Category: bubble

Whiskey Tango Foxtrot????! Florida SHORT TERM Funds Parked in CDOs and Other Shaky Investments???

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We are talking accounts used for day to day expenses and salaries, and when it was discovered that. “after learning that the money- market fund contained more than $700 million of defaulted debt”, there was a run on the fund, with over 35%, over $10 Billion of the $28 Billion in the fund, of its assets being withdrawn.

As a result, they have suspended withdrawals from the fund, which may leave some governments unable to pay their employees this week. (See also here.)

It’s gets better:

Stipanovich raised the possibility of having the state pension fund shoulder the risk of some of the troubled securities with a credit-default swap, through which the retirement fund would guarantee the debt in exchange for an insurance premium.

“It will be a wonderful diversifier,” Stipanovich said.

Sink immediately rejected the executive director’s plan.

A “Wonderful Diversifier”???? Talk about throwing good money after bad.

A brief list of bad investments:

  • $168 million of debt from KKR Atlantic Funding Trust cut to D, or default, from B by Fitch Ratings on Oct. 8
  • $356 million issued by KKR Pacific Funding Trust, cut to D from B by Fitch Ratings on Oct. 2
  • $180 million of paper from Ottimo Funding, cut to D from C by S&P on Nov. 9. S&P said an auction of Ottimo’s collateral “did not generate cash proceeds” to repay the asset-backed commercial paper.
  • $175 million of short-term debt issued by Axon Financial Funding, an SIV. It was cut to D from C by S&P when Axon failed to pay liabilities maturing Nov. 26, causing an “automatic liquidation event.”
  • $650 million of certificates of deposit from Countrywide Bank FSB, a unit of Countrywide Financial Corp., that now amounts to more than 3 percent of the pool’s assets. The bank’s rating was cut to Baa1, three levels above junk, by Moody’s on Aug. 16.

In a MONEY MARKET FUND? I’d sooner have Sweeny Todd give me a shave than trust Florida’s financial judgement.

Today’s Real Estate Update

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HUD is starting to dump foreclosed homes, teachers, police officers and firefighters in Charlotte, NC can get homes for fifty cents on the dollar, Third-quarter home prices dropped 1.7% from the second quarter as measured by the Case-Shiller index, and houme values are expected to drop $1.2 TRILLION next year, with a drop of $6.6 billion in property taxes.

So a federal agency is marking down homes that they can’t get rid of 50%, house prices are dropping at an annualized rate of about 7% a year, and property tax revenues are falling through the floor, and what is likely a 5+ year decline is only about 14 month along.

Arabs Bail Out Citigroup…AGAIN!!!!

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In 2001, Saudi Prince Alwaleed bin Talal rescued Citigroup, and this time, it’s the Abu Dhabi Investment Authority.

BTW, look at the terms:

  • They get a 4.9% stake.
  • In exchange for its investment, ADIA will receive convertible stock in Citigroup yielding 11% annually. (They are making the loan at 11%, when junk bonds get 9%, WTF????)
  • The shares are “required to be converted into common stock at a conversion price of between $31.83 and $37.24 a share over a period of time between March 2010 and September 2011.” (It’s currently trading at $29.75, the lowest since 2002, so this means that the conversion essentially means that they are very nearly paying for this investment)
  • This gives them a bigger stake in the firm than Saudi Prince Alwaleed bin Talal. (remember him?)

If this company isn’t functionally insolvent, then its management needs to go to be fired, and criminally investigated, because the only way a non-insolvent company takes a deal this bad is if someone is breaking the law.

Investors have increasingly expressed concerns about Citigroup’s “tier 1” capital levels — a common measure of a bank’s capital adequacy — which for the first time in years fell below its 7.5% target in the third quarter. Although the bank is still considered to be well capitalized, investors worried that Citigroup would be forced to cut its dividend.

H/T The Big Picture.

