Custom Search

Friday, December 21, 2007

Happy Holidays

Regualr posting will resume in the New Year.
Happy Holidays.


Thursday, December 20, 2007

"God I Hope You're Wrong"

Ambac, MBIA Outlook Lowered by S&P, ACA Cut to CCC (Update6): “The ratings outlook for MBIA Inc. and Ambac Financial Group Inc., the world's largest bond insurers, was lowered to negative by Standard & Poor's, raising the specter of more writedowns for the companies' investment- bank clients.

S&P also cut its A rating on ACA Financial Guaranty Corp. to CCC, suggesting potential default. Toronto-based Canadian Imperial Bank of Commerce said today it may have $2 billion of writedowns on U.S. subprime mortgage securities it insured through ACA.”


To best understand, in plain English, what these downgrades mean read: Requiem For The American Investment Bank from the Market Ticker.

To go from plain English to a little more sophistication read: Financial Day of Reckoning Approaches from Mish’s.

God I hope you’re wrong.” –Chief Risk Officer at a major investment bank after J. Kyle Bass, a hedge fund manager, presented his case for a MASSIVE bet on the occurrence of a housing market meltdown.

(From Calculated Risk) Here is the S&P Report: Detailed Results Of Subprime Stress Test Of Financial Guarantors Some excerpts from the company specific comments:

Ambac Assurance Corp.
We affirmed the 'AAA' financial strength and financial enhancement ratings of Ambac Assurance and the 'AA' debt ratings of Ambac Financial Group, Inc. but the outlooks have been changed to negative. ...

CIFG Financial Guaranty
We have affirmed the 'AAA' financial strength rating of CIFG and the outlook remains negative. ...

Financial Guaranty Insurance Co.
The ratings of FGIC and FGIC Corp. are placed on CreditWatch with negative implications. Our most recent analysis of the company's non-prime RMBS and CDO of ABS exposure indicates a level of losses which would result in its capital position falling below our 'AAA' requirements. ...

MBIA Insurance Corporation
The outlook on MBIA and MBIA Inc.'s financial strength and debt ratings is changed to negative and their ratings affirmed. The outlook change is warranted because of the absolute size of stress scenario losses relative to the adjusted capital cushion of $2.75 billion. ...

XL Capital Assurance Inc./XL Financial Assurance Ltd.
We revised the outlook on XLCA, XLFA, and Security Capital Assurance Ltd.'s financial strength and debt ratings to negative, while affirming the respective ratings. ...

ACA Financial Guaranty Corp.
The financial strength and financial enhancement ratings on ACA are lowered to 'CCC' and placed on CreditWatch Developing. The lower rating reflects the substantial excess-of-modeled stress test losses of nearly $2.2 billion over the company's adjusted capital cushion at Dec. 31, 2007 of approximately $650 million. While ACA has been diligently working to address contingent liquidity concerns, it has not focused significantly on raising additional capital. Lower new business activity during this period of rating uncertainty is a positive from a capital adequacy standpoint but the incremental improvement is not sufficient to close the gap between stress losses and the capital cushion. The magnitude of the gap is large enough to create significant doubt that the company could possibly access sufficient hard capital resources to resolve the problem. CreditWatch Developing acknowledges the possibility that the company may be able to modify its obligations to its counterparties but reflects the real possibility that the counterparties will require the company to post significant collateral going forward.

Remember these names. Ambac, CIFG, FGIC, MBIA, XLCA. They will be in the news again soon… and it will be market moving.

Wednesday, December 19, 2007

Half a Trillion Should Just About Do It...

Moody's Had $174 Billion in CDOs on Downgrade Review (Update1): “More than $174 billion of collateralized debt obligations tied to U.S. mortgages were under review for downgrades by Moody's Investors Service at the start of this month, according to the ratings company, suggesting the subprime crisis may deepen.

Moody's downgraded $50.9 billion of CDOs made up of structured-finance securities in November, or about 9.4 percent of the total, the New York-based company said in a statement today. Standard & Poor's, which today lowered ratings on $6.7 billion of the debt, has so far downgraded or placed under review $57 billion of the debt.

Moody's, S&P and Fitch Ratings issued a record 2,007 downgrades on CDOs last month, mainly because of the surging defaults among U.S. homeowners with poor credit or high debt, according to a report Dec. 9 by Morgan Stanley. CDOs have been the biggest source of losses at the world's largest banks and brokerages as subprime investments have soured.

Moody's, which has broadened its review of CDO ratings to those created before last year, said it expects “more negative rating actions” in coming months. At the end of November, 32 percent of structured-finance CDOs, based on original balances, that Moody's has rated were under review. Bondholders may be forced to sell or write down debt that's been downgraded.”

Well, the good news is they’re finally getting serious about rating this things appropriately. The bad news is they’ve only started looking into 32% of them. Expect more bad news in the new few weeks and months.

Morgan Stanley Reports Worse-Than-Estimated Loss (Update1): “Morgan Stanley, the second-biggest U.S. securities firm, reported a fourth-quarter loss of $3.56 billion, the first in the company's history, after $9.4 billion of writedowns on mortgage-related investments.

Chief Executive Officer John Mack is forgoing a bonus for the year and called the results “deeply disappointing.” Morgan Stanley obtained a $5 billion investment from China Investment Corp., the nation's sovereign wealth fund, the New York-based company said today in a statement.

