The Finance Round-Up: November 16th 2007

According to Gregory Peters, head of credit strategy at Morgan Stanley:

There's a greater than 50 percent probability that the financial system will come to a grinding halt. You have the SIVs, you have the conduits, you have the money-market funds, you have future losses still in the dealer's balance sheet in the banks [..] That's all toppling at once.

Financial institutions are acknowledging that the losses could reach over $400 billion, and that is before an additional several hundred billion dollars worth of residential real estate enters foreclosure, leading to additional losses in the derivatives market of many times that figure due to leverage.

Over the next few months, major impacts will be felt.

First, the gargantuan bond insurance industry is teetering on the brink of the abyss, with rating agencies threatening downgrades of 14-18 notches (from AAA to deep junk). That could leave trillions of dollars of bonds uninsured, and therefore no longer able to borrow a triple A credit rating independent of their true worth. Those bonds would lose much of their value, and many large investors, such as pension funds, would be obliged by law to sell anything below investment grade.

Secondly, US accountancy rules changed November 15, affecting the upcoming financial year. "FASB 157" dictates that banks and securities firms can no longer hide their worst assets as Level 3, which allowed them to be kept off balance sheet. Trade in classes of commercial paper theoretically worth more than entire countries will have to be valued using observable inputs for the first time (where possible), rather than mark-to-make-believe.

In addition, as of January, banks can no longer indemnify their auditors for signing off on accounts they cannot verify, leaving the auditors potentially liable over the virtually unquanitfiable exposure of their clients to the derivatives market. Auditors are therefore likely to make every effort to verify valuations where evidence of true value can be found.

A cascading failure of financial institutions is all too possible.

Downward Spiral of Deep Junk

The bond insurance industry has guaranteed more than $1 trillion of bonds issued by U.S. cities and states as well as bonds backed by mortgages, credit cards and other assets, and the guarantee allows borrowers to use the insurers' AAA rating. A loss of confidence by investors in the insurers' credit quality threatens the survival of the industry and the price of the thousands of bonds it guarantees.

Because of the "guarantee", god only knows what kind of garbage got rated as AAA. In return for the "guarantee" , companies like Ambac collect a fee. When times are good they keep collecting fees. When the proverbial * hits the fan, the guarantee is worthless. Is this a viable business model?

What we do not know is how much of that "AAA" paper banks are holding is really deserving of "AAA" status as opposed to being rated "AAA" because someone "guaranteed" it.

MBIA, Ambac Downgrades May Cost Market $200 Billion

The crisis of confidence in bond insurers that bestow top credit ratings on debt sold by borrowers from the New York Yankees to Citigroup Inc. may cost investors as much as $200 billion.

The AAA ratings of MBIA Inc., Ambac Financial Group Inc. and their five smaller competitors are being reviewed by Moody's Investors Service and Fitch Ratings. Without guarantees, $2.4 trillion of bonds may fall in value and some issuers would get shut out of the capital markets.

``We shudder to think of the ramifications,'' said Greg Peters, head of credit strategy at New York-based Morgan Stanley, the second-biggest U.S. securities firm by market value. ``You have politicians, taxpayers, municipalities, states. It just opens up a Pandora's box. That is a huge destabilizing force.''

For more than 20 years, the safety of insurance has eased the way for elementary schools, Wall Street banks and thousands of municipalities to sell debt with unquestioned credit quality. Now, mounting downgrades on insured bonds backed by assets such as mortgages are raising doubts about the stability of the guarantors. Armonk, New York-based MBIA, the world's largest, has a 28 percent probability of default, and Ambac's is 40 percent, prices of derivatives show.

Next Phase of the Crisis: The Great Ratings Debacle

The big three rating agencies have forever issued stellar, triple-A ratings to four specialized insurance companies — Ambac, MBIA, CIFG, and FGIC.

These are the companies that insure bonds and other credits from default.

Traditionally, they covered mostly tax-exempt municipal bonds. If a city or state defaulted, they'd step in and make good on the payments. But few cities or states defaulted.

So the muni default insurance seemed to work. And no one ever talked seriously about downgrading bond insurers like Ambac or MBIA.

But in recent years, in tandem with the housing bubble, the bond insurers have also insured massive amounts of mortgage-backed securities and other CDOs, a large percentage of which are in default … or soon will be.

So this time the default insurance is not working. It's an unbridled disaster. And the triple-A ratings of bond insurers are about to collapse.

This is no trivial matter. It directly impacts $2.3 trillion worth of municipal bonds, mortgage-backed bonds, plus asset-backed bonds packed with credit card and auto loans — the same kind of securities that are now collapsing....

....Many years ago, the rating agencies engineered a cockamamie system whereby thousands of local governments and other bond issuers could simply buy the default insurance from an Ambac or an MBIA and automatically claim the insurer's triple-A rating as their own.

As long as bond insurers like Ambac or MBIA were triple-A … then … the thousands of tax-exempt bonds and CDOs they insured were also triple-A.

It didn't matter if the bonds really merited just a double-A … or a single-A … or a triple-B. It didn't even matter if they were pure junk (double-B or lower).

All that mattered was that they had the insurance. And like magic, the Fairy Godmother agencies — Fitch, Moody's and S&P — transformed all of Cinderella's mice into dashing coachmen: Every single one of the thousands of states, cities, towns and CDO issuers that bought bond insurance waltzed away with a triple-A rating.

Any Credibility Left At Fitch?

Fitch said it will spend the next six weeks reviewing the capital of insurers including MBIA Inc., Ambac Financial Group Inc., CIFG Guaranty and Financial Guaranty Insurance Co. to ensure they have enough capital to warrant an AAA rating. Any guarantor that fails the new test may be downgraded within a month unless the company is able to raise more capital, New York- based Fitch said today in a statement.

CIFG and FGIC, the bond insurer whose owners include Blackstone Group LP, have the highest probability of suffering erosion in the capital because of the falling value of CDOs, Fitch said. Ambac has a "moderate probability" and MBIA is at "low" risk, Fitch said.

"Fitch recognizes that financial guarantors view maintenance of their 'AAA' ratings as a core part of their business strategies, and management teams will take any reasonable actions to avoid a downgrade," the statement said.

Please read that last sentence again.

Fitch is explicitly admitting that it is making rating decisions not on merit alone, but on perceived implications of what a rating change might do to the company being rated.

Countrywide Pleads For No Debt Downgrades

Given that Fitch is implicitly admitting that it is making rating decisions not on merit alone, but on perceived implications of what a rating change might do to the company being rated (see Any Credibility Left At Fitch?) what does Countrywide Financial have to lose by pleading downgrade could weaken business?

Countrywide (CFC), the largest U.S. mortgage lender, said in a U.S. regulatory filing on Friday, that if its credit rating dropped below its current lowest rating, this would "severely," limit its access to the public corporate debt market and that could have repercussions on its business.

A below investment-grade rating also would mean Countrywide would face more restrictive terms and higher rates when it renegotiated or refinanced its existing borrowings, the company said in a U.S. Securities and Exchange Commission filing.

Fitch Downgrades $37.2B Of CDOs, Slashing AAAs to Junk

Fitch Ratings downgraded Monday the credit ratings of $37.2 billion of global collateralized debt obligations, with more than $14 billion worth of transactions falling from the highest-rated AAA perch to speculative-grade, or junk, status.

The rating agency said more than 60 CDO transactions are still on watch for potential downgrade, with a resolution due on or before Nov 21.

CDO Dominoes Are Falling

Here is a summary of the CDO ratings scam.

  • The S&P is only downgrading the Carina CDO because it has to.
  • Why does it have to?
  • Because by State Street's selling, we will find out what those assets are really worth.
  • The S&P knows the answer is "not much" as evidenced by downgrading garbage it rated as AAA all the way to CCC-
  • The rated value of assets by Moody's, Fitch, and the S&P are one thing. What those assets are really worth on the open market are another thing.
  • The difference can be as much as 18 notches.

Previously I asked is there Any Credibility Left At Fitch? You can now ask the same question of the S&P and Moody's.

Fingers of Instability, Part XII

The next shoe to drop is Municipal Bombs er Bonds, and the credit default swap "CDS" market. Dominoes so to speak. Muni Bond insurers are in freefall as the credit rating agencies downgrade their prospects.

These firms are in freefall, as are all the other bond insurers. Anyone who is holding bonds insured by these dead men walking might want to consider calling your broker before the real stampede out of these SAFE and "insured" holdings begins. As credit ratings of the insurers are slashed, many holders of these bonds will be forced to sell. Muni bond funds, institutions and pension funds have covenants' which force them to do so.

Not far behind this unfolding tragedy is the credit default swap markets as these "OVER THE COUNTER" derivatives soar in price, and the parties to them are injured in unfolding CDO (collateralized debt obligations) and housing market disruptions. Insurance is not good if the counterparty to them is insolvent and the growing liabilities from the sub prime debacle is impairing their future ability to meet obligations outside those commitments. When the credit default markets crumble there will be real trouble that dwarfs current problems!

Credit pain is gain for a select few

All of these instruments rely on confidence for their very existence. Commercial paper could exist only if brokers believed SIVs were valued properly, and SIVs could exist only if their managers believed their underlying CDOs were valued right, and CDOs could exist only if their managers believed the underlying loans were properly valued, and so on.

Confidence is the heart and soul of credit markets, as unlike stocks, no promises of future growth will suffice -- only streams if cold, hard cash will do.

Now it turns out that slowly emerging at this time were a group of hedge-fund managers running their money in a style known as "credit arbitrage" who came to believe that these towers of debt were houses of cards just waiting to be pushed over. But how? There are no straightforward ways to short-sell these kinds of instruments.

The method that they hit upon: Destroy confidence, which was already beginning to ebb due to the rising rate of defaults far downstream in the underlying loans. According to Brian Reynolds, chief strategist at boutique brokerage M.S. Howells, the credit-arbitrage fund managers figured they could shake confidence, and make boatloads of money, by playing in the $70 trillion market for "credit-default swaps," or CDSs -- a set of securities that are issued by financial institutions as a kind of insurance policy on debt.

The CDS market thus became a key battleground between the arbitrage fund hit squads and the bankers. The arbitrage funds bought the credit-default swaps on the investment banks that issued the CDOs and shorted investment banks' stocks, two actions that created the impression of vulnerability among other market players. It's a bit like taking out a life insurance policy and buying a headstone for a sick relative. Someone might get the impression that your uncle's prospects aren't good.

You might wonder how there could be $70 trillion in CDS money out there, and the reason is pretty interesting. Imagine that you are at horse race at which the winner can earn a $10 billion prize, which in this case would be the amount a CDS would pay off in the event of a bank default. In the stands, however, are bettors with access to huge lines of credit that are betting up to $1 trillion among themselves on the outcome of the race. It doesn't matter that the most a CDS holder could ever win is $10 billion, because the betting -- or trading of the derivatives -- is a completely separate game.

Private mortgage insurers dragged down as delinquencies rise

As the housing market crumbles, homeowners are worried about mortgage payments and sellers are worried about slumping prices – but the companies that insure their loans are worrying about their very survival in the face of billions of dollars in claims.

Insurers like industry leader MGIC Investment Corp. are predicting they won't turn a profit for at least a year. The uncertainty is sending stocks downward and raising questions about what happens if loans go bad and the insurers behind them are out of business....

....If the insurers do run into trouble, the risks for the industry are huge. About 10 percent of the total loan market has private mortgage insurance, according to the Mortgage Insurance Companies of America. There was $776 billion in private mortgage insurance in force as of September, the trade group reported.

Hot Potato

Something to keep in mind: these days a lot of mortgage insurance works on the same "representation and warranty" business that everything else in mortgage-land does. The insurer does not necessarily or even usually underwrite the loan file itself prior to issuing a certificate; it "delegates" this to the lender. However, that means that the insurer can refuse to pay if it believes that the lender knew or should have known that the loan did not meet the insurer's requirements. The insurer generally doesn't find this out unless 1) the file is subject to routine QC audit or 2) the worst happens and a claim is filed.

So it's another episode of Finding Out Later, and the MIs don't want to hold the bag for it.

Subprime Losses May Reach $400 Billion, Analysts Say

Losses from the falling value of subprime mortgage assets may reach $300 billion to $400 billion worldwide, Deutsche Bank AG analysts said.

Wall Street's largest banks and brokers will be forced to write down as much as $130 billion because of the slump in subprime-related debt, according to a report today by New York- based credit analyst Mike Mayo. The rest of the losses will come from smaller banks and investors in mortgage-related securities.

Citigroup Inc., Merrill Lynch & Co. and Morgan Stanley led more than $40 billion of writedowns as record U.S. foreclosures plundered asset prices. Estimates are rising with Lehman Brothers Holdings Inc. last week predicting losses linked to U.S. mortgages may reach $250 billion over the next five years. Zurich-based Credit Suisse Group in July forecast $52 billion of costs related to mortgage-backed securities.

Banks' balance sheets will hit fan in January

If you think banks have trouble now, just wait until they report financial results in January.

That's when the balance sheet will really hit the fan.

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.

U.S. Banks, Brokers May Face $100 Billion in Additional Write-offs

Recent rule changes by the Financial Accounting Standards Board make it more difficult for companies to avoid putting real-world market prices on their hardest-to-value securities, known as Level 3 assets.

As Easy as Level 1, 2, 3…

Level 1 assets are easy to price using mark-to-market accounting, you have all probably heard that term. This is where an asset's worth is based on a real price. For instance IBM… check the quote on the NYSE that's the "mark to market" price.

Level 2 assets use something called "mark-to- model", but I call it Mark-to-Maybe. This is an estimate based on "observable inputs" which is used when no actually price quotes are available. An example might be a private transaction between two banks. They're saying "Maybe" this is what its worth.

Then there's Level 3 asset values, which are based on "unobservable" prices. This is basically the banks' own "assumption" as to what the
assets are worth. This is what's been called "Mark-to-Make-Believe" accounting. Because it's all just Fantasyland pricing… pure guesswork on the part of these Wall Street firms who of course are looking to cover their butts with the most generous valuation they can dream up.

Rule change sounds alarm on Wall Street

The new rule from the US Financial Accounting Standards Board - known as FASB regulation 157 - comes into force on Thursday. It affects the Level 3 tier of assets that are currently valued according to in-house models, or 'mark-to-make-believe' in the words of Bob Janjuah, credit chief for the Royal Bank of Scotland.

Mr Janjuah says the FASB rule change could lead to a further $100bn of writedowns as banks are forced to come clean, with total losses climbing as high as $500bn across all forms of distressed credit. The top six banks alone have $365bn of assets in Level 3.

