Wednesday, January 30, 2008

Debt Rattle, January 30 2008

Ilargi: This here puts a big smile on my face. We ran Bill Ackman's letter to the ratings agencies, about how they need to come clean on their bond insurers' assessments, a few days ago. Now Ackman takes it one step further, and writes to teh SEC and to Dinallo, who's trying hard to save the insurers. Ackman's one man crusade will make him very unpopular in lots of places, but now that he's made Bloomberg with his letter, who can ignore him? He's my hero for the day. Cutting Ben at his own game, so to speak.

MBIA, Ambac May Each Lose $11.6 Billion, Ackman Says

MBIA Inc. and Ambac Financial Group Inc., the two largest bond insurers, may each lose $11.6 billion on guarantees of residential mortgage securities and some collateralized debt obligations, according to hedge fund manager William Ackman.

Ackman calculated the losses using a model supplied by an unnamed investment bank and sent the findings in a letter to the Securities and Exchange Commission and New York Insurance Superintendent Eric Dinallo. Ackman is a managing partner of Pershing Square Capital Management LP, which is trying to profit from declines in the stocks and bonds of MBIA and Ambac.

Ackman, 41, stepped up his attack by posting on the Internet a list of asset-backed CDOs and other securities guaranteed by Armonk, New York-based MBIA and New York-based Ambac that allows others to craft their own loss predictions. Ackman didn't say how he got details on the securities, many of which haven't been disclosed by the companies.

"Up until this point in time, the market and the regulators have had to rely on the bond insurers and the rating agencies to calculate their own losses in what we deem a self-graded exam," Ackman said in a statement preceding release of the letter. "Now the market will have the opportunity to do its own analysis."

Ilargi: And there’s more in the “fun for the whole family” game of Downgrade Your Insurer (kudo for both to webjazz):

FGIC Loses AAA Rating at Fitch After Missing Deadline
Financial Guaranty Insurance Co., the world's fourth-largest bond insurer, lost its AAA credit rating at Fitch Ratings after missing a deadline to raise capital. Financial Guaranty, a unit of New York-based FGIC Corp., was cut two levels to AA, New York-based Fitch said today in a statement. The company had been AAA since at least 1991. Moody's Investors Service and Standard & Poor's are also reevaluating their ratings.

The loss of the AAA stamp jeopardizes ratings on bonds Financial Guaranty insured and limits the company's ability to generate new business. FGIC, along with MBIA Inc. and Ambac Financial Group Inc., are paying a price for expanding beyond their traditional business of backing municipal bonds to guaranteeing debt linked to riskier subprime mortgages and home- equity loans, as well as collateralized debt obligations.

"This announcement is based on FGIC's not yet raising new capital, or having executed other risk mitigation measures, to meet Fitch's AAA capital guidelines within a timeframe consistent with Fitch's expectations," the ratings company said today.
FGIC is controlled by Walnut Creek, California-based PMI Group Inc., Blackstone Group LP, and Cypress Group. PMI dropped 27 cents, or 2.9 percent, to $9.16 in New York Stock Exchange composite trading. Blackstone fell 43 cents to $18.56.
The insurance unit's top rating was placed under review by Fitch, Moody's and S&P in December after downgrades of securities backed by subprime mortgages. Fitch gave the company until this week to boost capital by $1 billion.[..]

About 71 percent of FGIC's guarantees are on municipal bonds, 23 percent are structured finance and 6 percent are international transactions, according to the company's Web site. FGIC guaranteed $21 billion of home-equity securities, $8.8 billion of subprime mortgage debt, and $10.3 billion of CDOs backed by subprime mortgages and other loans...

Ilargi: I don’t find this cut so interesting, not least of all since it was signaled loud and clear. What I’m much more curious about is where they go from here. How much time will this one buy them? What if markets fall again quickly? Today, Dallas Fed President Richard Fisher dissented, and next time he will probably not be alone anymore. This is a very risky game with the value of the US dollar. There are plenty countries wondering about their currencies being pegged to the dollar, and many more who are worried about their holdings in dollar-denominated paper.

Fed Lowers Rate to 3% as U.S. Expansion Falters
The Federal Reserve lowered its benchmark interest rate by half a percentage point to 3 percent, the second cut in as many weeks, to prevent the U.S. economy from sinking into a recession.

"Today's policy action, combined with those taken earlier, should help to promote moderate growth over time and to mitigate the risks to economic activity," the Federal Open Market Committee said in a statement after meeting today in Washington. "However, downside risks to growth remain."

The move, coupled with the Jan. 22 emergency cut of three- quarters of a point, is the fastest easing of monetary policy since 1990. Hours before the decision was announced, the Commerce Department reported that gross domestic product grew 0.6 percent in the fourth quarter, half the pace forecast by economists.

Stocks rallied, while the dollar fell and Treasury notes weakened.

"Financial markets remain under considerable stress, and credit has tightened further for some businesses and households," the Fed said today. "Recent information indicates a deepening of the housing contraction as well as some softening in labor markets."

In America, land of the bubbles, the next pop will be the biggest
Three cheers! Wall Street's got a new rally song: "I'm dreaming dreams, I'm scheming schemes, I'm building castles high." Actually it's the 1919 tune that launched the roaring run-up to the '29 crash and the Great Depression. Remember the lyrics: "I'm forever blowing bubbles. Pretty bubbles in the air. They fly so high, nearly reach the sky. Then like my dreams they fade and die."

And it still fits today! Listen to venture capitalist Eric Janszen's scary new paradigm in "The Next Bubble," a Harper's Magazine report: "That the Internet and the housing hyperinflations transpired within a period of 10 years, each creating trillions of fake wealth, is, I believe, only the beginning."