Mack's strategy of expanding in home loans and making bigger trading bets backfired as the firm's losses from securities linked to home loans more than doubled in November. He ousted Co-President Zoe Cruz, who had overseen the fixed- income unit responsible for the mortgage holdings, last month and promoted James Gorman and Walid Chammah, who previously ran wealth management and the firm's European operations.”

The losses were so big that Morgan Stanley needed $5 billion in additional capital… from none other than China Investment Corp.

“The loss of $3.61 a share in the three months ended Nov. 30 compares with net income of $1.98 billion, or $1.87 a year earlier. Analysts were estimating a loss of 39 cents, according to a survey by Bloomberg.”

To put it in perspective, the losses were so large they’ve wiped out a quite a few quarters of profits in a single swipe.

U.S. MBA's Mortgage Applications Index Fell 20% Last Week: “Mortgage applications in the U.S. fell last week by the most since 2004 as a jump in interest rates caused purchases and refinancing to decline, a private survey showed.

The Mortgage Bankers Association's index decreased 20 percent to 653.8 from 881.8 the prior week. The group's purchase index fell 11 percent and its refinancing gauge plunged 27 percent.

Loan restrictions and a glut of unsold homes on the market are prompting buyers to wait for even bigger price discounts, economists said. Higher borrowing costs and more foreclosures suggest the real-estate slump will continue to hurt economic growth well into 2008.

The refinancing index decreased to 2093.6 from 2879.8 and the group's purchase gauge fell to 422.2 from 472.

The average rate on a 30-year fixed loan rose to 6.18 percent, from 6.07 percent the prior week, the report showed. At that rate, monthly borrowing costs for each $100,000 of a loan would be about $611, compared with $566 when the rate was 5.47 percent in June 2005 as sales approached a record.”

There you have it.

Trichet Signals No Room to Cut Rates; German Confidence Drops: “European Central Bank President Jean- Claude Trichet signaled faster inflation will prevent a cut in borrowing costs as German business confidence fell to the lowest in almost two years.

The Munich-based Ifo research institute's business climate index, based on a survey of 7,000 executives, declined to 103 from 104.2 in November. Economists expected a reading of 103.8, the median of 38 forecasts in a Bloomberg News survey showed.

Waning sentiment underscores the bind facing central bankers as an economic expansion fades. In testimony today to lawmakers in Brussels, Trichet said the euro-area economy faces a “more protracted” period of elevated inflation than previously expected, indicating no imminent plan to reduce interest rates.”

With deep rate cuts off the table, the only real policy tool left is the continued massive injections of liquidity…

Money Market Rates Fall for Second Day on ECB Action (Update2): “Money market rates fell for a second day, adding to evidence that central banks are making headway in their attempts to counter turmoil in money markets.

The three-month euro interbank offered rate, or Euribor, dropped 7 basis points to 4.81 percent, the lowest since Nov. 30, the European Banking Federation said today. The three-month rate for pounds declined 18 basis points to 6.21 percent, the lowest in four months, the British Bankers' Association said.

The European Central Bank, which injected a record $500 billion into the banking system yesterday, “stands ready to act” again, council member Klaus Liebscher said today. The cost of three-month cash remained 81 basis points higher than the main refinancing rate. ECB President Jean-Claude Trichet said the coming weeks may be “challenging” for financial markets.”

Looks like $500 billion dollars is having some effect… and one would hope so. Mish discusses the ECB’s action and its possible consequences in more detail here.

“$500 billion is an enormous amount of money. To put it into perspective, $500 bln is 5% of total US banking system assets. My eyes are on LIBOR. If $500 bln doesn't move the rate...

Furthermore, everyone should remember that the $500 bln is funding just through year end. Come January this will need to be refinanced or rolled over.”

Central Banks the world over are praying right now that ‘half a trillion should do it.’. Cuz if it doesn’t, they’ve got nothing.

Monday, December 17, 2007

Asia Tanks

Stagflation May Return as Price, Credit Risks Meet (Update1): “The world economy is facing the risk of both recession and faster inflation.

Global growth this quarter and next may be the slowest in four years, while inflation might be the fastest in a decade, say economists at JPMorgan Chase & Co.

The worst U.S. housing slump in 16 years, coupled with a tightening of credit by banks, has brought the world's largest economy “close to stall speed,” according to former Federal Reserve Chairman Alan Greenspan. At the same time, rapid growth in China and other emerging markets is driving energy and food prices higher worldwide.

“What lies ahead is a period of stagflation -- slow or no growth combined with rising inflation -- in the advanced economies,” says Joachim Fels, co-chief global economist at Morgan Stanley in London.”

PPI and CPI did surprise to the upside last week… How permanent is this inflation threat as the credit crunch worsens? Nobody knows for sure. It depends entirely on what kind of action the world’s central banks will take in an attempt to ‘kick starts’ the credit markets again.

Emerging Markets Will Be `Truly Tested,' Deutsche Bank Says: “Emerging-market economies will be ``truly tested'' next year amid a slowdown in U.S. growth, declining commodity prices and growing investor risk aversion, Deutsche Bank AG said.

Developing nations will keep facing “near-term financial risk caused by the liquidity and credit crunch,” Deutsche said in a report today. A recession in the U.S., the biggest buyer of emerging-market countries' exports, “cannot be ruled out,” Deutsche said.