Although Level 3 assets are thinly traded, a series of ABX indexes give a rough guide to the market value of some $1,200bn sub-prime mortgage securities. These show that the lowest grades of 2006 vintage debt are worthless; BBB grades are down to just 18 cents on the dollar. AA grades are trading at around 60 cents, and AAA are near 85 cents.

Moreover, much of the entire $3,000bn global market for collateralised debt obligations is under strain. Merrill Lynch has declared a 30pc writedown on its holding of CDOs, offering a glimpse into the true values.

Few of the banks have admitted to losses on anything like the scale
suggested by market prices. UBS is still booking its US mortgage debt at 90 cents on the dollar.

While nobody knows what lies under the Level 3 rock, the new rule could spell trouble. Citigroup has $128bn of assets in this category, or 205pc of its tangible equity. The figures for other banks are: Morgan Stanley $88bn, (275pc); Goldman Sachs $72bn (212pc); and Lehman Brothers $35bn (194pc).

Carina: CD-Oh-No

  • The Carina CDO Ltd. liquidation event is a
    hallmark move toward risk aversion where the holders are saying We no longer are willing to accept the risk of potential cash flow impairment.
  • They are saying We just want to get whatever price we can get
    for the securities.
  • Now, the important risk for us going forward is that this is not
    a capitulation event, as equity market participants perceive, but a kickoff event precipitating increased risk aversion across the
    spectrum, not to mention the creation of "observable inputs" in
  • The new SFAS 157 provisions that firms have implemented require firms, whenever possible, to use "observable inputs" in pricing their Level Three assets.
  • Forced sales, at distressed prices, create "observable inputs";
    the result will be revaluation down the line and risk aversion that
    begets still more risk aversion.

The Truth Will Set You Free

The amount of losses that financial institutions have already recognized - $20 billion – is just the very tip of the iceberg of much larger losses that will end up in the hundreds of billions of dollars. At stake – in subprime alone – is about a trillion of sub-prime related RMBS and hundreds of billions of mortgage related CDOs. But calling this crisis a sub-prime meltdown is ludicrous as by now the contagion has seriously spread to near prime and prime mortgages. And it is spreading to subprime and near prime credit cards and auto loans where deliquencies are rising and will sharply rise further in the year ahead.

And it is spreading to every corner of the securitized financial system that is either frozen or on the way to freeze: CDOs issuance is near dead; the LBO market – and the related leveraged loans market – is piling deals that have been postponed, restructured or cancelled; the liquidity squeeze in the interbank market – especially at the one month to three months maturities - is continuing; the losses that banks and investment banks will experience in the next few quarters will erode their Tier 1 capital ratio; the ABCP and related SIV sectors are near dead and unraveling; and since the Super-conduit will flop the only options are those of bringing those SIV assets on balance sheet (with significant capital and liquidity effects) or sell them at a large loss; similar problems and crunches are emerging in the CLO, CMO and CMBS markets; junk bonds spreads are widening and corporate default rates will soon start to rise. Every corner of the securitization world is now under severe stress, including so called highly rated and “safe” (AAA and AA) securities.

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.

Credit and Financial Markets Losses: $100 billion or $200 billion? Or
most likely $500 billion?

New reliable estimates suggest that using these market prices – rather than level 3 model gimmicks - will lead to losses of another $100 billion on top of hundreds of billions of subprime losses. And some market participants are already talking –quite realistically – about total losses from this credit disaster in
the $500 billion range.

Indeed, losses of the order of $500 billion are actually quite
reasonable and likely once you account for all the losses from
subprime, near-prime, prime mortgages, CDOs, CLOs, failed LBOs, auto
loans, credit cards and other consumer credit, commercial real estate
loans, a variety of asset backed securities, level 3 asset value
recognition at market values, and other financial market losses.
Subprime alone is now estimated to lead to losses as high as $238
billion based on a mark to market analysis.

Banks Face $100 Billion of Writedowns on Level 3 Rule

Citigroup Inc., which this week said losses from subprime assets may be $11 billion, has 105 percent of its equity in Level 3 assets, Janjuah wrote. The New York-based bank fell 4.8 percent to $33.41, a four-and-a-half year low.

Merrill Lynch & Co., which wrote down $8.4 billion of subprime mortgage debt and other debt securities, has Level 3 assets equal to 38 percent of its equity ``and may well come out of all of this in the best health,'' Janjuah said. Merrill, the world's largest brokerage, fell 4.2 percent to $53.99....

....ABX indexes, which investors use to track the subprime-bond market, are showing ``observable levels'' that would wipe out institutions' capital if the benchmark's prices were used to value their Level 3 assets, according to Janjuah.

What's the subprime damage to banks?

However, when it comes to working out the impact on banks, the task becomes even harder. For in recent years, banks have not simply been acquiring subprime loans, they have been repackaging them into complex "asset-backed securities" (ABS) that can be difficult to value. The Bank of England, for example, suggests that on the basis of industry data some $700bn-worth of bonds backed by subprime loans are now in circulation in the world's financial system, with another $600bn of bonds backed by so-called "Alt A" loans, or those with slightly better credit quality.

Moreover, these bonds have then been used to create even more complex
securities backed by diversified pools of debt, known as collateralised debt obligations (CDOs). According to the Bank's calculations, for example, some $390bn of CDOs containing a proportion of mortgage debt were issued last year – though the precise level of the subprime component varies.

The multi-layered nature of these complex financial flows means it is hard to assess how defaults by homeowners will affect the value of related securities.

In recent weeks, some credit rating agencies have indeed started to downgrade their ratings of debt: Moody's and S&P, for example, downgraded about $100bn of mortgage-related securities last month. But most analysts think that this "downgrade" process is still at a very early stage – and in tangible terms, that means that subprime defaults have not yet delivered tangible losses for many security investors. "Most CDOs have yet to see many downgrades and there have been almost no actual defaults of the ABS bonds within the CDO portfolios," points out Matt King, analyst at Citigroup. "[But] all that is about to change."

Goldman Held Bigger Level 3 Share Than Citi, Merrill

Goldman Sachs Group Inc. held a bigger proportion of hard-to-value assets at the end of the third quarter than Citigroup Inc. and Merrill Lynch & Co., two of the firms hardest hit by subprime mortgage losses.

Goldman's Level 3 assets, for which market prices are so scarce that companies use internal models to gauge their value, accounted for 6.9 percent of the New York-based firm's $1.05 trillion total at the end of August, according to a filing with the U.S. Securities and Exchange Commission. Citigroup classified 5.7 percent of its assets as Level 3 on Sept. 30 and Merrill reported 2.5 percent.

Investors have grown wary of banks and brokerages with difficult-to-sell securities on their books, after profits at Citigroup and Merrill were crippled by at least $19 billion of writedowns, mostly from bonds backed by home loans to borrowers with poor credit histories. While Goldman officials say the firm won't report an ``extraordinary'' drop in its subprime holdings, investors remained skeptical, pushing its shares down 15 percent this month through yesterday in New York Stock Exchange composite trading.

Auditors set for tough talks with clients

Similar to the international accounting standards followed in Europe and elsewhere, it is aimed at simplifying and standardising "fair value" accounting, where assets and liabilities are booked at market price. Some companies, notably banks, took advantage of the option to introduce FAS 157 a year ago, including Goldman Sachs, Lehman Brothers, Citigroup, Merrill Lynch and JPMorgan.

At the top of the bucket hierarchy is Level One, involving assets with prices quoted in active markets, such as mainstream stocks. Level Two contains less-traded securities and uses prices for assets very like the one being valued.

At the bottom lurks Level Three, assets with "un-observable inputs", meaning their value is calculated via a series of assumptions. Most collateralised debt obligations end up here....

....Auditors are gearing up for tough year-end conversations with their clients.

Fannie Mae's fuzzy math

Investors might want to take a closer look at Fannie Mae's latest earnings report. Lost in the unsurprising news of the mortgage lender's heavy losses was a critical change in the way the company discloses its bad loans -- a move that could mask that credit losses that are rising above levels that the company predicted just three months ago.

Without the change in disclosure, an important yardstick for credit losses that Fannie Mae (Charts) provides to investors would have looked much worse than it did in financials filed last week.

Fannie Mae's potentially misleading disclosure comes at a crucial time for the company. Fannie Mae was severely penalized last year for overstating earnings and for a lack of oversight. As part of its punishment, the amount of home loans that Fannie Mae can make was limited.

But now influential members of Congress, including Senator Charles Schumer, want Fannie Mae's watchdog, the Office of Federal Housing Enterprise Oversight (OFHEO), to temporarily lift the portfolio limits on the company and its rival Freddie Mac. Legislators want both lenders to buy more subprime mortgages to help stave off foreclosures.

Fannie Mae already holds a substantial amount of risky mortgages in its $2.4 trillion mortgage book -- and the recent shift in how it discloses a much-watched credit yardstick disguises just how quickly bad loans may be rising.

The U.S. Credit Crunch of 2007: A Minsky Moment

Throughout the summer of 2007, more and more financial-market observers warned of the arrival of a Minsky moment. In fact, "We are in the midst of [such a moment]," said Paul McCulley, a bond fund director at Pacific Investment Management Company, in mid-August. McCulley, whose remarks were quoted on the cover of the Wall Street Journal, should know about a Minsky moment: he coined the term during the 1998 Russian debt crisis (Lahart 2007).

McCulley may have originated the term, but George Magnus, senior economic advisor at UBS, a global investment bank and asset management firm, offers perhaps the most succinct explanation of it. According to Magnus, the stage is first set by "a prolonged period of rapid acceleration of debt" in which more traditional and benign borrowing is steadily replaced by borrowing that depends on new debt to repay existing loans. Then the "moment" occurs, "when lenders become increasingly cautious or restrictive, and when it isn't only overleveraged structures that encounter financing difficulties. At this juncture, the risks of systemic economic contraction and asset depreciation become all too vivid" (Magnus 2007, p. 7).

Wall Street's money machine breaks down

Two things stand out about the credit crisis cascading through Wall Street: It is both totally shocking and utterly predictable.

Shocking, because a pack of the highest-paid executives on the planet, lauded as the best minds in business and backed by cadres of math whizzes and computer geeks, managed to lose tens of billions of dollars on exotic instruments built on the shaky foundation of subprime mortgages.

Predictable because whether it's junk bonds or tech stocks or emerging-market debt, Wall Street always rides a wave until it crashes. As the fees roll in, one firm after another abandons itself to the lure of easy money, then hands back, in a sudden, unforeseen spasm, a big chunk of the profits it booked in good times.

"The fee engine becomes so huge that these products take on a life of their own," says Tiger Williams, CEO of Williams Trading, a leading financial services firm for hedge funds. "Everyone rationalizes that it's safe because they're making so much money. But it's far from safe."

Peak Money

In any case, finance for the purpose of deploying capital has prevailed as reality among people who use the implements of the dinner table, but something weird has happened to it in recent years. It has entered a stage of grotesque, hypertrophic metastasis that now threatens the life of the industrial organism it evolved to serve. Its current state can be understood in direct relation to the run-up to peak oil (peak fossil fuel energy, really, since coal and gas figure into it, too). The oil age, we will soon discover, was an anomaly. Many of the things that seemed "normal" under its regime will turn out to have been rather special. And as the beginning of the end of the oil age becomes manifest, these special things are starting to self-destruct pretty spectacularly.

For one thing, finance in the past twenty years has evolved from being an organ serving a larger organism to taking over the organism, becoming a kind of blind, raging dominating parasite on its former host. Or to put it less hyperbolically, it has become an end in itself. That is what they mean when they say that the financial sector has been "driving" the economy. A feature of this ghastly process has been the evolution of financial instruments into ever more abstract entities removed from reality-based productive activities. Stocks and bonds were understood to represent direct investment in enterprise. Sometimes the enterprise was a failure, and sometimes the people running it were swindlers, but no one doubted that common stock represented the hope for profit in a particular venture like making steel or selling laxative chemicals.

The new "creatively-innovated" financial "derivatives" of recent years are now so divorced from any real activities or product that often the people trafficking in them don't understand what they're supposed to represent. I'd bet that more than half the people in the New York Stock exchange any given day could not explain the meaning of a credit default swap if a Taliban were holding their oldest child over a window ledge across Wall Street.

War of the Housing Worlds: 3 Reasons why the Bubble Spread

If anything this housing market has as much to do with human nature and mass psychology as it does with actual economics and market fundamentals. There is now an economic war in the housing industry. What can be done to ameliorate a decade long binge on credit and living beyond our means? Any good debt counselor will tell you that the first thing you need to do is cut up all your credit cards. Well we are at the point in the housing road where we have to decide if products such as sub-prime loans need to be "cut up" and never allowed in the market ever again. Those in the housing complex would argue that sub-prime has a niche and most folks will use them for financially prudent ends.

Well as the case in mass hysteria shows, not everyone is going to use certain information in a logical way. In fact, a large percentage will not especially when you have lenders pushing people into riskier loans that have higher kickbacks. This is another way to fix the industry; legislation is now trying to stop brokers from steering people into certain loans. This is a good start. If anything, before this mess is over we will return to localized lending in a few years and doing things as they were once done. Local lenders having a piece of the action and understanding the market dynamics of their respective areas and having a piece of their own financial skin in the game.

Financial Manias and the Trade of a Lifetime
(free registration required, PDF file to download)

"Alarmingly high" risk of systemic shock seen

Investors may not be prepared for the real possibility of a further downturn in the financial sector, and the risk of a systemic shock to the system is "alarmingly high," analysts at Morgan Stanley said on Friday in a report.

"Over the past several weeks, we have worked ourselves into a full-fledged bearish lather," analysts, including Greg Peters, said in a report.

"At the root of our near-term negativity is the alarmingly high potential for a systemic shock, as well as concerns on the financial system and economic environment due to the derailment of the securitization process," they said....

....By passing on loans, banks have been able to free up capital for further lending, which has been a key factor in the ability of consumers to obtain loans. Now, as demand for the repackaged debt dries up, banks in turn have less capacity to lend and the cost of borrowing is also set to rise.

Mortgage Loan Losses Pose Risk of Systemic Shock, Peters Says

There's a greater than 50 percent probability that the financial system ``will come to a grinding halt'' because of losses from mortgages, Gregory Peters, head of credit strategy at Morgan Stanley, said.

