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Topic: Please Don't Put Garbage in the Federal Reserve (Read 2541 times) |
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Walter Watts
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Please Don't Put Garbage in the Federal Reserve
« on: 2008-03-18 16:35:15 » |
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There was a very eye-opening open letter in today's Wall Street Journal from Andy Beal to Ben Bernanke. It was put in as an ad, so I can't link to it.
Here's the text, including the original bolding and caps.
To: Mr. Ben Bernanke
Please DON"T PUT GARBAGE in the FEDERAL RESERVE
"Dear Mr. Bernanke:
I was afraid that if simply wrote you this letter you might never see it. I thought this message was important and worthy of effort to attract your attention.
I am sure that you are hearing from the Wall Street crowd about how stupid the marketplace is because the market won't buy all the great loans that Wall Street has produced and how stupid or illiquid the market is because AAA RMBS are being offered at 60 cents on the dollar with no takers. First mortgage syndicated bank loans are offered for 70 cents on the dollar and Wall Street simply cannot believe buyers aren't standing in line to buy.
Consider for a moment that many corporate bonds are trading at premiums above par value. How can this be? If the market is so stupid and there is no liquidity, who is buying those good corporate bonds at 105 cents on the dollar??
Many AAA mortgage bonds are actually extremely high risk because of little-considered nuances in the hundreds of pages of trust indentures and servicing agreements. In addition to widely understood mortgage default and other concerns, these contracts permit the loan servicers to advance payments on behalf of defaulted homeowners for years and years and years at interest rates of 12% and more. These "servicer advancements" put funds back into the trust to be paid out to junior security holders. The "servicer advances" are subsequently repaid FIRST from foreclosed home sales. Therefore, foreclosed home sales may result in little or no proceeds, or even a liability, to the AAAs. This mechanism effectively transfers funds that really should belong to the AAA securities to junior securities. Servicers that own junior securities are incredibly motivated to drag their feet resolving defaulted loans, which results in great loss to the AAA holders. This is not a misprint: Defaulted first mortgage home loans may become a net liability, not an asset, to some of the AAAs. This is still not widely understood.
Simlarly, "first mortgage syndicated bank loans" issued since about 2004 are routinely garbage and not traditional first mortgages on anything determinable at all. Many, if not most, of these loans permit the borrowers to sell the collateral, keep the money, and reinvest in almost anything they want to, including stock, junk bonds, defaulted loans, or perhaps ice cream cones. Many, if not most, of these syndicated bank loans also permit UNLIMITED amounts of additional swap debt that is either senior to or of equal priority with the syndicated loan. These provisions are also no widely understood and are sometimes even disguised in the loan documents.
Falling prices for these type assets reflect people finally reading the hundreds of pages of fine print, not a problem with the marketplace. Prices should continue to fall as people wake up to the true nature of these assets. Many "last out" AAA RMBS are still overvalued at 60% of par. Many first mortgage syndicated bank loans are overvalued at 70% of par. Smart buyers won't touch any of this garbage at any price remotely close to what it originally sold for.
The Fed may be walking on very slippery ground. My fear is that the Fed has little more undersanding of the stench of the garbage than many of the current owners who bought all these debt instruments issued about 2004.
Is the US Government taking some of this garbage on its balance sheet as collateral for Federal Reserve loans? The AAA rating means absolutely nothing. Garbage is garbage even in a fancy wrapper that the ratings agencies love.
I do not pretend to know how the Fed is collateralizing loans. Perhaps I am naive in underestimating the insightfulness of the Feb, but many intelligent people were caught up in complacent decisions involving these assets. I know nothing more than what I read in the media about collateral for these Fed loans, but it sure sounds troubling.
Sincerely,
Andy Beal
6000 Legacy Drive
Dallas, Texas 75024
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Walter Watts
Tulsa Network Solutions, Inc.
No one gets to see the Wizard! Not nobody! Not no how!
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Hermit
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Re:Please Don't Put Garbage in the Federal Reserve
« Reply #1 on: 2008-03-18 18:10:04 » |
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Thank-you for the work Walter.
At this point I am not sure that it is really relevant what the Fed feeds on. It's been GIGO for so long (with the Fed being one of the largest producers) that the brown stuff is spread pretty evenly all over everything.
European bankers have been meeting 24x7 since last week to discuss how to try to step out of the way of the $ 50 to 60 Trillion or so of maturing derivitives that it seems will inevitably be defaulted in the next few months - unless the International central bankers print money as if there is no tomorrow. Which would, of course, make all securities practically worthless anyway. Even so, this, conservative bankers are saying, might be the "least worst" option.
