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The credit crisis has separated true libertarians from phony libertarians, and separated true liberals from phony liberals.

The phony liberals have inadvertently mocked themselves throughout the entire credit crisis, manning the barricades to defend the greatest act of socialism for the rich in US history. Ditto for supposed “libertarians,” eg Robert Rubin, Bruce Kovner, and the vast majority of institutional Wall Street which found itself drowning in its own quagmire, and changed their tune faster than you can say “WTF.”

Anyway, here’s the link.

The editorial in question is by Robert J. Shiller, who is a professor of economics and finance and famous analyst of speculative bubbles. A specialist in behavioral economics, in the application of psychology to understanding financial markets. A co-founder of Case Shiller Weiss, that house price index we talk about a lot. His editorial, “The Scars of Losing a Home,” speaks not of lofty academic economic concepts but of human sympathy, of things that are “really important.” With references from famous academic psychologists. I haven’t taken this kind of a tiger by the tail since I went after Austan Goolsbee last year.

Yes, it was only a year ago that the distinguished Dr. Goolsbee wrote this on the same editorial page:

And do not forget that the vast majority of even subprime borrowers have been making their payments. Indeed, fewer than 15 percent of borrowers in this most risky group have even been delinquent on a payment, much less defaulted.

When contemplating ways to prevent excessive mortgages for the 13 percent of subprime borrowers whose loans go sour, regulators must be careful that they do not wreck the ability of the other 87 percent to obtain mortgages.

For be it ever so humble, there really is no place like home, even if it does come with a balloon payment mortgage.

I actually think Goolsbee’s piece was the high-water-mark of the “subprime helps the poor” talking point. You certainly don’t hear much about that these days. Less than two months after Dr. Goolsbee’s earnest op-ed, we got an interview in the very same NYT with one Bill Dallas, CEO of the famously defunct Ownit Mortgage, effusively testifying to his own burning desire to help out the unfortunate in a way that finally put paid to the respectability of that line (“‘I am passionate about the normal person owning a home,’ said Mr. Dallas, who is also chairman of the Fox Sports Grill restaurant chain and manages the business interests of the Olsen twins. ‘I think owning a home solves all their problems.'”) Plus by now we’ve got some numbers on the 2007 mortgage vintage, the one that Dr. Goolsbee was afraid wasn’t going to ever materialize if we tightened up lending standards too much. A year ago we were looking at a 13% subprime ARM delinquency rate. Per Moody’s (no link) the Q4 07 subprime ARM delinquencies were running 20.02%. And that is not, you know, “just” another 7%. By now, those delinquent borrowers in Goolsbee’s 13% have probably mostly been foreclosed upon and are off the books. The 20% or so who are now delinquent were either part of the 87% that Goolsbee thought were “successful homeowners” last year, or else they’re those lucky duckies who bought homes after the publication date of Goolsbee’s plea that we not tighten standards too much.

Of course Shiller wasn’t exactly spending his time a year ago defending the subprime mortgage industry on the grounds that it put poor and minority people into ever-so-humble homes with balloons attached. I seem to recall him mostly arguing that homebuyers were engaged in a speculative mania. In a June 2007 interview:

Well, human thinking is built around stories, and the story that has sustained the housing boom is that homes are like stocks. Buy one anywhere and it’ll go up. It’s the easiest way to get rich.

At the time, that kind of statement struck some of us, at least, as not possibly the entire story either, but in any event a useful corrective to the saccharine silliness of the “Ownership Society” and Bill Dallas solving everyone’s problems by letting them put Roots in a Community (for only five points in YSP).

So I hope I can be just a tad startled by the New Shiller:

Homeownership is thus an extension of self; if one owns a part of a country, one tends to feel at one with that country. Policy makers around the world have long known that, and hence have supported the growth of homeownership.

MAYBE that’s why President Bush’s “Ownership Society” theme had such resonance in his 2004 re-election campaign. People instinctively understand that homeownership conveys good feelings about belonging in our society, and that such feelings matter enormously, not only to our economic success but also to the pleasure we can take in it.

So it’s no longer irrational exuberance or plain old speculating; it’s now an instinctive affirmation of some eternal verity of the human psyche? The ultimate patriotism: the definition of self so tied up in ownership of a slice of the motherland that to rent becomes not only psychologically dangerous–these people without selves can’t be up to anything good–but politically dangerous as well? Is it possible that Shiller can mean what he is writing here?

If you just scanned the first few paragraphs of Shiller’s op-ed you might come away with the impression of a sincere but somewhat hackneyed plea for us all to have a bit of sympathy for the foreclosed among us, foreclosure not in anyone’s experience being a walk in the park. Fair enough. It being Sunday in America, I suspect millions of us are being treated to exhortations to take a kinder view of the unfortunate than we often do; we need those exhortations; we are often lacking in sympathy. Hands up all who disagree.

But you keep reading and you find Shiller trying to explain the “trauma” of foreclosure. And that’s where this really gets weird:

Now, let’s take the other perspective — and examine some arguments against the stern view. They have to do with the psychological effects of strict enforcement of a mortgage contract, and economists and people in business may need to be reminded of them. After all, too much attention to abstract economic statistics just might make us overlook what is really important.

First, we have to consider that we cannot squarely place the blame for the current mortgage mess on the homeowner. It seems to be shared among mortgage brokers, mortgage originators, appraisers, regulatory agencies, securities ratings agencies, the chairman of the Federal Reserve and the president of the United States (who did not issue any warnings, but instead has consistently extolled the virtues of homeownership).

Because homeowners facing foreclosure must bear the brunt of the pain, they naturally feel indignation when all of these other parties continue to lead comfortable, even affluent lives. Trying to enforce mortgage contracts may thus have a perverse effect: instead of teaching homeowners that they should respect the contracts they sign, it may incline them to take a cynical view of the whole mess.

We need to modify mortgage contracts to keep homeowners from becoming cynical? That’s somehow more respectable an idea than the one saying we should throw them out on the street to “teach them a lesson”? If Shiller is serious that all those other parties are “to blame,” then why isn’t the obvious solution to throw them out on the street? There seems to be an assumption here that nothing can be done to punish those who are “really” to blame, so we’re left managing the psyches of those who can be punished. And that’s not cynical?

This the point at which Shiller dredges up the most stunningly unfortunate quote from William effing James (1890) to define the “fundamental” psychology of homeownership:

Homeownership is fundamental part of a sense of belonging to a country. The psychologist William James wrote in 1890 that “a man’s Self is the sum total of all that he CAN call his, not only his body and his psychic powers, but his clothes and his house, his wife and children, his ancestors and friends, his reputation and works, his lands and horses, and yacht and bank account.”

Now, that’s breath-taking. Horses. Yachts. His wife and his children. Ancestors. The whole late-Victorian wealthy male WASP defining the “Self” (with a capital!) as the wealthy male WASP surveying his extensive possessions, an oddly-assorted list that ranks the family and friends somewhere after the clothes and the house. (Yes, James did that on purpose.) The kind of sentiment that was a caricature of the late-Victorian male even in 1890. And Shiller drags this out in aid of generating sympathy for homeowners? Really? You couldn’t find some psychological insight about the emotional relationship of people to their homes that doesn’t speak the language of the male ego surveying his domain, sizing himself up against all the other males to see where he ranks?