The world's biggest banks and securities firms have written down at least $45 billion in the value of assets linked to subprime mortgages for the third quarter after borrowers with poor credit histories failed to keep up with payments. Structured investment vehicles have defaulted on debt, forcing lenders including Legg Mason Inc. and SunTrust Banks Inc. to prop up their money-market funds to cushion them from possible losses.

``You have the SIVs, you have the conduits, you have the money-market funds, you have future losses still in the dealer's balance sheet in the banks,'' Peters said in an interview in New York. ``That's all toppling at once.''

The risk of systemic shock from the current subprime meltdown is quite large in the near term, Peters said. ``It's an overarching concern that we have,'' he said.

OECD warns subprime turmoil not yet over

The full global impact of the U.S. subprime mortgage market crisis has yet to be felt although more information is needed to determine its full extent, OECD Chief Angel Gurria said in a speech in Budapest on Thursday....

.... He said the greatest impact of the recent turmoil was on confidence in the banking sector, which has not returned to normal, and said the crisis had accelerated an ongoing slowdown in the pace of global growth.

"(The) greatest impact of subprime is on the confidence level, and multiplication of the impact on the whole financial system, which stopped giving loans to each other and to normalize this would take time," Gurria said.

The Wile E. Coyote Economy

Now if the problem here was just "subprime mortgages," Wall Street would take a lickin' and keep on tickin'. But as Hutchinson points out there's a ton of bad paper out there: securitized credit card loans, mortgages other than subprime, asset-backed commercial paper and more. The list goes on and on.

Wall Street and America's banks made a ton of money because the people who decided how much their assets were worth were the same people who owned the assets. And since their bonuses were based on how much those assets were worth, let's just say those assets were worth a lot. It takes a lot of "profit" to justify bonuses equal to the raises of 80 million Americans, after all.

Bernanke and the Fed are aware there's a problem, and their easing of interest rates and other actions like forcing loans on the banks have been an attempt to deal with the problem by providing "liquidity". But here's the problem: you can give the banks money, or lend it to them, but you have a hard time making them buy huge steaming piles of crap. This isn't the Long Term Capital fiasco where some trades went bad but there was good reason to believe that if you held onto the position and unwound it you might make money. The underlying instruments are probably crap and you will never make your money back if you buy them at face (or that's the fear, and it's well founded). Nor is it nearly as small as Long Term Capital fiasco was; the amounts of money involved today are magnitudes larger. So the banks, while making "good citizen" noises, are mostly not willing to take that money and bail out those of their colleagues and competitors who are holding onto reams of worthless paper (the membership of which includes some big banks as well, including Citigroup).

Because this issue extends beyond Wall Street and into banks, most of whom were eager to get in on the easy and big money they saw securities firms and hedge funds earning, the consequences are going
to be very, very real for ordinary people. When the banks have to take large write-downs the amount of money they will have available to lend to businesses and possibly even to consumers will also decline. Bernanke may make interest rates low, but if this cascade continues, and there's no reason to believe it won't, there simply won't be the money to lend. (As an aside, this is exactly the reason why Great Depression lawmakers forbade banks to get involved in securities businesses. Removing those laws set the stage for what is happening.)

The Super Mortgage Market Birth Story: CDOs, Mezzanine, Unrated Tranches, and a Touch of Greed

Everything was coming together since people had lost faith in the gods of technology. The decline in the technology sector came like a plague of locusts. Who would have thought that a company selling for 200 times earnings with no potential for revenue generation would go bankrupt? The masses demanded better returns. Hooked on 20 to 30 percent annual returns they needed a place to speculate and funnel their preciously earned dollars. What better way than to bet the house? Why limit a mortgage to the local bank who would scrutinize the area with a fine tooth comb, analyze the buyers potential ability to pay the note, and have an actual stake in the mortgage? Why do this when you can sell that same mortgage to our friend Tim who would chop it up like a Sushi chef, charge a hefty fee for his investment banks underwriting fee, and put it for sale at the worldwide buffet? The appetite was prime and all he was doing was providing the hungry with a meal. After all, it was demanded....

....With the introduction of Gaussian copula models, which for purposes of our story dear reader only helped speed the CDO pricing process, the priming of the pump was in full force. Credit was now available to anyone who would be willing to pray to the Wall Street gods and believe in their new financial dogma. Many went on the pilgrimage to financial prosperity with eyes and arms wide open. They bought and sold, flipped and churned, and the market cheered with glory. Tim was happy for he had found a market larger than his small rural town, he had opened the market to the entire world.

Deep down a nagging whisper lurked in his mind. For Tim knew that even a few defaults would cause the perfectly structured Ponzi Scheme to fail; no one dare utter these words in prosperous times for the dogma of housing wealth was strong and deep. So many had bought the lie that was being sold and convinced themselves that a free lunch was possible. Not only was a free lunch possible but a free dinner as well so long as you were willing to play Tim's credit game. At a certain point in the game, the market sentiment shifted. Nature has a cruel way of showing humans that yes, we do answer to laws that man cannot control. The magnitude and the complexity of the market was no match for the weak foundations that it was built upon.

Bill Fleckenstein: Stage is set for a stock crash

As I looked at my screens during Wednesday's rout in stocks, it occurred to me that our financial system was in the process of imploding. With credit contracting, many businesses in that arena are in the process of being destroyed -- and, without a financial system, there is no capitalism.

Thus I wrote in my daily column on my Web site that day: "It seems to me that there's almost no chance of escaping a stock crash at this point."

Then the sell-off spiraled viciously Thursday. It was led by technology, after Cisco Systems' admission that problems faced by the financial institutions that constitute its largest customers were impacting the company's business. Speculation expired as it finally dawned on tech-stock bulls that if the economy is weak, businesses will be hurt and stocks won't go higher.

Thursday's sell-off was even more significant than Wednesday's because it was an indication of (a) dots being connected and (b) the speculative fever being broken. It was the last piece of the puzzle that I was looking for in signaling that a dislocation or a crash may be coming.

I know I've talked about this fairly often and that it hasn't happened. Such events have an extremely low probability of occurring. But the stage has been set by the reckless policies pursued by the Greenspan Fed in the past decade and a half. These have enabled the risks to pile up while rewarding folks for ignoring them. The Fed's efforts to stave off small forest fires have guaranteed a gigantic one.

Talk of Worst Recession Since the 1930s

Asked how he could conceivably give credibility to such an ominous forecast, Mr. Melcher observes: "I've never seen a market with more risk and what's significant is that risk is not yet priced in."

Given his grim expectations, he says there is no equity market in the world he would play right now. "When the American market goes down, other equity markets around the world should follow," he says.

As of now, his portfolio is pretty much devoid of stocks, save for an exchange-traded fund focused on leading companies in oil services, which he regards as an ongoing growth industry. The ETF, the Oil Services Holders Trust, trades on the American Stock Exchange under the symbol OIH. Although enthusiastic about the industry's growth prospects, Mr. Melcher says he would be reluctant to recommend oil services stock because he believes the price of oil could easily drop 50% in the recession he envisions.

Another danger he sees for the market is the prospect of huge withdrawals of funds from America by foreign investors due to the falling dollar, the credit crisis, and a slowing economy.

Monster Western credit crisis – prelude to a depression

The West (US,EU, Canada) is in the midst of a gigantic and spreading credit crisis that may well to lead it into a depression, if it is not fixed soon. So far, Central bank infusions (Over $1trillion worth in a few months since July!) have been the only thing that has stopped a massive bank liquidity crisis from shutting down commerce. But the damage to credit markets thus far is so huge, and worsening rapidly, that a very bad outcome seems assured. Gregory Peters of Morgan Stanley said there is a better than 50% chance of a systemic banking crisis that will hammer credit markets at this time.

So far, equity markets have barely reflected this turmoil to the degree it should. That is going to rapidly change. Central banks have been doing backflips to stem the crisis, and I think, things are rapidly spinning out of control. They have barely been able to stem a collapse in interbank lending, which would halt credit markets. The damage a paralyzed credit system will do to our credit dependent economies is going to be staggering. It would appear that much of the crisis is hidden from view, but the way it will inevitably reveal itself will be in falling corporate earnings, and collapsing consumer and business spending. In a few short months, we will see if I am right. So far, stock markets have not priced in falling earnings that we expect to appear in coming months, as contracting credit markets constrain all manner of spending and investment.

Carnage on Wall Street as loans go bad

the total losses facing the financial sector could amount to between $150bn and $450bn, and that many of the banks have hidden losses that have been concealed in off-balance sheet instruments like "structured investment vehicles (SIVs)".

The big Wall Street banks and investment houses who are most exposed could find their profits, and much of their capital base, wiped out.

To restore their profits, and indeed in some cases to remain solvent, they will be forced to sell off many assets and lay off many workers, as well as cutting the bonuses of their remaining staff and limiting their future lending.

The size of the financial sector in the US economy - with banks making up 30% of the profits of all US companies last year - means that the effects will be felt both in the real economy and on the stock market.

And with $2.8 trillion in distressed mortgage bonds, including $1.3 trillion in sub-prime bonds, there is enough distress to go around.

Paulson on Super-SIV: "Anything Worth Trying"

  • What is known is this:
    1) The structure must be in place by the end of the year because the SIVs (structured investment vehicles) cannot currently obtain short-term credit to finance their higher-yielding investments.
    2) As many as 60 financial institutions will be asked to participate once the structure and term sheet is released, perhaps sometime in the next week or two.
  • Also becoming clearer, is that the intention of the Super-SIV is more psychological than functional.
  • How so?
  • Currently the standoff in credit markets is so severe that a freeze has occurred among institutions.
  • There is simply no one willing to step in to bid for SIV assets.
  • The purpose of the fund is to provide at least the appearance of a backstop in order to kick start trading.
  • "This is something that is not a savior," U.S. Treasury Secretary Henry Paulson told the Times.
  • "Anything at the margin that will speed up liquidity is worth trying," he added.
  • Anything? What about accupuncture?

Paulson Announces Super-SIV Failure Already

Debt market are indeed deteriorating but comparisons to Long Term Capital management do not do this problem justice. This problem is orders of magnitude worse.

Now, Henry M. Paulson Jr., the Treasury secretary, is describing the proposal's benefits as helping "at the margin." In an interview on Thursday, before the latest agreement was made, he acknowledged that the proposed backup fund would not rescue troubled SIVs, only lead to a longer and more orderly demise.

"This is something that is not a savior," Mr. Paulson said, noting that he expected the fund to begin operating by the end of the year. "Anything at the margin that will speed up liquidity is worth trying."

This is an amazing admission of failure right as the agreement has been reached.

Credit Crisis to Credit Crunch

Banks which have write downs and losses have to raise capital to meet net cap requirements. One of the ways you can do that is by making fewer loans. Thus banks are tightening up their lending standards.

But there is another reason that lending standards are higher. Many banks no longer function as what we think of as banks in the "old days" of 20 years ago. Today a bank uses its capital to make a number of loans and then packages them up and sells them as a security to another investor. Banks are now originators of loans rather than long term lenders.

But the institutions which are the ultimate market are demanding higher quality loans, and thus originators are responding to the market demand. So far, there is little new CDO issuance, and no subprime securities to speak of. But standards are going to get tighter for all sorts of paper. Capital One informed us today that credit card delinquencies are up over a full percentage point from this time last year to 4.75%. Do you think that investors will buy credit card paper at the same terms as last year? The market for credit card asset backed securities is almost $700 billion. Rates are going to go up, and credit will be harder to get for those with less than pristine credit.

There is a distinct lack of confidence in the ratings of asset backed securities of all types. We do not have a liquidity crisis. We have a confidence crisis. As we see capital implode and confidence erode, we are facing the real possibility of a full blown credit crunch.

(By the way, this is not just a US problem. You can bet similar problems are going to crop up in institutions all over Europe.)

Toxic export: How America's risky subprime mortgages fouled the world's markets

But how did defaulting subprime borrowers in the U.S. end up causing havoc for a British bank that never lent a penny across the Atlantic?

The answer lies in the structure of the modern financial markets, experts say. Securitization --the repackaging and chopping up of loans and other assets into tradable slices -- has allowed risks to be spread across a more diverse set of investors around the globe. When functioning normally, the system is supposed to increase the availability of credit and spread risk, reducing the chance that a major financial institutional will collapse and cause a financial meltdown.

But it has also tied far-flung markets more closely together. That means a crisis in a niche market in one country can contaminate lots of other markets that at first glance have little to do with each other. Technology transfers information in seconds, giving the infection a more potent scope.

A month-long investigation by MarketWatch reveals how such a chain reaction, triggered by rising U.S. subprime-mortgage delinquencies unleashed turmoil among bankers, investors, depositors, policy-makers and regulators all over the world. Their stories -- told from the front lines -- illuminate the powerful linkages between seemingly disparate corners of the financial world, and the risks underlying them.

"The initial problem was in the U.S. in subprime, but the contagion played out globally," said London-based asset manager Dagmar Kent Kershaw of the M&G Investment Management, which oversees more than $400 billion. "In the current financial world, with the free transfer of information, you can't have one part of the world blowing up and not have that affect other regions."

King: the wrong target for Northern's rocks

In truth, listened to, or read, in full, Mr King's interview gives the most interesting account so far of the events that led to the first run on a British bank for 140 years. He also accepts a share, at least, of the blame.

The Bank, he admits, had not pressed hard enough for changes to Britain's inadequate investor protection scheme. That meant Northern Rock's retail deposits could not be transferred quickly to another institution once it was in trouble.

The result was a double-bind. Northern Rock could not be allowed to fail, but its financing needs were so large that any official help could not be hidden from the markets. A secret rescue was never a real option. For its part the Financial Services Authority had been too slow to identify the damage that would be done to Northern Rock by the collapse of the subprime lending market in the US....

....Mr King made mistakes. So too did Mr Darling. The FSA was fast asleep on sentry duty. The tripartite system they were operating was wholly inadequate to the task. But as we hurl the brickbats at imperfect officialdom, we should recall what got us here.

The Bank, Treasury or FSA cannot be blamed for the reckless behaviour of bankers who treated mortgage securitisation as the new alchemy; or for that of the Northern Rock directors who thought they had found a risk-free way to print money. The governor is surely right when he says that the role of the Bank of England "is not to do what the banks ask us to do".

British banks' value dives by £90bn in nine months

Nervous investors have wiped more than £90 billion off the value of Britain's eight leading banks in the past nine months on fears that they are heading for major credit losses, an analysis by The Times has found....

