sheets in 2006 and put into SPEs and commercial-paper conduits. That amount makes Enron look small-time.
Commercial banks use SPEs to securitize their own assets and also sponsor ABCP conduits, which purchase and securitize assets from third parties. New accounting rules for these activities will cost both banks and their corporate borrowers. With FASB rule 157 coming into effect on November 15, 2007, banks are required to consolidate their SPEs to add a lot more assets on their balance sheets and hence will have to raise capital to meet regulatory reserve requirements. Banks and near-banks may then be compelled to rein in their SPEs and conduit programs, and the terms for both loans and asset-backed commercial paper will tighten. Moreover, without the liquidity guarantees provided in bank-sponsored conduits, many companies might lose their access to the asset-backed market altogether.
Creating liquidity out of illiquid assets
The ability to create liquidity out of illiquid assets by packaging them into securities has been the most significant innovation in the capital markets in the past two decades. Since Fannie Mae and Freddie Mac started the trend in the mortgage market as part of their official mandate from Congress to foster more home ownership, securitization has expanded into a variety of credit markets. This was not a problem when the relationship between asset value and debt was kept within normal bounds.
At some point, asset securitization shifted into debt securitization as the debt bubble expanded from the Fed's loose monetary policy coupled with the Treasury's abuse of dollar hegemony, using the capital account surplus to finance an expanding trade deficit. Asset-backed securities were eventually overwhelmed by collateralized debt obligations, backed by payment streams from credit-card debt, auto and home-equity loans, commercial mortgages, and trade receivables beyond consumers' ability to carry once the temporary wealth effect of astronomical asset appreciation fueled by massive debt ends.
Asset-backed securitization allows originators to monetize illiquid assets and remove them from their balance sheets to devote the proceeds as new capital to finance growth. The macro-economic benefit of securitization is that it has enabled the extension of credit to far more individuals and businesses in the US. The macro-economic cost of securitization is vastly expanded systemic risk of default in a debt bubble, especially when the debts' proceeds are largely devoted to financing more debt rather than real investment for expansion.
Securitization of debt fed the debt bubble
As the debt bubble expanded, industrial companies began to look for profit from financial engineering, a respectable euphemism for manipulation. The problem was exacerbated by outdated financial-reporting practices that failed to keep pace with securitization innovation, thus allowing debt proceeds to be swapped with counterparties as current income and payment of principle counted as long-term capital investment. Debt liabilities then magically disappear from corporation annual reports. Programs executed in SPEs off-balance-sheet kept investors in the dark about the risks involved in their high-yield investments.
As early as 2002, Pacific Investment Management Co (PIMCO) bond fund manager Bill Gross accused General Electric of using off-balance-sheet activities to manipulate its reported earnings and also suggested that the company's heavy dependence on the short-term CP market was becoming precarious. See my AToL series on central banking: Banking Bunkum - Part 3d: The Lessons of the US experience
Paying for bad loans made in good times
As the biggest players in the structured-finance market, commercial banks in the US and Europe may have to face up to the real liabilities of their SPEs. Several studies of securitization programs by ratings agency S&P showed that all the major banks, and many minor ones, conducted significant off-balance-sheet securitizations through their own SPEs and through commercial paper conduits. Conduit programs alone financed approximately $500 billion in assets in 2006, none of which appeared on corporate or bank balance sheets, except as minor footnotes.
Securitization has enabled banks to finance assets through the capital markets, but the process has not eliminated associated risks for banks. In fact, in most cases, banks and asset-sellers have retained the majority of the risk of assets transferred off-balance-sheet. The process works profitably when the economy is strong and expanding and credit losses are small as easy and low-cost credit can bail out trouble loans, as was the case through most of the 1990s. But as former Federal Reserve chairman Alan Greenspan was fond of rationalizing: "Bad loans are made in good times." He never bothered to finish the second half of the truism: "No loans are made in bad times," a fatal fact when the economy depends on the roll over of existing debt.
Under current rules regarding SPE accounting, neither financial-services firms nor other types of businesses need disclose much about their off-balance-sheet activities. Even the rating agencies have to essentially take banks at their word about the performance of the assets in their SPEs and conduits. But that happy state of affairs will end in one week's time.
FASB Rule 157
Financial Accounting Standards Board (FASB) rule 157, effective November 15, 2007, will make it harder for companies to avoid putting market prices on securities considered hardest to value, known as Level 3 assets. Level 1 assets are mark-to-market, based on liquid real prices. Level 2 assets are mark-to-model, an estimate based on observable inputs and used when no quoted prices are readily available. Level 3 assets are those the value of which is based on "unobservable" inputs reflecting companies' "own assumptions" about the way assets would be priced.
At stake is the value of the assets on bank balance sheets, ie liabilities of increasingly complex and esoteric instruments, such as ABS (asset-backed securities), MBS (mortgage-backed securities), CDS (credit default swaps), CDO (collateralized debt obligations) and similar instruments.
