Debt Rattle, February 12 2008

Updated 5.50 pm

Ilargi: News is traveling fast and furious about failing auctions of various bonds. We posted an article on it earlier today, see below, and they keep on coming in. There is ever less trust, and there is ever less money. Note that this severely impacts many things we take for granted, like hospitals, bridges etc., public facilities and local governments. They have financed their day-to-day operations through bonds for years, and they have no idea where to go from here. No Buffett will solve their problems.

Buffett's Kiss of Death

Once again, much to do over nothing is being made of Buffet's offer to the monolines (at least as far as the health of the monolines themselves is concerned). Today's news is Buffett offers 800 billion dollar backup to troubled bond insurers:

Billionaire tycoon Warren Buffett on Tuesday offered to reinsure 800 billion dollars in municipal bonds now insured by three troubled reinsurers hard hit by the US mortgage and credit crunch. Buffett discussed the offer to Ambac, MBIA and FGIC, insurers at risk of losing their AAA credit ratings due to problems with subprime, or high-risk, mortgages and other loans, during a telephone interview with the CNBC business television net

Buffett smells an opportunity here and he is likely correct. Furthermore he is not going to make the mistake that both Ambac and MBIA made in insuring CDOs, subprime mortgages, and other toxic waste.

Buffett will cherry pick the good debt and leave Ambac and MBIA with the garbage, it’s as simple as that. Anyone who thinks this is a bailout for the monolines is mistaken. Ambac is down 15% on the news and MBIA is down 13% on the news. Some bailout!

The real news about municipals comes from Professor Bennett Sedacca who just yesterday wrote:

One of my best sell side sources just told me there were 11 failed auctions at Lehman on Friday, some at Goldman and 11 at Citi today. On top of that, SLMA was forced to pay 7 1/4 % for AAA 35 day money. Yes Virginia, there is a credit crunch.

In a failed auction, basically the re-marketing agent gets all sell orders and no buy orders. This is a sell imbalance at its worst and the municipality doesn't get the cash. If it happens more than once, the broker calls the issuer and says 'Mr. issuer, if you want money, you had better go to the fixed rate window'. And the fixed rate window, with the economy floundering and the insurers all but bankrupt (certainly not writing any new business), is kinda closed too. So be careful out there, real careful. If this turns into a rout, it could reverberate through the economy. Big time.

Can Buffett add liquidity to the municipal bond market? You bet. The price will be the kiss of death for the monolines themselves.

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Ilargi: I have no URL yet for the following:

"NEW YORK (Dow Jones)--Failed auctions of mostly municipal debt totaled approximately $6 billion Tuesday, with Citigroup (C) the lead underwriter on the bulk of the sales, according to a document from the bank...The failed auctions Tuesday follow at least six others, sparking concerns that this once safe corner of the credit markets is the next area to crumble. When an auction fails, the holders of the securities are paid a premium until the paper can be sold.

Citigroup, under an old moniker Smith, Barney, Harris Upham & Co, led the majority of the deals, but Goldman Sachs (GS) also was listed as the underwriter of seven separate auctions. The auctions themselves were small in size, with most between $50 million to $100 million each, and from a variety of issuers ranging from a San Diego hospital to the NJ Building Authority, according to the Citigroup document.

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Ilargi: Party time, sailors! 'T is the jolly season of auditors' accounts coming in for some major corporations. Yesterday, AIG, the world's largest insurer, went -painfully- first. For years, the audit accounts were as boring as daytime TV, but not this year. This can't escape a thorough explanation, so please bear with me:

First, auditors will now be held responsible for what they sign off on. That changes the rules of the game. John Crudele, November 8 :

The problem involves a rule passed a couple of years ago that will put the banking industry's outside auditors in peril if they sign off on results that they really can't verify. And right now there is nothing verifiable - or even understandable - about the banking industry's exposure to derivatives.

The auditors' dilemma was caused by a rule change that now prohibits banks from indemnifying auditors against mistakes. All other kinds of companies can hold their auditors blameless in the event of errors that might generate investor and government lawsuits. And sometimes that's the only way the accountants will give a nod to the company's books. But a rule enacted in February 2006 by the Treasury Department, Federal Reserve and the Federal Deposit Insurance Administration now prohibit banks from doing that. [..]The indemnification rule was changed "during a blissfully quiet time." The ramifications of the new rule "wasn't an issue because nobody saw any risk." Now there is risk.

Because these derivative securities are so complex and their value so difficult to calculate, banks might have a difficult time determining if they've written down enough value. And if banks are finding the calculations troublesome, then auditors aren't likely to be any more comfortable with their task. It's always devastating for a company when its outside, independent auditor refuses to attest to the truthfulness of a company report. But without any protection against lawsuits, the nation's biggest accounting firms - having learned their lessons from Enron Corp. and other cases of corporate fraud - will likely play hardball.

Moreover, since November 15, 2007, there’s FASB 157, which strangles the ‘mark-to-model’ model. Nouriel Roubini, November 5 :

The reality is that most financial institutions – banks, commercial banks, pension funds, hedge funds – have barely started to recognize the lower “fair value” of their impaired securities. Valuation of illiquid assets is a most complex issue; but starting with the November 15th adoption of FASB 157 the leeway that financial institutions have used so far for creative accounting will be much more limited. Valuation of illiquid assets is a most technical issue. But new regulations will limit the ability of financial institutions to put “illiquid” asset in “level 3” securities, i.e. securities where the lack of market prices allows them to use dubious “valuation models” and “unobservable inputs” to value such assets.

As an exception, here’s two articles on AIG, the first big fish to swim against both of these tides. Normally I’ll pick just one, but these two compliment each other. And they’re juicy. AIG writes off $5 billion in CDS based on CDO, while it doesn’t even know what they’re worth!! That’s the whole issue in all this talk of CDO’s and swaps. No-one knows their value, and so far no-one has been forced to be real about it. That is about to change. The next two weeks will be full of fun and BIG negative numbers. Mark my word, a term that you will read a lot this month is: Pennies On The Dollar.

AIG Falls on Concern Losses May Have Been Understated

American International Group Inc., the world's largest insurer by assets, fell the most in 20 years in New York trading after its auditor found faulty accounting may have understated losses on some holdings. So-called credit-default swaps issued by AIG, which protect fixed-income investors against losses, declined by $4.88 billion in value in October and November, four times more than previously disclosed, the company said today in a regulatory filing. AIG's auditors found "material weakness" in its accounting for the contracts, and the firm doesn't know what they were worth at the end of 2007, the filing said.