RGE – With the Recession Becoming Inevitable the Consensus Shifts Towards the Hard Landing View. And the Rising Risk of a Systemic Financial Meltdown

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Noriel Roubini’s latest prediction:

I now see the risk of a severe and worsening liquidity and credit crunch leading to a generalized meltdown of the financial system of a severity and magnitude like we have never observed before. In this extreme scenario whose likelihood is increasing we could see a generalized run on some banks; and runs on a couple of weaker (non-bank) broker dealers that may go bankrupt with severe and systemic ripple effects on a mass of highly leveraged derivative instruments that will lead to a seizure of the derivatives markets (think of LTCM to the power of three); a collapse of the ABCP market and a disorderly collapse of the SIVs and conduits; massive losses on money market funds with a run on both those sponsored by banks and those not sponsored by banks (with the latter at even more severe risk as the recent effective bailout of the formers’ losses by theirs sponsoring banks is not available to those not being backed by banks); ever growing defaults and losses ($500 billion plus) in subprime, near prime and prime mortgages with severe known-on effect on the RMBS and CDOs market; massive losses in consumer credit (auto loans, credit cards); severe problems and losses in commercial real estate and related CMBS; the drying up of liquidity and credit in a variety of asset backed securities putting the entire model of securitization at risk; runs on hedge funds and other financial institutions that do not have access to the Fed’s lender of last resort support; a sharp increase in corporate defaults and credit spreads; and a massive process of re-intermediation into the banking system of activities that were until now altogether securitized.

Let’s be clear, Dr. Roubini is, and always has been, a bear. Truth be told, Since I started following this in 2001, so have I.

More important that this is that the bears in general, and Dr. Roubini in particular, have been right time and time again.

We have trillions of dollars in leverage in instruments that no one understands, and when this unwinds, it will be ugly.

Congress Reviewing Bill to Allow Bankruptcy Judges Review Terms of Mortgage Loans

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Brad Miller (D-NC) and Linda Sanchez (D-Ca) have proposed legislation in the house, and there appears to be a push for this in the Senate.

It is anticipated that this could reduce foreclosures by 2 million.

One of the wierd things that I discovered in reading this is that, Judges already have this power for “Vacation homes, farms and investment properties.”

But not for principal homes…Weird.

If this passes, it may save the mortgage industry from itself.

Remember When I Said That Bear Stearns Would Be Gone in a Year?

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We have a little story about the relative success of Goldman Sachs as compared to the other investment banks. What interests me is this quote:

Money soothes a lot of concerns, of course, and Goldman has had plenty to spread around. Through the third quarter, Goldman’s $16.9 billion compensation pool — the money it sets aside to pay its employees — was significantly bigger than the entire $11.4 billion market capitalization of Bear Stearns.

So Bear Stearns’ market cap is less than Goldman’s payroll for just 3 months.

If they don’t go down, they will be bought out. It’s just a matter of time before the big fish eat the little fish, and as I predicted at the beginning of August, Bear Stearns will be one of the small fishes.

The Economic Gods Must Be Cramming in Preparation of the Thanksgiving Holiday

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So here are some economic updates.

First, it appears that the first major bank casualty of the housing bust is upon, Northern Rock, a bank which is responsible for about one in five mortgages in the UK. They have apparently been done in by a 1930s style run on the bank. They got some temporary liquidity through a £24 Billion (about $US 50 Billion) loan from the land of England, but it still appears that they are headed for liquidation, with the Tory shadow of the chancellor of the exchequer* George Osborne asking that, “The chancellor had not explained how taxpayers would get their money back.” The testimony of the CEO of Northern Rock, is more concerning though:

He told the Treasury Select Committee that the bank had planned how it would cope with a 40% fall in house prices.

But it had not planned how to respond if its ability to borrow dried up.

“What wasn’t stress-tested was the event deemed implausible – of the global markets freezing up overnight,” he said.

“The rapid and long-lasting closure of the global markets was not stress-tested,” he added.

Basically, we have a world capital market that resembles juggling, and if you lose one ball, others follow.

On top of this, we have a new home builders survey that is positively grim. The current outlook remains at a record low, but the 6 month outlook looks grim.