Level 3 assets are those that are so complex, or so remote from the initial underlying assets because they have been sliced, repackaged, resliced, repackaged and combined with other bits, that there simply is no way to reliably calculate what they are |
| Anonymous Coward
User ID: 335443
12/4/2007 7:41 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
Page 4 of 4
PATHOLOGY OF DEBT
PART 5: Off-balance-sheet debt
By Henry C K Liu
worth in changing market conditions because there is no ready market for them, and no market for the easily identifiable bits. Their value can only be derived from the changing value of other instruments through a complex network of hedging. Banks are still allowed to assign to Level 3 assets the value they can rationalize, but they are now obliged to tell regulators and the markets of the holdings are in that category.
US banks and brokers reportedly face as much as $100 billion of
writedowns because of Level 3 accounting rules, in addition to the losses caused by the subprime credit slump. Estimates of final losses from the credit crisis have suggested a range of $250 billion to $500 billion. More institutions are expected to revalue their currently mark-to-market value downward.
Big Wall Street firms to date have written down at least $40 billion as prices of mortgage-related assets dwindle because of record foreclosures. Morgan Stanley, the second-biggest US securities firm, is said to have 251% of its equity in Level 3 assets, making it the most vulnerable to writedowns, followed by Goldman Sachs at 185%. Citigroup, which has already written down $11 billion, has 105% of its equity in Level 3 assets. As market capitalization shrinks from falling share prices, the ratio of Level 3 assets to equity will rise.
Besides Citigroup, other banks may be forced to write down as much as $64 billion on collateralized debt obligations of securities backed by subprime assets, up from about $15 billion so far.
ABX indexes and Level 3 assets
ABX indexes, which investors use to track the subprime-bond market, are showing "observable levels" that would wipe out institution capital if ABX prices were used to value their Level 3 assets. ABX value reflects a percentage of the instrument face value. Ultra-safe AAA paper has lost 30% of its face value, more than half of that in the last two days of the second week in November. AA paper (Japan is rated AA, as are the best banks) has lost more than half its value. Lower-rated indices dropped earlier, now hovering around 20 cents on the dollar.
Adding to the banks' problems is the amount of Level 3 paper private equity or hedge funds bought with highly leverage financed by banks. Many clients who purchased Level 3 paper from banks are protected by "guaranteed sell back" clauses in their initial purchase agreements. Bank financing provided to real estate and construction firms and private equity funds whose business model was underpinned by cheap and easy credit is destined to become non-performing loans.
No matter how finance engineers slice and dice it, risk cannot be extinguished, it can only be transferred or redistributed. In the asset securitization process, companies un-bundle the securities into a hierarchy of different tranches by assigning varying degrees of credit risk out of general pool of assets. The tranches produced in a typical asset-backed deal range from AAA credits down to BB.
With the number of corporations still holding a AAA credit rating dwindling, and with growth of money rising at a faster rate than US sovereign debt, highly rated, asset-backed paper is an easy sell with institutional investors bulging with cash they must invest. Securitization can lower the cost of capital for companies than bank loans.
But in most cases, the originator of the asset, such as a manufacturing company financing trade receivables or a specialty finance lender securitizing loans, retains a residual interest in the performance of the assets. This interest obligates the issuer to cover losses in the asset pool up to a certain percentage. If losses exceed that percentage, other low-rated, subordinate tranches of the issuance begin to absorb them, with the loss climbing up the rating scale. The post-Enron fear taught the market that there are all sorts of toxic sludge out there hidden below the surface. Lack of specific transparency coupled with certain macro danger is an explosive mixture in a jittery market.
The risks for banks go beyond CDO exposure. The banks are also obligated to provide liquidity support if cash flow from the conduits they structured is not enough to pay off the paper as it matures. If enough loans in conduits go bad, the sponsor banks could be liable beyond the amount their capital can sustain. The US economy is strong and resilient and can be expected to weather each and every one of these financial problems separately. But the US economy is now predominantly a finance economy and a confluence of interrelated financial market failures can put a mighty economy in intensive care for a long time.
Even a Triple-A-rated company like General Electric could be vulnerable if it were unable to securitize assets easily. Through GE Capital, its finance subsidiary, GE uses sponsored SPEs and conduits to securitize loans and receivables for itself and for clients. In its latest annual reports, GE asserts that if required in the event of an accounting change regarding the consolidation of SPEs, GE could use "alternative securitization techniques ... at an insignificant incremental cost". Still, skeptics say that GE’s statement in its annual report about SPEs is misleading because such an accounting change would likely affect all off-balance-sheet financing alternatives. And if GE has to finance the assets on the balance sheet, the impact on its financial statements will be more than incremental.
What has compounded the problem is that nobody yet knows who holds the commercial paper that is exposed to the US subprime mortgage market and has been dubbed as toxic. CP is typically bought by pension and insurance funds, but until these funds can work out their exposure, they are refusing to buy more. It is this buying strike that has created the liquidity freeze.