"It raises the question about whether management is in control of what's going on with their derivatives," Edward Ketz, a Pennsylvania State University accounting professor, said in an interview. "The uncertainty as to whether additional losses are coming is as unsettling as anything."

AIG said it believes it has "procedures to appropriately determine the fair value" of the holdings. The company's financial products unit issues contracts that promise to reimburse investors for losses tied to $505.5 billion of securities as of Nov. 25, including corporate debt, European mortgages and collateralized debt obligations, which bundle together loans.

Fitch Ratings may lower the insurer's AA credit rating because AIG's "weakness in internal controls," coupled with "current market conditions, contributes to uncertainty regarding the valuation" of the derivative portfolio, the credit-ratings company said in a statement today. Today's announcement "will leave investors worrying about other skeletons in the closet," Nigel Dally, an analyst at Morgan Stanley, said in a note to clients. "Investors should brace for a mark-to-market loss of roughly $5 billion in the upcoming quarterly results." He rates the New York-based company "overweight."

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AIG warns of $4.8 billion sub-prime writedown

American International Group (AIG), the world’s largest insurance company, yesterday gave warning that it would need to write down the value of investments in sub-prime mortgages by about $4.88 billion (£2.5 billion) for October and November. The group, which predicted as recently as December that the write-down for those two months would be $1.1 billion, said the increase related to a change in the way it calculated the value of investments in its sub-prime mortgage derivatives portfolio.

AIG gave warning that its auditor, PricewaterhouseCoopers, had found a “material weakness” in the way the company values its portfolio of credit swaps and said that it had not yet determined the decline for December. Pricewaterhouse yesterday said: “[AIG] is still accumulating market data in order to update its valuation.”The announcement sent AIG’s shares to their biggest fall in 20 years, with the stock sliding 12 per cent to close at $44.74.

It also prompted Fitch to review AIG’s AA credit rating on the basis that the disclosure “brings additional uncertainty to the potential impact on the financial statements”. Fitch added that any downgrade would probably be limited to one notch.
The dive in share price caps a year in which AIG has lost about a third of its market value because of its heavy exposure to the US home-loan market as a sub-prime mortgage lender, a mortgage insurer and an investor in mortgage bonds and related securities.

Yesterday’s losses related to AIG’s investments in credit swaps involving collateralised debt obligations (CDOs), which are pools of bonds and other asset-backed securities. Credit swaps are tradeable insurance policies, with the owner effectively acting as the insurer. They have seen their value plummet as the surge in defaults on US mortgages feeds through into a jump in home-loan insurance claims.

Last August, AIG said its exposure to the sub-prime crisis was “minimal”, and in November it said its exposure to the debt remained “high quality” with “substantial protection”. AIG’s credit swap writedowns come after similar multibillion-dollar writedowns in monoline bond insurers such as MBIA and Ambac in recent weeks. Meanwhile, Swiss Re, the world’s biggest reinsurer, lost just over $1 billion in October on two credit-default swaps.

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Credit Default Swap Tsunami Approaches

By AIG's definition, housing must be at "depression levels". However, we are only in the third inning or so of housing declines. Six more innings are coming. What will AIG's swaps look like then?

It would be interesting to know who is on the other side of AIG's bet. The Wall Street Journal called me today asking my opinion on these swaps. I explained the real fireworks start when there is a major default on swaps. In all likelihood, at least for now, AIG can cover that loss. It will be painful and they may have to raise capital, but for now they can do so. However, there are $45 trillion of credit default swaps out there. A default on a mere 10% would cause an economic disaster. Unfortunately, it's guaranteed to happen.

Companies like Citigroup (C), AIG (AIG), Merrill Lynch (MER), Lehman (LEH), Morgan Stanley (MS), might think they are hedged. If so they are only fooling themselves. Just what is a guarantee from someone like MBIA (MBI), Ambac (ABK), or Madame Merriweather's Mudhut Malaysia worth? The answer is nothing. I mentioned dear Mmm. Madame Merriweather to the WSJ today and said that may as well be who is guaranteeing this stuff. There are countless hedge funds out there, leveraged to the hilt in garbage that has not been marked to market. The same holds true for banks and as we have seen today, insurance companies like AIG.

At some point, some company will declare bankruptcy or a debt downgrade will trigger a claim. That claim will not be paid because the hedge fund or mudhut (whichever comes first) does not have the means to do so. A cascade of defaults will occur up the line on any corporation counting on that claim as part of their hedge.

Consider GM. The market cap of GM is $15 billion or so. There are about $1 trillion in credit default swaps bet on the success or failure of GM. It is virtually impossible for this to be hedged because there is not $1 trillion in GM bonds available as collateral. The credit swaps on MBIA, Ambac, and the homebuilders trade deep into junk, some priced outright for default. Is there any wonder Moody's, Fitch, and the S&P are reluctant to downgrade MBIA and Ambac? The ratings assigned to Ambac and MBIA are a joke.

Madame Merriweather's Mudhut Malaysia Inc phoned me minutes ago. I spoke with Mme. Merriweather in person. She was upset by my comments to the Wall Street Journal. She went on to say that her AAA credit rating was still intact, that she could make good on her guarantees, and that she was not in any way affiliated with Madame Merriweather's Mudhut Phillipines. "My mudhut is priceless" she stated.

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CDO Losses Driving Credit-Default Swaps to Record, Analysts Say

Banks are driving the cost of protecting corporate bonds from default to the highest on record as they seek to hedge against losses on collateralized debt obligations, according to traders of credit-default swaps. Contracts on the benchmark Markit iTraxx Crossover Index soared 17 basis points to 547 at 12:50 p.m. in London, according to JPMorgan Chase & Co. The Markit iTraxx Asia Ex-Japan Series 8 Index soared the most in one day, rising 15 basis points to an all-time high of 144.5, according to BNP Paribas SA. The Markit CDX North America Investment Grade Index rose 2.5 basis points to 132.25, Deutsche Bank AG prices show. "Banks have taken losses, spreads are going wider and they are just cutting positions," said Andrea Cicione, a senior credit strategist at BNP Paribas in London. "Lenders are probably reducing risk positions in a deteriorating credit environment by unwinding CDOs."