Emerging-market nations in recent years have used the windfall from high commodity prices to cut dollar debt and boost foreign reserves, allowing them to weather the global credit market rout this year. Developing-nation debt posted gains even as widening losses from subprime-mortgage investments provoked aversion to higher-yielding assets. Emerging-market bonds denominated in local currencies have returned almost 20 percent this year, according to Deutsche.

“Many observers of emerging markets (ourselves included) have argued for the past several years that EM has changed, that it no longer is the same asset class that suffered multiple crises during the 1980s, 1990s and the early part of this decade,” Deutsche said. “2008 could well be the year in which the perceived resilience of emerging markets is truly tested.””

See my recent post The Global’ Decoupling Theory’ is Garbage.

Wall Street Sees 20% M&A Slump on Scarce LBO Credit (Update1): “Even Goldman Sachs Group Inc., the world's leading takeover adviser since 2001, is prepared for a decline in mergers and acquisitions income next year when a slowing economy reduces the market for leveraged buyouts.

The value of transactions may fall 20 percent from a record $3.9 trillion this year, executives at JPMorgan Chase & Co., Lehman Brothers Holdings Inc. and Bank of America Corp. estimate. That may reduce fees on Wall Street and contribute to Goldman's first profit drop since 2002, the last year M&A decreased, according to analysts surveyed by Bloomberg.

LBO firms, responsible for half of this year's 10 biggest purchases, now face financing costs that have more than doubled since June to the highest in four years. The pace of takeovers fell 33 percent since the end of the second quarter as chief executive officers at companies, including Virgin Media Inc. and Cadbury Schweppes Plc, delayed asset sales amid signs economic growth in countries ranging from the U.S. to Britain is ebbing.

“It's the end of an era for a while for the very large LBOs,” said Piero Novelli, 42, the London-based head of global M&A at UBS AG, Switzerland's biggest bank.”

Yup. The LBO premium definitely has to come out of equities. All potential buyout targets are going to massively under perform as the hedgies figure this out and liquidate.

Friday, December 14, 2007

Inflation, SIVs and Balance Sheets

On top of the largest spike in PPI since 1973, European inflation isn’t exactly tame.

European Inflation Rises More Than Initial Estimate (Update2): “European inflation accelerated more than initially estimated in November, to the fastest pace since May 2001, preventing central bankers from cutting interest rates as economic growth slows.

The inflation rate in the 13-nation euro area rose to 3.1 percent from 2.6 percent in October, the European Union's statistics office in Luxembourg said today. That exceeded an initial 3 percent estimate published on Nov. 30. Prices rose 0.5 percent on the month.

The European Central Bank has refrained from following counterparts in the U.S., U.K. and Canada in reducing borrowing costs, citing the risk that surging commodity prices and declining unemployment will trigger an inflationary spiral. ECB President Jean-Claude Trichet said Dec. 6 some governing council members favored raising interest

Citigroup Rescues SIVs With $58 Billion Debt Bailout (Update2): “Citigroup Inc. will take over seven troubled investment funds and assume $58 billion of debt to avoid forced asset sales that would further erode confidence in capital markets. Moody's Investors Service lowered the bank's credit ratings.

The biggest U.S. bank by assets will rescue the so-called structured investment vehicles, or SIVs, taking responsibility for their $49 billion of assets, the New York-based company said in a statement late yesterday.”

The balance sheet is feeling the pressure and Moody’s reacted swiftly.

“Moody's lowered Citigroup's credit rating to Aa3, the fourth-highest level, from Aa2 late yesterday. The bank will probably ``take sizable writedowns'' for securities backed by home mortgages and collateralized debt obligations, Moody's Senior Vice President Sean Jones said in a statement.”

That makes borrowing for Citigroup more expensive.

“Citigroup got a $7.5 billion cash infusion last month by selling a 4.9 percent stake to the ruling family of Abu Dhabi after the bank's capital ratio fell below the company's target.”

With the SIV now packed into the balance sheet, another round of writedowns will definitely result in the need for more cash infusions from sovereign wealth funds.

Money-Market Rates Fail to Respond to Bank Measures (Update4): “Money markets failed to respond for a second day to the biggest effort by central banks in six years to restore confidence in the world financial system.

The euro interbank offered rate banks charge each other for three-month loans stayed near a seven-year high, falling 1 basis point to 4.94 percent, the European Banking Federation said today. That's 94 basis points more than the European Central Bank's benchmark interest rate, close to the highest since 1999. The two- week rate soared a record 80 basis points to 4.95 percent.”

The market clearly doesn't believe central banks can do anything about this crisis.

“Two-week rates soared because today is the first day on which a cash loan in euros for that term will cover a borrower's needs through to the end-of-year holiday period. The rate rose 81 basis points to 4.95 percent, the highest since April 2001, the BBF said. The two-week rate for dollars jumped 73 basis points to 5.11 percent.

Australian money-market rates climbed to the highest since 1996 earlier today and Japanese rates held near a 12-year high.”

This is definitely a sign of distress.

Thursday, December 13, 2007

Grand Alliance of Central Banks Fails to Impress

A grand alliance of Central Banks makes for great headlines. Unfortunately it doesn’t accomplish much beyond generating a fleeting warm fuzzy feeling… $24 billion? That’s not even enough for one troubled financial firm. Countrwide, Washingto Mutual, UBS, Citigroup could each blow through that by themselves in an attempt to stay solvent.