On the more macro level, we have Countrywide shares plunging as the insurance rates it must pay on its loans jumped by 30 % (!), both Fannie Mae and Freddie Mac taking major hits because about the security of their mortgages (here and here), and Citigroup faces $15 billion write down in addition to having the good fortune of Goldman Sacks downgrading them to “sell” from “neutral”.

In consumer spending, auto sales could hit 15-year low.

*It’s an artifact of the parliamentary system that the minority party has a shadow cabinet, which is there to keep the various minister’s feet to the fire.

Bank of America Purchases $2 Billion in Preferred Countrywide Stock

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This is a bailout. Bank of America will purchase $2 billion worth of preferred Countrywide stock yielding 7.3%, and that can be converted into common stock at $18 per share. It should be noted that Countrywide is currently selling at $26.19, up 20% from before the infusion purchase.

This is a juxtaposition of desperation on the part of Countrywide and vulture opportunism on the part of BoA.

Honestly, I think that they will end up losing money on this.

Being Forced to Price Radioactive Toxic Waste at Market Values

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Sometimes, someone writes something that captures the totality of a situation in just a few words. In this case, it is my favorite bear, Nouriel Roubini on FASB 157, which, as I’ve mentioned before, requires more stringent evaluations of exotic financial instruments.

It really is forcing people to price assets that they thought had value, but are now viewed with the enthusiasm of a radioactive toxic waste sandwich.

Sounds like a job for Troma Films.

So Cal Home Prices Drop 20 2005 Levels

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Additionally, home sales are at a 20 year low. Of interest is the reports of some “bargain hunters” returning to the market.

When one looks at crashes, whether real-estate, or other assets, I think that this qualifies as a whistling in the dark.

We’ll have some more of that, and at least one dead cat bounce* before this is over.

*It refers to a short term spike in values during a bear market. It comes from the expression that “even a dead cat will bounce if it falls from a great height”.

Housing Contageon Infects Commercial Real Estate

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Commercial real estate loans for the 3rd quarter have fallen 4% year over year, and 30% from the second quarter.

The decrease in commercial/multifamily lending activity during the third quarter was driven by decreases in originations for most property types. When compared to the third quarter of 2006, the overall decrease included a 31 percent decrease in loans for office properties, a 20 percent decrease in loans for retail properties, an 18 percent decrease in loans for hotel properties, an 8 percent decrease in loans for industrial properties, as well as a 149 percent increase in loans for health care properties and a 14 percent increase in loans for multifamily properties.

So the things that increased were our tremendously inefficient health care system, and apartments for people who are no longer buying homes.

The Myth of Home Ownership and Plunging African American Home Ownership Rates

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In 1994, Black home ownership was at 42.3%. In 2004, it was 49.7%. It has now dropped to 46.7%.

The rise in home ownership rates was really pretty meteoric, and the drop is even steeper.

Dean Baker makes the point, which I agree with, that the idea that increased home ownership is a good in and of itself is a bad policy with significant negative consequences, or as he so eloquently puts it, “In other words, the big push to increase African American homeownership rates was in reality a big push to increase foreclosure rates among African American households, but the ideologues of homeownership were too blind to notice the impact of their policies.”

Home ownership provides benefits, like the creation of equity, but it also adds significant risks to the equation. When something major breaks, roof, hvac, plumbing, the home owner can face SIGNIFICANT unanticipated expenses, and the downsides of foreclosure are worse than those of eviction.

This policy was a centerpiece of the conservative “Ownership Society”, and it is having disastrous consequences, and it appears that these consequences will become more dire for the foreseeable future.

GE Fund Breaks the Buck

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The GEAM Trust Enhanced Cash Trust, is shutting down, and investors are getting $0.96/share. While this is a money fund, and not a money market fund, it is generally viewed as only a marginally higher risk, and losing money is nearly unheard of. Typically, it is a guaranteed $1 in, and $1 out, with the risk being that returns would be poor.

There is a possibility that this might happen with Money Market funds too, though it is less likely, as they are more tightly regulated, and they make safer investments, because their investment strategy is not as aggressive.