Translation: The next bubble is already expanding. Now listen very closely as Janszen makes the single most dangerous prediction of 2008: "There will and must be many more such booms, for without them the United States can no longer function. The bubble cycle has replaced the business cycle." After the collapse of the 1990s dot-com bubble we laughed at all the hype they had spewed: "This time it's different." "New paradigm." "New economy that only went up."

Well, stop laughing: The new, new came true, says Janszen. Seriously, the economy and the stock market can no longer function without an ever increasing series of bubbles, one after another, rapidly expanding then bursting, with all the manic trading, risk, uncertainty, hypervolatility and distortions that come with it.

Janszen traces bubbles through history: From the 1720's South Sea Bubble to the housing-subprime bubble. Bubbles are accelerating, becoming more frequent, a frenzy feeding on itself: "Nowadays we barely pause between such bouts of insanity. The dot-com crash of the early 2000s should have been followed by decades of soul-searching; instead, even before the old bubble fully deflated, a new mania began to take place."

What's so scary is not that the subprime bubble was happening so fast on the heels of the dot-com bubble, not that the pundits, the public and the policy makers all appeared to be ignoring it. What's really scary is that our best and brightest leaders in Washington, Wall Street and Corporate America wanted to create a bubble! They even threw jet fuel on this raging fire with cheap money, favorable taxes and minimal oversight.

Biggs's Tips for Rich: Expect War, Study Blitz, Mind Markets
Barton Biggs has some offbeat advice for the rich: Insure yourself against war and disaster by buying a remote farm or ranch and stocking it with "seed, fertilizer, canned food, wine, medicine, clothes, etc." The "etc." must mean guns. "A few rounds over the approaching brigands' heads would probably be a compelling persuader that there are easier farms to pillage," he writes in his new book, “Wealth, War and Wisdom."

Biggs is no paranoid survivalist. He was chief global strategist at Morgan Stanley before leaving in 2003 to form hedge fund Traxis Partners. He doesn't lock and load until the last page of this smart look at how World War II warped share prices, gutted wealth and remains a warning to investors. His message: Listen to markets, learn from history and prepare for the worst.

"Wealth, War and Wisdom" fills a void. Library shelves are packed with volumes on World War II. The history of stock markets also has been ably recorded, notably in Robert Sobel's "The Big Board." Yet how many books track the intersection of the two? The "wisdom" in the alliterative title refers to the spooky way markets can foreshadow the future. Biggs became fascinated with this phenomenon after discovering by chance that equity markets sensed major turning points in the war.[..]

Mankind endures "an episode of great wealth destruction" at least once every century, Biggs reminds us. So the wealthy should prepare to ride out a disaster, be it a tsunami, a market meltdown or Islamic terrorists with a dirty bomb.

The rich get complacent, assuming they will have time "to extricate themselves and their wealth" when trouble comes, Biggs says. The rich are mistaken, as the Holocaust proves. "Events move much faster than anyone expects," he says, "and the barbarians are on top of you before you can escape."

Ilargi: Yesterday we reported that the European Central Bank has been propping up Spain’s financial institutions in secret, and we’ve yet to find out how long that has been going on. Now the British want to write laws that allow secret actions by the Bank of England. That way they'd have official secrets. I would seriously question these practices. Either you have free markets, or you do not. If central banks are free to undermine the freedom of the market, in secret, who knows what they will do with those powers? The possibilities for market manipulation are endless.

UK seeks new laws to stop another Northern Rock
Britain could provide emergency loans in secret to ailing banks under a proposed law that would give the authorities more power to intervene to prevent another Northern Rock-style crisis.
The government on Wednesday launched a 12-week consultation on improving the framework to preserve financial stability and protect depositors should a bank fail.

The proposals include allowing a bank to keep emergency loans secret for a short period, in contrast to Northern Rock, whose announcement that it had needed emergency funding prompted the first run on the deposits of a UK bank for over 140 years as savers panicked.

"ELA (emergency liquidity assistance) may be a very short-term solution for a solvent bank and immediate disclosure could, by leading to a loss of consumer confidence, exacerbate any liquidity problems," the consultation document said. "In these circumstances, there may be strong arguments for delaying disclosure until the temporary problems have passed."

Ilargi: Look, Spain built more homes two years in a row, 2005-6, than Britain, France and Germany combined. It's one huge bubble. Now the ECB buys securities based on nothing but bubbles. There's nothing secure about them. The bubble needs to pop. Simple as that. For what will the ECB do when Ireland, Greece, Portugal et al start stumbling? These secret bail-outs are nothing else than a huge grab into taxpayers' pockets, with the loot thrown down a deep dark hole.

The secret bail-out of Spain's banks
Spanish banks issued a record £39bn of mortgage bonds and other asset-backed securities in the fourth quarter, according to ratings agency Moody's. Now, as you'll no doubt recall, the market for these securities seized up back in July and hasn't really opened up since. (Incidentally, that's one of the reasons why mortgage rates in the UK aren't really coming down, despite the fall in the interbank lending rate and the base rate. The banks and building societies still can't sell on the loans they make.)

So who is buying all these Spanish mortgages? Well, it seems they are being used as collateral for loans from the European Central Bank. The ECB accepts AAA-rated securities as collateral, apparently unaware that the label AAA carries a lot less weight than it used to.

This has helped Spanish banks avoid the fate of Northern Rock. The Rock, you'll no doubt remember, was brought down when it was unable to sell on its mortgages, which meant it was unable to pay back the money it had borrowed to write them in the first place. It seems that Spain's banks, rather than get a very public loan from the ECB, have instead been quietly dumping their mortgage books onto it.