Euribor Stays at 7-Year High, Defying Central Banks (Update1): “Interest rates on loans in euros stayed at a seven-year high, a day after global central banks teamed up in an attempt to thaw a freeze in money markets.

The three-month borrowing cost was at 4.95 percent, its highest level since December 2000, according to prices from the European Banking Federation today. That's 95 basis points more than the European Central Bank's benchmark interest rate and up from 4.18 percent at the start of July, before losses related to subprime mortgages contaminated money markets.

Policy makers in the U.S., U.K., Canada, Switzerland and the euro region agreed to the first coordinated action since the Sept. 11, 2001, terrorist attacks. The Federal Reserve said it will make $24 billion available to increase the supply of dollars into Europe. Banks have reported more than $66 billion in losses linked to U.S. subprime mortgages this year.

“It's not going to help us find an exit to this crisis,” said Cyril Beuzit, head of interest-rate strategy at BNP Paribas SA in London. “These measures aren't going to address the root cause of the crisis. Banks are still reluctant to lend money to each other because there are serious concerns about potential further bad news.””

Banks SHOULD be reluctant to lend money to each other because a couple of them aren’t going to be able to pay it back.

“The U.S. central bank also plans four auctions that will add as much as $40 billion. The Bank of England said it would widen the range of collateral it will accept on three-month loans.”

‘Widening’ the range of collateral is a clever way of avoiding saying ‘we are going to lower the quality of collateral’. Brilliant. Loose credit standards created this mess in the first place. Time to loosen the credit standards exactly where they are supposed to be the tightest to ‘save’ the markets.

U.S. Treasuries Little Changed as Central Banks' Efforts Fail: “Treasury notes were little changed as interest rates charged by banks for loans in the euro region stayed near a seven-year high, suggesting a Federal Reserve-led plan to revive credit markets is failing.

The three-month borrowing cost for euros was at 4.95 percent, its highest level since December 2000, according to prices from the European Banking Federation today. Policy makers in the U.S., U.K., Canada, Switzerland and the euro region announced the first coordinated action since Sept. 11, 2001.

The so-called “TED” spread, the difference between three- month Treasury bill yields and the London interbank offered rate for the same maturity, was at 2.20 percentage points, near the widest since August. The increase indicates banks are charging more to lend to each other.”

Yen Climbs From One-Month Low Against Dollar on Credit Losses: “The yen rose from a one-month low against the dollar on speculation a Federal Reserve-led plan to provide banks with extra funds won't resolve credit-market turmoil, prompting investors to exit so-called carry trades.

The yen gained against all 16 most-active currencies after Bank of America Corp. and Wachovia Corp. said provisions for loan defaults will increase, spurring investors to repay funds borrowed in Japan to buy higher-yielding assets. The yen strengthened the most against the Brazilian real, South African rand, Australian dollar, beneficiaries of the carry trade.”

Time to unload risky assets… again.

U.S. November Producer Prices Rise 3.2%; Core Up 0.4% (Update1): “Prices paid to U.S. producers climbed at the fastest pace in 34 years in November, pushed up by surging costs for fuel. Excluding food and energy, prices rose the most since February.

The 3.2 percent gain, twice as much as economists had forecast, follows a 0.1 percent increase in October, the Labor Department said today in Washington. Core prices, which exclude food and energy, jumped 0.4 percent after no change the prior month.

The rising prices highlight the Federal Reserve's concern that energy and commodity costs may feed inflation at the consumer level. The Fed this week cut its benchmark rate for a third time in four months and said it would “continue to monitor inflation developments.”

Economists had forecast a 1.5 percent increase in producer prices, according to the median of 77 estimates in a Bloomberg survey. Forecasts ranged from 0.3 percent to 2.5 percent. Excluding food and energy, the median forecast was for an increase of 0.2 percent following no change the prior month.

November's gain in producer prices was the biggest since August 1973, according to Labor Department figures.”

Makes sense now why the Fed only cut 25 basis points. Greatest increase since 1973. Hmmmmmmm. I don’t see anything in the near term that would change that since the US dollar slide is not likely to reverse anytime soon. Stagflation here we come… (You did notice Chinas recent inflation numbers right? China Inflation Reaches 11-Year High, Trade Gap Grows)

U.S. November Retail Sales Rise More Than Forecast (Updated1): “Retail sales in the U.S. increased twice as much as forecast in November, easing concern near- record fuel prices and falling home values would trip up consumers.

The 1.2 percent increase, the biggest since May, followed a 0.2 percent gain the prior month, the Commerce Department said today in Washington. Purchases excluding automobiles jumped 1.8 percent, the most since January 2006.

More jobs and higher incomes may cushion the damage from $3-a-gallon gasoline and declining home prices, preventing a collapse in demand, economists said. The increase bears out the Federal Reserve's decision this week to reduce the benchmark interest rate by just a quarter point. Policy makers took additional steps yesterday to spur bank lending.”

Not bad actually. All things considered.

Wednesday, December 12, 2007

The Global 'Decoupling Theory' is Garbage

Asian Stocks Fall Most in 3 Weeks on Growth Concern; Banks Drop: “Asian stocks declined, sending a regional benchmark to its biggest loss in three weeks, after the Federal Reserve said U.S. economic growth is slowing and Morgan Stanley said Japan may enter a recession.

