By Mike Whitney

Online Journal Contributing Writer


Feb 26, 2008, 00:31



The credit storm, which began in July when two Bear Stearns hedge funds were forced to liquidate, has continued to intensify.

Last week the noose tightened around auction-rate securities (ARS), a little-known part of the market that requires short-term funding to set rates for long-term municipal bonds. The $330 billion ARS market has dried up overnight pushing up rates as high as 20 per cent on some bonds -- a new benchmark for short-term debt. Auction-rate securities are now headed for extinction just like the other previously vital parts of the structured finance paradigm.

The $2 trillion market for collateralized debt obligations (CDOs), the multi-trillion dollar mortgage-backed securities market (MBSs) and the $1.3 asset-backed commercial paper (ABCP) market have all shut down, draining a small ocean of capital from the financial system and pushing many of the banks and hedge funds closer to default.

The price of insuring corporate bonds has skyrocketed in the last few weeks, making it more difficult for businesses to get the funding they need to expand or continue present operations. Much of this has to do with the growing uncertainty about the reliability of credit default swaps, a $45 trillion dollar market which remains virtually unregulated. Credit default swaps are a type of financial instrument that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent if a borrower fails to adhere to its debt agreements. When the price of CDSs increases, it means that there is greater doubt about the quality of the bond.

Prices are presently soaring because the entire structured finance market -- and everything connected to it -- is under withering attack from the meltdown in subprime mortgages. As foreclosures continue to rise, the subprime loans that were transformed into securities will continue to unwind, destroying trillions of dollars of virtual capital in the secondary market.

It all sounds more complicated than it really is. Imagine a 200-foot conveyor belt with two burly workers and a mountain-sized pile of money on one end and a towering bonfire on the other. Every time a home goes into foreclosure, the two workers stack the money that was lost on the transaction, plus all of the cash that was leveraged on the home via "securitization" and derivatives, onto the conveyor belt where it is fed into the fire. That is precisely what is happening right now and the amount of capital that is being consumed by the flames far exceeds the Fed's paltry increases in the money supply or Bush's projected $168 billion "surplus package." Capital is being sucked out of the system faster than it can be replaced, which is apparent by the sudden cramping in the financial system and a more generalized slowdown in consumer spending.

According to a recent Bloomberg article: "A year ago, $20 million would have gotten Luminent Mortgage Capital, Inc., access to $640 million in loans to buy top-rated mortgage-backed securities. Now that much cash gets the firm no more than $80 million. . . . [Only] 6 lenders are offering 5 times leverage, while a year ago, 20 banks extended 33 times."

The banks are not providing anywhere near as much money for leveraged investments as they did just last year. And, when credit shrinks on a national scale -- as it is -- so does the economy. It' a simple formula: less money means less economic activity, less growth, fewer jobs, tighter budgets and more pain.

Bloomberg continues: "Wall Street firms, reeling from $146 billion in losses on their debt holdings, are fueling a credit crisis by clamping down on lending to investors and hedge funds that use borrowed money to buy securities. By pulling back, [the banks] are contributing to reduced demand and lower prices throughout the fixed-income world."

The banks are in no position to be generous because they're already saddled with $400 billion in MBSs and CDOs -- as well as another $170 billion in private equity deals -- for which there is currently no market. They've had to dramatically cut back on their lending because they either don't have the resources or are facing bankruptcy in the near future.

An article which appeared on the front page of the Financial Times last week illustrates how hard-pressed the banks really are: "US banks have been quietly borrowing massive amounts of money from the Federal Reserve . . . $50 billion in one month."

The Fed's new Term Auction Facility "allows the banks to borrow money against all sort of dodgy collateral," says Christopher Wood, analyst at CLSA. "The banks are increasingly giving the Fed the garbage collateral nobody else wants to take . . . [this] suggests a perilous condition for America's banking system."

The move has sparked unease among some analysts about the stress developing in opaque corners of the US banking system and the banks' growing reliance on indirect forms of government support." ["US Banks borrow $50 billion via New Fed Facility", Financial Times] (The story appeared nowhere in the US media.)

At the same time the banks are getting backdoor injections of liquidity from the Fed. Banking giant Citigroup has been trying to offload some of its branches so it can cover its structured investment losses. It all looks rather desperate, but scouring the planet for capital to shore up flagging balance sheets is turning out to be a full-time job for many of America's largest investment banks. It is the only way they can stay one step ahead of the hangman.