....HSBC, forced into its first profit warning by the credit crisis, is worth £11.8 billion less than it was in February. The UK's biggest bank and one of Europe's largest by assets, it still has a market worth of £100.7 billion. Other banks to fall foul of market nerves include Bradford & Bingley, the mortgage lender, Alliance & Leicester and Lloyds TSB. Valuations of these three have fallen by just over £10 billion in the past nine months.

Alex Potter, an analyst at Collins Stewart, has been bearish on the UK banking sector all year, although he retains a "buy" recommendation on Barclays. He said that if Barclays and other banks were on course to "materially miss consensus", they would have to notify the stock market formally.

"That said, there is a lot of fear out there," he added. "It is a pretty irrational market. People just go online and check out the credit indices. They see even decent triple A-rated paper is trading at pretty big haircuts."

Japanese banks' subprime woes widen

Mizuho Financial, Japan's second-largest bank, reported a 16.6 percent drop in first-half net profits to 327.06 billion yen (2.95 billion dollars) as it booked losses of almost 70 billion yen related to the US subprime loan crisis....

....Another Japanese mid-size player, Aozora Bank, said its net profit for the fiscal first half to September fell 20 percent to 42.75 billion yen, hit by losses arising from its investments in mortgage backed securities.

"Given the sharp declines in markets since mid-October, it may take some time before the subprime mortgage lending troubles settle down," chairman Kimikazu Noumi told reporters.

Japan's biggest bank Mitsubishi UFJ Financial Group (MUFG) last month warned it expects a 31.9 percent drop in net profits to 600 billion yen this year due to weak income, losses on subprime loans and problems at its credit card subsidiary.

Canada's Royal Bank to take subprime charge

Royal Bank of Canada said on Tuesday it will take a C$160-million ($167-million) after-tax charge in the fourth quarter on investments tied to the U.S. subprime mortgage market, making it the second Canadian bank in a week to write down exposure to this default-hit sector.

Commercial Real Estate Black Hole

Blackstone's chief operating officer Hamilton James said Monday the sagging private-equity market might not make a comeback until major Wall Street banks get a better handle on the credit crisis.

Mish comment: We might have a better handle on the credit crisis sometime on or around January 1, 2012 . That number was not plucked out of the air. It is based on historical new home sales, historical starts, and mortgage rate resets in conjunction with a consumer led recession.

"The mortgage black hole is worsening ... it is deeper, darker, scarier than what the banks originally thought," he said. "My sense is they don't have a clear picture of how this will play out, and their confidence is low."

Mish comment: You ain't seen nothing yet. Residential is nowhere near a bottom and commercial is staring over the abyss.

James believes the market for leveraged loans, which buyout funds use to finance deals, appears to be picking up after a crippling summer.

Mish comment: False hope springs eternal.

One-Third of Americans 'Concerned' That Subprime Mortgage Crisis May Affect Ability to Obtain Car Loans, Other Credit

As woes in the subprime mortgage market persist, a new survey indicates that Americans shopping for car loans and other forms of credit are beginning to get nervous.

The survey of 1,000 consumers was fielded in late October by market researcher Synovate of Chicago for GDEXAuto ( – a new Web-based marketplace where auto dealers and financial institutions come together to securely package, buy and sell asset-backed debt.

In response to the question – "Given the fallout in the subprime mortgage market, how concerned are you that your ability to obtain credit for something like a car loan will be affected?" – a significant portion of the population expressed fears about possible spillover from the subprime crisis. Fully one-third of the sample (33 percent) said they were "extremely" or "somewhat" concerned their credit may be at risk.

Amid Housing Crisis, Reverse Mortgage Market is Booming

There is still one area of the mortgage industry that is beyond red-hot right now — worth covering because of how poorly the rest of the mortgage market is performing. Reverse mortgages are white hot, and a good number of loan officers have been looking into reverse mortgages as a way to keep afloat as the rest of their residential business has gone kaput....

....Reverse mortgages were once primarily a tool used to keep from foreclosing on an old retiree. But it appears that the drive for industry innovation has finally arrived to the grey-haired — reverse mortgage fundings have surged 41 percent through the end of September, according to HUD statistics.

And what's been driving the growth in reverse mortgages? A group of investment banks, outfits like Lehman, that have decided they're willing to buy reverse mortgages so they can eventually securitize them. The emergence of a private party market has led to a proliferation of new reverse mortgage "products," so this market segment is no longer constricted to the arcane standards of someone like, say, Fannie Mae.

Well that, and the fact that Granny and Gramps want to go to the Bahamas.

Momentum building for steeper yield curve

This flight from risky assets has sparked a dramatic dip in short-dated bond yields. The sliding dollar and fears over inflation have prevented yields for long maturity notes and bonds falling as quickly.

One of the most popular trading strategies in the bond market involves buying and selling Treasury notes and bonds that have different maturities. Longer-dated securities typically yield more than shorter-dated notes, as investors demand a higher return the longer they hold a bond that pays a fixed rate of return.

This means that the yield curve – which plots the yields paid out by different bonds against the dates at which they mature – should naturally slope upwards. In recent days, the difference between short and long-dated bond yields has reached its steepest level since February 2005. Traders think momentum for a steeper curve is building.

A steeper yield curve puts a floor under mortgage rates, potentially exacerbating existing problems in the housing market as borrowers struggle to refinance into new home loans.

What's Wrong With Approved Appraiser Lists

That's actually why I find those emails quoted in the indictment to be so explosive. I have spent a lot of years learning to decipher coded language about regulatory-not-exactly-improprieties-but-perhaps-areas-of-concern and other corporate-speak ways of putting it that I'm utterly blown away by the unvarnished language being used here. You just don't accuse a major account like WaMu of out-and-out violation of safety and soundness regulation unless the conduct is egregious in the extreme, or you think it is clear that you are being lined up for bagholder duty, or both. It sure sounds to me like WaMu wanted to tell eAppraiseIT what to do, while having eAppraiseIT do the scut work plus the small matter of making all the relevant warranties in the utterly certain event it backfired. Mortgage market participants can be so amazingly short-sighted sometimes it's hard to believe, but somebody at eAppraiseIT seems to have figured out who the sucker at the table was. No doubt they wouldn't be on the receiving end of a civil suit from Mr. Cuomo if someone higher-up had listened to whatever internal employee called bull on this one.

Why didn't they listen? Why doesn't any corporation ever listen? Because the WaMu account is huge, and nobody wants to stop a gravy train. The indictment also includes snippets of emails suggesting that WaMu dangled other business relationships outside the appraisal management function in front of First American if it rolled over. Which is more or less exactly what lenders to do appraisers all the time: offer repeat business if they play ball, or being kicked off the team if they don't.

Redefining "Normal"

According to the country's large independent credit card issuer, among customers who are "at least three months late on their mortgage payments," some "70% are current on their credit cards."

And the above-mentioned change in bankruptcy law is one major culprit behind this trend, the other culprit being the rising number of subprime-related foreclosures. In other words, the revised law makes forclosure-related bankruptcy easier on households than is credit card-related bankruptcy. The outlandish irony is that many of the banks and financial institutions hid hardest by the subprime debacle are the very institutions that pushed for and got the bankruptcy law changed in their favor. So they got the boost in credit-card profits they wanted, but, oops, those profits are dwarfed in many cases by the size of the write-offs from bad mortages and other subprime-related losses now piling up.

Prisoners of Debt

In a financial version of Night of the Living Dead, debts forgiven by bankruptcy courts are springing back to life to haunt consumers. Fueling these miniature horror stories is an unlikely market in which seemingly extinguished debts are avidly bought and sold....

....Consumer lawyers and even some longtime players in the bankruptcy-paper market say they're worried that the trading of canceled debt encourages unsavory efforts to collect on discharged debt. "What you are highlighting is a significant abuse in the industry," acknowledges William Weinstein, a former chief executive of B-Line and a pioneer in the debt-buying business.

Speaking generally and not about his former company, he confirms that
some lenders and debt buyers simply hound consumers to pay debts that have been canceled, while others refrain from informing consumer credit bureaus when debts are eliminated. "The failure to accurately update credit reporting has allowed unscrupulous activity to prosper,"says Weinstein.

How to profit from a 'police state'

In the midst of a six-year war on terrorism, widening income inequality and a growing fear of immigrants, America has become something of a police state, according to a new study, with as much as 25% of our entire labor force focused on protection rather than production.

The evidence is all around us, from the 47% increase in U.S. workers classified as security guards since 2002 to the sharp advance in the number of men and women under arms in Iraq, Afghanistan and elsewhere.

And it's not just public police forces and shopping-mall rent-a-cops. During the raging brush fires in Southern California last month, it was revealed that many wealthy homeowners now hire private firefighters through their insurance companies.

The study by noted Santa Fe Institute and University of Massachusetts economists Samuel Bowles and Arjun Jayadev, called "Garrison America," suggests that one in four Americans are now engaged in "guard labor," which means they either provide security for people and property or impose work discipline at factories, farms and retailers.

China tightens foreign investment rules

China has released new rules to prohibit or limit foreign investment in key industries as it seeks to cool its overheated economy and clean up its damaged environment, state press reported Thursday.

In a wide-ranging directive published late Wednesday, China's key economic developmental agency identified sectors from real estate and financials to oil and rare metals as restricted or off limits to foreign capital.

Have Global Stock Markets Peaked on "Peak Oil?"

For the vast majority of Americans who usually don't follow trends in the crude oil futures market, the Global "Oil Shock" only caught their attention after gasoline prices suddenly jumped 25 cents a gallon at the pump this month, and about 80 cents more than a year ago. Last week, West Texas Sweet crude oil surged to an all-time high of $98.62 /barrel, and jolted the Dow Jones Industrials 4% lower towards the 13,000 level, zapping the value of investors' 401k accounts.

Guy Caruso, the head of the US Energy Information Administration, told reporters on Nov 12th, "We haven't seen the full pass-through of high oil prices yet. I would say what's in the pipe right now for gasoline is about another 20 cents."

The stunning rise in the price of crude oil, up 56% this year and up 365% in a decade, to within a whisker of the magical $100 /barrel level, has some traders wondering whether "Peak Oil" is finally here. If correct, is the spectacular bull-run for global stock markets, which is now 4.5-years old, building a major "rounding top" pattern? Until recently, high and rising oil prices didn't disturb the bullish psychology among global stock market operators. Instead, the spin surrounding rising oil prices described a positive story, an unprecedented boom in the world economy.

But historically, Global "Oil Shocks" have tipped the global economy into recession.

Regarding the credibility at Fitch article, I think that the management teams referred to in the original Bloomberg article linked by Mish are those at the various bond insurers, not that of Fitch itself. IOW, Mish misinterpreted this to mean that Fitch would bend over for the insurers, whereas Fitch was saying that they expected the insurers would take prudent steps to prevent downgrades.

Not that that's really possible at this point...

Head on into the liquidity trap.

From the top dogs, 2T out of the credit markets
If however you read the details, they are really saying 4T and are referencing it to US assets in the text.

Maybe the mother of all "corralitos".

Except in the US where people are not liquid it's going to be more like a slaughtering chute then a corral.

However, Fitch will be under enormous pressure, because of the likely collateral damage, not to downgrade and may take an over optimistic view where possible.

I always find Stoneleigh's analysis fascinating. I happen to live in the USA right on the Mexican border, so I have a question (I'm not sure anyone can really answer it though): after the big crash, which economy do you think will be better off, the USA's or Mexico's?

IMO it would depend on who you are and how long down the road you are looking.

Mexico is basically imploding now, even without a sub prime crisis, so a couple more bips against them from the north and it could get real ugly.

On the other hand their society is much less diverse and clearly outlined, so these type of conflicts might be solved a lot quicker.

Add the quasi feudal system the drug cartels have established and it becomes clear that it would depend on how the cookie crumbles.

Generally speaking one would be best off where one knows the "lay of the land" the best, where one can disappear in the background noise and where one has the strongest support network.

I have friends in Mexico, but I would expect them to last about 10 minutes if the fur really starts flying.

I don't think Mexico will be the place to be given that 40% of government revenues come from oil and Cantrell production has already peaked. I think all those detention centers that Halliburton is building on the border are in case Mexico comes apart completely and there is a mass exodus. I would go to Canada instead. Cold, but politically stable and plenty of fresh water and oil.

Mexico has big exports of oil money, which is going away before the next presidential term because Cantarell production is collapsing, and remittances from America, which is going away before the next presidential term because the dollar is colllapsing.

Re: Mexico and remitances

I often shop at grocery stores with a high proportion of Mexicans over hre without papers as clients. In Harris County, Tx (Houston, Deer Park, Pasadena and a host of smaller suburbs) around 20% of the population is here without papers, so-called illegal immigrants. Many of these folks send cash home to Mexico and other countries to help the wives, mothers and children left behind in the villages. Its the top source of foreign exchange for the average Mexican and is preventing famine in lots of villages.

The Friday and Saturday lines at these stores for check-cashing ect. are down by about 2/3rds. The reason there have been few lay-offs in the construction downterm is the use of all the undocumented workers-they are not reported, so their lay-offs and unemployment doesn't show up on the statistics. The employers pay around $8 per hour for the workers, but they save by not paying social security, purchasing Workman's Compensation or Health insurance and the undocumented workers can be easily exploited and abused with improper equipment and unsafe jobs. Who in their right mind is going to work cleaning tanks of carcinogenic goop? so the petrochemical refiner hires a cotroctor who hires a sub-contractor who isn't picky about papers .

This money is the very tenuous lifeline that keeps a whole lot of village communities in Mexico afloat. In the last few years the main revolutionary activity is in states in central and southern Mexico-Oaxaca, Chiapas, Guerro, Tobasco. The states in the north are controlled by the drug lords. As conditions remain miserable or become worse since NAFTA, emmegration to the US has been a safety valve. The men and women who come to the US are the very best people in Mexico. They may not be very educated, but they have a strong sense of duty to their familiy. They will do any kind of labor to fulfil their obligations, and endure miserable living conditions by camping on the floor of a house that rents to wetbacks a bed space for $50-$100 a week eating tortillas, canned beans and sardines. But, because they are up here and importing their childrn, wives, brothers, sisters as quickly as they can there isn't a big enough base of people who want a real change to grab the power from the rich men who own Mexico still living in Mexico. Its a safety valve.
The Lou Dobbs Know Nothing anti-illegal immigrant stance has stuck the escape valve closed. The more effective the paramilitary militias are in throwing immigrants out of the US, the more misery in central and southern Mexico.