Mizuho Financial Group Inc. and HSBC Holdings Plc led banks lower on speculation a quarter-point interest-rate cut by the Fed yesterday won't rekindle growth in the world's largest economy. Canon Inc., BHP Billiton Ltd. and PetroChina Co. retreated on concern demand for electronics and raw materials will slump.

“Market sentiment has been shaken,” said Yang Haeman, who manages the equivalent of almost $1 billion at NH-CA Asset Management in Seoul. “A U.S. slowdown is already quite certain and investors now are also worried that this will result in a global slowdown.””

They should be worried. The ‘decoupling theory’ was a weak one at best.
Naked Capitalism presents the case in the post America Faces Day of Reckoning With Debt:

“Evans-Pritchard explicitly disagrees with the "decoupling" thesis, which says that even if the US has a sharp contraction, the rest of the world need not be affected.”

Nouriel Roubini has taken issue with this idea since 2006. His updated views: Recoupling rather than Decoupling: the Forthcoming Contagion to China, East Asia and Emerging Markets

This is a global economy. This is a global credit bubble. This is a global credit crunch. Therefore, the consequences will be GLOBAL.

Tuesday, December 11, 2007

Fed Decisions Ruins The Charts for the Bulls

Fed Lowers Rate by a Quarter Point to 4.25 Percent (Update4): “The Federal Reserve lowered its benchmark interest rate by a quarter-point to 4.25 percent, while signaling officials are open to further cuts if the housing slump and credit squeeze worsen.

Stocks fell and Treasury notes surged after the decision, which some economists said fell short of what's needed to spur lending and avert a recession. The central bank also pared the discount rate by a quarter-point to 4.75 percent, counter to speculation among investors that the Fed would make a deeper reduction.

"Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation,'' the Federal Open Market Committee said in a statement after meeting today in Washington. The change ```should help promote moderate growth over time.''

The Fed dropped language from its previous statement that risks of slower growth and faster inflation were ``roughly'' balanced. The economy is faltering after a third-quarter surge as house prices drop, consumer spending slows and banks tighten lending standards for even their best customers.”

Treasuries Rise Most in Three Years as Fed Rate Cuts Disappoint: “Treasuries rose the most in more than three years on concern that the Federal Reserve's quarter- point reductions in borrowing costs won't be enough to avoid the risk of recession.

The rally pushed yields on two-year notes, more sensitive to expectations of further rate cuts than longer-maturity debt, back below 3 percent. The central bank lowered its target for overnight loans between banks to 4.25 percent and the rate it charges banks for direct loans to 4.75 percent, disheartening investors expecting a bigger reduction in the discount rate.”

U.S. Stocks Fall After Fed Cuts Benchmark Rate by Quarter Point: “U.S. stocks tumbled the most in a month as investors speculated the Federal Reserve's quarter- point interest-rate cut will fail to prevent a recession.

Bank of America Corp. and Citigroup Inc. led all 93 companies in the S&P 500 Financials Index lower, and homebuilder shares fell the most ever after the Fed said the housing slump is getting worse. Washington Mutual Inc., the largest U.S. savings and loan, posted its steepest drop in a month on plans to write down the value of its home-lending unit. Freddie Mac, the second-biggest mortgage-finance company, slid for a third day after forecasting a wider loss than analysts estimated.

The S&P 500 lost 38.31, or 2.5 percent, to 1,477.65. The Dow Jones Industrial Average retreated 294.26, or 2.1 percent, to 13,432.77. The Nasdaq Composite Index decreased 66.6, or 2.5 percent, to 2,652.35. Almost 14 stocks declined for every one that rose on the New York Stock Exchange. Treasuries rallied and the dollar weakened against the euro and yen.

“It should have been more aggressive,'' said Quincy Krosby, who helps manage $330 billion as chief investment strategist at the Hartford in Hartford, Connecticut. “The market's instinctive reaction is that it's too little too late and that the Fed is behind the curve.””

Forget about too little too late. That’s not it at all. Its more that the cuts don’t matter much. They can’t ‘fix’ the situation. The cuts have little affect on what really matters: LIBOR and EURIBOR rates… these cuts won’t inflate risky assets because lenders of all kinds are cutting back on their risk exposures by tightening all their credit standards.

Monday, December 10, 2007

UBS Confessess, More SIVs go on Balance Sheet, Bond Sales Collapse

UBS to Sell Stakes After $10 Billion in Writedowns (Update4): “UBS AG will write down U.S. subprime mortgage investments by $10 billion, the biggest such loss by a European bank, and replenish capital by selling stakes to investors in Singapore and the Middle East.

Europe's largest bank by assets plans to raise 13 billion Swiss francs ($11.5 billion) selling bonds that will convert into shares to Government of Singapore Investment Corp. and an unidentified Middle Eastern investor, Chairman Marcel Ospel said on a conference call with reporters today.

UBS also plans to sell 36.4 million treasury shares that it previously intended to cancel, raising about 2 billion francs, and proposed replacing the 2007 cash dividend with stock, boosting capital by 4.4 billion francs. The convertible bond sale and dividend change must be approved by an extraordinary shareholders meeting in mid-February, the bank said.

UBS plans to raise a total of 19.4 billion francs through all the measures, which will improve its so-called Tier 1 capital ratio, a measure of financial strength, to more than 12 percent from 10.6 percent on Sept. 30.”