Banks are facing mounting writedowns on CDOs, securities that package credit-default swaps, bonds or loans, as the fallout from the collapse of U.S. subprime mortgages spreads across financial markets. The Group of Seven estimates banks worldwide will suffer writedowns of $400 billion on home loans, German Finance Minister Peer Steinbrueck said at a weekend meeting of officials and central bankers in Tokyo.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They 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 rise indicates worsening perceptions of credit quality; a decline, the opposite. Fitch Ratings may downgrade the $220 billion of CDOs it assesses that are based on corporate securities because of rising losses, the New York-based company said last week. CDOs with AAA grades that are based on credit-default swaps and aren't actively managed may face the steepest reductions of as much as five steps, the company said.

Ratings firms are responding to criticism that they failed to react quickly enough as increasing defaults on subprime mortgages caused a plunge in the value of CDOs. Fitch, a unit of Fimalac SA in Paris, lowered $67 billion of mortgage-linked CDOs in November, slashing some top-rated debt to speculative grade, or junk. Falling prices for leveraged loans may be forcing banks to unwind collateralized loan obligations. UBS AG and Wachovia Corp. are trying to sell $700 million in loans because of the unwinding of their so-called market value CLOs, which package the debt and are based on the net value of the underlying loans, the Wall Street Journal reported.

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Ilargi: While everyone talks and writes about all the liquidity that the Fed is adding to the market, Lee Adler shows the opposite is the case:

Fed Eunuchs Reveal True Selves In Technicolor

Many observers have expressed disbelief that the Fed is actually aggressively reducing the monetary base, in particular that part of the base which directly affects the trading accounts of 20 of the world’s largest banks, the Fed’s Primary Dealers. Wall Street Examiner Professional Edition subscribers have had the benefit of seeing the data on a day to day basis as charted in the daily Fed Report. The general public however, has not had the benefit of that insight.

The vast majority of market pundits, economists, and quasi-journalists for the mainstream infomercial outlets like Marketwatch, the Wall Street Journal, Bloomberg, and especially CNBC, are totally clueless. To a man and woman, they all think that the Fed has aggressively been adding liquidity to the system.



The proof, they say, is in the pudding and the Fed has just served it up in multicolored, multi-layered glory. The Fed itself is confirming, in graphical form, the very facts that I have been reporting on and charting for our subscribers every day for the past half year and more. The Fed has aggressively collapsed the size of the System Open Market Account, beginning slowly last July, then moving aggressively beginning in December. The effect has been to withdraw billions of dollars of what is, in essence, margin buying power from the trading accounts of the Primary Dealers.

It is no coincidence that the stock market topped out around the time the Fed began to withdraw liquidity last summer, and it is no coincidence that the market nosedived when the Fed began its massive moves to shift reserves out of the hands of the primary dealers and into other, mostly smaller, banks when it created the Term Auction Facility.

The Fed aggressively cut the size of its permanent holdings of Treasuries, and also substantially cut its holdings of repurchase agreements, resulting in the collapse of the System Open Market Account (SOMA). It replaced only part of that with the Term Auction Facility. The Currency Swap facility with foreign central banks has no direct day to day impact on the US market. When the Fed turned out the lights at the SOMA office in July, that was the end of the bull market. When the Fed began moving the furniture out to the hinterlands, again the US stock market took the brunt of the hit.

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IndyMac Posts $509.1 Million Loss as Slump Deepens

IndyMac Bancorp Inc., the second- biggest independent U.S. mortgage company, posted a record fourth-quarter loss and suspended its dividend "indefinitely" as the housing slump entered its third year. IndyMac fell as much as 11 percent in New York trading after reporting a net loss of $509.1 million, or $6.43 a share, compared with a profit of $72.2 million, or 97 cents, in the same period a year earlier. The Pasadena, California-based company was expected to have a loss of $1.57, the average estimate of seven analysts surveyed by Bloomberg.

After reporting the company's first annual loss in its 23- year history, Chief Executive Officer Michael Perry said IndyMac will return to profitability by tightening lending standards, curtailing new home construction and lot financing and ending most home-equity loans. IndyMac has lost 80 percent of its market value in the past 12 months on concern it may not survive as a separate company.

"A forecast of profitability in 2008 looks optimistic," said Brian Horey, a general partner at Aurelian Partners LP, a New York-based investment firm that last year moved from betting against shares of subprime lenders to betting against companies focused on better credits, including IndyMac. "The loans they originated in the last two years put them near the eye of the storm, and credit costs are likely to be an ongoing problem."

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New Hitches In Markets May Widen Credit Woes

A widening array of financial-market problems threatens to trigger a new phase in the global credit crunch, extending it beyond the risky mortgages that have cost banks and investors more than $100 billion in losses and helped push the U.S. economy toward recession. In the past few days, low-rated corporate loans -- the kind that fueled the buyout boom of recent years -- have plummeted in value. As a result, banks are expected to try to unload some of those loans this week at fire-sale prices.

Nervous buyers also have retreated in recent days from the market for securities backed by student loans and municipal bonds, roiling some corners of the short-term money markets. Similarly, investors have recoiled from debt backed by commercial real estate, such as office buildings. Over the weekend, the world's top banking authorities warned that the U.S.-led economic slowdown and continued uncertainty about securities could lead banks to further reduce their lending, and choke off economic activity. One sign of investors' anxiety: Standard & Poor's said its index of the prices on high-risk corporate loans fell to a record low of 86.28 cents on the dollar at the end of last week.

Few market participants expect defaults on any of this debt to match the elevated levels seen in last year's rout in the market for risky, or subprime, mortgages. But collectively, they threaten to deepen the financial system's wounds and create a growing pileup of shaky assets on the books of banks. Behind the latest problems are some common themes: Investors bought some of these debt securities with borrowed money, or leverage. As prices have declined, lenders have forced the sale of some of these securities. The cash being pulled out of the market by these sales has magnified the losses from rising defaults.

Meanwhile, the Federal Reserve's interest-rate cuts, which were designed to reinvigorate the slowing U.S. economy, may be having unintended consequences in some quarters: sending investors fleeing from investments that do poorly when interest rates fall. After years in which banks and investors have lent money on especially easy terms, "You've had the biggest credit bubble -- probably the biggest credit bubble we have ever had," says Jim Reid, credit strategist at Deutsche Bank AG in London. Part of the bubble has already been unwound, he says. The problem is, "nobody quite knows where that ends."

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Buffett Offers to Assume Muni Liabilities of Insurers

Billionaire investor Warren Buffett said he offered to assume responsibility for $800 billion of municipal bonds guaranteed by MBIA Inc., Ambac Financial Group Inc. and FGIC Corp. Buffett's Berkshire Hathaway Inc. would put up $5 billion as part of the plan that would exclude subprime-related obligations. One company has already rebuffed the proposal and the two others haven't responded, Buffett told CNBC television.