My last name, Ebersole is a Pennsylvania Dutch name. I am descended from one of six brothers that immigrated to Lancaster County. They took as their last name the name of the village that they came from in the Canton of Apenzell (SP?), which shows they were peasant farmers and apparently sent money home to help each other immigrate, and although they were Mennonites, a variety of Anabaptists, came for economic opportunity. They got to the 13 Colonies before there was much restriction on immigration. They are not a lot different from the Mexicans and Central Americans that are coming over here now.

I'm a big believer in learning history, because if I reflrvt on history and my current actions and behavior I can often see better ways of taking action. I don't think that history repeats itself, but human reactions to many similar life situations can show us more useful ways of behaving. Peak Oil is a unique world event, but changing situations altered by prior human behavir isn't unique. Around here people often quote authors like Jevon or Diamond who are trying to do the same thing-determine the best courses of action based on human history. They are far from being the first historians to take this approach. But, we need to go a step or two farther when we read and absorb these histories and try to see how our lives fit in. This approach was the approach of Confucious, the Chinese philosopher from the 4th century B.C.E. and also a number of religeous teachers like Jesus. When you take away the superstition there's a good set of techniques for dealing with a lot of human problems.One of these is the concept of stewardship-we don't own the earth, but are rather entrusted with it for the benefit of god. I don't know whether god made man, but I do know that man makes god-we all have different concepts, often contradictory. But we do have a duty IMHO to leave the world a better place and to help each other as much as possible. In the industrial west we never assumed our duties and obligations to each other and to the world as we should, and the path isn't occult.Its pretty obvious to any person who reflects on the world that our root problem is overpopulation, that climate change because of human behavior would be greatly reduced if we had a population close to the sustainable population of the earth. Its also clear that where the population increase is happening is amoung the destitute and uneducated-the 1.6 billion people who don't have any access to electricity, living hand to mouth and not educating their children. These poor starving children are the pool from which fanatics recruit suicide bombers. Hope is a necessity in the human mental balance. If they ncan't have hope from economic expectations, they seek the solace of the christian Kingdom of Heaven or the 13th Imman if Shia or the 72 virgins if Sunni. Its also doubtful that peak oil would be an urgent problem with 1/3rd as many consumers as today.

Its very clear-we need to educate the children of themost hopeless people on the planet, to get them sustainable electricity and access to the internet and the hope that they will become prosperous too.
Bob Ebersole

Migrant Money Flow: A $300 Billion Current

Globally, migrants from poor countries send home more than three times the global total in foreign aid.

No one is going to be immune from the coming crisis.

The men and women who come to the US are the very best people in Mexico.

Some of them are. Some of them are drug-dealers, serial killers, and other assorted criminals fleeing trouble in their home towns. Just like in any other group of people you might pick, there are good and bad.

These poor starving children are the pool from which fanatics recruit suicide bombers.

That is simply not true. Studies have shown that it's not poverty that creates suicide bombers. It's occupation. The suicide bombers in Israel are often from the middle class, even upper class professionals. You even have the Palestinian equivalent of soccer moms doing it, leaving their children motherless. This is not an economic phenomenon.

Its very clear-we need to educate the children of themost hopeless people on the planet, to get them sustainable electricity and access to the internet and the hope that they will become prosperous too.

If not for peak oil, I would think that was a good idea. With peak oil looming (or in the rear-view mirror), it's impossible. We'll be hard pressed to keep our own lights on.

The suicide bombers ... is not an economic phenomenon.

Lack of access to a court of law where grievances can be addressed leads to asymetric warfare.

Yes. We're fooling ourselves if we think providing for people economically will prevent violence. That's what the Israelis thought. There were a lot of good intentions when they took over the occupied territories. They were going to build infrastructure: roads, water, sewer, electricity - and lift the Palestinians out of poverty. But the Palestinians were strangely ungrateful.

Reminds me of The Life of Brian:

Apart from better sanitation and medicine and education and irrigation and public health and roads and a freshwater system and baths and public order ... what HAVE the Romans done for US?

That's what the Israelis thought. There were a lot of good intentions when they took over the occupied territories.

Please excuse my entering the fray on a sour note but, Leanan my dear, I think with that rather Freudian slip showing your argument is reduced to naked balderdash.

Feed the belly and empty the mind and the kingdom will be secure.

But on the other hand true civilizations do not live by Big Macs alone.

( BTW for fun, see Noam Chomsky about what the USA and the Israelis get up to)

I'd respond, but I have no clue what you are trying to say.

See Klee:)

In that case, I think you need to adjust your irony detectors and re-read my posts. ;-)

Fair enough and will adjust, but to be kind on your part, with this life so fraught with care and massive information overload, your irony be not quite so flat ironed. A few more ruffles to warn the dilettante if you would be so kind.

Or speaking more literally, I apologize for the misreading of yours. I was reading the Stoneleigh for the financial and glossing on through when I came to what I considered a jarring political clanger and made that inappropriate comment. Sorry:)

true civilizations do not live by Big Macs alone.

I have several truly uncivilized friends. Thanks for the sound byte!

Gotta have some whoppers and jumbo jacks too for variety.

Robert a Tucson

I haven't escaped from reality. I have a daypass.

Yes, After all the Israelis were so kind as to appropriate their land for settlements and prohibit them from ruling themselves.

That was exactly my point. As I stated further up the thread, it's not poverty that creates suicide bombers. It's occupation.

And the only reason we are occupying the Middle East is because of the oil.

Actually, I recently read that 48% of the Israeli population now lives in the part occupied in 1967.

Furthermore, they occupy the more valuable and fertile areas. The Palestinians have been moved to a large number of ghettos that are largely isolated from one another.

I repeat here a famous interview with Golda Meir - who was Israel's Prime Minister from 1969-1974

There were no such thing as Palestinians ... It was not as though there was a Palestinian people in Palestine considering itself as a Palestinian people and we came and threw them out and took their country away from them. They did not exist.

How exactly can you have "good intentions" when you pretend that a people does not exist?

It is a bit like the British pretending that Australia did not have any inhabitants when they arrived.

Golda Meir was born in Russia and brought up in the USA

Actually, I recently read that 48% of the Israeli population now lives in the part occupied in 1967.

The population of Israel is 7 million. Of that, 200,000 Jews live in eastern part of Jerusalem, 200,000 in the rest of the west bank, and about 20,000 on the Golan heights. That's about 7 percent.

So I'm a sappy liberal. Let me give you a slightly more conservative reason for aiding them, particularly with renewable power. If we help them leap-frog the fossil fuel stage of industrialsation there will be more of the limited resources to go around becausewhat little electricity used by them is generated with gasoline or diesel generators. If we can help the poorest villages in India and China get wind turbines, solar concentrators and microhydro they will make progress towards a modern life without building transmission lines and coal plants.

I agree its going to take a lot of money. I've thought of a source, though, by returning to some old-fashioned taxation policy. Hillary Clinton and the Democrat energy plan make noises about a windfall profits tax, and I think the odds of passing one are quite high. My suggestion is to provide exemption the windfall profits based on their investment in sustainable energy or US E&P. How it would work is this: A Windfall Profits tax is calculated by subtracting a predetermined "old oil" price from the world energy price and the difference is payable to the feds as a Windfall Profits Tax. If the government would allow the ol companies to deduct their investment in tertiary recovery, deep production construction costs and Windfarms and Solar facilities from their windfall profits tax liability it would stimulate investment in the areas that benefit our peak energy situation, stimulate US jobs and really speed up the construction of sustainable energy projects. It would also benefit the oil companies by directing them towards a business where they can make a real difference in improving the earth.

Bob Ebersole

FYI Hillary only has the ear of about a third of the Iowa voters, Obama is four points ahead, and Edwards has most of the rest. The odds of the Edwards supporters checking the stats and switching to Obama if Edwards can't make it is very high. The media likes Hillary, but the Democrats willing to slip and slide through snow and ice on 1/3/2008 aren't paying much attention to them.

The 9-11 suicide bombers were not undereducated. They were not poverty-stricken. Dogma can trump economic circumstances.

If after the upcoming chaos strikes and things are really bad,,and I observed a rag tag group coming up my lane here at the farm,,if I didn't know them I would likely chose mexicans over the typical American if they wished to stay and help me or join in and work for whatever returns I might provide or could provide...being nothing but some space and part of my land and a few castoffs....

I have worked with a few and talked to more and have came to the conclusion that they have more in common with my past ancestors than todays almost valueless suburbanites or cityfolk.

It pains me to say that but it happens to be the truth. They do work hard,and have the ethics that we once cherished.

There are two different types of Mexicans. Those with some spanish blood or background in their heritage and those primarily mestizo, or of indian background and perhaps some inbetween. I find them almost all to be worthwhile individuals when I speak to them. If I manage a few words of spanish they are happy to reply in the same vein.


I have suggested "Reverse Peace Corps Plan" where poor farmers from Third World countries come to the US to show Americans how to implement sustainable farming practices.

Excellent suggestion, West Texas. I have spent a lot of time in rural India and Nepal and there is a lot we could learn from these people. They can likewise learn many things from us.
I live in rural Virginia and there has been an astonishing influx of people from Mexico and central America. Most of them are fine hardworking people. Maybe they can teach us some things to make life more pleasant on the down side of the oil peak.
And peak oil or not, the lights in the schools should be the last to be turned out.

Countries like Romania have large number of highly-skilled old-fashioned peasant farmers. Romania's horse and cart crackdown

I am sure a lot of them would be delighted to get green cards. I guess the H1B could be expanded to include these special skills

have came to the conclusion that they have more in common with my past ancestors than todays almost valueless suburbanites or cityfolk.

Cityfolk have no value? Go ahead, explain further, if you think such a position.

I just hate to throw fuel on this fire, but costal and/or urban folks in this country have changed in the last generation.

Two years ago we just flat stopped selling equipment in GMT -5 and started requiring 50% prepayment on consulting work there. We got burned again and just stopped working there entirely. When every single interaction is an insulting dance of attempted fraud from the guy making a purchase via Ebay clear up to the largest softswitch vendor in North America that speaks volumes about the level of corruption there. Looking at it from my perspective the only way I can tell a New Yorker from an Indonesian is by the accent and I don't have time for the shenanigans that come from either group.

It isn't just our government that is corrupt, its almost all of us, with the rare exception of the culture of rural America, and even that is fraying due to the demon crystal meth. We've rotted from the inside out and most everything about us stinks :-(

Land of the free, home of the brave? Perhaps once, but no longer ...

Hello Stoneleigh,

I just wanted to thank you for all the work you have been putting into TOD/CAN and your financial expertise in these money matters. It is much appreciated by me even though I don't have the financial acumen to add much to the discussion. Please continue.

Bob Shaw in Phx,Az Are Humans Smarter than Yeast?

Just a big thank you for all your work, these round-ups don't usually get a lot of comments, but I've gained a lot from reading them and look forward to them.

Saudi minister warns of dollar collapse. Unintentionally too, as his microphone was open when the OPEC members thought it was off. OPEC as a whole is debating moving off the dollar, apparently.

"The greatest shortcoming of the human race is our inability to understand the exponential function." -- Dr. Albert Bartlett
Into the Grey Zone

It is logical to assume, IMHO, that if he feels the US$ is so vulnerable that they can't openly discuss diversifying out of the US$,,many are quietly reducing their exposure.
No one wants to be the last one to the exit when the fire alarm sounds. Far better to inch quietly towards the door before the panicked rush.

No one is discussing it openly but the signs are all there. Two smaller Asian nations recently vastly reduced their dollar holdings (Vietnam and I can't recall the other offhand). China is hinting that it is doing just that. Japan is discussing a rate hike, which would throw things all out of kilter regarding the yen carry trade and its relationship to the dollar. OPEC is discussing moving out of the dollar. Major investors are warning to get out of the dollar. The signs are all there for anyone to see.

"The greatest shortcoming of the human race is our inability to understand the exponential function." -- Dr. Albert Bartlett
Into the Grey Zone

General questions about the US dollars and those who would try to get out of them. If China and others tried to vastly reduce their US dollar holdings, who would be there to buy them? Does the US itself step in and buy them back? Or does Europe step in? Because at the ridiculous sums of money China holds in US dollars, another major player or two has to step up and buy them, it can't just be left to "the market", the totals here may soon be in the trillions. Although if the value collapses, I suppose that's less of an issue. But the sellers will be trying to avoid that, of course.

China has been acquiring billions in US dollars a month lately, I don't think reversing that trend can sneak past people. How would they even start without starting selling off without setting off a crash?

Also, I'll chime in with thanks for these threads as well, which have evolved from the time they were just TOD Canada round-ups, and there were almost never comments on them. Keeping them up and hitting such a wide spread of material is incredible.

The best thing for China to do with their surplus dollars is to spend them: oil, other commodities, infrastructure, expertise, manufacturing. For awhile, most of these things will be readily available on the open market although the price will go up even faster than it has lately. In the long run, China has to run faster and faster on the treadmill to keep growing, and eventually just to stay in place.

They have been trying to do just that. For several years, the central part of British Columbia has been crawling with Chinese commodity brokers looking to buy all sorts of raw materials.

A couple of years ago, after receiving numerous contacts from brokers looking to buy raw logs with USD for export to China, I asked one fellow what was going on. He said that the Chinese were looking to buy any raw materials they could with their excess US Dollars, and transport them to China while they could still afford the transportation costs. He said it didn't matter if they had an immediate need for the raw materials, it would be cheaper to buy now while their US dollars still had some value, and store the material for later manufacturing. They were expecting transportation costs to skyrocket and the value of the US dollar to plummet within a few years.

He wasn't at all interested in manufactured wood products, and he was insistent on payment in US dollars.

Us Canucks seem to have become the hewers of raw wood for the Chinese now instead of the Americans.

"Because at the ridiculous sums of money China holds in US dollars, another major player or two has to step up and buy them, it can't just be left to "the market"

Hey, I have R$100,00 here. If China wants to trade... :)

The dollar market is collapsing, just not as fast as some expected. China's "ridiculous" sums are actually lower than we were earlier led to believe. As I recall, I saw figures recently that indicated China has already divested itself of $300 billion of US dollars, down to now holding roughly $450 billion from a high near $750 billion. And they are taking losses on the way out but they know it's better to take the loss now than a bigger loss later. Also, China is using these dollars, rapidly, in Africa to buy real assets. Those getting the dollars are corrupt tin-pot dictators who will then try to cash in against the dollar in the US and in US financial institutions. So China gets tangible assets while the US gets to support petty dictators by our efforts at propping up the dollar. This is what comes of pure, unadulterated greed. Historically, many philosophers have noted that capitalism was a fine system, if moderated by an external set of ethics. Strip away the ethics as we have done with modern society and you are left with a raw red-in-tooth-and-claw ape pillaging his neighbor for whatever he can get. Anyway, China is already divesting itself of these dollars, playing every other sucker on the planet still willing to believe the dollar is valuable into one of their marks.