That’s a pretty massive write down and some serious dilution. UBS is trading up pre-market. Go figure.

Societe Generale Takes On $4.3 Billion of SIV Assets (Update3): “Societe Generale SA, France's second-biggest bank by market value, will bail out its $4.3 billion structured investment vehicle after losses related to the collapse of the U.S. subprime-mortgage market.

Societe Generale will take on assets including $387 million of bonds backed by subprime mortgages, the Paris-based lender said in an e-mailed statement today. The company rose 1.6 percent to 108.19 euros ($159.25) as of 1:35 p.m. in Paris.

The rescue of Societe Generale's SIV follows similar actions by London-based HSBC Holdings Plc and Rabobank Groep NV in Utrecht, Netherlands, to limit losses from a potential fire sale of assets. The falling value of Societe Generale's Premier Asset Collateralized Entity Ltd., or PACE, pushed it close to having to name a trustee to protect senior debt holders, Standard & Poor's warned on Dec. 7.”

Putting these assets on their balance sheets limits the amount of capital these institutions can throw around in new loans to businesses and consumers.

Global Bond Sales Tumbled 66% Last Quarter, BIS Says (Update1): “Governments and companies reduced sales of bonds and money-market securities by 66 percent to a net $396 billion worldwide in the third quarter as credit markets slumped, the Bank for International Settlements said.

Borrowing declined from a record $1.17 trillion in the second quarter, according to a report today by the BIS, which has monitored financial markets for central banks since 1930. The BIS figures subtract maturing debt from sales.

The biggest financial institutions cut lending after writing down more than $70 billion on securities related to bad U.S. home loans. Europe and emerging markets led the decline, with borrowing in Germany, France and the U.K. dropping 77 percent to $61 billion. That compares with a 56 percent decline in the U.S. to $165 billion. Emerging market borrowing plunged to $1.4 billion from $67.1 billion in the second quarter.”

This will definitely have a negative impact on the future earnings of the entire financial sector.

Wednesday, December 5, 2007

UK: Definately The Next Important Victim

Crude looks like a potential double top and Gold looks a little toppy too, with a lower high after $850 held. Could there be a bigger US dollar bounce in the cards?

U.K. House Prices Decline, Worst Streak Since 1995 (Update2): “U.K. house prices fell for a third month in November, the worst performance in more than a decade, and services growth slowed, increasing speculation the Bank of England will cut interest rates tomorrow.

The average cost of a home in Britain declined 1.1 percent to 194,895 pounds ($400,000) from a month earlier, a report by HBOS Plc showed today. Prices last fell for three months in a row in 1995. Services from banking to travel grew at the slowest pace in four years last month, according to an index by the Chartered Institute of Purchasing and Supply.

The pound fell to a four-year low against the euro as banks including Barclays Capital switched their forecasts to predict the Bank of England will reduce its benchmark rate. While Governor Mervyn King says he's still concerned about inflation, rising credit costs are threatening to drag down the housing market and hobble growth in Europe's second-largest economy.”

Again… There can be no doubt. The real estate bubble is bursting in the UK. The same mess that is currently causing so much misery in the US will occur in the UK.

“The U.K. economy is slowing from its fastest pace in three years as the financial services industry reels from the subprime slump and rising credit costs discourage consumers with record debt.”

The credit crunch is definitely causing casuallities…

U.K. Consumer Confidence Falls Most Since 2004, Nationwide Says: “U.K. consumer confidence fell the most in at least three years in November as higher borrowing costs and rising prices discouraged spending, Nationwide Building Society said.

An index of sentiment taken from a survey of 1,001 people declined 12 points to 86, the largest drop since the gauge was introduced in May 2004, Britain's fourth-biggest mortgage lender said today in an e-mailed statement. A measure showing willingness to spend fell 14 points to 63, the lowest recorded.

The report is the second to suggest pessimism among consumers deepened in November after contagion from the U.S. subprime slump raised credit costs for Britons with record debt, and oil prices rose close to $100 a barrel.”

There you have it. People are finally waking up to the fact that they’ve fucked themselves into a nasty little debt corner. Most baby boomers probably did not envision their retirement to be indefinitely postponed… The sudden realization that they are nothing more than debt slaves has noticeably dampened their moods.

U.K. Rate Forecasts Change to `Cut' on Signs of Slowing Growth: “U.K. economists at Barclays Capital, Lloyds TSB Group Plc and Royal Bank of Canada changed their predictions for the Bank of England rate decision tomorrow and forecast a cut after reports signaled the economy is weakening.

Simon Hayes at Barclays, Kenneth Broux at Lloyds TSB and Richard McGuire at Royal Bank of Canada said the central bank will lower its benchmark interest rate by a quarter point to 5.5 percent. All three previously forecast no change. Global Insight Inc., RIA Ltd., Wachovia Corp. and Ideaglobal also altered their predictions, saying the bank will reduce the rate.

U.K. services from banks to airlines expanded at the slowest pace in four years last month, house prices declined in their worst streak since 1995 and consumer confidence fell the most since 2004, separate reports showed today. The new forecasts widen the split among economists, who are the most divided on the central bank's decision since June 2004.”

Bank of Canada cut. The UK will probably cut. Slowly rates the world over will go down in an attempt to ease the credit crunch.