In the last few days, gold has spiked to $950, a new high, while oil futures passed the $100 per barrel mark. The battered greenback has already taken a beating, and yet, Fed Chairman Bernanke is signaling that there are more rate cuts to come. The prospect of a global run on the dollar has never been greater. Still, Bernanke will do whatever he can to resuscitate the faltering banking system, even if he destroys the currency in the process. Unfortunately, interest rates alone won't cut it. The banks need capital; and fast. Meanwhile, the waning dollar has sent food and energy prices soaring which is leaving consumers without the discretionary income they need for anything beyond the basic necessities.

As a result, retail sales are down and employers are forced to lay off workers to reduce their spending. This is all part of the self-reinforcing negative-feedback loop that begins with falling home prices and then rumbles through the broader economy. There is no chance that the economy will rebound until housing prices stabilize and the rate of foreclosures returns to normal. But that could be a long way off. With housing inventory at historic highs and mortgage applications at new lows, the economy could keep somersaulting down the stairwell for a good two years or more. Only then, will we hit rock-bottom.

The country is now headed into a deep and protracted recession. Low interest credit and financial innovation have paralyzed the credit markets while inflating a monstrous equity bubble that is wreaking havoc with the world's financial system. The new market architecture, "structured finance," has collapsed under the stress of falling asset values and rising defaults. Many of the banks are technically insolvent already, drowning in their own red ink. Public confidence in the nations' financial institutions has never been lower. Monetary policy and deregulation have failed. The system is self-destructing.

Now that the credit crunch has rendered the markets dysfunctional, spokesmen for the investor class are speaking out and confirming what many have suspected from the very beginning; that the present troubles originated at the Federal Reserve and, ultimately, that's where the responsibility lies. In an article in the Wall Street Journal last week, Harvard economics professor and former member of the Council of Economic Advisers under President Reagan, Martin Feldstein, made this candid admission: "There is plenty of blame to go around for the current situation. The Federal Reserve bears much of the responsibility, because of its failure to provide the appropriate supervisory oversight for the major money center banks.

The Fed's banking examiners have complete access to all of the financial transactions of the banks that they supervise, and should have the technical expertise to evaluate the risks that those banks are taking. Because these banks provide credit to the nonbank financial institutions, the Fed can also indirectly examine what those other institutions are doing.

"The Fed's bank examinations are supposed to assess the adequacy of each bank's capital and the quality of its assets. The Fed declared that the banks had adequate capital because it gave far too little weight to their massive off balance-sheet positions -- the structured investment vehicles (SIVs), conduits and credit line obligations---that the banks have now been forced to bring onto their balance sheets. Examiners also overstated the quality of the banks' assets, failing to allow for the potential bursting of the house price bubble. The implication of this for Fed supervision policy is clear. The way out of the current crisis is not."

How odd. So, when all else fails, tell the truth?

But Feldstein is right, the Fed refused to perform its oversight duties because its friends in the banking industry were raking in vast profits selling sketchy, subprime junk to gullible investors around the world. They knew about the "massive off balance-sheet positions" which allowed the banks to create mortgage-backed securities and CDOs without sufficient capital reserves. They knew it all -- every last bit of it -- which simply proves that the Federal Reserve is an organization which serves the exclusive interests of the banking establishment and their corporate brethren in the financial industry.

Surprised?

The upcoming global recession/depression will give us plenty of time to mull over the ruinous effects of Fed policy and to devise a plan for abolishing the Federal Reserve once and for all. That is, if it doesn't destroy us first.

Mike Whitney lives in Washington state. He can be reached at fergiewhitney@msn.com.

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Foreclosure Phil
Information Regarding the Gramm-Leach-Bliley Act of 1999

EVERY economic situation presents opportunities.................

You fail to grasp the situation. The sky is not worth what they are going to sell it for.

No I grasp the situation fully. You are a loser and I am a winner. There is money to be made in EVERY economic situation. I have been out of the market a year come November. Just waiting for the last of the fool bulls to give up before I jump in again. And this is really gonna frost your ovaries.......I netted 500k in 30 months on the internet. This done while you were ohhing and ahhing about the neat stuff on your screen. And to piss you off even more most of that 500k was selling sub prime mortgage leads at $30 to $50 a lead. And you could have done the same had you realized to potential of the net. But you didn't. You are content to flip burgers or make a liberal arts degree your lifes work.