(James on the psychological effect of losing one’s property: ” . . . although it is true that a part of our depression at the loss of possessions is due to our feeling that we must now go without certain goods that we expected the possessions to bring in their train, yet in every case there remains, over and above this, a sense of the shrinkage of our personality, a partial conversion of ourselves to nothingness, which is a psychological phenomenon by itself. We are all at once assimilated to the tramps and poor devils whom we so despise, and at the same time removed farther than ever away from the happy sons of earth who lord it over land and sea and men in the full-blown lustihood that wealth and power can give, and before whom, stiffen ourselves as we will by appealing to anti-snobbish first principles, we cannot escape an emotion, open or sneaking, of respect and dread.”)

I’m actually, you know, in favor of some sympathy for homeowners, but one thing that does get in the way of that for a lot of us is, well, the rather disgusting shallowness that a lot of them displayed on the way up. There is this whole part of our culture that has sprung into being since 1890 that takes a rather severe view of conspicuous consumption, unbridled materialism, and totally self-defeating use of debt to buy McMansions, if not yachts. We were treated to a fair amount of that kind of thing in the last few years. In fact, we had Dr. Shiller explaining to us last year that a lot of folks just wanted to get rich, quick, in real estate.

It is undeniably true, I assert, that not everyone was a speculatin’ spend-thrift maxing out the HELOCs to buy more toys, and that part of our problem today with public opinion is that we extend our (quite proper) disgust for these latter-day Yuppies to the entire class “homeowner.” But it is surely an odd way to engage our sympathies for the non-speculator class to speak of it in Jamesian terms as the man whose self is defined by his Stuff, and whose psychological pain is felt most acutely when he recognizes that he is now just like the riff-raff.

It’s worse than odd–it’s downright reactionary–to then go on to that evocation of homeownership as good citizenship and good citizenship as “feel[ing] at one with [the] country.” This puts a rather sinister light on Shiller’s earlier insistence that we need to make sure people don’t get too “cynical.”

I see that Yves at naked capitalism was just as disgusted by Shiller as I am:

Now admittedly, this is not a validated instrument, but a widely used stress scoring test puts loss of spouse as 100 and divorce at 73. Foreclosure is 30, below sex difficulties (39), pregnancy (40), or personal injury (53). Change in residence is 20.

Note that if we as a society were worried about psychological damage, being fired (47) is far worse than foreclosure (30), and if it leads to a change in financial status (38) and/or change to a different line of work (36) those are separate, additive stress factors. Yet policy-makers have no qualms about advocating more open trade even though it produces industry restructurings that produce unemployment that does more psychological damage than foreclosures. As a society, we’ll pursue efficiency that first cost blue collar jobs, and now that we’ve gotten inured to that, white collar ones as well (although Alan Blinder draws the line there).

But efficiency arguments don’t apply to housing since we are sentimental about it. And it’s that sentimentality that bears examination, since it engendered policies that helped produce this mess.

I would only add that we are about five years too far into a war that has not made a majority of us “feel at one with that country.” I think of another really important policy change we could be pursuing right now to shore up everyone’s psychological estrangement from their patriotic self-satisfaction. But “efficiency arguments” don’t apply to wars, either.

My fellow bleeding heart liberals like Goolsbee found themselves defending the subprime industry in the name of increasing minority homeownership. Now we’re treated to the spectacle of Shiller arguing for homeowner bailout legislation in the same terms that Bush used to defend the “Ownership Society.” Housing policy, I gather, makes strange bedfellows. It certainly makes strange editorials.

Shiller’s unwitting self-parody embodies the principle at the heart of the TAF and every other tentacle of the Wall Street bailout. Far more than “economist statistics which can cause us to lose sight of what’s really important,” what’s REALLY important is protection of those Selves which include “lands and horses, and yacht and bank account.”

You can *not* make this stuff up.

Pardon my French, but our economy is being run by f*cking idiots.

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via

[…]

Net loss for the first quarter of 2008 was $151 million, compared to a net loss of $2.5 billion in the fourth quarter of 2007. Improved results reflect reduced losses related to a change in the guarantee obligation valuation methodology implemented under SFAS No. 157, “Fair Value Measurements” (SFAS 157), which better aligns revenue recognition with the economic release from risk under the guarantee. As a result, effective January 1, 2008, the company no longer records estimates of deferred gains or immediate losses recognized upon issuances of single-family Mortgage Participation Certificates (PCs) and Structured Securities in guarantor swap transactions through losses on certain credit guarantees, a component of non-interest expense. In the fourth quarter of 2007, the company incurred $1.3 billion in losses on certain credit guarantees.

Improved results also reflect lower interest-rate related mark-to-market losses as a result of the company’s adoption of SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115” (SFAS 159). Effective January 1, 2008, the company elected the fair value option for certain available-for-sale mortgage-related securities and its foreign-currency denominated debt. Upon adoption of SFAS 159, the company recognized a $1.0 billion after-tax increase to its beginning retained earnings at January 1, 2008. See the Appendix for more detail on the adoption of SFAS 157 and SFAS 159. [in other words, mark to market is out the window–ed]

[…]

Portfolio Activity and Balances

Year-to-date through April 30, 2008, the company estimates that the unpaid principal balance of the company’s retained portfolio increased at an annualized rate of about 7 percent to approximately $738 billion.

During the month of April 2008, the company estimates that the amount of retained portfolio mortgage purchase and sales agreements entered into totaled approximately $43 billion.

The company estimates that its total credit guarantee portfolio increased at an annualized rate of about 10 percent to approximately $1.8 trillion year-to-date through April 30, 2008.

At March 31, 2008, Freddie Mac estimates that its single-family serious delinquency (i.e., 90 plus days late) rate for non-credit enhanced, credit enhanced and all loans was approximately 0.54 percent, 1.81 percent and 0.77 percent, respectively.

Fair Value of Net Assets

The company’s attribution of changes in fair value relies on models, assumptions and other measurement techniques that evolve over time.

At March 31, 2008, the fair value of net assets was ($5.2) billion as compared to $12.6 billion at December 31, 2007, reflecting a net after-tax reduction of $17.8 billion. This change in fair value of net assets includes the payment of preferred and common stock dividends during the first quarter of 2008.

The change in fair value of net assets includes a pre-tax reduction in fair value of $28.8 billion as a result of net mortgage-to-debt OAS widening, partially offset by a pre-tax increase in fair value related to core spread income in the first quarter of 2008. In addition, the company estimates that the change in fair value of its credit guarantee activities resulted in a pre-tax reduction of $3.0 billion. …

A company with a $1.8trn credit guarantee portfolio has net asset FV at -5.2 billion, down $20 billion in three months after accounting for the $2.6bn in accounting rule changes. Given that we’re now reading of houses in Atlanta selling for under $20,000 which local property tax auditors insist on valuing at $100,000, “fair value according to Freddie” and “fair value according to the market” are two very different things, which won’t stop racing apart any time soon.