Of course, no one's overtly admitting to this. And at the moment, the consequences of all this aren't entirely clear. But if the ECB is holding a lot of mortgages as collateral against loans to Spanish banks, and the Spanish property market crashes as badly as say, the US, you do have to wonder just how much of that money the ECB is going to get back. How will German taxpayers feel about bailing out the Spanish? I don't know. But I can't wait to find out.

Ilargi: The title of the following article is just another way of saying: here come the pink slips and mass unemployment.

Corporate America braced for recession
Leading US companies are shifting into recession mode and preparing to cut costs, freeze hiring and reduce capital spending as they brace for an economic slowdown, senior executives and industry experts said. Their concerns are likely to be reinforced by the International Monetary Fund, which slashed its forecast for US growth and warned that no country would be completely immune from what it termed a “global slowdown”.

Separately, a US study due out today shows that chief financial officers’ views of the economy are the most pessimistic in nearly four years.

Business leaders say rising oil prices, sagging consumer confidence and the on-going credit crunch are prompting them to put in place contingency plans to protect against the expected economic downturn. “We have a number of levers we can pull in terms of capital and costs,” said Andrew Liveris, chief executive of Dow Chemical, which reported a halving in fourth-quarter earnings. “We have been buttoned down since July with a total clampdown on costs and capital expenditure.”

Jim Owens, chief executive of Caterpillar, the world’s largest maker of construction equipment and a company regarded as a gauge of national economic health, last week warned of “anaemic growth in the US”. Multinationals are counting on growth in overseas demand and the weak dollar to offset domestic weakness.
A leading US management consultant said that over the past few months, his firm had been “deluged” with calls from smaller, domestically-focused companies asking for advice on how to deal with a recession.

“They all want to know what to cut and what to hold back if the economy hits the buffers,” he said.

Ilargi: I have repeatedly talked about the role of the 1999 Glass-Steagall repeal in creating the market mess we are in. Once commercial banks could also be investment banks, and much more, they became both the house and the player at the crap table. It took them less than 10 years to drain the entire world economy into oblivion. Reinstating Glass-Steagall should be high on the political agenda, if we are ever to have a functioning economy again.

The Great Credit Unwind of 2008
The US' current account deficit (nearly $800 billion) has been recycling into US Treasuries and securities from foreign investors. Up to this point, American markets were an attractive place to put one's savings. The dollar was strong, and the stock market had a proven record of profitability and transparency. But since President Bill Clinton repealed Glass-Steagall in 1999, the markets have been reconfigured according to an entirely new model, "structured finance".

Glass-Steagall was the last of the Depression-era bulwarks against the merging of commercial and investment banks. As a result banking has changed from a culture of "protection" (of deposits) to "risk taking", which is the securities business. Through "financial innovation" the investment banks created myriad structured debt instruments which they sold through their Enron-like "off balance" sheets operations (SIVs and Conduits).

Now, trillions of dollars of these subprime and mortgage-backed bonds---many of which were rated triple A---are held by foreign banks, retirement funds, insurance companies, and hedge funds. They are steadily losing value with every rating's downgrade.

Ilargi: Mish has a good one for those of you who haven’t yet clued in to the non-recourse loan issue. Yes, people walk away, and no, they do not go bankrupt because of it. It shatters their credit rating, but that may not be their prime concern.

By the way, Mish also had a story yesterday on banks’ non-borrowed reserves. We had that last week, we trumped him there, and Minyanville. No gloating here, though. Humility is our middle name.

You Walk
There is an interesting new business that just started up January 1, 2008. The business is called You Walk Away.

Is Foreclosure Right For You?
• Are you stressed out about your mortgage payments?
• Do you have little or no equity in your home?
• Have you had trouble trying to sell your house?
• Is your home sinking under the waves of the real estate crash?
• What if you could live payment free for up to 8 months or more and walk away without owing a penny?

Unshackle yourself today from a losing investment and use our proven method to Walk Away.

I spoke with John Maddux a "senior advocate" with You Walk Away (YWA) about the business. As one might expect it is booming. For $995 one receives a half hour of legal counsel where individual strategies are mapped out and all the laws pertaining to recourse vs. non-recourse loans as well as judicial procedures are explained to the customer. YWA also files the necessary legal papers to stop mortgage companies from calling and informs you immediately of how many days you will be able to stay in the house for free. Should the lender take longer to process the documents, YWA will keep you informed of any extra time.

With the amount of money at stake, the fee seems reasonable for the services provided.

Maddux informed me that YWA is currently operating in the state of California only, but Nevada and Florida will soon be coming online. Eventually they expect to be nationwide.

FBI probes 14 firms for possible subprime fraud
The investigation, in cooperation with the SEC, looks at companies from mortgage lenders to financial firms that bundle home loans into securities sold to investors.

The Federal Bureau of Investigation on Tuesday said it is investigating 14 companies for possible fraud or insider trading violations in connection with loans made to risky borrowers - and investments spun off of those loans. Agency officials did not identify the companies under investigation but said the wide-ranging probe, which began in spring 2007, involves companies across the industry - from mortgage lenders to financial firms that bundle home loans into securities sold to investors.

The FBI is working in conjunction with the Securities and Exchange Commission, Neil Power, chief of the FBI's economic crimes unit in Washington, said during a briefing with reporters. The development comes as authorities in New York and Connecticut investigate whether Wall Street banks hid crucial information about high-risk loans bundled into securities that were sold to investors.[..]

Morgan Stanley, Goldman Sachs Group and Bear Stearns all disclosed in regulatory filings Tuesday that they are cooperating with requests for information from various, but unspecified, regulatory and government agencies. Officials at the companies either declined to comment or could not immediately be reached

Goldman Sachs hit with fresh legal action relating to sub-prime fallout
The legal fallout from the sub-prime crisis in the United States continued yesterday as Goldman Sachs conceded for the first time that it was the target of legal action and the FBI opened an investigation into 14 companies involved in America’s mortgage bond industry.
Morgan Stanley revealed yesterday that it, too, was the subject of new lawsuits, relating to the bank’s role in underwriting secondary share offerings for New Century Financial and Countrywide, the US mortgage lenders.