Buffett is attempting to take advantage of the distress among bond insurers by picking off the profitable municipal guaranty business and leaving MBIA, Ambac and FGIC with debt that has caused more than $5 billion in losses. The three companies are struggling to maintain their AAA ratings after writedowns on the value of mortgage guarantees.

"If you gave up your entire municipal business, that's the book of business where the value in the companies is right now," said CreditSights Inc. analyst Robert Haines. "You'd essentially be ceding that whole book to Buffett and what you'd be left with would be the book of business where all the troubles are." The bond insurers lend their AAA stamp to $2.4 trillion of debt, and are sitting on losses of as much as $41 billion, according to JPMorgan Chase & Co. analysts.

Armonk, New York-based MBIA, which started as the Municipal Bond Insurance Association in 1974, Ambac and FGIC are reeling from their expansion beyond guaranteeing municipal debt to collateralized debt obligations, which repackage assets such as mortgage bonds and buyout loans into new securities with varying risk. As the value of some CDOs plummet, ratings companies are pressing the insurers to add more capital. "How deep that problem is, with the CDOs and other things, we can't figure it out," Buffett said.

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U.S. Stock Futures Rise as Buffett Offers to Help Bond Insurers

U.S. stock-index futures rose after Warren Buffett's offer to take over liabilities from bond insurers and a plan to help delinquent homeowners avoid foreclosure spurred gains in financial shares. MBIA Inc. and Ambac Financial Group Inc., the two largest bond insurers, rallied after Buffett told CNBC that his company would be willing to take on insurers' obligations for municipal bonds. Citigroup Inc., Bear Stearns Cos. and Lehman Brothers Holdings Inc. climbed after people familiar with the plans said six U.S. lenders will announce new steps to help borrowers in danger of default.

Standard & Poor's 500 Index futures expiring in March added 9.1 to 1,347.3 at 8:50 a.m. in New York. Dow Jones Industrial Average futures advanced 60 to 12,298. Nasdaq-100 futures climbed 12.5 to 1,809.75. Shares in Europe and Asia also gained. "It's another potential solution to some of the credit problems," Mark Bronzo, who helps manage $11 billion at Security Global Investors in Irvington, New York, said of Buffett's offer. "That's why the markets are responding well."

Concern that bond insurers don't have enough money to pay claims on the $2.4 trillion in assets they guarantee has contributed to a 9.1 percent drop in S&P 500 financial shares in 2008. MBIA has lost 80 percent of its value in the last year, and Ambac has slumped 88 percent, on concern that the companies will lose their AAA credit ratings.

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Paulson, U.S. Banks Forge 30-Day Foreclosure-Freeze Deal

Bank of America Corp., Citigroup Inc. and four other U.S. lenders agreed with Treasury Secretary Henry Paulson to take new steps to help borrowers in danger of foreclosure stay in their homes. Paulson and the banks offered a 30-day freeze on some foreclosures while loan modifications are considered. The Treasury chief, with Housing and Urban Development Secretary Alphonso Jackson, said today at a news conference in Washington that "Project Lifeline" would help stabilize communities disrupted by mortgage defaults.

"If someone is willing to make a call, to reach out, there's a chance they can save their home," Paulson said. "As our economy works through this difficult period, we will look for additional opportunities to try to avoid preventable foreclosures." The program is designed to help a broad range of homeowners, not just subprime debtors who borrowed more than they could afford. Still, it won't help everyone, Paulson said. The U.S. housing correction "is not over" and "the worst is just beginning" for subprime borrowers who face higher interest rates in the next two years, he sai

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Six Major Banks to Unveil Plan to Halt Foreclosures

Six of the largest U.S. mortgage lenders will announce on Tuesday a program to identify seriously delinquent borrowers and halt any foreclosure process while they try to work out a new payment scheme, sources familiar with the plan said. The lenders will unite under the program, dubbed "Project Lifeline," to identify borrowers more than 60 days delinquent and stall any foreclosure proceedings while they try to develop new loan terms, the sources told Reuters.

Executives from Washington Mutual, Bank of America, Wells Fargo, JPMorgan Chase, Citigroup and Countrywide Financial are due to announce the plan on Tuesday morning with U.S. Treasury Secretary Henry Paulson. A source familiar with the plan said the initiative dovetails with other foreclosure-prevention efforts already underway at many lenders, but said it will give more reassurance to troubled borrowers that they can avoid foreclosure even if they are seriously late with payments. Earlier Monday, Countrywide announced an expanded program to help people with subprime mortgages stay in their homes.

The program created by the largest U.S. mortgage lender and the Association of Community Organizations for Reform Now, or ACORN, comes as hundreds of thousands of borrowers nationwide face rising rates on their adjustable-rate mortgages. It is intended to allow struggling borrowers refinance into less costly fixed-rate loans, or have their monthly payments frozen or lowered. Some economists believe the nation's housing crisis may have helped push the economy into recession.

The number of U.S. homes that slipped into some stage of foreclosure in 2007 was 79 percent higher than in the previous year, a real estate tracking company said last week. Many homeowners started to fall behind on mortgage payments in the last three months, setting the stage for more foreclosures this year.

"From a borrower's perspective, any program to help people stay in their homes is a good idea,"  Jaime Peters, an analyst at Morningstar, said of Countrywide's plan. "Borrowers who can demonstrate they can afford lower payments will be most helped." Michael Gross, managing director of loan administration at Countrywide, did not say on a conference call what the program would cost or how many borrowers might be assisted, but said he expects the program to last "many years."

Countrywide's announcement was delayed more than three weeks, after Countrywide agreed on Jan. 11 to be acquired by Bank of America Corp, the second-largest U.S. bank. Countrywide in 2007 made about one in six U.S. home loans. It essentially stopped making subprime mortgages, which go to people with poor credit, after critics said it fueled the housing crisis by offering loans that people could not afford.
Bank of America has not made subprime mortgages since 2001.

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CDO update: talk of firesale, liquidations begin

At Christmas, 33 CDOs had triggered “events of default”. Mid January and that number had risen to 58. According to Standard & Poor’s that figure has now spiked to 80 - worth around $97bn. The number of defaulting CDOs has in fact increased by $13bn in the past week alone. But more worrying is the fact that senior creditors are now pushing for CDOs to be liquidated - indicating the beginnings, perhaps, of a much-speculated-upon fire sale of CDO assets. A total of 18 CDOs, worth an estimated $18bn, have opted for liquidation as at Thursday. One is understood to have completed the process.