I’m sure Obama will love being given the job of bailout out Freddie once he’s inaugurated.

Some “change” that will be.

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via

The Bank of England has imposed a permanent news blackout on its £50bn-plus plan to ease the credit crunch.

Ferocious and unprecedented secrecy means taxpayers will never know the names of the banks that have been supported through the special liquidity scheme, which was unveiled by Bank Governor Mervyn King last week.

Requests under the Freedom of Information Act are to be denied. Details will be kept secret even after 30 years – the period after which all but the most sensitive state documents are released.

Any Bank of England employee leaking the names of institutions involved will face court action for breach of contract.

Even a figure for the overall amount advanced will not be published until October. Meanwhile the Bank is expected to issue at least £50bn of Treasury bills to banks in exchange for their mortgages – entirely in secret.

This hypersensitive official stance is thought to be a response to the events of last year when a huge stigma was attached to any lender suspected of going to the Bank for cash help.

The scheme is intended to steady the markets, but it is feared that reports of banks making widespread use of the facility could trigger further instability.

Barclays and HBoS have both confirmed they will use the Bank of England scheme. ‘We welcome the Bank facility and we will participate in it,’ confirmed Andy Hornby, chief executive of HBoS.

Other banks declined to comment, but it is expected that this week all of the leading banks, with the exception of Lloyds TSB, will tender some of their mortgages to the Bank of England.

HBoS confirmed last week it had packaged up £9bn of mortgages ready either for securitisation – in effect, selling them on in the wholesale financial markets – or to be offered to the Bank in return for Treasury bills.

The scheme, drawn up by King and approved by Chancellor Alistair Darling, aims to improve banks’ liquidity by temporarily swapping bundles of mortgages and credit card debt for Treasury bills, which are short-dated Government debt that matures within nine months.

The scheme will run for three years so these bills will be replaced by new ones when required.

Under the plan, bills will be exchanged only for securities rated triple-A – the highest possible grade of security – by at least two of the three big ratings agencies, Fitch, Moody’s and Standard & Poor’s.

It would not normally be considered acceptable for big companies to arrange billions of pounds of financial support without telling their shareholders.

But one source close to major institutional investors said: ‘I can see why there may be a case for secrecy.

‘It may be the lesser of two evils.’

The £50bn or more of Treasury bills involved will dwarf the £17.6bn currently in issue, but the authorities are adamant this will not destabilise the Government debt market.

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The bailout of Bear Stearns was, in effect, a bailout of JPMorgan Chase.

Chase wrote the most credit default swaps of anyone. They also had by far the largest number of open but uncleared swaps (i.e., JPMC sells one side of the swap to a counterparty, but cannot spin off its own side — overwhelmingly, the “BSC will not default” side of the default-swap bet — because no market participants *wanted* credit default swaps). In other words they were a huge risk for JPMC.

Of course, (I think) nobody knows the exact distribution of swaps JPMC had regarding Bear Stearns. However, it’s almost certain that a preponderance of the credit default swaps were Bear Stearns swaps, considering how few people there were who would bet that Bear wouldn’t default.

And everyone on the other side of JPMC’s open, uncleared BSC credit default swaps was defrauded. They paid for default protection, and the unprecedented, extralegal, Fed-brokered absorption of BSC by JPMC defrauded all of those people.

Indirectly, everyone who purchased financial default swaps has been defrauded, because the Fed now accepts garbage for whatever you say its value is — as long as you’re one of the “sweet 16” broker dealers. None of the banks will ever go bankrupt, which means that all the private sector actors who saw BSC coming were defrauded, while JPM, the primary market maker of credit default swaps which greased the wheels with merry abandon, gets bailed out.

And the Fed’s “bailout,” in the form of exchanging AAA Treasuries for “AAA” (garbage) mortgage-backed securities, is a tax on everybody who was stupid enough to trust the “full faith and credit of the United States Treasury.”

The credit default swap market — the venue for private buying and selling of insurance against default — has been inflated out of existence, because its largest (financials) segment has been rendered too big to fail by a moronic/compliant Fed. What is all that default protection worth now? Nothing.

This dose of regulatory fascism (the invalidation of a tens of trillions of dollar market), has, by the way, been brought to you by the Republicans.

It’s always good to put the Greenspan – Rubin – Bernanke free-base, free-lunch, free market brand of capitalism in perspective: it’s a fraud.

Let’s just say that if Paulson or Bernanke or Jamie Dimon happened to be black, and walking out of a bank, he’d be shot dead on sight or handed 25 years in the slammer, for robbery (as well as aggravated assault with an assault weapon, etc).

(TOH to “mystery” for that lesson …)

Oh, by the way, this isn’t the first type of “screw the intelligent bears” move Bernanke has pulled. Remember the bogus “discount rate” cut that Bernanke announced half an hour before close of business last Friday? All those options purchased by all the intelligently bearish people were rendered worthless.

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I didn’t post this article at first, because I thought the financial press was making a much bigger deal out of what seemed, to me, a fairly tepid critique of Bernanke’s actions.

April 8 (Bloomberg) — Former Federal Reserve Chairman Paul Volcker questioned the central bank’s decision to rescue Bear Stearns Cos. with a $29 billion loan, saying it was at “the very edge” of its legal authority.

“The Federal Reserve has judged it necessary to take actions that extend to the very edge of its lawful and implied powers, transcending in the process certain long-embedded central banking principles and practices,” Volcker said in a speech to the Economic Club of New York.

Fed Chairman Ben S. Bernanke last month agreed to lend against Bear Stearns securities, paving the way for JPMorgan Chase & Co. to buy its Wall Street rival. Bernanke, who worked with Treasury Secretary Henry Paulson to broker the bailout, last week defended the move as necessary to prevent “severe” damage to financial markets.

Volcker, the Fed chairman from 1979 to 1987, had implicit criticism for U.S. regulators and market participants who allowed “excesses of subprime mortgages” to spread into “the mother of all crises.” The Fed’s Bear Stearns loan was unusual, he said.

“What appears to be in substance a direct transfer of mortgage and mortgage-backed securities of questionable pedigree from an investment bank to the Federal Reserve seems to test the time-honored central bank mantra in time of crisis: lend freely at high rates against good collateral; test it to the point of no return,” he said. …

The first three times I read that last sentence, it sounded like this in my head:

“… test the time-honored central bank mantra in time of crisis: lend freely at high rates against good collateral [and] test [lending freely at high rates against good collateral] to the point of no return” (as in, lend at high rates against good collateral until/unless something bad happens). Which seemed oddly dovish coming from Volcker.

However, I’m pretty sure that’s not what Volcker meant, but rather, “… test the time-honored central bank mantra in time of crisis — lend freely at high rates against good collateral — test [the mantra of good collateral] to the point of no return.” (As in, “no return” to the present Fed system.)