"The greatest shortcoming of the human race is our inability to understand the exponential function." -- Dr. Albert Bartlett
Into the Grey Zone

What happens if Japan raises interest rates? If the carry trade stops and unwinds then the yen goes up, eh? Then Japan's export economy tanks, in addition to their insolvent businesses that have persisted thanks to 0% interest. Assume we know for certain that Japan will raise interest rates. What follows?

Tim Morrison

Peak oil, global warming, and economic collapse are not the problems, they are the result of the problem. The problem is a collective action problem and an inability to make good long term plans.

I think it's important to point out these lines below from a NY Post article, where John Crudele is a excellent source of finance information.

Stoneleigh did link to the article, but not the last paragraph. We have daily contact, even while I'm away from home, like now, but this one slipped through a little bit, and shouldn't have, in my way humble opinion.

Amongst all the truckloads of numbers, which tend to become merely abstract quite easily, you got to pick the ones that stand out. These do.

I think very few people so far comprehend the magnitude of what is about to come down, the very amount of money, the numbers game. Crudele lifts the veil a tad here. And yes, what he says is that JPMorgan Chase & Co's derivative exposure is 6x the yearly US GDP, and almost twice the world GDP, while its assets are just one tenth of its exposure. Citigroup is in for over twice US annual GDP.

It's important to bring this up because so far, everyone looks at what is presented as banks writing off a few billion, while they are worth 1000 times more. They are not. We have to stop looking at the magician's sleight of hand, and see what truly is inside the hat.

If JPMorgan Chase loses just 5.5% on its derivative exposure, all its assets are gone. That's where we stand. That's your money fund, your pension fund, and down the line, the investment fund and credit line of the company you work for, and of the town you live in.

The camel's back is about to break.


Banks' balance sheets will hit fan in January

So far, Citigroup's derivative investments have gotten the most attention, especially after its Chairman Chuck Prince was forced to resign earlier this week.

But, according to the latest figures from the Of fice of the Comptroller of the Currency, JPMorgan Chase & Co. has the most exposure to derivatives, with $80 trillion outstanding. The bank has total assets of just $1.46 trillion.

By comparison, Citigroup had "just" $34.9 trillion in derivative exposure and total assets of $2.2 trillion.

Bank of America and Wachovia Corp. were a distant second and third in derivative holdings. Washington could, of course, step in and ask accounting firms to be gentle on their clients.

But if investors ever found out about a move like that the nervousness would just increase.

So what's the best plan for our US$ savings in US banks?
I'm thinking of a Swiss bank account in Swiss Francs.

Paulson said he'd try anything. Obviously, Bernanke will try anything as well with that 50 basis cut. Knowing this I say we will get a massive bailout. Massive. Huge-it will tank the dollar, but its to be expected, it is the only way. A Bank Freeze not only would tank the dollar as well, but it would bring commerce to a halt, just as Gas Prices, Food, and Rent/Mortgage payments foreclosure go through the roof. The bailout at least keeps commerce going. Doubtful Bernanke, and Paulson have any other alternative other than to print money like the world is ending tomorrow.
There is little to lose. Its a race to the bottom and the USD has a huge head start, and a long long long way to go.
If you aren't fabulously wealthy right now, precious metals and food don't look that expensive. PM's may be one of your few real bartering tools if your bank goes under- which is possible for a few. But likely we are about to start seeing 100 Billion injections into the Financial system along with more rate cuts. This should keep financial markets going in the choppy manner they are now - and the inflation should help U.S multinationals immensely.

They have a list of the safest banks to use some in Switzerland.

Don't know if you can access the list without subscribing.

Robert Prechter's book "Conquer the Crash" has it also.


I would second your recommendation of Conquer the Crash.

Thanks ilargi - you're right that it's important to draw attention to numbers like that that really put things in perspective.

The current bank write-offs are only the tip of the tip of the iceberg when it comes to the scale of the losses we'll be seeing in the future.


You've been predicting these events for quite some time, and it turns out you were right. Congratulations, I guess... wish the circumstances were better, but you were warning about this for a while now.

Let's hope we don't end up in a global 1930's style Depression!


Just to also add my thanks for Stoneleighs hard work, really first class. I have been following Roubini's articles and blogs and you can also obtain fascinating insights there.

All my assets are now held in cash (with some gold), and 90% of the cash is either on call or at 3 months notice. I think I will be keeping it that way for some time to come!

I have also moved to cash or resource stocks. I have 2 private REIT’S I am involved in, almost all commercial real estate. Mish has been sounding the alarm on commercial real estate. I do get a 7.00 return each quarter, but if I stay in them what have I got? No value left in fund. So I requested complete redemption of all our shares in each fund. Guess what? Even though 4th qrt. is open redemption on shares both funds are holding back do to market conditions. I will just have to wait and hope to get my money out.

Stoneleigh, thanks for the weekly summary!!!

Wow, good work. Very impressive. I have been watching this mess unfold for about two years. I hope the whole thing falls apart. The people in charge of the money aren't worthy to manage a grocery store, much less the world money supply.

EXCELLENT sourcing. I have to admit to bias though, since I'm reading most of those sites and sources already. It's hard to believe we have warming, oil, and greed peaking in the same generation. From the greatest to the leastest!

There is no cure for stupid.

It's hard to believe we have warming, oil, and greed peaking in the same generation.

It's the other way around. We have exponentially growing populations, demand of resources, demand on the environment, demand on the biosphere, demand of fractional banking (demand on the future). It necessarily follows that the limits of each of these are hit in close proximity. If it wasn't these particular issues it would have been other limits (social cohesion, inequality of wealth, available land, etc). It's hard to believe that we are so poorly organized, what with our big brains, tools, science and all.

Tim Morrison

Peak oil, global warming, and economic collapse are not the problems, they are the result of the problem. The problem is a collective action problem and an inability to make good long term plans.

It's hard to believe that we are so poorly organized, what with our big brains, tools, science and all.

We're awfully well organized, we just have awfully myopic priorities.

So...what does it mean, for us non-financial types? And what should we do to prepare for it? Is there anything an ordinary person can do?

IMO it means we are moving inexorably towards a real credit crunch (as opposed to the preliminaries we're seeing now) - little or no credit available (only at a very high rate of interest to the most secure borrowers). I would argue that the banking system is ultimately facing insolvency, and the scale of the losses would be too great for a bailout. If banks fail in concert, then deposit insurance wouldn't be worth the paper it's written on. Having access to you funds will be very important, so don't trust the banking system.

Preparations would include securing access to funds and getting out of debt, and this includes mortgages. It's better to own something tiny outright than owning a small fraction of a large house. Renting is also a good idea - think of rent as paying someone else a fee to take the price risk for you.

After that, I'd consider investing in a degree of self -sufficency (ie covering as many of the essentials of your own existence as possible, as some of what you need could become unobtainable). Practical skills and hand tools would be useful.

Having access to you funds will be very important, so don't trust the banking system.

Man, that's easier said than done. I'm still looking for a new bank since my bank went belly-up. (RIP, Netbank.) My employer doesn't pay in cash. It's check or direct deposit.

I have no debt, not even a mortgage, but for those not as fortunate, "getting out of debt" probably isn't something that can be done before Jan./1Q 2008.

And I guess if your vision of the future is correct, we should cash out IRAs, Roth IRAs, deferred compensation, etc., despite any penalty. But geez, it's hard to do that.

While Stoneleigh's and the other replys have merit, I would suggest that they make an apriori assumption of how the future might play out. To me, developing a scenario of the future is the most difficult and crucial part rather than the actual steps that flow out of the scenario.

Someone who believes in a fast crash/societal collapse will likely take different actions then someone who believes there will be ample time to make adjustments. And, clearly, someone who believes there will be no crash at all will take different actions, if they take any any action at all, then those who believe a crash is inevitable.

There are also psychologial questions such as how deeply does a person really want to survive, that is, how much of today do they want to "give up" in order to increase the probability they will survive tomorrow. For example, one could stop eating out in order have the money to buy storage food.

There was a recent thread on the LATOC forum regarding moving to a better location. What struck me about the replies was that the posters assumed that a worst case would not develop since most of them suggested moving to a small town near a largeish city.

So, without beating this to death, I'd start by asking myself how is the future likely to play out; inflation/deflation, recession/Great DepressionII, corporatism-fascism/"democracy", civil order/anarchy and so forth. When that is complete it becomes quite easy to know what steps are necessary.


To me, developing a scenario of the future is the most difficult and crucial part rather than the actual steps that flow out of the scenario.

I don't think it's possible. Nobody can know the future.

I honestly don't have a clue what will happen. I'm not ruling out a fast crash. I don't fully understand international finance, but even the MSM is getting kind of nervous about the credit crunch.

But I'm also not ruling out BAU continuing for the rest of my lifetime, perhaps with a few speedbumps along the way, as we wind through catabolic collapse. There's an awful lot of inertia in a system as large and complex as ours.

That's why I haven't completely bailed out of the stock market. If we get the inflationary rather that the Great Depression version of the apocalypse, stocks might be better protection.


It may not be obvious to you but you have made a decision about the future: Things will happen slowly enough so that I (Leanan) will have time to make adjustments as necessary. Further, that I will be able to make the adjustments without constraint. And, lastly, that my ability to survive will not be impacted.

It's not the conclusion I came to years ago but we each have to walk the walk we believe in.


It may not be obvious to you but you have made a decision about the future: Things will happen slowly enough so that I (Leanan) will have time to make adjustments as necessary. Further, that I will be able to make the adjustments without constraint. And, lastly, that my ability to survive will not be impacted.

Completely wrong. It's more like, "I don't know what will happen, so I don't know what to do about it. This could really suck, but what can you do?"

I'm an INTP. I like keeping my options open as long as possible. I realize this could come back to bite me. But I don't believe I will be able to make adjustments without constraint, nor that my ability to survive will not be impacted. I just don't know what's going to happen, or what I should do. My "decision" on the future is that it's uncertain, so the best thing to do is hedge as much as possible.

I agree - it's really hard to make drastic adjustments. Selling the home I loved in England in 2000, leaving behind my academic career and moving to Ontario to learn how to farm was the hardest thing I ever did. Everyone said we were crazy, and some still do, but we've been watching this crisis (or should I say these crises) move closer for a long time and felt we had to do something about it.

Having a salary paid into a bank isn't necessarily a bad thing, but I wouldn't suggest leaving your savings there, deposit insurance or no deposit insurance.

I have no idea how old you are, but I doubt if most people will see anything of their pensions when they get to retirement age. A bird in the hand is worth two in the bush, so to speak.

Stoneleigh, you and WT have mentioned renting as a good way to go, but I don't necessarily see the sound logic in this. Your landlord could just as easily go into foreclosure or try to change terms on your lease and then you end up having to take them to court.

I think you have less control or your life in this situation.

Your landlord could just as easily go into foreclosure or try to change terms on your lease and then you end up having to take them to court.

Why? Why not just leave? Heck, they'll usually give you some cash if you just go away quietly. ("Cash for keys.")

IMO, that is why renting is a good idea: you aren't tied down. Mobility is a good thing in a time of crisis. It's inconvenient if you have to move a lot, but it beats the heck out of being foreclosed on because you can't make payments, or can't afford the property taxes.

I'm looking to rent very soon as my house is under contract. One of the strategic decisions I am making is to rent a nice apartment in a 2-family house that's been in the owner's family for over 50 years w/no current mortgage. The apartment has a new, high efficiency furnace and the bills will be all mine to pay. That means I pass up a comparably priced, but really spectacular apartment in a home that was purchased by the current owners 3 years ago. The difference: the one I'm skipping (that has heat & hot water included) has a HUGE new mortgage. If this owner, a mergers & acquisition lawyer, has a gap in employment, I'd be at a higher risk in my rental homestead. I'm going for security. (I readily admit, however, that I am already wistful about not seeing those Tiffany stained glass windows every morning.)

I don't like heat and hot water included. That's what I have, but I don't like it. It means no matter how much I conserve, my bill doesn't go down. It leads to people doing dopey things like leaving the heat on and opening the windows.

I haven't used heat for 3 years (starting my fourth). I'm in an apartment in a house built in the 1880s. I had an aging but well-more-than-adequate space heater that warmed the whole place quickly back when I used it.

They had to install new heaters to the whole building last year. They got the cheapest possible (these still have constantly burning pilot lights, argh, which in my case I immediately turned off). Cost them $34,000 or so for 8 apartments in the building, and on this sort of "improvement" landlords here can pass through 50% of the cost to certain tenants (long term tenants...) over a 5 or 10 year period (we have a version of rent control). My rent goes up next month by an additional $25 for a heater I will never use, save for right after it was installed, I turned it on for about 20 minutes to see what it worked like for the sake of curiosity, and it was maybe 20% as effective as the old one at warming up the place.

It's now covered by the bookcase that was there before, where they "had" to put it to meet all the regulations.

As we discussed a few months ago, renters really have no legal standing in a foreclosure, unless the owner of the mortgage subordinated the lien to the residential lease. You are basically a squatter, once the bank forecloses.

There is a front page NYT article on this topic. Congress is working on a Renter's Bill of Rights, which is heavily opposed by the financial industry.

In any case, I agree with Leanan. Your potential loss, as a renter, in a foreclosure proceeding is much less than your potential loss as an owner in a contracting real estate environment.

Here's the article I read this morning:

NY Times: As Owners Feel Mortgage Pain, So Do Renters

LAS VEGAS — In the foreclosure crisis of 2007, thousands of American families are losing their homes without ever missing a payment. They are renters in houses whose owners default on their mortgages — a large but little noticed class of casualties.

Some live in big apartments, others in houses owned by small investors who got in over their heads.

There are no exact figures for how many renters have been evicted because of foreclosures, but a survey taken this year by the Mortgage Bankers Association found that one in eight foreclosures was non-owner-occupied. This figure probably underestimates the problem, according to the association, because buildings receive tax benefits if they are registered as owner-occupied. More than one million properties are expected to enter foreclosure this year.

Many renters say they never even knew their buildings were heading for foreclosure.

I just don't like giving advice to people to get out of their houses and go rent somewhere. The problem with renting is that you do not control your destiny in the dwelling and can be surprised at any moment with eviction, poor management practices (i.e., carbon monoxide poisoning - which happened to me in college), pests, violent neighbors, and noise.