Unwinding of synthetic CDOs - which reference CDS contracts - is thought to be behind some of the rapid spread-widening on credit indices on Friday. More painful liquidations are also to be expected. Further downgrades of RMBS - particularly 2006-2007 vintages, and the downgrading of bond insurer XLCA on Thursday, which played big in the CDO world - will push a great deal more CDOs towards default

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Advisers mull options for insured muni bonds

As the subprime crisis spreads to major municipal bond insurers, financial advisers are weighing how clients who own insured muni bonds should proceed. Late last month, MBIA Inc., an Armonk, N.Y.-based muni bond in-surer, posted a $3.4 billion loss from marking down the value of mortgage-linked securities it had insured.
That could lead to a downgrade in the company's AAA credit rating; the ratings of the muni bonds it insures could also be in question.

Depending on the underlying credit rating of the insured muni bonds, a rating cut for the insurers could either be a boon or a bust for investors, advisers and analysts said. A muni bond insured by XL Capital Assurance Inc. of New York, whose rating was cut to an A from AAA by Fitch Ratings Inc., could see a price decline of 5% to 10% if the bond's underlying rating is a weak single A or a BBB, according to Matt Fabian, managing director at Municipal Market Advisors of Concord, Mass.

Muni bonds, which are issued by governments to fund projects, have typically been a safe haven for investors. But now clients are questioning the quality of the insured muni bonds and worrying that they may default, especially because insurance coverage can raise poorly rated bonds to AAA status..

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Limit to Stupidity

A couple of kernels of wisdom are starting to emerge.

First, bailouts are only possible if the risk is well-known, small and contained. Once the risk becomes too large and remains unknown, the state is going to cut these turkeys loose. It is already happening in Europe, and it will definitely happen here.

Second, banks everywhere are scrambling to survive by offering extremely high rates of return to the remaining capital in existence. Expect this trend to continue. Expect it to completely neutralize any attempt by the world’s central banks to manipulate the cost of capital lower.

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£91bn Northern Rock debt is public liability

Gordon Brown’s reputation for prudent economic management was dealt a blow yesterday after an estimated £91 billion of debt from Northern Rock, the troubled bank, was moved on to the Government’s balance sheet.
Shifting the bank’s entire debt, which could grow to as much as £100 billion once calculations are complete, on to the public sector balance sheet will shred the Prime Minister’s “golden rule” that government debt should represent no more than 40 per cent of national income. Experts said last night that the debt had now risen to 45 per cent.

Northern Rock was forced last September to borrow an estimated £25 billion from the Bank of England, forcing the central bank to take control of the Rock’s activities. As a result, the Office of National Statistics said yesterday that Northern Rock must be classified as part of the public sector. In the longer term, the increased debt could lead to higher taxes or reduced government spending, analysts said. The Conservatives seized on the development, saying the breach of Mr Brown’s so-called fiscal rule to match borrowing with Government revenue over an economic cycle, undermined his entire economic record.

George Osborne, the Shadow Chancellor, said the figure was the equivalent of £3,000 for every family. Mr Osborne said: “Gordon Brown has staked his reputation for competence on meeting his own fiscal rules. Today those rules have been blown to pieces as a result of his economic incompetence. “Gordon Brown has effectively saddled every taxpayer with a second mortgage as a result of his mishan-dling of the Northern Rock crisis.”

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SocGen to offer cut-price shares

Scandal-hit Societe Generale will sell 5.5bn euros ($8bn; £4.1bn) of shares at a 40% discount to shore up its balance sheet after huge trading losses. The French bank will offer shares at 47.50 euros each to existing investors, down from Friday's close of 77.72. Analysts said the huge discount showed the pressure on the bank after alleged illicit trades cost it 4.9bn euros. The plans emerged as lawyers for Jerome Kerviel, who the bank blames for the losses, try to get him freed. On Friday, the Paris appeals court ordered Mr Kerviel to be jailed while unauthorised trades of about 50bn euros at the bank are investigated.

Mr Kerviel is being investigated for breach of trust, falsifying documents and breaching computer security, but not the more serious charge of fraud. The court ruled that he should be held in custody because of the "necessities of the investigation" and the risk that he could flee the country. But the trader's lawyer, Elisabeth Meyer, said she would go to a higher appeals court on Monday. A second man questioned about the scandal was freed without charge over the weekend.

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Ilargi: Mea maybe culpa? I have said that Germany looks like a stronghold in Europe. But I have to admit, if the ongoing drawn-out IKB issue is more widespread than we presently know, I may be wrong in that assessment. Germany’s banking situation is unique, as I’ve explained before: the concentration move has largely passed it by. There are lots of smaller, often community, banks. The government has an added problem: the ECB is the central bank, and a lender of last resort may not be available in Europe, even when that ECB secretly props up banks. Direct intervention by the German government may be judged to be against European legislation. To be continued.....

German government to step in to help IKB -paper

The German government is expected to step in to help subprime-stricken lender IKB, two newspapers reported, quoting unnamed sources. A spokesman for the Finance Ministry declined to comment. The German bank became one of Germany's highest-profile casualties of the global credit crisis in late July. It has since been propped up by two rescues, shouldered mainly by its top shareholder, state bank KfW.

The Handelsblatt newspaper reported that the government was looking for a solution that would not create a permanent burden on the federal budget. The story, quoting unnamed government sources, will appear on Tuesday. The Sueddeutsche Zeitung, quoting unnamed sources who are negotiating IKB's future, said the situation was so dramatic that no option was taboo, including using taxpayers' money to save the bank.

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Sub-prime fears at WestLB and IKB threaten German banking

WestLB and the IKB, once dubbed the turbines in Germany's powerhouse, were struggling yesterday to cling on to their reputation as serious lenders.

The two banks are still reeling from the meltdown in the US sub-prime market. The crisis is percolating through the whole of the German banking sector; politicians are increasingly nervous that at least one German bank may go under, which would send a devastating signal to the markets. A board meeting of the government-owned lender Kreditanstalt fuer Wiederaufbau (KfW) is scheduled for Wednesday to find a further €2billion (£1.5billion) to prop up the credit base of IKB, which is facing heavy new writedowns. KfW, which controls about 40 per cent of IKB, has been behind two earlier rescue packages for the bank at a cost of €5billion.