Maybe I’m just slowing down with age, and this was more obvious to others who read the article. But it makes more sense now, and comes across as a much more pointed critique of Bernanke.

Market-participant herd psychology baffles me. I guess every community suffers from echo-chamber effects sometimes, but it’s just strange how normally intelligent, independent, ahead-of-the-curve finance people such as Dick Bove, GaveKal, and so on, completely abandon their convictions and common sense during times of stress, and find any number of rationalizations for why perpetuating a bailout culture is “brilliant.”

So Volcker’s words are all the more valuable, in my book.

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Ambrose Evans-Pritchard:

The Fed has been criticised for its rescue of Bear Stearns, which critics say has degenerated into a taxpayer gift to rich bankers.

A senior official at one of the Scandinavian central banks told The Daily Telegraph that Fed strategists had stepped up contacts to learn how Norway, Sweden and Finland managed their traumatic crisis from 1991 to 1993, which brought the region’s economy to its knees.

It is understood that Fed vice-chairman Don Kohn remains very concerned by the depth of the US crisis and is eyeing the Nordic approach for contingency options.

Scandinavia’s bank rescue proved successful and is now a model for central bankers, unlike Japan’s drawn-out response, where ailing banks were propped up in a half-public limbo for years.

While the responses varied in each Nordic country, there a was major effort to avoid the sort of “moral hazard” that has bedevilled efforts by the Fed and the Bank of England in trying to stabilise their banking systems.

Norway ensured that shareholders of insolvent lenders received nothing and the senior management was entirely purged. Two of the country’s top four banks – Christiania Bank and Fokus – were seized by force majeure.

“We were determined not to get caught in the game we’ve seen with Bear Stearns where shareholders make money out of the rescue,” said one Norwegian adviser.

“The law was amended so that we could take 100pc control of any bank where its equity had fallen below zero. Shareholders were left with nothing. It was very controversial,” he said.

Stefan Ingves, governor of Sweden’s Riksbank, said his country passed an act so it could seize banks where the capital adequacy ratio had fallen below 2pc. Efforts were also made to protect against “blackmail” by shareholders.

Mr Ingves said there were parallels with the US crisis, citing the use of off-balance sheet vehicles to speculate on property. All the Nordic banks were nursed back to health and refloated or merged.

The tough policies contrast with the Fed’s bail-out of Bear Stearns, where shareholders forced JP Morgan to increase its Fed-led rescue offer from $2 to $10 a share. Christopher Wood, chief strategist at brokers CLSA, says the Fed’s piecemeal approach has led to “appalling moral hazard”.

“Shareholders have been able to lobby for a higher share price only because the Fed took over the credit risk on $30bn of the investment bank’s dubious paper. The whole affair also amounts to a colossal subsidy for JP Morgan,” he said.

Any taxpayer bailout of the system needs to be combined with a massive purge of those not footing the bill for their own mistakes — banking management — and the complete slaughter of banking shareholders.

At the moment, Washington Mutual, Citigroup, and Countrywide are just three of the best-known “banks” whose debt to Uncle Sam — mostly to the Federal Home Loan Banks — exceeds their net assets. They are effectively the property of the US government.

A price must be paid. Under the free market ideal that never happens in real life, the banks fail, everyone freaks out for six months, and the economy experiences torrid growth afterwards.

In the real world, the future individuals of the (banking) institutions are forced to pay for the mistakes of the current institutional occupants. Future Wall Streeters will pay for the mistakes of today’s Wall Street by paying billions more in homage to stupid regulations, oversight that isn’t, and market share lost to more competitive, less cosseted overseas competitors.

The three regulatory options are as follows:

1) Do nothing; reward the bankers for their naked pursuit of risk without reward.

2) The aforementioned Nordic route.

3) A massive patchwork of new regulations and controls, which almost-exclusively subsidizes the institutional malfeasance of the past nine months at the cost of choking future Wall Street vibrancy.

The Nordic option is by far the most attractive of the three. It allocates responsibility, discourages future bad behavior, and punishes prior bad behavior. It keeps the system relatively healthy — assuming the banks are returned to private ownership within less than four years.

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The SEC:

… Fair value assumes the exchange of assets or liabilities in orderly transactions. Under SFAS 157, it is appropriate for you to consider actual market prices, or observable inputs, even when the market is less liquid than historical market volumes, unless those prices are the result of a forced liquidation or distress sale. …

Considering that pretty much every credit market has been defined as a “forced liquidation or distressed sale,” this amounts to a gigantic escape hatch from any semblance of objectivity in terms of pricing garbage level 3 assets.

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On March 17, Lehman dropped more than 40 percent in one day, at one point.

How’d they survive?

Portfolio, not normally my favorite magazine, has an interesting article on the subject:

Bear Stearns collapsed for two reasons. It had a short-term funding crisis where lenders pulled their loans and customers pulled their cash. But it also had a longer-term leverage problem. Last week’s crisis didn’t happen in a vacuum; that leverage eventually led to the collapse in confidence. […]

What actually happened to Lehman’s balance sheet in the first quarter? Assets rose. Leverage rose. Write-downs were suspiciously minuscule. And the company fiddled with the way it defines a key measure of the firm’s net worth. Let’s look at the cautionary flags:

Lehman’s balance sheet isn’t shrinking, as we’d expect.

Lehman finished the first quarter was total assets of $786 billion, up almost 14 percent from the previous quarter and 40 percent from a year earlier. Other financial institutions are taking down their exposure right now amid the market turmoil to be prudent. Lehman says it wants to. It is not.

Lehman got more leveraged, not less.

The investment banks “gross” leverage hit 31.7 times equity, up from the fourth quarter and way up from last year’s 28.1. According to Brad Hintz, an analyst with Bernstein Research, Lehman’s leverage reached its highest point since 2000. Lehman, like all the investment banks, prefers to look at net leverage, excluding hedges, and that went down. And the firm says that the asset rise was mainly a result of increases in short-term items that have low risk. But we’ve heard a lot of that lately across the financial world. It’s quite simple: The more leverage Lehman has, the less room assets have to fall to wipe out its equity.

Lehman includes debt in its calculation of equity. Say what?

… In a note in its earnings release, Lehman said it has a new definition of “tangible equity,” or the hard assets that it has left over after subtracting its liabilities. This is a measure of net worth, the yardstick by which investment banks are valued. Lehman’s new definition allows for a higher portion of long-term subordinated borrowings (which it calls “equity-like”) in tangible equity. Previously, it had a cap on the percentage of “perpetual preferred stock,” a form of equity-like debt that doesn’t have a maturity date, in its equity. Now, it doesn’t have a cap. Think of it this way: If you borrow money from your parents to make your down payment on your house and they don’t expect to get paid back right away (at least not before you pay your mortgage off) is it equity in your house? No, it’s a loan. And Lehman hasn’t borrowed from mommy and daddy.

Lehman says it is merely conforming to the Securities and Exchange Commission’s definition of tangible equity and had contemplated making the change for a while. And the firm says the change didn’t result in any difference to its net leverage ratio.

