Category: Economy

MBIA, Largest Bond Insurer, Risking Moody’s Downgrade

No Comments

Moody’s has said that MBIA is, “‘somewhat likely’ to face a shortage of capital that threatens its AAA credit rating.”

If their credit rating slips, then the bonds that they insure will have to be re-rated….House of cards.

The loss of MBIA’s top ranking would cast doubt over the ratings of $652 billion of state, municipal and structured finance bonds that the company guarantees. MBIA is among at least eight bond insurers seeking to ward off potential credit-rating downgrades by Moody’s, Fitch Ratings and Standard & Poor’s. The insurers guarantee $2.4 trillion of debt and downgrades could cause losses of $200 billion, according to Bloomberg data.

Banks That Purchase Loans May Be Liable for Original Lender Misdeeds

No Comments

When I originally came across this story, it was just a glitch in foreclosures. Cleveland federal judge Christopher Boyko tossed 14 foreclosures without prejudice, because the plaintiffs could not show that they owned the loans.

Basically, the title on the loans was never changed, they just put it in the transfer contract.

I figured, this isn’t a big deal…It just means that before foreclosing, the banks have to do some paperwork, so amidst a sea of financial ice-bergs, this is a spring rain.

Well, once again, I am wrong.

It appears that the methods used to pool loans into CDOs and similar instruments may also mean that the organizations holding the CDOs are legally liable for any unethical or illegal tactics used whenever the loans were first made.

The problem stems from a shortcut that many players in the fast-moving securitization business have used in recent years. Normally, when a loan is sold, a simple document is prepared showing that the debt and any collateral attached to it has been transferred to the purchaser. That piece of paper is called an assignment. But in buying up thousands of mortgages at a time, Wall Street commonly skips this step, which requires separate paperwork for each loan. Instead, the industry customarily relies on a lengthy contract, known as a pooling-and-servicing agreement (PSA) to spell out arrangements for all of the loans in a pool. But, as some recent court rulings indicate, a PSA may not be good enough when it comes time to foreclose.

…

There also could be a more troubling consequence for investors, says Kathleen C. Engel, a professor at Cleveland-Marshall College of Law. Players in the secondary market for mortgages rely on an obscure but critical legal theory–known as the “holder in due course” doctrine–to insulate themselves from problems with the underlying loans.

Under the doctrine, a homeowner who believes that a lender deceived him about the terms of a loan can’t press such claims against the purchaser of a mortgage, such as a mortgage-backed securities trust. The holder-in-due-course doctrine protects pension funds and the like from having to worry about any misbehavior by home lenders–and thereby greases the wheels for the whole mortgage-securities market. But it’s a different story if, as appears to be common practice, the trust waits to complete paperwork transferring a loan until after it goes into default. In that case, the holder-in-due-course protection evaporates, and anybody who tries to foreclose could face defenses from the borrower that he or she was lied to when seeking a loan.

Ouch!

Florida Pension Investments in Big Sh#@ Pile

No Comments

Well, a few days ago, it was the short term money market type funds for local Florida governments and school boards, and today, it’s the state of Florida’s pension fund.

More Structured Investment Vehicles (SIV), more downgrades, more losses.

I think that what has been going on for the past 18-24 months is that the investment banks have realized that the stuff is illiquid (economist speak for worthless), so they fobbed it off on a lot of people with more money than brains, state pension and similar funds.

Given that the level of leverage and complexity is greater than in 1929, the consequences of the collapse might be a lot worse than in 1929. This is not just subprime….It’s almost everything out there.

Krugman Nails the Root Cause of the Liquididy/Insolvency Crisis

No Comments

Basically, he sees the cause as being the free market fundamentalism that is practiced by regulators, brokers, and politicians. I wholeheartedly agree.

This time, market players seem truly horrified — because they’ve suddenly realized that they don’t understand the complex financial system they created.

This is, of course, a symptom, not the cause, but he does see the cause too.

How did things get so opaque? The answer is “financial innovation” — two words that should, from now on, strike fear into investors’ hearts.

O.K., to be fair, some kinds of financial innovation are good. I don’t want to go back to the days when checking accounts didn’t pay interest and you couldn’t withdraw cash on weekends.

But the innovations of recent years — the alphabet soup of C.D.O.’s and S.I.V.’s, R.M.B.S. and A.B.C.P. — were sold on false pretenses. They were promoted as ways to spread risk, making investment safer. What they did instead — aside from making their creators a lot of money, which they didn’t have to repay when it all went bust — was to spread confusion, luring investors into taking on more risk than they realized.

Why was this allowed to happen? At a deep level, I believe that the problem was ideological: policy makers, committed to the view that the market is always right, simply ignored the warning signs. We know, in particular, that Alan Greenspan brushed aside warnings from Edward Gramlich, who was a member of the Federal Reserve Board, about a potential subprime crisis.

(emphasis mine)

So, when does he get his Nobel?

Go and read the whole thing

Unregulated Competition Hurts Innovation and Consumers

No Comments

This analysis comes from that bastion of Communist thought, the Financial Times. John Gapper compares Europe, where GSM was mandated by government, and the US, where anyone who rented the spectrum could use whatever standard they wanted, giving us providers with GSM and CDMA.