And now we are in a recession. And guess what? I refuse to participate. This year my sales are up over 40%.

Read my sig, Traders words, those words will determine if you are a winner or loser.

Folks. You read it right here. This is just one reason we need to get rid of Republicans. The person that just wrote the above quote just dearly loves those Repugs. Ever ask yourself why?

I'll get out of Nomad's way now; I'm sure that he and Phil Gramm are going to get together and discuss a new way of going out and making an honest buck.

QUOTE (Nomad)

Mind telling us how what I did was not an honest buck? There was a market for those leads. I recognized the market and prospered from it. Had I not taken those leads someone else would have. Now Shemp, tell us that if you had the forsight, intelligence, and drive (on helluva stretch to be sure) you would have declined that 1/2 million. Tell us that Shemp.......

Why did you unload them, Nomad?

What Opportunities? Opportunities for who?

This opportunity?

Unload what Shemp?

He doesn't understand how your business works. You were selling "leads," (a name of someone or some agency that had something to sell) not "unloading" (selling properties and such) anything. Sad.

Are you telling us that Nomad didn't have any idea about those certain names of someone or some agency that had something to sell, or what they were selling?! Pleaaaassse!

You are delusional Shemp. Here is how it works....
It's called affiliate marketing. I put up several websites and sent people to the sites where they filled out a mortgage application. And SHAZAMM I got paid for those applications. To the tune of 500k after taxes (about 80k worth). I was #1 on google for the best terms needed to get the most apps for a loooooooooong time. But alas the market for those went south, google finally got smarter than me and I was burned out spending 12 to 14 hours day seven days a week at a keyboard. Back to brick and morter................

Now Shemp, what was unethical or immoral about that. And please tell us you would not have done the same had you the smarts and the drive to do so.

TaaDaaa!

Must have been some web site!

It was Shemp. A 500k web site. You won't take home that much in the next 20 years. Now you gonna answer the questions I posed or weasel out as usual?

Indeed. After your statement, concerning your run in with Google, do I need to necessarily answer the question? Google has already answered it for you, didn't they?

What run in was that Shemp? You apparently have this predilection for jumping to conclusions without having any tangible facts to back up you conclusions.
So again, what was this run in with Google I had?

And Google did not answer this question................



Now you have 2 questions to answer.

Nomad: why don't you figure them out the very same way you walked all over yourself to start with.

Mixture of red herrring and personal attack: A personal attack is committed when a person substitutes abusive remarks for evidence when attacking another person's claim or claims. This line of "reasoning" is fallacious because the attack is directed at the person making the claim and not the claim itself. The truth value of a claim is independent of the person making the claim. After all, no matter how repugnant an individual might be, he or she can still make true claims.

Errrr, thanks Solo.


Well it don't matter much here. We all know what Shemp is about. Every time he is backed into a corner that requires specific answers to his delusional conclusions he pulls a rope-a-dope. Never mind the fact that he has already paraded his ignorance and stupidity well before that point. What really astounds me here is his childish attempt to belittle my accomplishment. When I was his age I was in awe at those who were successful. I remember one time, when I was in the construction business this haggered crusty man with dirt all over him came into my store and dropped a set of plans on the counter and demanded an estimate in 2 days. I said " Who the hell are you and if we are low bidder how are you going to pay for the job" He tried to stare me down but I wouldn't flinch. Finally he said "you got balls kid" and walked out only to reappear with credit and bank references he grabbed from his truck. I sent them up tp corporate and found out this guy had over 2 mill in just his business accounts. Mind you this was 1974. He took a liking to me and we did millions in business. One day I asked him " how did you make all your money" and he replied without hesitation " by keeping my overalls dirty and counting my own money".
I learned from the winners in life. Losers like shemp don't and won't learn. Shemp is content flipping burgers for the rest of his pathetic life. No doubt still lives with a parent and will until that parent dies. Fkn looser leech.

This was the quote from the website about fallacies. It has no application to anyone specific here. It's just an exaggeration to illustrate that a person's worth (as dictated by others' world view) doesn't dictate whether or not they have the right to have an opinion. Few of us are as bad as to be called "repugnant," but even if the "repugnant" has the right to have an opinion, we do as well. Get it?


Good story about the old guy. He's quite smart. Also, shows how quickly we use our rule to judge another.