Lehman reaped substantial earnings gains because investors thought it is more likely to go bankrupt.

For several quarters, all the investment banks have been taking gains on their liabilities. Say you owe $100 to your friend. But you run into severe problems and your friend starts to figure you can only afford to pay back $95. If you were an investment bank, the magic of fair value accounting dictates that you could get to reduce your liability. What’s more, that $5 gain gets added to earnings. Because investors thought Lehman was more likely to default, its liabilities fell in value and Lehman garnered earnings from this. How much did Lehman win through losing? $600 million in the quarter. How much was its net income? $489 million.

Lehman and all the other investment banks are following the accounting rules on this, but that $600 million is hardly the stuff of quality earnings. Indeed, Bernstein’s Hintz called the bank’s earnings quality “weak.”

Lehman’s write-downs seem tiny.

Lehman finished the quarter with $87.3 billion of real estate assets. These include residential mortgages and commercial real estate paper. The bank only wrote these assets down by 3 percent. And its Level III assets —the hardest to value portion of these instruments—were written down by only the same percentage. The indexes and publicly traded instruments and companies that serve as proxies for these securities generally fell more than that in the quarter. Lehman points out that took larger gross write-downs and then made money through hedges, for a smaller net number.

Lehman remains exposed to lots of dodgy mortgages, including a group labeled: “Prime and Alt-A.” Prime mortgages represent loans to good quality borrowers; Alt-A loans go to borrowers a mere step up from subprime, and represent an area with almost as many problem loans as subprime. The total amount of such mortgages on Lehman’s balance sheet was $14.6 billion in the first quarter and it actually rose from $12.7 billion in the previous quarter. Is this the time to be increasing exposure to questionable mortgages? More ominously, only $1 billion of that figure is prime and the rest is Alt-A, according to Hintz’s estimate.

The picture emerging is that of an investment bank that is dancing as fast as it can. If Lehman can keep piling up more assets, and if these assets come back, Lehman comes out a big winner. But if it didn’t properly mark down those assets during these bad times, the investment bank’s returns —and therefore its profitability—will be much lower in the future.

And that’s the good case. If the assets do not recover, then time is against the firm.

There is a larger, monetary policy issue here. The Federal Reserve has announced that it will lend to investment banks for the first time since the Depression, acting as a lender of last resort. At the very least, regulators should be demanding that the investment banks bring down their leverage and reduce their risk. Are the regulators sending a stern-enough message to Lehman? If so, it’s not getting through.

One constant of this crisis is that a very large number of rumors which were batted down early turned out to be correct later. Beazer, Citigroup, Countrywide, Lehman, Bear Stearns at the same time, Thornburg, and so on — all of them were jolted by massive rumors which smashed their stocks down. In some cases, government support has put off the day of reckoning postponed the day of reckoning, but the Fed’s ability to support the markets is limited.

The Fed has dumped huge amounts of Treasuries off its balance sheet to make room for the alphabet soup of financial-engineering junk.

I will trust the street. Lehman traded about 220 million shares on March 17. There were a lot of people selling, and they knew something.

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Bloomberg:

Federal Home Loan Banks May Buy $150 Billion of Bonds (Update1)
By Dawn Kopecki and Jody Shenn

March 24 (Bloomberg) — Federal Home Loan Banks were freed to increase their purchase of mortgage-backed bonds by about $150 billion as part of a government effort to pump money back into a market that slumped as the housing crisis deepened.

Directors of the Federal Housing Finance Board, the banks’ regulator, approved the temporary increase today, according to an e-mailed statement. The purchases will be restricted to securities guaranteed by Fannie Mae and Freddie Mac, the board said.

“It’s an opportunity for the Federal Home Loan Banks to supply more liquidity to the secondary markets,” said John von Seggern, president of the Council of Federal Home Loan Banks which represents the banks. “I think that’s a good thing and the market needs to get that liquidity as soon as possible.”

The approval for Federal Home Loan Banks to increase their purchases comes a week after Fannie Mae and Freddie Mac, the two government-chartered mortgage-finance companies, were cleared to buy at least $200 billion of mortgage securities.

The FHLBs are cooperatives created by President Herbert Hoover in 1932 to spur mortgage lending. The system’s 8,100 owners and customers range from New York-based Citigroup Inc., the largest U.S. bank, to the single-branch Custer Federal Savings & Loan in Broken Bow, Nebraska. Their government ties support top AAA ratings from Standard & Poor’s and Moody’s Investors Service.

Record Spreads

The government increased the limit on the 12 FHLBs’ investments to 6 times capital for two years, up from 3 times, the statement said. The statement said that would increase the banks’ spending by “well in excess” of $100 billion. Based on the banks’ capital of $54 billion, the change may increase the FHLB’s purchasing power by about $150 billion.

The increase failed to spur a rally in debt backed the agencies. About $4.5 trillion of mortgage securities backed by Fannie Mae, Freddie Mac or smaller federal agency Ginnie Mae are outstanding, according to Federal Reserve data.

The difference in yields on the Bloomberg index for Fannie Mae’s current-coupon, 30-year fixed-rate mortgage bonds and 10- year government notes widened by about 5 basis points to 182 basis points. The spread reached a 22-year high of 237 three weeks ago.

The spread helps determine the interest rate on new prime home mortgages of $417,000 or less. A basis point is 0.01 percentage points.

To the longtime loyalists of this blog, the FHLB story is an ancient one, pre-dating even the FT’s cursory coverage of this backstop behemoth by two weeks.

In other news, two impressive graphs illustrate the relative enormity of what Bernanke is doing. (A hat tip to a worthy Frenchman for these… ):

blargh.png

blargh1.png

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This .pdf is a good primer on why the credit unwind has a long, long way to go — regardless of what anybody does.

The analyses of MBIA and Ambac (slides 58-75) are particularly illuminating, detailed, well-done, and scary.

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… is down 26 30 33 37 percent in pre-market trading …

Merrill: -16%

Morgan Stanley: -12%

Goldman, UBS and Wachovia: -9%

Citigroup: -5%

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Oil: $110

Gold: $1020

JPY-USD: Y97.3

USD-EUR: $1.58

Inflation: Who knows? But MZM is running at 16 percent, year-on-year.

researchstlouisfedorg.png

Red: Value of USD

Blue: Money zero maturity, the aggregate of cash, short-term bonds, CDs, and other very liquid cash instruments in the system, aka MZM; %chng from year ago

Green: Commercial lending, %chng from year ago

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Wow.

JPMorgan Buys Bear Stearns for $2 a Share After Clients Flee
By Yalman Onaran

March 16 (Bloomberg) — JPMorgan Chase & Co. agreed to buy Bear Stearns Cos. for about $2 a share after a run on the company ended 85 years of independence for Wall Street’s fifth- largest securities firm and prompted a bailout by the Federal Reserve.