Goldman Sachs reported in its annual report, published yesterday, that it had received requests from regulators for information relating to high-risk sub-prime mortgages and related investment products that it had helped to package, such as collateralised debt obligations, which are pools of bonds and other asset-backed securities.

One case involving Goldman is being led by Andrew Cuomo, the New York attorney-general, who has issued subpoenas to the main Wall Street firms as he seeks to determine whether they knew more about the risks of sub-prime mortgage bonds than they let on.

Fed lends $30-billion to cash-strapped banks
The Federal Reserve, working to combat effects of a serious credit crisis, said Tuesday it had auctioned $30-billion (U.S.) in funds to commercial banks at an interest rate of 3.123 per cent. It marked the fourth in a series of innovative auctions the Fed began last month in an effort to provide cash-strapped banks with extra reserves. The Fed's hope is that the increased resources will keep banks lending and prevent a severe credit squeeze from pushing the country into a recession.

The latest auction results indicated that the Fed's program is having success. The 3.123 per cent interest rate for the $30-billion in short-term loans marked the lowest rate of any of the four actions. The previous auction resulted in a rate of 3.95 per cent and the first two saw rates at 4.65 per cent and 4.67 per cent. Bids for the current auction were received on Monday. The sharp drop in rates had been expected. Analysts said it reflected the fact that the central bank cut a key interest rate last week by three-fourths of a percentage point, the biggest reduction in more than two decades.

Mr. Bernanke has said that the current auction process will continue for as long as needed to make sure that banks have sufficient reserves. He said the auctions might become a permanent addition to the Fed's “tool box” of strategies it can employ when credit markets have seized up. But he said before that occurs, the Fed would seek comments from the public on how the auctions should be designed so that they can be best used by financial institutions.

For Fed, It's Not Clear-Cut
Ben S. Bernanke and his colleagues at the Federal Reserve will decide today whether to cut interest rates for the second time in a week -- and find themselves in the difficult position of having either to risk cutting rates too much or risk disappointing financial markets and spurring more panic.

Futures markets are placing a 77 percent chance on a rate cut of half a percentage point or more. If the Fed follows through and gives financial markets what they expect, it would help stimulate a slowing U.S. economy with the steepest cutting of interest rates in a single month in the modern history of the Federal Reserve. But it also would leave the Fed with less flexibility to cut rates further if the economy gets worse. There have been some tentative signs lately that the economy is not slowing too seriously, including a report yesterday of strong sales of durable goods.

If, on the other hand, the Fed cuts rates by only a quarter percentage point or not at all, it could spook financial markets and prompt renewed worry that the central bank is not responding to the risk of a recession aggressively enough. "The Fed is in a tough spot," said Ethan S. Harris, chief U.S. economist of Lehman Brothers. "They want to look aggressive, but it's hard to keep up with the markets, which keep pricing in even more aggressive rate cuts."

Fed quiet on bond insurers rescue
In autumn 1998 when hedge fund Long-Term Capital Management was imploding, William McDonough, then president of the New York Federal Reserve, pulled the heads of Wall Street banks into an oak-panelled Fed meeting room – and bullied them into organising a collective bail-out.

The meeting is renowned since it quelled the LTCM storm. With Wall Street now facing the threat of a new financial calamity – this time from the embattled bond insurers – some bankers are wondering if the Fed could repeat its trick.

In public, at least, it would seem not. In recent days, it has been Eric Dinallo, New York Superintendent of Insurance, who has spearheaded efforts to cut a deal, by approaching 13 large investment banks and issuing public statements on the matter.

By contrast, the New York Fed, and its president, Tim Geithner, have been notably silent, avoiding comment on the issue altogether. This stance is partly because official responsibility for overseeing the bond insurers rests with the state insurance regulators, not the Fed. Thus the insurance regulator from Wisconsin, which regulates Ambac, one of the two biggest bond insurers, also took part in the meeting with banks.

Bankers believe the Fed also wants to avoid derailing private sector efforts to resolve the crisis, either by stepping in too early or forcefully. “LTCM means everyone is now looking to the Fed but the Fed does not want to give the impression that it will just sort things out,” says one former US official, who points out that the “impetus must come from the private sector”

Banks seek value in monoline rescue plan
With the New York insurance regulator pushing for a deal to bail out the bond insurers, or monolines, the banks approached to stump up the cash will be working hard to see where value lies for them.
It is understood that Eric Dinallo, the New York insurance superintendent, is pushing for $10bn-$15bn to prop up the troubled sector.

Some analysts and bankers believe that figure is too high. Compared with Merrill Lynch’s $3.1bn write-offs linked to monoline hedges, $15bn from all banks may look fairly small, but Merrilll’s contracts were mostly with ACA Capital, the bond insurer closest to insolvency.

Writedowns from ratings downgrades to other monolines would not be half as painful, bankers insist. Geraud Charpin, analyst at UBS, believes an industry-wide downgrade from AAA to AA would lead to $10bn in total writedowns at the most for banks on monoline-guaranteed structured bonds such as mortgage-backed debt.
Standard & Poor’s said this month it expected total after-tax losses for the monoline industry from mortgage-backed bonds and the more complex collateralised debt obligations to be $13.6bn.

S&P’s assessment could worsen, particularly since its estimates of losses had grown by 20 per cent, or almost $2.5bn, since its previous examination in mid-December. S&P said this growth was not significant in terms of individual companies’ capital strengthening plans. A number of monolines have talked about raising $1bn-$2bn of new capital, which across the eight or nine most important groups leads to the proposed $10bn-$15bn.