Nobody has a clue what to do about this slow motion catastrophe - largely predictable since the M3 was buried and the stabilization fund began intervening ever more wildly after 9/11, making historic investment strategies unusable. At the present levels the pending defaults represent some 5 or 6 years of US GDP and we have all seen what borrowing a few percent of that to pay for our dear leader's wars has done to the global economy. Virtual money or not, there is no way to simply paper this mess over. Freezing the market won't prevent a melt-down, because the probable defaults represent only 10 to 15% of the outstanding derivatives, but a freeze would effectively prevent all International settlements. Whatever happens now, the impact is expected to be massive, devastating and international. European Banks are expecting a walloping as the American investors default - which won't do the Euro any good at all.
Unless you can afford a farm with good water supplies, bought for cash, in a Mennonite or Amish area of upper New York State, Connecticut or Pennsylvania, which with the financial, environmental and fuel issues all coming to a head might be the most sensible investment of all right now; I recommend staying in gold and moving speculative investments to Dubai, China and South America (recognizing that with what is likely coming they may be lost, but that if they survive they will probably recover and may add value better than other markets)*.
Kind Regards
Hermit
*Buying a farm next to Bush and Reverend Moon's ranches in Paraguay might also be a sensible move - only land prices are soaring down there while Paraguay's Mariscal Estigarribia air base is swarming with American military hardware and personnel.
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With or without religion, you would have good people doing good things and evil people doing evil things. But for good people to do evil things, that takes religion. - Steven Weinberg, 1999
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Fritz
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Re:Please Don't Put Garbage in the Federal Reserve
« Reply #2 on: 2008-03-19 21:40:46 » |
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Great info.
thx
Fritz
PS: thought this cartoonists comment fits
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Where there is the necessary technical skill to move mountains, there is no need for the faith that moves mountains -anon-
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Hermit
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Re:Please Don't Put Garbage in the Federal Reserve
« Reply #3 on: 2008-04-09 12:08:16 » |
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IMF says US crisis is 'largest financial shock since Great Depression'
Source: The Guardian
Authors: Heather Stewart (Washington)
Dated: 2008-04-09
America's mortgage crisis has spiralled into "the largest financial shock since the Great Depression" and there is now a one-in-four chance of a full-blown global recession over the next 12 months, the International Monetary Fund warned today.
The US is already sliding into what the IMF predicts will be a "mild recession" but there is mounting pessimism about the ability of the rest of the world to escape unscathed, the IMF said in its twice-yearly World Economic Outlook. Britain is particularly vulnerable, it warned, as it slashed its growth targets for both the US and the UK.
The report made it clear that there will be no early resolution to the global financial crisis.
"The financial shock that erupted in August 2007, as the US sub-prime mortgage market was derailed by the reversal of the housing boom, has spread quickly and unpredictably to inflict extensive damage on markets and institutions at the heart of the financial system," it said.
After warning earlier this week that the world's financial firms could end up shouldering $1 trillion (£500bn) worth of losses from the credit crunch, the IMF said it expects the US to achieve GDP growth of just 0.5% this year, and 0.6% in 2008, with the housing crash getting even worse.
Simon Johnson, the IMF's director of research, said later the key risk to the forecasts was the danger of a vicious circle emerging, as house prices continue to fall, dealing a fresh blow to the banks, and exacerbating the problems in the markets. "Sentiment in financial markets has improved in recent weeks since the Federal Reserve's strong actions with regard to investment banks. But we have seen how strains in markets can quickly become reinforcing, and the possibility of a negative spiral or 'financial decelerator' remains a possibility."
President George Bush has already signed off a $150bn tax rebate package to kick-start the economy, and the Federal Reserve has backed an emergency buyout of investment bank Bear Stearns, but the IMF said this may still not be enough: "Room may need to be found for some additional support for housing and financial markets."
In the UK, the chancellor has repeatedly insisted that the economy is "better-placed" to weather the storm, because of its flexible labour market and low unemployment, but the IMF calculated that the British housing market is overvalued by up to 30%, and could be destined for a damaging correction.
Alistair Darling is due to fly to Washington tomorrow to discuss the turmoil with fellow G7 finance ministers.
Mervyn King, governor of the Bank of England, will also be in Washington this weekend to discuss the ramifications of the credit crunch with central bankers from around the world.
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With or without religion, you would have good people doing good things and evil people doing evil things. But for good people to do evil things, that takes religion. - Steven Weinberg, 1999
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Hermit
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Re:Please Don't Put Garbage in the Federal Reserve
« Reply #4 on: 2008-04-21 04:30:11 » |
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Are we facing another Great Depression?