The central bank will fund as much as $30 billion of Bear Stearns’s “less-liquid assets,” the two companies said in a statement today. The deal values New York-based Bear Stearns, with 14,000 employees, about $270 million, far less than the $4 billion market value on March 14. The stock had fallen 80 percent in the past 12 months.

JPMorgan Chief Executive Officer Jamie Dimon had the upper hand in negotiations after coming to the smaller firm’s rescue last week with a cash infusion engineered by the Federal Reserve Bank of New York. Bear Stearns’s CEO, Alan Schwartz, faced the prospect of bankruptcy as clients pulled $17 billion in two days last week and creditors stopped renewing loans.

“JPMorgan Chase stands behind Bear Stearns,” Dimon said in the statement. “Bear Stearns’ clients and counterparties should feel secure that JPMorgan is guaranteeing Bear Stearns’ counterparty risk. We welcome their clients, counterparties and employees to our firm, and we are glad to be their partner.”

Bear Stearns’s sale to JPMorgan caps an eight-month slide in the company’s fortunes that began last July with the collapse of two of its hedge funds. Those failures sparked a wider market concern that called into doubt the value of any asset linked to the mortgage market, Bear Stearns’s biggest business.

Without a resolution this weekend, the situation would probably have continued to deteriorate when markets resumed trading tomorrow, according to analysts and investors including Cambiar Investors LLC’s Brian Barish.

Fed Rescue

The Fed’s rescue attempt last week failed to avert a crisis of confidence among Bear Stearns’s customers and shareholders, who drove the stock down a record 47 percent after the cash infusion was announced.

Bear Stearns’s profit exceeded $2 billion in 2006, yet JPMorgan’s deal values that company at about one quarter the value of just the securities firm’s headquarters building in midtown Manhattan. The 1.2 million-square-foot, 45-story structure built in 2001 is worth about $1.2 billion, based on the average $1,000 per-square-foot that comparable office space in the city is currently fetching.

Bear Stearns’s prime brokerage unit, which provides loans and processes trades for hedge funds, generated $1.2 billion in revenue last year. That business is probably the only piece left of the company with value after the mortgage market collapsed last year, analysts have said.

Frozen Market

The prime brokerage was the third-largest behind Goldman Sachs Group Inc. and Morgan Stanley as of April 2007, according to Sanford C. Bernstein & Co. About a sixth of the firm’s income came from packaging and trading mortgage bonds, a market that has been almost completely frozen since July.

“As bad as things are at Bear Stearns, this is still a franchise with a lot of value, particularly the prime brokerage business, which is what JPMorgan is after,” said William Fitzpatrick, who helps manage $1.6 billion at Optique Capital Management, including JPMorgan shares. “That’s the crown jewel, and that would fit into JPMorgan’s business extremely well.”

Dimon’s New York-based firm has suffered fewer losses than rivals during the credit-market contraction, which has prompted $195 billion of writedowns and losses by Wall Streets biggest banks and securities firms.

JPMorgan, the third-largest U.S. bank by assets, has posted $3.7 billion in writedowns, a fraction of the $22.4 billion reported by New York-based Citigroup Inc., the biggest U.S. bank.

Crisis of Confidence

“It’ll be perceived as a positive for the markets,” said E. William Stone, who oversees $77 billion as chief investment strategist at PNC Wealth Management in Philadelphia. “It puts a floor under all the financials. The longer-term thesis is that the Fed won’t let good companies fail based on lack of liquidity and a crisis of confidence.”

Treasury Secretary Henry Paulson defended the Fed’s bailout today, saying policy makers will do whatever is needed to prevent disruptions in financial markets from hurting the economy. Paulson said he was involved with the discussions on Bear Stearns’s future this weekend, without elaborating.

“There’s always a decision to be made to say what’s best for the stability of the marketplace, the orderliness of the marketplace,” Paulson said. “I think we made the right decision.”

Great Depression

Bear Stearns, founded in 1923, survived the Great Depression and first sold shares to the public in 1985. Schwartz, an executive with more than 30 years of experience at Bear Stearns, was the hand-picked choice of his predecessor, James “Jimmy” Cayne, 74, who remains non-executive chairman of the firm.

Cayne stepped down after reporting an $854 million fourth- quarter loss, the first in the company’s history. He was at a bridge tournament in Detroit last week as the firm faced speculation about its cash position. Cayne came under fire last July for playing golf and bridge while the hedge funds collapsed.

On a conference call with analysts and investors after the bailout announcement on March 14, Schwartz said the company’s book value was “fundamentally” unchanged. Clients continued to withdraw funds, he said. The book value was about $80 a share at the end of November.

When Bear Stearns invited potential buyers for detailed presentations by department chiefs yesterday, only JPMorgan and private equity firm J.C. Flowers & Co. showed up, according to people familiar with the talks.

14,000 Employees

Other potential buyers, such as Royal Bank of Scotland Group Plc and HSBC Holdings Plc, which had expressed interest in the past, didn’t send representatives. Hundreds of Bear Stearns employees went to work yesterday to help with the sale process and the presentations.

Bear Stearns employs 14,000 people worldwide, according to its Web site, and has offices in cities including London, Tokyo, Hong Kong, Beijing, Shanghai, Singapore, Milan and Sao Paulo.

Joseph Lewis, the second-largest shareholder in Bear Stearns Cos., wasn’t planning to reduce his stake, a person close to him said March 11. Lewis, a 71-year-old billionaire, has put in more than $1 billion into the firm since September, paying as much as $150 for a share.

JPMorgan’s participation in the bailout follows a long tradition at the bank of stepping in to rescue financial markets from crisis, according to Charles Geisst, the author of “100 Years on Wall Street.”

The bank has also profited from others’ crises. JPMorgan got at least $725 million of revenue for taking on half the energy trades from collapsed hedge fund Amaranth Advisors LLC in 2006.

The only way this could have happened so quickly was if the Fed guaranteed to backstop any and all losses on the deal JPMC might have incurred in the future. JPMC has apparently assumed all of BSC’s derivatives positions, and there was no way they could have carefully evaluated even a significant majority of those in the space of four days. That would have required confirming the liquidity of the counterparties to the vast majority of the trades, etc, etc …

So Bear was overvalued by 1400% as of Friday’s close …

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With a hat tip to the redoubtable Mish Shedlock, let’s look at BSC’s balance sheet, viewable here.

bear-derivatives.png

Hmm.

$13.4 trillion of derivatives positions.

And the market is supposed to figure out to what extent this behemoth has not been marked to market — in 26 days?

When I first heard the scale of the leverage of BSC’s Dublin subsidiary (“a billion levered up to a trillion” ie 1000-1) I thought I was hearing some exaggeration for dramatic effect. But BSC’s market capitalization is now $4 billion, and that is supposed to support over $13 trillion in gross derivatives positions. That’s technically ~3500-1 leverage.

The permabull reflex would be to argue that BSC’s net exposure is a minuscule fraction of $13.4 trillion, and that most of the swaps, etc. cancel each other out. But who knows? Who knows what other off-balance-sheet vehicles Bear has?