Some see this figure as inadequate. Independent Strategy, a London-based research house, believes closer to $140bn is needed

Bond Insurer Default May Roil Default Swap Market
A default by a bond insurer such as ACA Capital Holdings Inc. may trigger a "settlement disaster" for credit-default swaps because of uncertainty over how to make good on overlapping contracts, according to Bank of America Corp. analysts.

Some investors including Merrill Lynch & Co. bought credit- default swaps from financial guarantors to guard against losses on mortgage-linked securities, and then later bought protection for the possibility those guarantees may be worthless. The structure of such contracts means some may not be able to redeem their hedges in the event of default, the analysts wrote. "We see huge potential problems for settling CDS contracts," the analysts, led by Glen Taksler in New York, wrote in a Jan. 25 report. "Even a credit event for a relatively small monoline, such as ACA, could have significant implications."

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt or to hedge against losses. The buyer gets face value in exchange for the underlying securities or the cash equivalent should a borrower default. A 2005 supplement to industry documents made it possible for investors to use credit-default swaps to hedge against both losses on the debt sold by bond insurers and losses on securities that the insurers guaranteed, Taksler said.

Merrill Lynch bought $19.9 billion in credit-default swap protection from financial guarantors to protect against losses on mortgage-linked securities known as collateralized debt obligations, the New York-based firm disclosed in a statement last month. The bonds and loans underlying the securities have been defaulting at a record pace. The possibility that the bond insurers themselves fail prompted Merrill to buy an additional $2 billion of protection as of Dec. 28 that would pay it if an insurer defaulted, according to the company's disclosure.

An actual default could cause problems for Wall Street in determining who can collect on such hedges and how much, the Bank of America analysts wrote in their report titled "Monolines: A Potential CDS Settlement Disaster?"

Societe Generale Board Faces Mounting Pressure to Drop Bouton
French President Nicolas Sarkozy said this week that senior executives at Societe Generale should face "consequences," and Jean Arthuis, a former finance minister and head of the French Senate commission on finance, said Bouton has "no choice but to resign." Sarkozy is a president "associated with money and finance, so this story will have a terrible impact on his popularity," said Jean-Marc Lech, co-chairman of Paris-based polling firm Ipsos SA. "Bouton is out."

The trading shortfall, more than four times the $1.4 billion of losses by Nick Leeson that brought down Barings Plc in 1995, forced Bouton to turn to shareholders to raise 5.5 billion euros in a stock offering and triggered speculation the 144-year-old bank will be taken over. The loss, announced on Jan. 24, overshadowed the 2.05 billion euros in subprime-related writedowns the French bank also disclosed that day.

BNP Paribas SA, the largest French bank, is holding preliminary internal discussions about a possible bid, the Wall Street Journal reported yesterday, citing a person familiar with the talks. A spokesman at Paris-based BNP Paribas, which tried and failed to buy Societe Generale in 1999, declined to comment.

Prime Minister Francois Fillon told Parliament yesterday that the government will ensure that Societe Generale remains in French hands. "Societe Generale is a great French bank and Societe Generale will remain a great French bank," Fillon said.

UBS Reports Record Loss After $14 Billion Writedown
UBS AG, Europe's largest bank by assets, had a record loss after raising fourth-quarter writedowns on assets infected by U.S. subprime mortgages to $14 billion. The Zurich-based bank announced today a net loss of 12.5 billion Swiss francs ($11.4 billion) for the fourth quarter, almost double the median estimate of analysts surveyed by Bloomberg. The annual shortfall was about 4.4 billion francs, the first since UBS was created through a merger a decade ago.

UBS fell as much as 4.1 percent in Swiss trading as its loss exceeded those reported earlier this month by Citigroup Inc. and Merrill Lynch & Co. The collapse of the U.S. subprime mortgage market has led to more than $130 billion of losses and markdowns at securities firms and banks since June.

"The damage is enormous," said Dominique Biedermann, director of Ethos Foundation in Geneva that holds UBS shares worth about 80 million francs and has called for an independent audit of the bank's controls. "It wipes out profit and shows that an inquiry is needed to make sure it doesn't happen again, and eventually whose responsibility this is."

The bank increased markdowns directly linked to the subprime market to about $12 billion from the $10 billion it forecast in December and said an additional $2 billion of writedowns are for other U.S. residential mortgage securities. "Weak" debt-trading revenue and the sale of securities at a loss to cut risky assets contributed to the results, UBS said.

"Value declines have extended beyond just subprime-related exposures, to new areas, for which we do not yet have disclosure on exposure size," Jeremy Sigee, an analyst at Citigroup, said in a note to clients. "The recently bolstered capital base remains vulnerable to further erosion.”

Crisis inflicts fresh wounds, UBS cut deepest
Fresh writeoffs at big European and Japanese banks on Wednesday threw the investor spotlight firmly back onto the credit crunch after days gazing at Societe Generale's stunning losses, which it blames on a junior trader.

With the Federal Reserve expected to cut interest rates for the second week running, Swiss bank UBS illuminated the depth of the crisis -- unveiling $4 billion in new writedowns tied to the U.S. subprime mortgage meltdown, dragging it deep into the red for the year.

UBS has now written off a total of $18.4 billion on the back of a credit crisis that has caused over $100 billion in losses worldwide and forced UBS and others, such as Citigroup bank posted a 12.5 billion Swiss franc ($11.45 billion) loss for the last three months of 2007 and a full-year loss of 4.4 billion francs.