The sense of crisis has now reached the Berlin government. IKB lends to one in ten of Germany's blue-chip companies. Jochen Sanio, the head of the financial services monitoring agency, has warned that if IKB's problems were to spin out of control, then Germany could be facing its worst banking crisis in 75 years. Talks were held in the Chancellery this week and both Peer Steinbrück, the Finance Minister, and Michael Glos, the Economic Minister, will be attending the meeting on Wednesday.

The rescue deal being stitched together this weekend will have to involve commercial banks but no one seems to be very interested in taking on IKB. Börsen-Zeitung, the well-informed financial newspaper, reported that neither the DZ Bank nor WGZ Bank would be submitting non-binding bids by the deadline of next Friday. The concern is that there is still not enough information available about the bank's exposure to the sub-prime crisis. WestLB looks as if it could live to fight another day. But as Der Spiegel magazine commented yesterday, it was a case of “the patient being saved after an emergency amputation”. Even that may be looking on the bright side.

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Ilargi: For in-depth understanding of what happens to South Africa, and why, read what Naomi Klein writes in The Shock Doctrine about the aftermath of the much heralded ANC/Mandela victory over apartheid.

Rand Sinks as South African Electricity Grid Fails

Gold is above $900 an ounce and platinum has never been higher, yet traders are selling the South African rand faster than any other major currency because President Thabo Mbeki can't keep the lights on. The rand is down 12 percent this year against the dollar, six times more than the next-worst performer among the world's most widely traded currencies. UBS AG forecasts the sharpest drop in the rand since 2001 this year, and option prices show it has the worst prospects of any currency.

The decline signals the world is losing confidence in South Africa's ability to remedy a power shortage that has disrupted mining of some of the world's most valuable precious-metals deposits just when prices are climbing. Mbeki, the 65-year-old successor to Nelson Mandela who has presided over nine years of economic growth, steps down in 2009, and the man most likely to replace him, Jacob Zuma, is due to stand trial this year on charges from fraud to tax evasion.

"The currency is the share price of a country," said George Glynos, managing director of Johannesburg-based Econometrix Treasury Management, which advises investors on bond and foreign-exchange holdings. "If anyone wants to know what foreigners are thinking about South Africa at the moment, they need look no further than the rand." The rand fell 6 percent to 7.81 per dollar last week, the largest weekly drop since June 2006, and was little changed at 7.79 as of 5:05 p.m. in Johannesburg today. Zurich-based UBS, the world's second-biggest currency trader last year with almost 15 percent of the market, according to Euromoney Institutional Investor Plc, forecasts continued "rand weakness."

State-owned Eskom Holdings Ltd., which supplies 95 percent of South Africa's power, cut electricity to businesses last month, and most of the country's mines had to shut for five days. Eskom says the government ignored repeated calls to invest in the electricity grid, and it won't be able to increase generation capacity until 2013. "If the gold mines stay shut, the rand is going to fall sharply," said Werner Gey van Pittius, a currency manager in London at Investec Asset Management, which oversees about $60 billion in assets. "Our strategy is simply to be long the good stories and short the bad stories. And South Africa is definitely not one of the better stories."

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Yen Rises as AIG Losses Prompt Investors to Trim Carry Trades

The yen rose against 13 of the world's 16 most-active currencies as widening credit-market losses spurred investors to reduce holdings of higher-yielding assets financed in Japan. The currency gained against the New Zealand dollar and the Norwegian krone as traders reduced so-called carry trades. American International Group Inc., the world's largest insurer by assets, said it may have underestimated a decline in the value of derivative holdings. The euro traded near a three-week low versus the dollar before a report that will probably show the weakest German investor confidence in 15 years.

"I am quite yen-bullish," said Michiyoshi Kato, a senior vice president of currency sales in Tokyo at Mizuho Corporate Bank Ltd., a unit of Japan's second-largest publicly traded lender by assets. "Subprime debt problems are far from over. The markets will remain shaky, buoying the yen."

The risk of Asian companies and governments defaulting on their debt increased, according to traders of credit-default swaps. The Markit iTraxx Japan index of 50 investment-grade companies rose 10.5 basis points to 88.5 basis points in Tokyo, according to prices from Morgan Stanley. AIG said credit-default swaps it had issued declined by $4.88 billion in October and November, four times greater than it had previously indicated.

The Group of Seven estimates banks worldwide will suffer writedowns of $400 billion, German Finance Minister Peer Steinbrueck said on Feb. 9. They have posted about $146 billion of losses in the past year. "The yen is likely to be bought as speculators unwind carry trades," said Tsutomu Soma, a bond and currency dealer in Tokyo at Okasan Securities Co., Japan's fifth-largest broker by revenue. "Everyone is concerned about how much money banks will lose."

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The Mother of All Rip-offs: Get ready for a real hosing

Low interest credit and 'financial innovation' are a deadly-combo. They knocked the banking system for a loop, clogged the credit markets with billions of dollars of subprime sludge, and left the real estate market sprawling on the canvas. Still-even though $2 trillion of capitalization has been wiped-out from falling home prices; and even though the financial system is in a terminal state of paralysis-no one has been held accountable. In fact, not one trader, mortgage lender, rating's-agency official, fund manager, or investment banker has been indicted or even charged with criminal wrongdoing.

NOT ONE. The system operates without rules or guard rails. It's the Wild West!



The system is so thoroughly marinated in corruption, that every trace of regulatory-oversight has been removed. The SEC is little more than a public relations sham loaded with business-friendly sycophants who try to sustain the publics confidence while, at the same time, kow-towing to their corporate paymasters. It's a complete hoax.

Last week, the Chairman of the SEC, Christopher Cox, gave a speech at the Ronald Reagan Building.

He said: "We've already launched an initiative in this area to investigate possible fraud or breaches of fiduciary duty involving collateralized debt obligations. Among the issues confronting us this year will be determining whether bank holding companies and securities firms made proper disclosure in their filings and public statements of what they knew about their CDO portfolios and their valuations. We'll determine whether brokers carefully followed suitability requirements when they sold complex debt-related derivatives that shortly afterward went bad. And in this area, as elsewhere, we'll be investigating whether unscrupulous insiders used non-public information to bail out of these securities or to sell them short, in violation of the securities laws.