More importantly, are there enough trees in the United States to print the amount of money required to do these bailouts? (Now I understand the permabears’ rationale for going long timber.. ha … ha..)

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The late Bear Stearns (1923-2008), from 1985. (TOH Maoxian)

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LONDON: Financial market traders across London have been told by their firms to stop dealing with Bear Stearns, while dealers in New York scaled back their transactions with the ailing investment bank, sources in several dealing rooms said on Friday.

At least six major institutions in London — including Commerzbank , Royal Bank of Scotland and JPMorgan — had stopped giving prices to the U.S. bank, a credit trader at one European institution in London, who declined to be identified, told Reuters.

Credit Suisse had also stopped trading with Bear Stearns , a London-based equities broker said.

None of the institutions named by the traders would comment on the subject when contacted by Reuters.

A London-based government bond trader said banks had been withdrawing from transactions with Bear Stearns since Thursday. …

I am “hearing” that Lehman — which dropped 14 percent today — is currently “extremely” stable in cash terms, although I have no idea how any one person, even a very highly-placed one, could be sure of any major banking institution’s financial status. All the major financial institutions have sprawling off-balance-sheet vehicles, some of which are only known by certain parts of the respective banks.

As far as BSC is concerned, the regulators seem completely out to lunch. Apparently, BSC has a colossal subsidiary, or off-balance-sheet vehicle, or something, domiciled in Dublin, which has a leverage multiple in the hundreds. And it’s cooked. I believe that the regulators/ Fed have once again been fed woefully incomplete information on the true state of Bear’s finances.

My guess is that Lehman is the counterparty in some disproportionate number of the derivatives tied to BSC’s Dublin vehicle, which are now worthless because their counterparty, Bear, won’t be able to pay up.

In gold we trust …

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March 14 (Bloomberg) — Bear Stearns Cos. obtained emergency funding from JPMorgan Chase & Co. and the New York Federal Reserve as the securities firm said its cash position had “significantly deteriorated.”The New York Fed will “provide non-recourse, back-to-back” financing for up to 28 days, JPMorgan said in a statement today. Bear Stearns said it was in talks with the New York-based bank “regarding permanent funding or other alternatives.”Bear Stearns plummeted $21, or a record 37 percent, to $36 at 10:08 a.m. in New York Stock Exchange composite trading, the lowest level in more than eight years. The shares fell to as low as $26.85 earlier today.Chief Executive Officer Alan Schwartz said in a separate statement that the firm acted in response to “market rumors” of a liquidity crisis. He had denied this week that Bear Stearns faced a cash shortage, saying the company’s “liquidity cushion” was sufficient to weather the credit-market contraction. Traders have been reluctant to engage in long-term transactions such as credit-default swaps with Bear Stearns as the counterparty, the Wall Street Journal reported yesterday.

Bear Stearns is finished. If your prime broker freezes up, your trading freezes up, too. Every hedge fund, etc. that has BSC as a prime broker is doing whatever it can to get out of that relationship; everyone knows that everyone else is also trying to do that; so Bear Stearns is facing a high-finance version of a run on a bank. Its stock is down 48 percent just today, to about $29, from $160 nine months ago.

Lehman is down 12 percent and still falling. Watch them.

It seems that the keystone-kop Fed has tried the same “bandaid on the jugular” with BSC that it did with Countrywide. JPM threw a 28-day lifeline to Bear, guaranteed by the Fed, much as the Fed (allegedly) got Bank of America to stake Countrywide when it was blowing up.

And of course, for good measure, Bernanke pulled another “getting back at the bears” stunt. The first “tape bomb” was simply that Bear had gotten “financing” from JPM. That sounded like a huge piece of good news and forced BSC short sellers to dump their positions. BSC soared 10% in pre-market trading. Then the second piece of information hit the wires and BSC collapsed 50 percent. JPM probably made more money stealing all those short positions than it “risked” in supporting Bear.

And, as usual, the Fed screwed over the smaller traders who did real research, and made the right calls, in favor of the politically-connected institutions. What a bunch of parasites.

In gold we trust.

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If this won’t awaken the all-bullish-all the time cult of optimism from its decade-long hypnosis, I don’t know what will.

U.S. Treasuries Riskier Than German Debt, Default Swaps Show
By Abigail Moses

March 11 (Bloomberg) — The risk of losses on U.S. Treasury notes exceeded German bunds for the first time ever amid investor concern the subprime mortgage crisis is sapping government reserves, credit-default swaps prices show.

Contracts on 10-year Treasuries traded at a record 16 basis points earlier today, compared with 15 basis points on German government notes, according to data compiled by BNP Paribas SA. In July, U.S. credit-default swaps were at 1.6 basis points, compared with 2.5 basis points on bunds.

Federal Reserve Chairman Ben S. Bernanke announced plans today to lend as much as $200 billion of Treasury notes in exchange for debt including private mortgage-backed bonds to avert an exodus from the securities that threatens to deepen the housing slump and economic slowdown.

“The U.S. government is not immune from the consequences of the credit crisis,” said Fabrizio Capanna, BNP’s head of high-grade corporate trading in London. “Support for troubled financial institutions in the U.S. will be perceived as a weakening of U.S. sovereign credit.”

The Fed is trying to ease investor concern that a decline in house valuations and record foreclosures will add to losses for companies including Freddie Mac and Fannie Mae, the two biggest providers of U.S. mortgages. The $4.5 trillion of agency mortgage securities is about the same size as the market for Treasury notes.

Credit-default swaps are used to speculate on the ability of companies or governments to repay their debt and offer a benchmark for pricing securities. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A decline indicates improvement in the perception of credit quality; an increase, the opposite.

Hoarding Treasuries

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

Investors and securities firms have hoarded Treasuries during the credit crisis because they are considered the safest and most easily traded securities, reducing yields on two-year notes to the lowest since 2003. Yields on Treasuries have been lower than on German bunds since October.

U.S. yields rose today by the most since May 2004 to 1.77 percent from 1.5 percent on Bernanke’s plan.

The Federal Reserve has introduced another one of its smoke-and-mirrors facilities–the TLSF I think they are calling this one–with $200 billion in notional “short term lending support” to “liquidity-impaired” institutions.

A colossal misunderstanding of what liquidity means is at the root of all this. Academics who have never executed a single trade in their lives are making momentous, and poisonous, policy decisions, based upon liquidity as a theory. As a theory, liquidity “should be” constant across time, so a company that blows up because it levered too much shouldn’t blow up, because the “temporary” illiquidity doesn’t reflect the “true value” of the assets.

Liquidity, however, is a reflection of trust within and among the system. When trust falls, liquidity plunges as people stop playing the game and gather information themselves, instead of leaving it up to an obviously unreliable ratings agency or other intermediary, which they did previously.

Unfortunately, it’s not in the nature of man to admit that he’s wrong. It’s even less in the nature of a professional academic who has invested his entire life in the idea that deflation is evil. He is not going to renounce an entire life’s work, no matter what new information says.