Source: thisismoney.co.uk
Authors: William Rees-Mogg (Mail on Sunday)
Dated: 2008-04-21
As the IMF releases a frankly gloomy world economic outlook, veteran luminary of broadcasting and media, Lord Rees-Mogg asks if we are facing an economic threat similar to that of the 1930s.
Could the world be on the brink of another Great Depression such as the slump of the early Thirties? The managing director of the International Monetary Fund, Dominique Strauss-Kahn, has warned us of the risk. I respect the expertise of IMF forecasting.
Last Wednesday the IMF published its World Economic Outlook. It has lowered its previous forecasts of global economic growth, including those for us and America. 'Risks to the global projection are tilted to the down side, especially those related to the possibility of a full-blown credit crunch.'
The report said the dislocation, which began last August, was: 'The largest financial shock since the Great Depression.' This was followed on Thursday by an address given to ministers in Washington by Mr Strauss-Kahn.
He said there was only limited time to repair the financial system after 'the worst crisis since the Great Depression'. He warned of the threat from 'fire and ice', that is from rising inflation and slumping growth.
In the Seventies, we had to become accustomed to the fact that the oilprice inflation was acting as a brake on the world economy; the word ' stagflation' was coined to describe that combination of rising prices with declining growth. There is ample evidence that stagflation has returned.
Of course, the present crisis is not an exact repeat of the Great Depression. The pattern is not the same. In the late Twenties the mood of the US was highly confident, stock-market prices were high and rising, and so was debt.
Strangely enough, the panic that interrupted this American dream [ Hermit : In 1929 ] began in London. A crooked English financier, Clarence Hatry, was trying to merge major UK steel companies, and was issuing stocks to cover the deal. Some of the stocks were fraudulent - the same certificates had been printed twice and given as security to different leading banks. An alert clerk spotted the discrepancy.
On September 20, 1929, the fraud became known and the Hatry empire collapsed. He was jailed for fraud. The Bank of England raised interest rates to protect the London market. American money flowed in to Britain to take advantage of the higher London rates.
There was less money available for brokers' loans in New York. In the week beginning October 21, the New York stock market plunged; it was not to recover its 1929 peak until 15 years later. American industry did not recover its full confidence until after the outbreak of the Second World War in 1939.
The 1929 pattern in New York was one of gross over-confidence, rising prices and rising debt; there was a stock-market boom; that was followed by the panic crash, accompanied by the revelation of several frauds. The panic was the signal for further falls in prices, debt liquidation and deflation. The higher the boom, the steeper and longer is likely to be the recession.
British heavy industry was already in recession in the late Twenties, and Britain therefore had a comparatively mild recession in the early Thirties. America had enjoyed a confident boom in the Twenties, and therefore had a deeper and more prolonged recession.
One can tick off factors that applied to both the Great Depression and to the present crisis. Both have been primarily monetary crises, springing from fluctuations in the availability of funds.
In the late Twenties, American funds went into the stock market; in the early 2000s, both in Britain and the US, the bubble was in housing. Debt levels naturally rose. Banks invented new ways of leveraging investments, thereby earning fees and interest.
In the Twenties, Wall Street banks floated new investment trusts that often invested in each other. This was known as 'pig on pork'. As Tom Lehrer sang: 'We will all go together when we go.' They went.
On the other hand, the Great Depression was primarily a Great Deflation; after the stock market crash, confidence vanished as prices fell; in Mr Strauss-Kahn's terms, the world economy was frozen in ice.
Most people still feared inflation, since they were still close to the German hyperinflation of 1923, but the crisis after 1929 was one of falling prices. Nowadays there is more inflation, particularly in oil and food prices, and also rising inflation spreading in the expanding Asian countries, particularly China.
I find the greatest anxiety among experts is not now the banks, dangerous though the credit crunch has been. Bankers behaved, in too many cases, with recklessness and poor judgment. Yet bank failures have been a recurrent feature in banking history. The greater worries are the prices of oil and food.
In Britain we are now becoming familiar, if not at all comfortable, with the idea of crude oil at more than $100 a barrel, and of heavily taxed petrol at more than £1 a litre. The oil price enters into almost everything - and particularly into the production and distribution of foodstuffs.
In the past 18 months food prices have risen by about half. If the Chinese and Indian middle classes continue to move towards European eating patterns, and if arable land is used to grow biofuels, the prices of grains will rise to a level that cannot be afforded by the poorest.
Food-price inflation leads to starvation, and parts of Africa are already on the verge of famine. In Britain, we must expect prices to continue to move in both directions. Energy prices, subject to political risks and political shortages, may continue to rise; food prices are almost certain to do so. House prices may follow the American model, where they have fallen by up to 30%.