Newspaper reports said subprime losses at Japan's Mizuho Financial Group Inc may have ballooned to as much as $2.8 billion, potentially forcing the bank to cut its full-year forecast for a second time. Japan's 2nd-largest bank, which reports results on Thursday, may have to inject 200 billion yen ($1.9 billion) or more into its faltering brokerage unit, the Nikkei business daily said

Private investors take the money and run
Private investors withdrew the highest-ever amounts from investment funds last month and switched into cash and low-risk savings. The figures have left the investment industry braced for more dismal news when the figures for this month are totted up.

The combination of tumbling markets, fears about recession and the Northern Rock affair saw net outflows from retail funds reach £377.4m in December, turning the last quarter of 2007 into the investment industry’s worst on record, according to the In-vestment Management Association.

The December outflows follow £332m in net redemptions from funds in November, breaking a 15-year history of net inflows into UK investment funds from individual savers.

Central bankers are fiddling as Rome burns
David Blanchflower, the leading dove on Britain's Monetary Policy Committee, has broken ranks in a rare outburst of dissent, rebuking colleagues for waiting too long to cut rates as the economy slows abruptly.

"Worrying about inflation at this time seems like fiddling while Rome burns," he said, resorting to language rarely heard in the bland world of central banks. "The evidence from the housing market, and especially the commercial property market, is worrying. Consumer confidence is low in the UK. Interest rates are restrictive at their current levels and that is why I have been voting for cuts," he said.

The comments came as the International Monetary Fund tore up its growth forecast for 2008 and abandons a quarter-century doctrine of fiscal orthodoxy. It warned that damage from the credit turmoil has reached the point where governments may need to ignore the rule book and resort to radical measures. "What is clear is there will be a serious slowdown," said Dominique Strauss-Kahn, the IMF's managing director. "I don't think we would get rid of the crisis with just monetary tools. A new fiscal policy is probably an accurate answer to the crisis."

Britain has far less scope for fiscal stimulus than the US or most of Western Europe. The UK budget deficit is already above the EU's legal limit of 3pc of GDP. The current account deficit has reached 5.6pc of GDP on a quarterly basis, by far the w orst of the big G7 economies. Any move to rescue the economy will have to come chiefly from lower interest rates

Royal Bank set for further writedown related to bond insurer, CFO says
Royal Bank of Canada (TSX:RY) says it will write down the full amount of its exposure to a U.S. bond insurer this quarter, a liability valued at $104 million months ago. The chief financial officer of Canada's biggest bank told a U.S. banking industry conference Tuesday that the Royal will write off in the current quarter the exposure to the unnamed insurer, believed to be troubled ACA Capital Holdings Inc.

The blue-chip bank's exposure to the bond insurer was disclosed in its last quarterly report on Nov. 30. At that time, the bank took a writedown of $357 million pre-tax, or $160 million after tax and employee bonus reductions. Since then, the bond insurer has run into further trouble which forced Royal Bank to write down the rest of its insurance value, CFO Janice Fukakusa told the Citi Financial Services conference in New York.

Canada won't escape U.S. woes, TD chief says
Toronto-Dominion Bank chief executive Ed Clark says a significant slowdown is coming, and the Canadian economy will not decouple from the United States. Speaking to a financial services conference in New York, Mr. Clark spoke positively of the domestic banking environment.

“I always say to people if you don't buy me, buy one of the Canadian banks,” he told the room of investors. “It's been a terrific story in Canada.” But he added Canada's economy will not likely escape troubles south of the border.
“Our outlook is that Canada will not decouple itself from the United States,” he said, adding there will be an impact on the bank's business.

“We're sitting here, the guns of August, waiting for the war to begin and anticipating it,” he said. “... Over a year ago, I announced it was coming, and all I did was end up cutting expenses probably a year in advance. But I do think this time it really is coming, and we are going to have a significant slowdown.”

Canada: Firms' concern over economy grows, ratchet down investment plans
Business confidence in the Canadian economy has sunk to a nine-year low and many firms have cut back on investment plans, a survey by the Conference Board of Canada suggests. Surprisingly, the group's winter index of business confidence is largely unchanged in the fourth quarter of 2007 as an all-time-high percentage of 1,000 firms polled in December reported operating at a high capacity during the period.

But the outlook turned decidedly gloomy when the subject came to prospects for the next six months, when many are predicting the Canadian economy will slump as the U.S. heads to, or close to, recession. Expressing concerns over the high Canadian dollar and weak demand in the U.S., only 8.3 per cent said they believe overall conditions will improve, compared with 33 per cent who thought it would worsen. The 8.3 per cent is the second-worst result since 1990, when the Canadian economy was in recession.

As well, the share of firms who expected their profitability to improve over the next six months fell 17.2 percentage points - a historically large number for the Conference Board survey.


Anonymous said...

Hi ilargi, what is your opinion on how the credit crunch will affect Eastern Europe relative to say Euro-zone? I'm writing from Poland and I think that our relative underdevelopment has a positive effect, in a sense that our banks did not participate in the subprime madness, so, luckily, no losses here. On the other hand, many banks here are owned by Western banks (today it was announced that Citi put a Polish bank on sale). Also, we will be affected should recession occur in Germany as most our exports go there.

Anonymous said...

Hi Guys,

Your Roundups from the Drum were my first foray into reading financial news.

I therefore don't have any historical analysis to base my sense of a quickening and more threatening pace to these Rattles.

Are you feeling that same sense, that quickening at the crest of a wave?


Anonymous said...

Hey Stoneleigh & ilargi, new blog's lookin' good.

An aside (sparked by the pieces on Canada), but any input would be much appreciated:
My father owns some condos (not fully paid off) in Woodstock, Ontario where the new Toyota plant is under construction. He believes this assures a rising property value, with the intention to sell in 5 - 7 years when he retires. In the meantime he is collecting the rent. I don't want him to get burned but it sure is getting warm with housing price corrections looming and southern Ontario's dependence on the U.S. I don't know what to tell him!