Huh? So, after 6 years of sitting on the sidelines watching the fat-cat investment banks and hedge funds sell dodgy securities, (comprised of mortgages from unemployed thrift-store workers with bad credit) Cox has finally decided to ?to investigate possible fraud or breaches of fiduciary duty? What a joke. Trillions of dollars have been lost, the financial system is reeling, and the nation is headed into recession. We want scalps---not excuses! Did Cox know that the CDOs, the MBSs, the ABCP and the rest of the alphabet soup of 'structured investments' were unalloyed garbage?

Yes, of course, he did. Everyone knew. But they were making so much money selling snake oil to credulous investors they couldn't help themselves. They went ape. Two week's ago TV investment guru, Jim Cramer, even admitted that he and his business buddies used to call the investors who bought these sketchy debt pools morons and Bozos. That says it all, doesn't it?

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Greed, Fraud and Duplicity: How the Housing/Lending Bubble Inflated

Author Richard Bitner was kind enough to send me a copy of his new book Greed, Fraud & Ignorance: A Subprime Insider's Look at the Mortgage Collapse which I can recommend to you as a concise account of the entire subprime lending bubble and implosion. Bitner has a unique view of all the players, as he was a major subprime mortgage broker for many years prior to the implosion.

He was unashamed to describe himself as a subprime mortgage broker before the excesses consumed the business, as he felt that even though the system was less than perfect, the subprime market served a valuable purpose to those with impaired credit. With proper vetting and risk management, the higher-risk borrowers were rejected and those whose credit history supported their ability and willingness to pay could buy a house by paying higher interest rates.

I can't summarize a 191-page book in a few paragraphs, but this is my primary take-away from this very clearly written account:
When everybody from the borrowers to Wall Street began gaming the system, all credibility was lost. It is still lost, and will remain lost until the entire model of payment for all players is radically restructured. Bitner reports that up to 80% of all subprime loan applications were rejected by honest subprime mortgage brokers. This stunning statistic suggests the frenzy which overtook the nation as people who were clearly below-average credit risks stormed the housing market, trying to get in and get rich just like everybody else.

While there is nothing remarkable about this human behavior--we all want to get in on the Get Rich Quick Scheme of the Day--what is remarkable is that Wall Street and the credit ratings agencies went for the Get Rich Quick scheme in the same frenzied fashion. (OK, so there's nothing remarkable about that, either.)

But unlike a subprime borrower, Wall Street and the rating agencies (Moodys et. al.) could approve their own terms and grant themselves a high rating. In Bitner's memorable description, "Not only was the fox guarding the henhouse, he hired a contractor and built a separate wing so he could feast at his convenience." Bitner describes how Wall Street's securitization of mortgages fragmented what was once an integrated process. The granting of a mortgage used to be--and still is, in smaller local banks--an integrated process within the bank. The loan officer verifies employment and income of the borrower, hires a trusted local appraiser, confirms the loan meets all underwriting requirements, confirms the down payment wasn't borrowed, etc

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Investors pay the price for Wall Street’s risk appetite

Less than a decade after Wall Street’s last major partnership went public, stockholders are paying the price for bankrolling the industry’s expanding risk appetite. Four of the five biggest US securities firms lost about $83 billion of market value last year, almost 90% of their net income since 1999. That cut the annual average return for Morgan Stanley, Merrill Lynch, Lehman Brothers Holdings and Bear Stearns during those nine years to 9.7% from 16.8%.

The private partnerships that once dominated Wall Street guarded their capital, used less leverage and limited their risk to trading blocks of stock for clients and shares of companies in mergers, said Roy Smith, a finance professor at New York University’s Stern School of Business and a former partner at Goldman Sachs Group. Since raising money from the public, many of the biggest firms have abandoned that caution.

“If you’re betting with other peoples’ money, you’re more willing to take risk than if it’s your own,” said Anson Beard, 71, who retired from Morgan Stanley in 1994 after 17 years at the New York-based company, where he ran the equities division and helped with the initial public offering in 1986.

Morgan Stanley, Merrill, Lehman and Bear Stearns have lost between 3% and 19% of their value this year in New York Stock Exchange trading on concern that they may be forced to take more writedowns if bond insurers like MBIA and Ambac Financial Group are stripped of their top credit ratings. Revenue from structured credit and leveraged finance has dropped and demand for takeover advice and underwriting may dwindle as the US economy slows, analysts say.

Even Goldman has faltered. New York-based Goldman, which went public in May 1999, evaded last year’s market losses and reaped record earnings. This year, the biggest and most profitable securities firm has lost 13% in NYSE trading, while analysts predict earnings will drop as equity stakes in companies such as Beijing-based Industrial & Commercial Bank of China lose value and investment-banking fees decline.

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Ilargi: I guess we're just waiting for a court in Caracas to pass judgment in the Chavez vs Exxon, Conoco cases. Sovereignty really still is a recognized issue, people.

Venezuelan Oil Output Undermined by Chavez, CERA Says

Venezuelan President Hugo Chavez's policies have cut the South American country's oil output by 1.2 million barrels a day, enough to supply 80 percent of U.S. East Coast demand, according to Cambridge Energy Research Associates.

Production from Venezuelan fields has plunged by more than one-third since Chavez assumed the presidency in 1999 because of a lack of investment by the country's state oil company, Rene Ortiz, a Cambridge Energy Research Associates senior associate, said today in an interview in Houston. Another factor was the replacement of engineers with military personnel ill-equipped to manage oil fields, he said. Venezuela, home to the largest oil reserves in the Western Hemisphere, also fired U.S.-linked consulting firms formerly relied on to advise on oil investments and strategy, said Ortiz, the former energy minister for Ecuador. Chavez has largely shut the country off from U.S. and European investment under his effort to build a socialist society, Ortiz said.

"What is hard to fathom is how he has all of these people advising him with PhDs in economics from American and European universities, and yet he thinks socialism will work,”said Ortiz, who is based in the Ecuadorian capital of Quito. Venezuela is pumping about 2.3 million barrels of crude a day, down from 3.5 million a day in 1998, the year before Chavez began his reign, Ortiz said. Oil and Energy Minister Rafael Ramirez said Feb. 2 that the country is producing 3.3 million barrels of oil a day.

Venezuelan officials say the difference between their figures and estimates by others is a result of outside groups depending too heavily on one another and biased reporting by those opposed to Chavez's government. State-owned Petroleos de Venezuela SA last year seized control of four heavy-oil ventures in the Orinoco Belt region. Exxon Mobil Corp. and ConocoPhillips abandoned their projects rather than accept lesser roles and diminished profits.