The Government will try hard to keep up optimism. Chancellor Alistair Darling's forecasts for 2008 and 2009 are notably more optimistic than those of the IMF.
The key year for the global economy may be 2010. That is also the last year in which Gordon Brown can call a General Election. The growth in 2008 and 2009 is likely to be lower and slower than Mr Darling hopes.
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With or without religion, you would have good people doing good things and evil people doing evil things. But for good people to do evil things, that takes religion. - Steven Weinberg, 1999
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Hermit
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Re:Please Don't Put Garbage in the Federal Reserve
« Reply #5 on: 2008-05-28 16:34:48 » |
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U.S. home prices plunge and consumer confidence slides
Source: International Herald Tribune
Authors: Vikas Bajaj
Dated: 2008-05-27
NEW YORK: America's home-buying season, when for-sale signs sprout like dandelions on lawns across the country, is shaping up to be even worse than expected this year, with prices falling, sales slowing and few signs of a turnaround emerging.
Two reports released Tuesday captured the bleak picture. One showed home prices in 20 major metropolitan areas fell 14.4 percent in March from a year earlier. The other showed sales of new homes, although up slightly in April, remained mired near their lowest levels since 1991.
While Wall Street is growing hopeful that the U.S. economy might dodge a recession, many economists warn that the pain in the housing market may last for several years. Even local markets like Seattle, which once seemed immune to the slump, are weakening.
The problem boils down to supply and demand. Spring and early summer is traditionally the busiest period for home buying. But there are simply too many homes in many parts of the country, and too few people with the means to buy them. The situation is likely to get worse because a rising tide of foreclosures is flooding the market with even more homes, while a slack economy and tight mortgage market are reducing the pool of potential buyers.
Today's troubles can be traced to the excesses of the recent housing boom, said Ronald Peltier, the chief executive of Home Services of America, which owns real estate brokerages across the country.
"It's like eating beyond your stomach's capacity," Peltier said during a recent interview. "We have huge indigestion." Sellers confront a sobering reality: There are more than 4.5 million homes on the market nationwide. The way houses are selling now, it would take nearly 11 months to clear the market. The last time so many homes were for sale was in the early 1980s, when the U.S. economy was in a deep recession and interest rates were two to four times as high as they are today. [ Hermit : Notice that if official inflation rates were not artificially reduced from the 1980s that US interest rates would be visibly negative. ]
For the most part, sales keep falling. Sales of existing single family homes tumbled 20 percent during the first four months of the year from a year earlier and are running at their lowest levels since 1998. Sales of new homes have fallen 42 percent over the last year. The Commerce Department reported Tuesday that sales increased 3.3 percent in April from March, when sales tumbled 11 percent, although the increase largely reflected a statistical revision to the earlier figures.
In Seattle, where housing had held up better than much of the rest of the country in the last two years, home sales have slowed sharply. Sales in King County, which includes Seattle, fell more than 33 percent in April from the same month a year earlier while the number of homes for sale is up 55 percent. Single-family home prices have fallen about 6.5 percent from their peak in July 2007 to February, according to the Standard & Poor's Case-Shiller index.
Like in other regions, the slowdown is hitting outlying areas first and hardest. Sales and prices are still robust in downtown Seattle and affluent suburbs like Bellevue because they are more desirable and closer to big employers like Microsoft, Starbucks and Boeing.
"We are still getting multiple offers on properties there," Phil Rodocker, a real estate agent based in Seattle, said about downtown and Bellevue. But "as you move south, every 10 miles south you go, you see more and more short sales and repossessed houses."
Builders are having trouble selling units in some newer condominium buildings. Rodocker got an e-mail from one developer last week who a few months ago had quickly sold 251 units in a project under construction.
Now, investors who had signed contracts to buy 40 of those units had reneged on their deals.
Basic economics would suggest that lower prices should increase demand, but if buyers expect that prices will be lower still in the future, they will wait before deciding to buy.
The units in downtown Seattle are now being resold for as little as $225,950 for a one bedroom with one bathroom prices that Rodocker said were so low as to be "ridiculous." Seeing the number of homes on the market rise and prices fall, buyers are becoming more picky and negotiating harder, he and other agents said.
One of Rodocker's clients, Dennis Humphrey, lives south of Seattle in Tukwila and has been looking to buy a home with three or four bedrooms and one or two bathrooms. Parents of 10-year-old twin boys, Humphrey, who works in the home improvement division of Sears, and his wife live in a rental home now and want a bigger place.
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With or without religion, you would have good people doing good things and evil people doing evil things. But for good people to do evil things, that takes religion. - Steven Weinberg, 1999
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