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Friday, August 31, 2007

Bernanke is NOT Greenspan


Today is the big day. What will Bernanke say? I have to say it again: Bernanke is NOT Greenspan.

President Bush stole some of Bernanke’s thunder when he started babbling about a possible subprime bailout package. Traders got a little giddy early in the morning and started spiking futures higher across the board.

First Bush: Bush to Expand Government Role to Deal With Subprime (Update3): “President George W. Bush will today announce steps the administration says will help people with subprime mortgages keep their homes.

Bush will let the Federal Housing Administration, which insures mortgages for low- and middle-income borrowers, guarantee loans for delinquent borrowers, allowing them to avoid foreclosure and refinance at more favorable rates, according to an administration official, who spoke on condition of anonymity.”

This is a terrible. The only thing guaranteeing a non-performing loan will accomplish is that the losses will be transferred from the homeowner to the generic taxpayer. I intend to write in depth on the economic implications of this at a later date. Bottom line: This was tried in Japan when their credit and real-estate bubble burst. It did nothing but prolong the agony. Non-performing loans tied up massive quantities of bank reserves and ruined their balance sheets for ten years. This made it impossible for financial institutions to provide ample credit to those who deserved it. The consequences were deflation and economic stagnation.

The Bush plan is explained very well here: Bush Moves To Aid Lenders

Barclays Rescues $1.6 Billion Cairn Capital Debt Fund (Update3): “Barclays Plc, the U.K.'s third- biggest bank, will help rescue a $1.6 billion debt fund run by London-based asset manager Cairn Capital after it was unable to raise money in the credit markets.

Barclays's securities unit will provide a loan to refinance the fund's asset-backed commercial paper as it falls due, the London-based bank said today in a statement. The fund owns U.S. securities mostly backed by home loans.”

Uh oh. Barclays now too. Throwing good money after bad has a terrible crowding out effect. In this case, as financial institutions are forced to pump up the balance sheets of various lenders it ties up their capital. This makes it unavailable to worthy lenders seeking funds for PRODUCTIVE investments. The consequences to the economy can be massive and have been massive in the past. Again, this is exactly what happened in Japan.

Deutsche Bank Shuts Credit-Trading Unit in London (Update1): “Deutsche Bank AG, Germany's biggest bank, is disbanding a London-based team of traders that made wrong-way bets on credit-markets using the firm's money, said a person familiar with the situation.”

Most financial institutions are now starting a retrenching process as they recalculate and reduce their VAR. Yet again, we are talking about long run consequences: “Getting rid of a whole team implies getting rid of a strategy and the earnings going forward,” said Lakhani, who rates Deutsche Bank stock “hold.”

Lone Star Cuts Offer for Accredited to $214 Million (Update2): “Lone Star Funds cut its takeover offer for Accredited Home Lenders Holding Co. by 44 percent to $214 million, after the subprime mortgage company fired 60 percent of its workers and stopped making new loans.”

No surprise here. Expect this kind of re-pricing to become a trend.

Mergers Slow From Record Pace to Least Busy Month in Two Years: “Mergers and acquisitions slowed from a record pace as turbulent credit markets eroded investor confidence and led to the worst month for takeovers in two years.”

Despite the slow down, mergers and acquisitions are still at ridiculously elevated levels in frequency, size and premiums.

Britain's Housing Lenders Tighten Subprime Credit (Update1): “U.K. lenders responsible for 12 percent of the nation's mortgages are tightening standards for loans on house purchases, withdrawing offers and raising the cost for borrowers with less than perfect credit.”

I cannot say this often enough: Its not JUST the US. The credit bubble is GLOBAL. The U.K. is just a few months behind on the timeline.

“There are some lenders who have pulled their current product range and not announced any new ones,” said Ray Boulger, senior technical manager at Charcol Ltd., Britain's biggest online mortgage broker. “Others have put up rates until they get little or no business.”

This is capitalism. This is how capitalism evolves. New fancy financial products were created, employed, tested and now the data is pouring in. Economic agents are no rapidly studying this data and adjusting their assumptions, terms and conditions. In this case the most probable outcome is that most of these products will cease to be available at all to most borrowers because the risk of these products had been UNDERESTIMATED and therefore UNDERPRICED.

“U.K. consumers shoulder a record 1.35 trillion pounds in debt, the highest per capita among the Group of Seven nations. Mortgage lending hit a record in July, rising 13 percent over the year even as the Bank of England raised its benchmark interest rate to the highest in six years.”

What happens when you have debt levels like that and financial institutions have decided to take a step back? Equity indices putting in new record highs is definitely NOT what happens.

“The Financial Services Authority, Britain's securities regulator, last month said it had studied 485 subprime loans and found that more than half were awarded to customers who were not required to provide evidence of their income. And with almost half the loans, the brokers involved failed to adequately assess the ability of borrowers to pay.”

Sound familiar?

For fun: China kung fu monks seek apology for ninja affront: I would totally have ninja-ed them monks. Like they'd even stand a chance... :P