He quotes a 5 year old article from Wired:

Once the marketplace was allowed to work, it quickly converged to CDMA, which proved to be superior. CDMA is ascendant in America. More important, it’s the foundation for the next generation of cell phone technology – 3G – since it turned out to be the only technology capable of making the leap to fast and capacious wireless data transmission. Had the US government mandated a standard, by contrast, it would undoubtedly have picked TDMA or GSM, since those were the dominant technologies at the time. And then we wouldn’t have CDMA leading the way to 3G today.

Certainly, it is good to read such a deeply held faith in the marketplace leading to its own advancement.

Of course, it would help if it were not 180° wrong. As Mr. Gapper states:

I am afraid that history has not been kind to this argument. Europe has stayed ahead of the US in mobile telephony, and in 3G services. Having one technology standard has spurred competition among network operators and handset manufacturers while competition in the US has been stymied by a proliferation of technologies.

In truth, he is only partly right. US mobile technology deployment, and for that matter US broadband suck because this is what the unfettered free market leads to.

The Europeans mandated a single standard, and have prevented carriers from locking in customers. From a purely profit perspective, there is more money in making your customers captive than there is in providing them a superior and innovative product.

That’s why local phone carriers and cable companies spent their money on lobbying, and creating limited products that require you to purchase all or nothing. To quote Willie Sutton, it’s where the money is.

They are monopolists by necessity….There is only so much in the way of wire or cable you can place in a city, so the last mile is necessarily a monopoly or duopoly, and they spend their money on protecting this, not on benefiting the consumer.

People are Starting to Get It About Alan “Bubbles” Greenspan

No Comments

Patrick Artus, chief economist of Natixis SA and one of France’s most listened-to pundits says that “very bad” Fed chairman. A quote from his interview:

Artus: Yes. Greenspan was an arsonist and a fireman combined. He derived all his glory from his reaction to the savings-and- loans crisis, to the collapse of Long-Term Capital Management LP, and to Sept. 11, 2001. But LTCM and the savings-and-loans crisis were his doing. He absolutely failed to see where the malfunctions in the U.S. economy were.

Greenspan came up with a phrase, “irrational exuberance,” in 1997, but he didn’t do anything about it.

According to the article, Stiglitz is similarly down on Greenspan.

State Money Market Fund in Montana Now in Trouble

No Comments

I get the sense that the serious of complex investmentsts that Atrios calls “The Big Sh@$pile” were aggressively dumped off on a lot of states and municipalities over the past few years, because it now appears that
Montana’s Short Term Investment Pool, another money market like investment. And again, there appears to be a run on this.

We’ve got the same thing going on in King County, WA (Seattle).

But here is the scary quote:

Montana has completed a thorough review of its subprime exposures. Less than 1% of the underlying assets of its SIVs are subprime, South said, with the rest being bank debt and prime and commercial mortgages.

“It’s not a subprime issue anymore, it’s an asset-backed commercial paper issue now,” South added.

Translated into English, this means that the entire us investment system is now unsafe.

90% Plunge in the US Dollar Forecast

No Comments

So says Trends Research Institute Director Gerald Celente, he is forecasting a 90% plunge and Gold being at $2,000.00/ounce.

Personally, based on nothing more than my gut, I would say that this is unreasonable, I don’t see it dropping more than 50% long term $3.00=€1.00, with an overshoot to somewhere around $5.00=€1.00 at the height of the speculative frenzy.

Still, this guy did, “forecast the subprime mortgage financial crisis and the dollar’s decline a year ago and gold’s current rise in May”, though so were a lot of other people.

However, I agree that, “the subprime mortgage meltdown was just the first “small, high-risk segment of the market” to collapse”.

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

No Comments

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

No Comments

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.

I Wish that I Were a Right Wing Moron

No Comments

You may not remember the last time that I quoted Amity Shlaes. It was an indirect quote by way of Rich Karlgaard, who is so stupid, that he should be getting a personal aide to cut his meat, where Karlgaard implied that the reason for the 1937 recession was that “the investor class” were somehow sick and tired of FDR’s “soak the rich policies”, when even the most solidly Chicago School economist could tell you that it was caused by a reduction in federal spending to balance the budget.

Well, Amity Shlaes is at it again, suggesting that potential shortfall in Social Security in 30+ years should be kept at a level of bare survival for 1935, the date of establishment of the program.

As an FYI, 45 million Americans did not have indoor plumbing in 1930, and you had similar numbers in terms of electricity. This was out of a total population of 123 million, giving about 37% of the population without these amenities.

So, why do I wish that I were a right wing moron? Because Amity Shlaes is a senior fellow in economic history at the Council on Foreign Relations, and with those connections, she makes more in 90 days than I do in a year.

The right wing intellectual infrastructure is an artifact of subsidies for bad ideas and opaque thought processes, which since people like the Coors family and Richard Mellon Scaife are aggressively buying*, leads to more bad ideas and opaque thought processes through the invisible hand of the market place.

*I believe that over the past 30 years, these folks have spent over two billion dollars, that’s $2,000,000,000.00, or about $800 for every man, woman, and child in the US, for think tanks and related activities. When you add in Olin, Bradley, DeVos (Amway), and the rest of these folks who never worked a day in their lives for their money, you are probably well over $3 billion….A quick Google shows spending of just the major organizations from 1990-2000 to be $1B.

Arabs Bail Out Citigroup…AGAIN!!!!

No Comments

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

No Comments

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.