Skepticism over SMLEC
The Treasury constantly monitors financial markets. By mid-year, key market participants were telling Anthony Ryan, the Treasury's assistant secretary for financial markets, their rising anxiety over the ABCP market from which SIVs roll over the short-term debt. The market saw a massive restructuring approaching with a potential for a disorderly unwind of many SIVs. The Treasury became actively engaged in the seeking a resolution by playing a lead role in facilitating discussions among competing banks.
Citigroup, Bank of America and JP Morgan/Chase, seeking to allay fears of a downward price-spiral that would hit their balance sheets, announced on October 15, 2007, their plans to put up credit guarantees up to $100 billion for the Single-Master Liquidity Enhancement Conduit (SMLEC), which would buy mortgage-linked securities.
Critics charged that the Treasury was essentially helping big banks escape from the financial pain of risky bets that turned sour, banks that in earlier years had earned huge profits. Ryan countered that the government's role was merely to "facilitate market participants" and that no public sector money was involved. At any rate, the super SIV being created was "voluntary" and no bank was required or forced to take part. Still, a big promoter of the arrangement is Citigroup, which has the largest risk exposure from SIVs.
Citigroup, which is the largest sponsor of SIVs with seven such affiliates, has been criticized that its own SIVs would benefit most from the plan. Bank of America will also benefit. The Charlotte, NC, bank's mutual funds are big investors of commercial paper, including debt sold by the SIVs. Bank of America said its concern wasn't whether the CP would be paid off but rather the unnecessary seizing up of the market. Reportedly, the price of admission for SIVs will be high. SIVs will only be allowed to sell assets rated AA or better and likely will be unable to sell collateralized debt obligations: pools of debt repackaged into slices with different levels of risk and return, backed by subprime assets. In addition, the SIVs will have to pay a fee to the super conduit and accept a discount in the price of the securities they are selling. In return for that discount, the SIVs will receive notes in the "junior" layer in the conduit which will take the first hit if losses are incurred.
The restructuring of SIVs also raises the specter that certain SIV note holders may find themselves stuck with unexpected losses. Many fixed-income managers are intrigued by the idea of investing in a "Super SIV" fund. But some also say they are wary of its complexity. The banks will essentially sell all of their currently off balance sheet SIVs to the SMLEC and use their own balance sheets to buy the CP issued by the SMLEC to finance these purchases. Participating banks will "insure" investors against some portion of future losses within the SMLEC.
In November 2005, Merrill Lynch chief executive E Stanley O'Neal told investors that the brokerage firm would shift its strategy and would become more aggressive investing its own money in increase profitability. Two years later, asked how Merrill Lynch could lose so much money, O'Neal said: "We made a mistake," as he resigned from the company with an option and retirement package of $161.5 million.
Henry C K Liu is chairman of a New York-based private investment group. His website is at [link to www.henryckliu.com] |
| Anonymous Coward
User ID: 335443
12/4/2007 8:04 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
1.
The threat of a fire sale of assets by investors that also rely on the shrinking market for ABCP prompted US Treasury Secretary Henry Paulson to broker talks that may lead to the creation of a $80-100 billion fund by Citigroup Inc, JP Morgan Chase & Co and Bank of America Corp.
2
Wall Street is gripped by financial panic and has stopped funding mortgage bonds, even those that are AAA rated and backed by prime home loans. Even the Fed's decision on August 17 to cut the discount rate 50 basis points to 5.75%, its September 18 decision to cut the same rate another 50 basis points to 5.25% and the Fed Funds rate target 50 basis points to 4.5%, failed to revive demand for ABCP. Its October 31 decision to cut the discount rate another 25 basis points to 5% and the Fed Funds rate target another 25 basis points to 4.5% still failed to revive demand. The rate for overnight borrowing in the asset-backed commercial paper market soared 0.39 percentage points, the biggest rise since the September 11 terrorist attacks. Overnight yields fell 2 basis points to 6.01% while 30-day paper widened 9 basis points to 6.09%. A basis point is 0.01 percentage point. Quoting: Anonymous Coward 335443
1 Absolute insanity , how can three of the biggest and currently debt crash spiraling shopfront financial criminals for the money power do that? answer the fed acts as their lender of last resort(its called floating a kite in old financial parlance).
2 Financial thuggery to do another Waterloo , ie what happened to the bank of england and the investors of the day, when they sold because of deceit and then agents of the money power bought all the assets at pennies to the pound, watch for money power agents to try the same again, they think it is time to shear the sheep. |
| Anonymous Coward
User ID: 263324
12/4/2007 8:34 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
Good call OP. Going on three years now. Yup, can't be long. |
| suzy q
User ID: 335299
12/4/2007 10:58 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
While the dollar has been falling against other currencies, I have been making a profit. Small investors can open CDs and Money Market accounts in foreign currencies at Everbank.com online. I read about this in a few reputable sources and have accounts and have made money to make up for loses in stock portfolios. The mininum deposit is $10,000. If this is too much, you can invest in currency related ETFs. If Ben (Federal Reserve) cuts rates, the dollar will head south big time! The japanese yen is set to appreciate because of the unwinding carry trade. |
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