Ilargi said...


Data on Eastern Europe are sparse so far. What is clear in general is that Poland, since its inception in the EU, has relied heavily on Brussels and the western European private sector for investment. That could go down quickly.

I'm not so sure Polish banks are not invested in commercial paper and securities that have mortgages in the US, UK, Spain, France as collateral. I can't prove it right now, but I am very suspicious. It has been the game of choice all throughout the financial world.

I would also suspect government funds as well as pension- and mutual funds all over Eastern Europe to be invested in CDO's and the like, which will go down to being worth pennies on the dollar. Plus, housing prices in the region have probable gone up substantially, like in most other places. The problems we face are not in subprime mortgages, but in a far wider range of investments, basically in any loan that has been issued the past decade. They have all been used to borrow ten times their value.

The credit crunch will hit heavily in investment and development. It will get much harder to build large projects. Much of the overall infrastructure will remain as it is now, with few new additions, and even huge looming problems in maintenance. I hope the Polish are wise enough to keep gardening and growing as much of their own food as they can. In that respect they are likely better off than the West, just as the Russians were.

Greyzone said...

Someone asked if they sense a quickening here. That's my impression but I have to warn everyone not to yield to an emotional basis when trying to assess these things. The awful economic mess of the 1978-1982 period brought much of this same sense of quickening, as if it would all come apart and then it didn't.

What I learned from living through that is that people will tell almost any lie to themselves rather than face the truth. The truth is that the US was bankrupt decades ago but we've been lying to ourselves and the rest of the world. And rather than face the truth, the entire world has been playing the same game, accepting these lies, in exchange for a shot at their piece of the pie.

This worked, in part I believe, because the resource base was constantly expanding, including energy. Now we are facing the possibility of true contraction.

This entire thing may come down suddenly and personally I am preparing as if it will. But on the other hand, I have to respect the possibility that it may go on far longer than any of us are willing to admit precisely because of our species-wide willingness to lie to ourselves and each other. That may seem incredible but what happened in the early 1980s seemed incredible too at that time.

Do not underestimate the ability of homo sapiens to lie to itself.

Ilargi said...


The quickening you talk about exists, I think, mainly in the coverage of the crunch by the mainstream press. We have been covering this far longer than they have, and much better too, if I may say so myself.

We were forced out of The Oil Drum for putting things in the plain stark terms that we feel they simply need to be put in. TV and newspapers have been cheerleading the wonders of the economy until now, oblivious, at least in their writing, to reality.

They still do that wherever they can, painting a picture of markets saved by Fed cuts and that sort of nonsense. And that needs to be balanced. Because this will get very ugly, and going into that completely unprepared is not looking like a good idea.

There is something profoundly cynical and ironic about the fact that we need to be there to inform people, while not making a penny doing so, because highly paid journalists refuse to say what is really going on. I think the mainstream media should be held responsible as accomplices in the greatest robbery of all time.

Anonymous said...

While I'm predisposed to agree with Ilargi and the reality of what underlies the current situation, my brain tends to resist that view and agree with GreyZone. I've asked this question before and the answer still seems to be a bit up in the air: What makes this situation different from those of the past? While I have no idea how we can avoid a major breakdown of the economy and financial system, yet it seems that every time the precipice is approached, the Fed or a common wealth fund, or a white night investor or a buyout comes to the rescue and saves the day. It seems like the whole system is fungible in that, if it can't work one way, they'll just change the rules and make it work another way. So this makes things very confusing.
Meanwhile, money is evaporating from the face of the earth at a rapid pace at the moment. While one may not be able to be convinced that things are going to collapse imminantly, it's even harder to find any evidence that things are going to get better any time soon. For someone like me who has no patience, the waiting to find out what actually happens is excruciating.

Ilargi said...


Last April, I told a group of friends in Montreal that home prices in the city would come down by 50% within two years. Needless to say, they did not believe one letter of that. The arguments have always been along the lines of "we don't have subprime here". And when I would explain that subprime is not the problem, but merely a media word disguising a far bigger issue, the brains would switch off. They still are. My friends will get burned.

A few months ago, someone said that Canada is fine, since "housing prices went up 12,5% in 2007". My reaction was that that number indicates a problem, not something positive. Price increases like that occur in bubbles, not in healthy economies.

I refrain from doling out investment advice here as much as I can, I see our role as providers of information, which people should use to draw their own conclusions.

Still, I doubt that Toyota plant will live very long: car sales in the US and Canada will come crashing down disastrously when there no longer is credit available for car loans. Steeply rising unemployment and cliff-diving real estate values will leave the man in the street having to fight to meet daily needs, and cars will become luxury items, not everyday purchases.

Real estate prices in Waterloo won't be spared.

souperman2 said...

Ilargi - really like when you do a quick comment after each story link you post on the home page.

Funny add in the local paper the other day that said in bold;

your way out of debt

The local fertility center is looking for donors. I about died laughing when I say this.

Ilargi said...

Hey Souperman, good to see you.

I'm glad you like the little comments, thanks. I like doing them too, a freedom now available, away from TOD. This format we have here has to be perfected still, but it makes me feel much better already than TOD. I think they should be an added way to explain matters a bit more, why we put up the articles we do, and what we feel is the essence in them.

One thing: my comments always precede the article and links, they don't follow them.

Greyzone said...

To make my point, look at the rate cut just made today. In the 25 minutes following the rate cut, the market went from -40 to +80 for the day (as I write this). What really changed? Nothing, except the Fed is just begging harder for people to go into debt deeper to save the bankster class.

Ultimately the repercussions will not be avoided by our civilization. But some people believe that they personally might avoid the repercussions, so the lies continue.