As long as Democrats continue making favorable noises about reappointing Bernanke, the United States remains a one-way trade. Anybody who can’t see that at this point is atrociously uninformed, or in denial.

Anyway, this is Bernanke’s way of end-running around a massive rate cut. He dumps money into the system by effectively printing it and calling it a “short-term loan.”

You can see it in fixed income. Why own a Treasury if the Fed is just going to steal it from you by printing money, and then handing it out to the bankers who screwed up.

March 11 (Bloomberg) — The Federal Reserve, struggling to contain a crisis of confidence in credit markets, will for the first time lend Treasuries in exchange for debt that includes mortgage-backed securities.

The Fed said in a statement in Washington it plans to make up to $200 billion available through weekly auctions. Officials told reporters on condition of anonymity that the program may be increased as needed. The Fed coordinated the effort with central banks in Europe and Canada, which plan to inject up to $45 billion into their banking systems.

U.S. stocks rallied the most in five years on optimism the initiative will help avert a wider credit crunch. Treasuries fell, while the premiums investors demand for debt backed by home loans guaranteed by Fannie Mae remained near a 22-year high. Fannie Mae and Freddie Mac, chartered by the government, are the largest sources of money for U.S. home loans.

“This is the most significant step the Fed has taken so far,” said David Resler, chief economist at Nomura Securities International Inc. in New York. “This relieves some of the pressure” in the credit markets, he said.

Today’s steps indicate the Fed is increasingly concerned about the investor exodus from mortgage debt, which threatens to deepen the housing contraction and the economic slowdown. Officials said the program is aimed at countering a decline in liquidity in financial markets around the world, and comes after signs of increasing stress in U.S. mortgage securities.

Evening Call

Policy makers held a 90-minute conference call last night, where the Federal Open Market Committee authorized the new liquidity measure along with increases in swap lines with European central banks by a vote of 9-0, Fed spokeswoman Michelle Smith said. Fed Governor Frederic Mishkin didn’t vote because he was traveling, she said.

The Fed said it will lend Treasuries for 28-day periods in return for debt including AAA-rated mortgage securities sold by Fannie Mae, Freddie Mac and by banks. The loans will be made under a new program, the Term Securities Lending Facility, to so- called primary dealers, the 20 banks and securities firms that trade directly with the central bank.

Officials “will consult with primary dealers on technical design features” on the new resource before the first weekly auction is held on March 27, the statement said.

The Fed holds about $713 billion of Treasuries on its balance sheet.

Aid to Dealers

The resource allows dealers to switch debt that is less liquid for U.S. government securities that are easily tradable, the officials said. They anticipated that the primary dealers, which include Goldman Sachs Group. Inc., Bear Stearns Cos. and Merrill Lynch & Co., will lend the Treasuries on to other firms in return for cash. That will help the dealers finance their balance sheets, they told reporters.

This is bullshit.

It’s a staggering increase in inflation by any other name.

It’s a bailout of Bear Stearns, which was on the ropes yesterday.

It robs holders of CD’ and everyone else who is long dollars.

It robs anyone who bought a Treasury, or anything in fixed income.

It’s the Japanification of the United States economy.

If you can’t understand that at this point, you’re on your own. It’s your responsibility to keep yourself informed. There are too many looters and not enough producers in this economic system, and if you still trust it, it’s your own fault.

As I have said on this blog many, many times, it has been investment suicide to buy Treasuries in the past several months. You get raped in global terms because the dollar will fall by more than your bonds appreciate. You will probably be raped in dollar terms too, just because the Fed has such an obvious bias in favor of real estate and equities, at the expense of bonds.

Something bad is happening, and virtually every single action taken since August by the Bernanke Fed has only aggravated the problem.

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MBIA has kept up a game of begging for massive ratings concessions from Fitch in private, while trash-talking the ratings agencies (especially Fitch, which is by far the most aggressive of the three) in public.

Fitch is not amused.

13:20

MBI MBIA Inc: Follow up on Fitch’s response to MBIA; willing to continue ratings without charge to MBIA (11.01 -0.98) -Update

From today’s letter from Fitch Ratings to MBIA: ” I am writing in response to your letter to Fitch Ratings delivered to us this past Friday requesting that we withdraw MBIA’s Insurer Financial Strength rating, but maintain MBIA’s debt ratings. Regarding the commercial relationship between MBIA and Fitch, as I suggested to you in our meeting on Friday, we are empathetic to the financial and operational stress MBIA is presently undergoing and are aware of the significant cost containment measures you are initiating. We are, therefore, willing to continue our ratings without charge to MBIA. I assume, in the interest of your stakeholders, that you will be seeking and will receive equal concessions and/or sizable fee reductions from both S&P and Moody’s.

In addition, I would like clarification of your intentions regarding cooperation with our rating process. You stated in your March 7 press release, and in your letter to us of the same date, that you would like us to withdraw our IFS ratings, but continue rating MBIA’s debt securities. Separately, by email sent a day later on March 8 (a copy of which is attached hereto) you requested that we return or destroy key portfolio information and discontinue all use of that information in proceeding with our rating analysis. It seems disingenuous at best to assert in your letter to investors published yesterday, March 9 (footnote 1), that you “intend to work with Fitch to perform the analysis needed to rate [MBIA’s] debt securities”, while privately demanding return of the portfolio information and materials that you freely provided to support our ratings and that of other rating agencies for many years. It would appear that rather than “work with Fitch” your intention could be to emasculate our opinion by withholding information and subsequently discredit our opinion as being uninformed. In your letter, you also state that the value of IFS ratings in today’s volatile capital markets is disconnected from individual instruments insured by MBIA and “overwhelmed by the forces of trading markets in unrelated securities.” If you believe that, then you should request withdrawal of all rating agencies’ IFS ratings.

Your conflicting views lead me to question whether it is the Fitch capital model, rating process or fees that you object to or rather is it that you are aware we are continuing our analytical review and may conclude that, in our view, MBIA’s insurer financial strength is no longer ‘AAA’. I believe the central issue is MBIA’s financial strength and the value of your insurance policies to investors, not the value of an IFS rating. It seems an unusual first step in attempting to rebuild MBIA’s reduced credibility with investors to limit information, decrease transparency and restrict “informed opinions” (which I believe Fitch has) just because we may not conclude that MBIA is a ‘AAA’ company. I believe that the best way forward for MBIA to reestablish the value of its products in the market is to make more information available to more rating agencies rather than just aligning MBIA with Standard & Poor’s and Moody’s.”

Ouch.

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Barry Ritholtz has a bullseye Bloomberg screenshot showing that a single buyer pumped up ABK’s share price 25 percent, at 4:05 pm. I’m sure it’s a “complete” coincidence that that day happened to be the day before Ambac’s “$1.5 billion” share offering. The picture really says it all: this is the most obvious pump (as in “pump and dump”) I have ever seen of a major stock. I’m sure the SEC won’t investigate it, because the SEC doesn’t make it its business to investigate pumps which actually matter (and which inflate asset prices).

What a corpse of a company.

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