Tuesday, December 4, 2007

Fannie Mae, Freddie Mac 'Closed The Gap', Florida Screwed

Fannie Mae and Freddie Mac successfully closed the gap, and another headline out of Florida. (Florida Report: SUBPRIME CRISIS from The Mess That Greenspan Made)

Florida's Pension Fund Holds Same `Suspect' Debt as Frozen Pool: “Florida's pension fund owns more than $1 billion of the same downgraded and defaulted debt that sparked a run on a state investment pool for local governments and forced officials to freeze withdrawals.

The State Board of Administration, manager of $37 billion in short-term assets, including the pool, also oversees the $138 billion Florida Retirement System. The board purchased $3.3 billion of debt whose top ratings were reduced following the collapse of the subprime mortgage market, according to documents obtained by Bloomberg News through an open records request.

Like the hundreds of school districts and towns unable to access $14 billion frozen in the Local Government Investment Pool, Florida's 1.1 million current and retired state workers rely on the board's management to boost returns on the funds that pay their pensions. That has left them vulnerable to the same potential for losses. A state-created home insurer and the treasury are also at risk.

“These were highly inappropriate investments for taxpayers' money,” said Joseph Mason, a finance professor at Drexel University in Philadelphia. “This is the tip of the iceberg for pension funds. We know the paper is sitting there. There are substantial subprime-related losses that haven't shown up yet.””

… and to think: This is only the BEGINNING.

Monday, December 3, 2007

Libor Spikes Again, More Moodys Downgrades

Despite daily, desperate, massive injections of liquidity Libor is still spiking higher. Be worried. No es bueno. More downgrades from Moody’s are pending and the Florida school boards have decided to reject any losses on their frozen funds…

This little short covering bounce in equities has run its course. If not today, then very soon…

Bloomberg Charts:
1 month Libor - US0001M
Asset Backed Commercial Paper (ABCP) - FCPOAB

One-Month Pound Libor Soars as Banks Seek Year-End Funding: “The cost of borrowing in pounds for a month climbed the most in more than 10 years as banks sought funds to cover their commitments through to the start of 2008 amid a credit squeeze.

The London interbank offered rate that banks charge each other for such loans due after the end of the year jumped 63 basis points to 6.72 percent, the highest since December 1998, the British Bankers' Association said today.

Soaring bank lending rates reflect growing concern about the strength of financial institutions after more than $60 billion of writedowns this year linked to U.S. subprime-mortgage defaults. The European Central Bank, Bank of England and the Federal Reserve all offered emergency funds last week in an attempt to soothe concerns that credit conditions will deteriorate at the end of the year.

Today is the first day on which a cash loan of one month in pounds will cover a borrower's needs through the end-of-year holiday period.”

Yen Rises as Moody's Prepares Rating Cuts on Subprime Losses: “The yen rebounded from a two-week low against the dollar after Moody's Investors Service said it is preparing the biggest credit-rating cuts since subprime-mortgage defaults rocked financial markets.

The yen rose versus all 16 most-traded currencies as investors retreated from carry trades and sold higher-yielding assets bought with loans from Japan. The yen also advanced as Bank of Japan Governor Toshihiko Fukui signaled interest rates may have to rise.”

This is one of many clues that last weeks short covering rally is running out of steam.

Moody's May Cut Ratings on $105 Billion of SIVs (Update1): “Moody's Investors Service is preparing the biggest credit rating cuts since subprime mortgages contaminated the bond market, foreshadowing losses for investments that pay Florida teachers and money market funds.

Moody's may lower ratings on $105 billion of debt sold by structured investment vehicles after the net asset values of 20 SIVs sponsored by firms including New York-based Citigroup Inc. declined to 55 percent from 71 percent a month ago, Moody's said in a statement Nov. 30. The assets were valued at 102 percent in June.

“The assets that SIVs hold are continuing to decline in value,” said Ira Jersey, an interest-rate strategist in New York at Credit Suisse Group, Switzerland's second-biggest bank by assets. “As they do that it's creating more problems for the holders.”

School districts, towns and cities across Florida were denied access to their money after the State Board of Administration halted withdrawals from the Local Government Investment Pool on Nov. 29 to stem a run on the fund, which had $2 billion in SIVs and other debt tainted by the subprime collapse, state records show.

Downgrades would make it more difficult for SIVs, companies that use short-term debt to invest in higher-yielding assets, to obtain financing. Three of the funds defaulted in the past four months. Treasury Secretary Henry Paulson is working with Citigroup, New York-based JPMorgan Chase & Co. and Bank of America Corp. in Charlotte, North Carolina, to form an $80 billion fund to help bail them out.”

Can you say fire sale? A downgrade of this magnitude will force the holders of this structured debt to liquidate en masse.

Florida Schools Struggle to Pay Teachers Amid Freeze (Update4): “School districts, counties and cities across Florida sought to raise cash after being denied access to their deposits in a $14 billion state-run investment fund.

The Jefferson County school district was forced to take out a short-term loan to cover payroll for the 220 teachers and other employees in the system after $2.7 million it held in the pool was frozen yesterday. At least five other districts also obtained last-minute loans, said Wayne Blanton, executive director of the Florida School Boards Association.

“The unthinkable and the unimaginable have just happened here in Florida,” said Hal Wilson, chief financial officer of the Jefferson County school district, located 30 miles (48 kilometers) east of the state capital Tallahassee. “What we just experienced here is a classic run-on-the bank meltdown.”