Since I have children, I would not prefer to be renting. If you are single and young, renting is OK because you can pack and leave pretty easily and quickly, otherwise, I would think twice before going that route.

The problem with renting is that you do not control your destiny in the dwelling and can be surprised at any moment with eviction, poor management practices (i.e., carbon monoxide poisoning - which happened to me in college), pests, violent neighbors, and noise.

That can happen if you own your property as well. The difference is that if you rent, it's easier to move to a better location.

The thing is...once a certain percentage of homes are in foreclosure, not only do property values plummet, crime, vandalism, etc., increase. People feel unsafe in their own homes (especially if the drop in property taxes means less police and firefighters). You can't sell your home in those circumstances; who would buy? And if you get in trouble, the fees from the banks, etc., will suck you dry.

My family moved often when I was a kid. It was hard in some ways, but as an adult, I'm grateful for the experience. I think it gave me some skills I would never have acquired otherwise.

I watched 'The Grapes of Wrath' last night.Certainly the Joad family didn't find it easier to move to a better location. I had forgotten that one of the premises of the story was that the families on the road had been sharecroppers and the banks had foreclosed on their former landlords. I doubt the historical accuracy of that, but the point is the searing impact of being 'dispossessed' and 'evicted'. In the face of a huge economic contraction, to at least be able to keep one's home would be an immeasurable comfort, I would think. Frequent moves may confer valuable life skills, but at what cost? Ma Joad had to watch her family disintegrate, and I think that had universal resonance among people of that generation.

If you think that the Joad family had it rough, you ought to read about what happened to those who stayed in the Dust Bowl areas (check out "The Worst Hard Time").

Hi Stoneleigh,
If the banking system faces insolvency, when you say "securing access to funds," do you mean simply holding cash?

Essentially yes. Being liquid means holding cash and cash equivalents like short term treasuries.

Alas, if you don't have money you are kinda screwed.

Look at things this way: We are ALL going over the cliff. So, if we are all going over a cliff, how do you go over later than sooner. Because, if you go over later enough, the others bodies should provide a ramp on can walk down.

Having some cash in hand puts you ahead of people who don't have cash/get their cash out of the bank. *IF* there is a run on the banks, having some cash will put you better off.

If things are 'riot in the streets' bad, having food stored (See Mormans) would be a good plan. Visit old Y2K pages for lists of what one should consider having.

I have a problem with your over the cliff analogy. Rather than being last, I'd suggest taking the time to put on a parachute and going first, leaving plenty of time to get out of the way at the bottom before everyone else follows. In practice this amounts to something very like Westexas' ELP suggestion - living within your means with room to spare and no debt, however much of a diminuition this means for your standard of living.

Many people can't really afford their current standard even now at the best of times. Trying to hang on to it will only guarantee a personal tragedy when there's far less money (and virtually no credit) available, especially if it involves being trapped in a leveraged position in an illiquid property market.

What they said, 100% liquidity and no debt.

One thing no one ever mentions is water. Other then having lots of water it is a good idea to have a modern military type non chemical water purifying system.

However the most important thing of all is to get in the proper frame of mind and have some responses or routines already decided upon for various scenarios.

Lots of good bits of info here

I have mentioned water before, more often in the Energy and Environment Round-Ups though. Access to water could scarcely be more important. Among common-sense preparations I would include a water filter unit like those aid agencies use in the third world, along with a supply of replacement filters. Units like the Big Berkey from British Berkefeld are available from Lehman's Non-Electric Catalogue (for white ceramic filter elements that last for a long time) or at here (for more effective black activated charcoal filter elements that don't last so long).

A water filtration unit is not an expensive proposition - about $250 (US) for the unit with one set of filter elements, and about $100 (US) for replacement elements (either black or white). It works purely by gravity, requiring no power. Mine works a treat on the water from my drilled well, but I could also drink the water from the 100 year old hand-pumped dug well on my property if I filtered it through activated charcoal.

Everyone should think about where their water will be coming from in a money-limited and energy-limited future.

place u'r bets for as many scenarios as possible.

i'm doing partial withdrawal & early penalty of ira for preps & yet hoping
i can time getting all in ira out + invested for inflation/hyperinflation if things hang together
.i think electronic money will allow the financial system to
continue for some time; hiding behind inflating.

if deflation &/or hard crash happens i will have basics
but have to , like most everyone else work my fanny off
growing food, etc. obviously i will likely lose the ira $'s.

i'd like to be futher from the metro area i am near, but family is here so we will be for the foreseeable future & if the inflation route holds true i will push to buy a backup place in the back country. i'm least prepared for mad max scenario;though i did outdoor adventure
for a living a few years so
i have an idea or two; sure is a scary thought.

i'm very fortunate to have some capital to work with.

in u'r case leanee i remember u not being wedded to a location. still like matt savinar i'm sure u have some preps & plans.

in some ways not having a choice for now due to family about location
makes my decisions easier, though taking that penalty
w/ tax hit hurt but the securing preps [waterwell, etc.] the $'s brought was worth it psychologically.

good luck with the tough decisions[my family often thinks i'm nuts!


thanks so much for all u'r work in this area!!!

So, Stoneleigh brings us one step closer to the needed capitulation.

Good deal.

The only thing holding us back from the normal outcome now is (a) the stock market, still up on the year. That has to change, if not this year, then next, but no one really knows...(b) Belief by many that China's growth is unstoppable. I commented on that, I think that the great unseen train coming down the track toward us is a Chinese collapse, which will suck billions of dollars of invested money down the tubes with market losses there of over half easy. The risks of a Chinese collapse are to me greater and sooner than the U.S. one, and (c)the belief in commodities and oil/gas price increases into infinity. Right now, when all else fails, scream "Peak everything" and pour money into commodities. This could result in catastrophic losses for many, who may not even know how deeply they are invested in commodities and energy by hedge funds and mutual funds until it's too late.

I want to do a second post on a more personal view of the "easy money" world which many claim existed over the last decade, but allow me to say that in much of the country it was a simply never occured.


Date: December, 1997.

I had come off a very bad couple of years. Some earlier ventures of mine had not done well, and at the end of the day, I simply had to return what assets I had and the keys to the building. A rough period.

I stayed with family, took some menial work, first as a bus boy/waiter/dishwasher, sometimes grill cook, and then as a small time clerk at a warehouse. I kept my contacts up, and finally found, in December 1997, a job closer to my former skills, a midlevel supervisor at a media research firm.

From there, I began to pulled upward, slowly at first, but then at an increasing rate. I started part time/probationary, but stayed and rose in income with earch promotion. Ten years later, I would have a full time position, complete with health benefits, paid holidays, etc. I still had/have some ventures I want to attempt, some deals I want to do, but the security has made it hard to leave.

As the new century neared, my investements in the market had increased. I now had made money on several companies I had invested in, and had a nice little nest egg going, but why take chances. I decided to move it to a nice safe place, a utility in Kansas, the utility that electrified Kansas city, Aquilla Corp.

Aquilla had never missed paying a dividend since 1924. They were off the old peaks, so made for a good buying opportunity. Being cautious, I did not place everything I had there, but held some aside in cash, and had some other small holdings.

Then, 9/11. And of course, Enron, still AAA rated by many bond rating agencies until only weeks before it crashed.

The ratings agencies panicked, dirt began to leak out from all over the utilities industry. Including Aquilla:

Almost complete collapse, as the shares fell, the ratings agencies by now were in full hysteria, downgrading it more, and more. The dividend stopped for all share holders. Remember, this was a company that had paid dividends through the great depression.

Luckily, my job remained, but I had expenses, expenses that had been pushed back by years of hard times, and now a massive lose in the markets. I was driving a GEO Storm at the time, with 240,000 miles. It blew up. Head cracked, all she wrote.

I had need of dental care. My blood pressure had long been prone to stay at critically high levels if I did not recieve medication. My clothes were falling farther behind my job station, I look the part of an employee two or three levels back to where I had been 3 years earlier.

Only one thing to do, you guessed it already: Credit cards.
My credit was not terrible, and interest rates were low after 9/11.
I played catchup, using credit cards to get back up to speed.

Fast forward, 2006. I was making more money, but had less. The credit card rates has escalated. It seemed the minimum payments were not climbing at an astoundng rate. Christmas season last year, I ran out of blood pressure medicine, my doctor on vacation, within hours my blood pressure had climbed to what the doctors called "hypertension crisis". I went to the emergency room. I still at that time had no insurance, was paying for medication and doctors visits out of pocket. The emergency room trip cost me some $600 dollars, and the medication had to be paid for. I fell behind on the cards, late. Deadly.

By the beginning of 2007, the card rates were now astronomical. Any access to credit was cut off, as the accounts were closed immediately by the card companies. One of the cards was at 24.0%, the other at 32%. Between the tow of them, I owed about 14,000 dollars.

Even if I had decided to buy a home closer to where I work, I could not get a mortgage. Niether by the way, could anyone I worked with. Their income was not high enough, they did not live at their current address long enough, their credit rating was not good enough.

It was then that I began to study hard the "credit rating" system. I also studied the way in which banks calculate credit card rates. I began to see the way in which this system was used to keep people out of homes, cars, and other needs. Everyone I knew rented. I asked them why, why not buy? They laughed. They had been down that path. I had not tried to buy a home in years. I did not know how hard it now was. I learned fast.

I learned something else. Beginning in a period at the beginning of 2007, I went on a debt paying binge. I did not travel, even to see family in Alabama or to my favored vacation spot, Wisconsin. I did not go to concerts. Fortunately, I was out of a prior relationship, so I had no female to buy gifts for at the moment.

I paid. And paid, 4 times, sometimes 5 times the minimum.

The debt on one card, the highest interest one, was cut in half in a matter of months. Their reward? The interest rate went up, and they raised the minimum payment (?). I now realized I must try to pay even faster, as they would try to pull me back into deliquint status by raising the interest until I would have to be late, and thus, another rate increase would be forthcoming.
In recent months I have been paying them at over $1000 per month. I should be completely out of debt with them by first quarter of 2008.
This bank has lost a third of it's share value since the start of the year. I feel sorry for it's shareholders, but as for the bank, the faster they collapse, the better.

The other card, with National City Bank, has been professional and decent. As I was able to pay, they lowered the rates, from 24% down to 15%.

This is the difference between the swine loan sharks in the industry, and the decent firms doing honest business. I want to praise and thank National City Bank here and now.

But, to the centrel point from which we began, "easy money"?


This is a crisis staged and whipped up by the financial community in everyway.
It is nothing less than a land grab, wealth grab, and home grab.

Until the American people learn to stop being whipped into these hysterias, and think things through, they will jerk us around like a dog on a chain.

Likewise, and sorry to have to say this, most of this "Peak this, peak that, peak tomorrrow, peak everything" idiocy. We are being bled to death by our ease at believing every hysteria that comes down the road.

Where does it lead? Why of course, to peak....Just ask the poor bastaards up on the East coast or in the upper midwest if they have to wait for "peak oil".
They can't afford heating oil now. Is it because there is no oil? Helll no, we know better, with record air traval using the same distillates they need being poured through jet liners, and a coming summer season of speedboats on the lake...

What a hysterical bunch of crap the financial community is peddling, all to give us a reason they can legally bleed us to death. Crisis?

Yes. A crisis of dignity, a crisis of intellegence, a crisis of education. There were those who used to refer to the American people as "sheepie" on TOD. I was critical of them for using that term.

But now, I worry, as I hear the "sheepie" being whipped into artificial hysteria's of every sort.

Easy money? Yeah, as guy once told me, "This deal could make you reasonably well off if you were already filthy rich."

I will tell the liar bankers.....there has been no "easy money" where I live.


I don't think you can disconnect a collapse and china and one in the US I think its a sort of mutual collapse in the works.

However I think the trigger will be a collapse of the housing market in Europe especially Britain and also in Canada. This will probably take out the housing boom going on in South America and parts of Asia. This crises will make it impossible for the US to prop itself of and as it goes down China drops which send the US down farther etc. And of course on the other side we see US/European trade going down. This will of course touch South America and Mexico. So you can see how as we start getting a sort of sloshing of problems around the world.

This is the unsolvable problem.

I think that the great unseen train coming down the track toward us is a Chinese collapse, which will suck billions of dollars of invested money down the tubes.

I think you're right about China's prospects Roger. Their economy is in an enormous bubble, and IMO when it bursts, they'll have their version of our 1930s, while we have something worse. I'd say it's highly likely that the developing credit crunch will be global - in other words that it will impact on all economies at about the same time.

So, Stoneleigh brings us one step closer to the needed capitulation.

It's possible IMO that we could see a short term bottom soon and another upward spurt, but if so I think it will be relatively short lived. In other words, if this is a downside capitulation in stocks, it's a very small-scale one (IMO such psychological cycles occur at different scales simultaneously). Looking at the bigger picture, we're still close to a historic top, with a bottom very, very far beneath us

China is probably in a bubble, but when it bursts, I don't see them being worse off than they were before the hyper-capitalism took off. Overall GDP is high, but per capita GDP is still low. They have low wages, and most of the population probably lives on under $5 a day today - i.e. most of the population is already living our 1930s.

The novelty/demand volume meter can't easily be turned down. Once someone is exposed to a 'stimuli' that is culturally promoted, its is very difficult to change the desire for this stimuli. (see Schultz/ habituation papers). Im going to write on this next.

But the main discussion point that we (or the Chinese) CAN tighten our belts with no problem is much different than if we will.

Thanks Stoneleigh for compiling all these news sources-thats an amazing effort which is much appreciated. Peak Oil/Energy is the story of our generation - but many of the possible credit scenarios will trump peak oil - at least in the short term. Finance and energy are now inextricably linked..

Peak Oil/Energy is the story of our generation - but many of the possible credit scenarios will trump peak oil - at least in the short term. Finance and energy are now inextricably linked.

This is pretty much the way I see it too - energy is the master resource, but finance has an extremely important dynamic of its own that can derail the economic train before it actually runs short of fuel.

I don't think China is in a bubble because their banking system doesn't really work like ours. The banks have tons of bad loans that don't get paid back on and nobody cares. It doesn't really matter though cause the government just bails the banks out and they lend some more.

""The reality," Gave said, "is that Chinese banks have often acted as a financing arm of the government. So it's not like Japan or the United States or France, where you have bad loans that force banks to contract lending, which leads to an economic slowdown. In China, the bad bank loans are actually on the government books."

For comparison, Gave cited the emergency €400 million, or $507 million, bridge loan provided last year by the Italian government for a bailout of the chronically troubled national airline, Alitalia.