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Bond Insurance Turns Toxic for Munis as Rates Soar

Bond insurance sold by MBIA Inc., Ambac Financial Group Inc. and Security Capital Assurance Ltd. is backfiring on counties, universities and hospitals across the U.S., more than doubling some borrowing costs.
Park Nicollet Health Services in Minneapolis may pay an extra $5 million to $6 million this year, about a quarter of its operating profit, because interest on $375 million in floating- rate debt doubled in the last six weeks, said Chief Financial Officer David Cooke. The rate on $98 million insured by Ambac climbed to 6 percent on Jan. 30 from 3.06 percent on Jan. 2.

"We'll have to reduce our capital expenditure program, which means less equipment, less modernization of facilities," Cooke said in an interview. The hospital paid Ambac to "count on that AAA insurance for 30 years. Now it's going away on us."

Investors are shunning insured bonds after three of the biggest guarantors, owned by Ambac, Security Capital and FGIC Corp., were stripped of at least one AAA credit rating amid losses on debt tied to subprime mortgages. Interest costs on floating-rate bonds sold by more than 100 governments, hospitals and colleges rose as much as 7 percentage points since the beginning of January even as the Federal Reserve lowered its benchmark rate for U.S. borrowing by 1.25 percentage points.

"The market's in a state of turmoil," said Bryan Mayhew, chief financial officer for [the Bay Area Toll Authority in Oakland, California], which manages the San Francisco Bay Bridge and six other state-owned toll bridges. Tax-exempt money-market funds can't hold debt rated lower than AA-, and downgrades to insurers are enough in some instances to make the bonds it backs ineligible.

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Credit card debt related to housing crash

“Anybody who is having trouble servicing their mortgage is going to try using credit cards to finance those other expenditures,” said Tom Cargill, an economics professor at the University of Nevada, Reno. “I suspect you’ll find that a lot of the states that have had the most serious mortgage problems and foreclosures will also tend to have higher balances (on their residents’ credit cards).”

It’s a trend that holds true for Nevada, which has been hit especially hard by the subprime mortgage crisis. Nevadans had the second-highest average credit card balance in the nation at $7,645, according to Experian’s www.NationalScoreIndex.com site. California residents were fourth with a mean credit card balance of $7,209. Mississippi residents had the lowest mean credit card balance nationwide at $5,216.

Nationwide, the use of revolving credit — fueled largely by credit cards — kept increasing throughout 2007, according to a recent consumer credit report by the Federal Reserve. After a 5.4 percent increase in the first quarter of 2007, use of revolving credit saw an 8.8 percent jump in the third quarter. By November last year, use of revolving credit rose by 11.3 percent. In comparison, revolving credit increased by 6.1 percent in 2006 and 3.1 percent in 2005

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Auction-Bond Failures Spread to Student Loan Debt

College Loan Corp., a San Diego- based lender, said some bonds it issued with rates determined through periodic auctions failed to attract enough bids. The company wouldn't say which specific issues failed or identify the banks that managed the auctions. Demand for bonds in the $360 billion auction-rate securities market is waning on investor concern that dealers who collect fees for managing the bidding on the bonds won't commit their own capital to prevent failures. Reduced appetite for auction-rate debt in the municipal market also reflects expectations that the credit strength of insurers backing the securities may deteriorate.

Auction bonds issued by Sallie Mae, the largest student loan lender, also failed to attract enough bidders last week, according to a report today by Keefe, Bruyette & Woods, a New York-based securities firm. The report said weak demand for auction securities may not extend to other debt backed by the same pool of student loans. Auction bonds have interest rates that are determined by bidding that typically occurs every seven, 28 or 35 days. When there aren't enough buyers, as has occurred in recent months on some securities, the auction fails and bondholders who wanted to sell are left holding the securities. Rates at failed auctions are set at a level spelled out in bond documents.

Fitch Ratings in a Dec. 19 report said some issuers of student-loan backed securities "have been faced with the possibility of failed auctions." Ratings on the debt may be cut as rising rates at auctions shrink the gap between what the student loan companies pay on their bonds and what they collect on the student loans they hold, Fitch said. Bidding by dealers is essential to the smooth functioning of auction securities and banks are now wary of loading their balance sheets with the bonds, Epstein said. Failures are concentrated in securities that were privately sold, he added.

In the municipal market, at least two auctions run by Lehman Brothers Holdings Inc. failed on Jan. 22, the first day the bond investors could react to a ratings downgrade of Ambac Financial Group Inc.'s main insurance units. Debt issued by electric utility Nevada Power reset at 6.757 percent, the maximum proscribed under the terms of the bonds, while securities from Georgetown University reset at 6.604 percent. Ambac insures Nevada Power's debt, while MBIA Inc.'s MBIA Insurance Corp. guarantees Georgetown's debt.

Failed auctions have hurt companies that bought those variable-rate securities as short-term investments with excess cash, and are unable to sell their holdings. Bristol-Myers Squibb announced Jan. 31 a $275 million write-off of its holdings, which totaled $811 million at the end of 2007. About a third of 449 companies polled in a survey last May for the Association for Finance Professionals said they had investments in auction-rate bonds.

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Dmitry Orlov: Money as Metaphor

At the start we might have a traditional society, with a largely non-monetized economy, analogous to a healthy working individual, who makes a bit of spending money, and uses it to get drunk (i.e., consume) after work and on holidays. His liver (economy) is in fine shape, able to process all the alcohol with no ill effects (provide the consumer goods in exchange for money). Over time, his liquor consumption (spending) increases, and his capacity for work drops (outsourcing). He now borrows against everything he owns (equity cash-outs), his future earnings (consumer debt) and even the earnings of his unborn children (national debt) in order to continue drinking his fill every night.

Later, his liver becomes enlarged and diseased (bubble economy), is no longer capable of processing all this alcohol, generates back-pressure (commodity price spikes, energy shortages) and even causes black-outs (market crashes). He can work even less (layoffs), and becomes unable to service his debts (foreclosures, repossessions, defaults). No longer able to afford all the booze, he goes on the wagon (decrease in consumer confidence and spending), which gives him delirium tremens (recession, depression).

Now, delirium tremens is a serious, sometimes life-threatening medical condition that requires medical intervention (government stimulus package). The DT-sufferer can be a danger to himself and to others. By far the easiest way to help is to buy the bum a drink (tax rebate checks in the mail this May). If he is well enough to make it from his mailbox to the checks cashed place to the nearest bar, we can all breathe easier. Once he feels better, maybe he'll even buy us a round.

Seems like a good metaphor to me...

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