Ilargi and Stoneleigh tell it like it is, and I agree with their assessments overall. The huge variable is human psychology, which is so malleable, distorted, and twisting that it's hard to be sure of anything where human psychology is involved.

Frankly though, I wish we'd get this crash over and done with because that alone would shock some sense into at least a few people.

Anonymous said...

I think each rate cut from here will have less and less effect on the market psychology. I give the effect of this cut about 1 week or less to wear off. Then it will depend on the tone of the news as to whether the market goes higher or lower again.
The Fed indicated further weakness in employment, so I wonder what if anything they saw in this Friday's numbers.
Strike one for the markets and Fed watchers, they have this Fed pretty well figured out.

Farmerod said...

Webjazz said "While I have no idea how we can avoid a major breakdown of the economy and financial system, yet it seems that every time the precipice is approached, the Fed or a common wealth fund, or a white night investor or a buyout comes to the rescue and saves the day".

The DOW was at 343 points on July 1, 1929. After the crash, it did indeed recover (in NOMINAL terms) to that level ... in 1954. So to say that the FED or a combintion of white knights has always saved the day, I would argue, can only be attributed to perhaps the last 79 years. Which might seem like forever, but isn't. To people who study these phenomenon, though, it's just part of the cycle.

Stoneleigh said...

Hi Webjazz,

We've become very used to virtually infinite substitutability, but everything has its limits. We have pushed so many of our critical systems to the edge by continually trimming back redundancy (and therefore resilience) in the name of efficiency. At the same time, our subsystems have become ever more tightly coupled, so that a failure in one area is far more likely to spill over into another. IMO the risk of cascading system failure is now acute.

I would strongly recommend a recent TOD article - The Failure of Networked Systems - for a more in-depth look at finance from a systems perspective.

Anonymous said...

Nice blog!

Some argue the US stock market will continue to be propped up because the wealthiest 10% own most of it… till it isn’t possible anymore. That would be when they have completely migrated to the Chinese exchange perhaps? Or gold. Or a new currency.

The quip “markets can remain irrational longer than you can remain solvent” comes to mind.


goritsas said...

webjazz said "I give the effect of this cut about 1 week or less to wear off."

I give it about 4 hours or less. This rate cut was a done deal well before it actually happened. It may be the most telegraphed rate cut in the post WWII era. It had already been discounted and will not provide much in the way of upward pressure.

As for each rate cut having less effect, if you mean in propping up the financial markets, I would agree. In terms of sentiment, there may be far more out there seeing this action not as a positive effort on the part of the Fed to stem the tide but an outright admission that deflation is not just happening but it is happening fast and it is totally outside the control of the Fed to prevent that from happening.

Stoneleigh said...

The gap between the 3% Fed target rate and the market rate (3-month US treasury bill yield), which the Fed rate trails, is still significant. Therefore (IMO) the Fed still has more rate cutting to do.

The danger with rapid rate cutting is that instead of being seen as a panacea, it comes to be seen as evidence of Fed desperation. If market participants already on the verge of panicking see something that reinforces that impulse, then a much larger and self-reinforcing decline can set in, which is exactly what I would expect to happen at some point. Although no one can tell you exactly when such a thing might take on a life of its own, my concern is that it could be relatively soon. There could also be relatively little notice, meaning that waiting for incontrovertible evidence before taking evasive action may mean waiting too long to be able to get out at all.

Many players are hanging on, trying to wring out every last penny of profit on the assumption that they'll be able to get out before a rush for the exits bars the way. That's a dangerous strategy though. The potential gains don't look great so late in the game, but the potential losses could be huge.

Anonymous said...

MBIA, Ambac May Each Lose $11.6 Billion, Ackman Says


FGIC Insurer Rating Cut AA by Fitch After Failing to Raise Cash

I think we may need another rate cut.

Anonymous said...

“Between Greenspan and Bernanke, we may see the Federal Reserve fail. We’ve had three central banks in America. The first two failed. This one’s going to fail too.”


Anonymous said...

I knew funds in money markets weren't safe, and not to go over 100k w/ FDIC insurance. Now that FDIC funds aren't safe nec. either I've got a question.

What happens to your stocks & bonds if your broker goes under? If your cash isn't safe with them, are your T-Bills?

Thanks for the money / credit cycle link. Best discription of money creation I've read.

Anonymous said...

Thanks for the reply ilargi. I was trying to verify that I am drawing the right conclusions, as I'm unfortunately not far removed from Econ*101. I didn't mean to fish for investment advice, but I don't have complete confidence in my understanding of economics yet and would be loathe to convey an inaccurate view under the guise of "good advice".

Anonymous said...


Anonymous said...

Goritas wins a cigar for four hrs or less on the effects of the rate change and on Market Ticker, Genesis gives a good reason for that I think. Thanks Stoneleigh for the link to that blog.

What does everyone think about that bit from the 'In the land of Bubbles' article that the next bubble of 'Alternate energy' is already formed and will save the day, so to speak? It seems to follow how I have seen things in that there seems to have been a lot of private moneyed companies forming in the past few years and only lately that there has been much publicly available companies to invest in.

If this is what is happening I think there could be some money to be made for a year or two before that one would blowup. Enough maybe to buy that 5 acre idyllic Cigarette tree orchard in the Candy Rock Mountains, you know, the one where the beer runs free.

(Sorry about the above two miss-posts , my elbow or mind must have slipped.)

The Lizard said...

We were forced out of The Oil Drum for putting things in the plain stark terms that we feel they simply need to be put in.

You were forced out of The Oil Drum because the Techies there need to assert that Peak Oil is all about holes in the ground and nothing else.

Your data clouded their data, and its their sandbox.