That loan was replaced in December by a complex financial restructuring in which the airline raised fresh capital from investors and split off a ground services and debt-holding unit, AZ Servizi, in which an Italian state financial company took a 49 percent holding.

In a similar scenario in China, Gave said, a failing airline would simply call the government to say that it was about to fold, and the government would instruct a state bank to issue the loan.

"So in China, this would show up as a bad bank loan instead of a government debt, and it happens all the time," he said.

China has literally been carrying the USA on its back for years-when it decides it doesn't want to do it anymore the implications will be just as severe as global oil depletion (for the USA).

When I say "needed capitulation" I mean it just that way. It may not be wanted, but it is needed.

I am talking about something close to what we saw in the 1970's, which were tough, but better the 70's than the 30's in my view.

The whacking of interest rates I think will be seen as a huge mistake, only extending a bubble that had to be popped.

The last of the small investors had finally gotten into the housing market. They had done the unforgivable and had the nerve to try to own their own home. Had they "beaten" the system, and did they really think they would be allowed to live well? What do you think, the financial community would allow this....young people owning their own home? The nerve...

The last of the small investors had finally gotten their trust up and gotten back into the financial markets, the stock markets and mutual funds.

Folks, that is always, ALWAYS the sure sign that the market is topped. The last of the suckers are in, take um down.

I will tell you what terrified me and when I knew the market was due for a MAJOR setback.....I recently spoke to a 22 year old woman I work with who was investing in mutual funds....need I say more?


I can imagine a commodities drop if economic activity plummets.

However, could you forsee, for example, oil and gold halving while the value of the dollar drops by 2/3? In other words, isn't it what you can purchase with your $ that counts?

If a currency inflates faster than the rate at which commodities deflate aren't you better off owning the commodities?

Jason Bradford asks,
"However, could you forsee, for example, oil and gold halving while the value of the dollar drops by 2/3? In other words, isn't it what you can purchase with your $ that counts?"

And of course we just know that the value of the U.S. dollar is going to keep dropping and dropping....because after all the Japanese and Europeans are superhuman (wrong), and they have such a better demographic situation than we do (wrong), and they are far less dependent on imported oil and gas (really, really, wrong) and we will never ever raise interest rates in the face of a severe recession (going by history, very wrong...)....

Another interesting chart...

As a general rule, if gold is high, then stocks are low, and if stocks are high, then gold is low. Right now, we seem to be facing a situation where stocks are high, and gold is high. (?)

If history is of any use at informing us at all, this must mean that either stocks must come down and gold remain high, or gold must come down and stocks remain high. The current situation indicates an inbalance and abberation.

I will leave it to you to decide which will drop first, and which way you will bet your money.


of course, this financial turmoil would find the FED doing nothing?!!? these guys took short rates to 1%, remember? bernanke gave the infamous "deflation we can't let it happen here" speeches in fall 2002- spring 2003. we probably don't immediately transition to the total system collapse where hand tools and seeds or guns 'n ammo are the best "investments". so the endgame would be the weimar scenario: stocks high in nominal terms while the dollar drops gold soars and the dollar ultimately collapses. the current situation is unbalanced and aberrant, but not unprecedented. if the situation is less dire, it no doubt pays to remember that bernanke is no paul volker!

IMO we could see gold and oil halving while the dollar spikes upward. My view of the dollar is that we're seeing a medium-term downside capitulation that should lead to a significant increase in dollar value.

In a deflationary spiral, and firesale of assets (to meet margin calls and running costs) leads to an increase in the value of the dollar relative to goods. In comparison with other currencies, dollar-denominated short-term treasuries are likely IMO to be considered a safe haven in a world of junk debt (however unlikely that may sound at the moment), and that should feed into a sharp increase in the value of the dollar. I would expect both the dollar and the yen to rise (as the yen carry trade unwinds), and the Euro and the Canadian dollar (for instance) to fall.

Thanks for your very hard work.

If this is the big one some thoughts to bear in mind.

You won't be safe in anything except hard assets, in your hand, or treasuries (preferably short term). Possibly not even in government obligations - however RRSPs and the like can only hold paper claims so in these 3 month TBills are to be preferred. Even callable money in banks or credit unions is not safe even if you are below the insurable limits. If the bank shuts its door thats it you are only a creditor.

It may not be here just yet, there have been many scares along the way. However it sure doesn't look good.



There are few things that must be kept in mind if we are to make good personal choices in the period coming:

First, the United States of America and Canada. If you count in "hard assets" these nations are as rich as they have ever been. Probably much richer. In most of North America, the infrastructure is very good despite some widely publicised issues (bridges come to mind), the roads are better than almost anywhere on Earth, we have more airports, shipping ports, industrial buildings, office parks, and good information infrastructure (although the market penetration of broadband internet has been a major disappointment) than any region on Earth.

All this is to point out that this is a purely a financial crisis, created by the financial community to benefit the financial community. There is nothing whatsoever nation threatening to the U.S. or to Canada in this "crisis". Both are as sound financially as any region in the world. For those looking forward to the end of the "Western world", you may have to wait much, much longer than you planned, so I hope you brought your fvckin lunch.

Now, what to do to avoid being sliced diced and having your property and wealth stolen by the financial community (because that is what this is really all about, a land, house and wealth grab by the financial community)
1. Pay down debt. Sacrifice if you must but JUST DO IT. You will be astounded at how much the banks and the creditors are already bleeding you for, simply astounded! It will show almost immediately.
Most Americans are paying more per year in interest and financial fees than they are in energy costs, and particularly than they are in gasoline costs. If the choice is between changing driving habits or paying down debt, PAY DOWN DEBT FIRST. All of it.

2. Sweat equity. If you must build or remodel, see if you and some friends can do it yourself. This is imperative. And don't borrow money to do, whatever you do. If you are looking for a home, consider building it yourself or at least acting as your own contractor. Again, if you can do it this way rather than buy it, do it. And if you can pay for it in segments and out of pocket, DO IT. Mortgages are now in the same catagory as credit card debt.

The ratings agencies rate your credit worthiness as an individual. They play huge games with the credit ratings, able to set them based on the most baseless information. Have you moved in the last year? Sorry chump, you just lowered your credit rating. Have you been screwed with by a creditor until you said "fine, I'll pay it off and just close the account." Sorry chump, even though you reduced your debt and payed in full, you just lowered your credit rating.

It is time to start rating the creditors the way they rate us.
Obviously, credit cards are junk status, as are rent to own, and check cashing firms.
Next worst, auto loans, and consumer loans from non bank consumer credit firms, mail order firms offering credit with catalog sales, etc.
Next, unsecured bank debt, signiture loans, etc.
Next worst, bank auto loans. That is not the banks fault, because the money is being borrowed on a depreciating item.
Next worst is home finance and mortgage loans.

Note that mortgage loans are still ranked at the top, not because of the quality of the firms doing the loaning, but because the asset being borrowed against is an appreciating asset.

However, extreme caution MUST be used when dealing with mortgage bankers and home loan lenders.

The mortgage lending industry was once respected in the financial services community above most others. It was felt that there were many shysters in the financial community, but the mortgage lenders could be trusted.

One of the great unspoken losses in this recent financial bit of shady dealings is that the home loan and mortgage lending industry have destroyed credibility and trust that took decades to build. Not since the great depression have they been so distrusted, and it will not be for the rest of our lives that respect and trust will be placed in them again. A horrible loss of credibility, a tainted industry.

3. Cars and trucks. DO NOT BUY NEW. The depreciation on new cars is incredible. If the car is efficient on fuel, you may lose more in the first two years of ownership on depreciation than the cost of the fuel the car will burn in it's life with the first owner, i.e., you. Buy used, slightly used if you want to be up to date, but do NOT buy a new car or truck, it is a horrendous loss.

If you can afford to drive what you have even another year, do it. If you do not have a car payment, stay that way as long as possible and pay down the other debt you may have, or put the money into bonds.

4. This brings me to my most controversial thought, and it has taken me awhile to make this decision: This is for informational purposes only, and is not to be taken as advice, but is simply my view at this time of what I should be doing. The writer is not liable for any decision made by readers, and is not giving, and is not authorised to give any financial information. This paragraph is for discussion purposes only:

At this time, I would not buy, nor own stocks, and would avoid any ownership of stocks in mutual funds wherever possible. I am right now interested in bonds, CD's at banks that are FDIC insured, and a very small number of agency bonds with the TVA (Tennessee Valley Authority).

I do NOT have any interest in agency bonds backed by mortgage lending (duh!):-), and do not have any investments, nor want any, in energy or commodities. After the dust settles, I may look at certain energy opportunities, mostly LLC's involved in energy transportation, such as nat gas pipelines or propane distribution. Also, once I am able to establish whch firms and which formats show the most promise, I will look to investing in PV solar. But not until volatility drops and sanity returns to markets. Right now, it's U.S. backed bonds and CD's, at least until this coming spring.

The philosophy is actually simple: Get rid of the debt, so I am not being bled by the financial community, and own none, NONE of their shares, as they are far too risky. Bonds. Get paid while you wait, and let's vote with our money and let the financial community do without our blood for awhile.

Thank you

Roger Conner Jr.

Thanks Stoneleigh for these finance roundups. I look forward to reading them every week.

Regarding mortgage paydown, what about real estate taxes? I fear that my local government is going to jack my taxes right up with inflation and all the rest of the credit problems they're going to face. Why own a house outright when they can still make it impossible to live in it? Or at least they can slap a lien on it and make it so you don't own it anymore.

On another topic, I came across this link indirectly from TOD.
It shows what the Fed is up to on any given day for open market operations. I plan to look at it to gauge what the fed is up to and see when there is unusual activity taking place.


Regarding mortgage paydown, what about real estate taxes? I fear that my local government is going to jack my taxes right up with inflation and all the rest of the credit problems they're going to face.

But remember, there will be others who are in the same boat. Hopefully the others will raise a hew and cry and keep things repressed cost-wise.

What about StatoilHydro, half owned by the Kingdom of Norway (no mational dent, $250 billion in investments) ?

Or PetroBras, half owned by the Republic of Brazil ?

Or hydroelectric producers outside the USA ? Some half state owned ?


Roger, can you elaborate on your thinking behind investing in "bonds, CD's at banks that are FDIC insured, and a very small number of agency bonds with the TVA (Tennessee Valley Authority)." ?

I'm guessing your argument goes like this: The looming financial credit blow-up will cause banks to sell their stocks to raise cash to pay off debts to avoid bankruptcy. General market panic follows from the sustained sell-off.

I've been more focused on the US dollar slide/collapse, and accelerating (and under-reported) inflation. As well as growing resource scarcity. Those themes lead me to get out of the USD, into foreign stocks (emphasizing resources like energy, mining, food) and gold.

The dollar is losing value fast. I was just in Europe and it is a very pricey place for Americans now.

Here are some specific questions:

1. Why do you think the dollars from your CD's and Treasuries will be worth much when they come due? Stocks and commodities at least represent a claim on real assets, whereas bonds only get you fiat currency which is subject to hyperinflation (which the Fed seems to be engaged in producing).

2. If the financial credit blow-up is going to be as large as this finance roundup indicates, how can you feel confident that the FDIC system will survive to ensure CD's? (I recall that the FDIC system is set up with banks ensuring each other, not the Federal Govt guaranteeing anything).

3. Are you certain that the entire world stock market will tank, or will it mainly be US?

4. Why not a diversified portfolio (stocks, bonds, commodities, gold, foreign, domestic, ...) since we can't be sure how it will all play out?

Thanks for any responses,

Don't try to predict the future. Get ready for it.

I'll throw two cents in for what that is worth these days:) and say what I am doing.

I have put almost all my 'wealth' into money markets that are part of each Mutual Fund and am watching what the equity market is doing. In the case of real drastic drops in the stock market I will dump my mutual fund money market holdings and put them into treasury bonds or ready cash. If the market does look to recover for a another bit of a bump up I will move from their funds into something called a "corporate class" fund within the fund 'family'. Moving between the money market and the corporate class funds incur no tax implications nor redemption fees. I do not know what if anything like this is available in the US but would imagine there would be something similar if not the same.

The few stocks I do hold now are the likes of Saskatchewan Potash because as far as I know they are not making any more of that stuff.

Hope that is some help and if anyone can see any flaws in my ointment please let me know, it would be most appreciated!

I second the recommendation for short-term treasuries (liquidity and no debt are the most important things IMO), and also for some hard assets (so long as they don't require debt). Hard assets are not a hedge against deflation as their prices should fall, but they are an insurance policy against disruption of a just-in-time economy.

A somewhat light-hearted look at the current world financial mess, if that's possible, from the Mogambo Guru:

It surprises me, as I look out of the periscope of the Mogambo Bunker, that the world is not in flames, and the idiots collectively known as "the American public" are not out rioting in the streets. Then I remember the old adage that "ignorance is bliss". Then I remember that I am pretty ignorant about a lot of things, too, and wonder why I am not blissful.

Thanks again Stonesleigh,
My wifes prediction was that a recession would start when people quit buying expensive "drive up" coffee. This was her leading indicator.
Starbucks is now reporting declining sales. hmmmm

"If you want to fix the budget turn it over to a housewife with 3 kids" CM


I assume that your friends and family are listening more closely to your warnings now. . . .


I think D is listening to his wife's prognostications more carefully now...:)

WT, yes they are!
Nice to have a bit of tailwind instead of a headwind.

My pond for microhydo is finished, turbine building foundation is poured. Working on turbine mounting and nozzle adjustment brackets. (ac/dc/direct power?-the big question now) I will send some pictures if you would like.

I bet people are listening far closer to anything you have to say as well. Thanks for all your helpful posts.

best, D

Poor wife, left barefoot in the kitchen again:(

(but not pregnant)


Debt, that lovely exponential function. What a thing to base your money on.

Mises largely predicted all this almost 90 years ago. Dropping the gold standard in 1971 just accelerated it. Our politicians are a bunch of twerps. But then, so are the voters.

See you on the other side.

Thanks to everyone for all the kind words. I hope to do a least one Finance Round-Up per week. Ideally there would be two, as events are unfolding quickly, but ilargi and I usually do them together and he's away with very limited internet access at present. The frequency of coverage should increase again in the not too distant future, especially if high speed internet access in this area actually arrives as promised. That would make research a lot less time-consuming :)

I just wanted to say how impressed I am by how kind and civil everyone on this TOD site are to one another. I come to this site for the honest discussions and concise and all encompassing articles. Its great and so are you.

Thankyou TOD'ers