Florida's State Board of Administration, manager of the Local Government Investment Pool, halted withdrawals yesterday at an emergency meeting after $13 billion was pulled out this month from participants. Governments from Orange County, home of Disney World, to Pompano Beach asked for their money back following disclosures that the fund held $1.5 billion of downgraded and defaulted debt.”

Florida Governments Reject Idea of Accepting Losses on Pool: “A newly formed advisory panel composed of Florida school and local government officials with money frozen in a state-run investment pool said they won't accept a return of less than 100 percent of their investment.

Members of the new panel, on a conference call late yesterday with officials from the agency that runs the fund, rejected a proposal to survey pool participants to determine whether they would accept as little as 90 cents on the dollar of their deposits in order to access their money in December.

“The very fact that you're out here talking to us about taking less than 100 percent is in my mind unacceptable,” said MaryEllen Elia, superintendent of Hillsborough County Public Schools, which has $573 million tied up in the pool, more than any other school district. “You need to figure out how to make the taxpayers in Florida whole. It isn't going to be fixed by asking us to take less than what we put in there.””

When all else fails, just WILL the losses away. Just refuse to accept them. Make them unreal with the force of your mind alone. Just concentrate really really hard on the big fat negative sign and force it to disappear.

Friday, November 30, 2007

High on Rate Cut Euphoria, Again

The market is high on rate cut euphoria again. The broader equity markets have strung together an impressive winning streak this week… Time to get short again.

Three-Month Libor for Euros Soars to 6 1/2-Year High, BBA Says: “The cost of borrowing euros for three months rose to the highest since May 2001, according to the British Bankers' Association.

The London interbank offered rate, the amount banks charge each other for such loans, rose 3 basis points to 4.81 percent, its 13th straight day of gains.

That's 81 basis points more than the European Central Bank's benchmark rate, the biggest gap ever.

The overnight euro rate rose for a second day, up 9 basis points to 4.08 percent, the BBA said today.”

That does not bode well for the equity markets in longer term. Libor rates are signaling that the financial system is under severe strain DESPITE massive injections of liquidity to date. Economic growth will almost certainly drop SIGNIFICANTLY in the near future.

ECB Takes More Steps to Counter Money-Market Tensions (Update3): “The European Central Bank took additional steps to calm money markets after the cost of borrowing in euros for a month rose to a six-year high.

The ECB will extend the maturity of its regular refinancing operation settling on Dec. 19 to two weeks from one, the Frankfurt-based central bank said in an e-mailed statement today. The operation will mature on Jan. 4 instead of Dec. 28. The ECB Governing Council, meeting via teleconference yesterday, decided the extra measure was necessary to “satisfy the banking sector's liquidity needs” for the holiday period over Christmas and the end of the year.

The move comes a day after the Bank of England said it will offer commercial banks emergency funds with longer repayment terms because of the risk that money markets will “tighten” at year- end. The U.S. Federal Reserve has also pledged to provide extra cash through a series of repurchase agreements into next year. Fallout from losses on U.S. subprime mortgages has made banks reluctant to lend to each other, pushing up credit costs.”

Paulson, Banks in Talks to Stem Surge in Foreclosures (Update1): “U.S. Treasury Secretary Henry Paulson is negotiating an agreement with banks to stem a surge in foreclosures by fixing interest rates on loans to subprime borrowers, according to people familiar with a meeting he led yesterday.

The Bush administration cut its forecast for economic growth yesterday, reflecting a deepening housing recession that's roiled financial markets since August. The Commerce Department reported the same day that the median price of a new house fell 13 percent in October from a year earlier, while fewer homes were sold than economists anticipated.”

The proposal is to ‘fix’ rates for 3 years, then allow the resets to occur. This does nothing but postpone the necessary price corrections. If you couldn’t afford a reset now, you won’t be able to afford the reset rate 3 years from now. End of story.

“Bair has proposed letting borrowers with adjustable-rate subprime mortgages, who are living in their homes and unable to afford resets, get extensions on the starter rate for at least five years. They could also be offered 30-year fixed-rate loans. Reich prefers a three-year freeze.

The rout will get worse because defaults on home loans are likely to rise, analysts said. The FDIC estimates that 1.54 million nonprime mortgages valued at $331 billion will reset by the end of next year.”

Stalling won’t solve the problem.

Bernanke Says Fed to Judge Market `Turbulence' Impact (Update2): “Federal Reserve Chairman Ben S. Bernanke said “renewed turbulence” in markets may have shifted the risks between growth and inflation, cementing speculation the central bank will lower interest rates as soon as next month.”

The cuts had already been priced in prior to this speech and even prior to the speech given by Kohn. This was nothing new.

Thursday, November 29, 2007

Oil Surges After Pipeline Explosion

Oil Surges After Enbridge Pipeline Explosion Cuts U.S. Supplies: “Oil surged more than $4 a barrel, the most in a month, after an explosion cut Canadian oil shipments through Enbridge Inc. pipelines that typically provide about 15 percent of U.S. crude imports.

Enbridge closed four pipelines that supply an average of 1.5 million barrels a day after a blast yesterday killed two workers. The company said today a fire is still burning at the Clearbrook terminal in Minnesota where the pipelines meet.

“It's an important pipeline and it's also where it's being hit, these pipeline junctions are a nightmare,'' said Rob Laughlin, a senior broker at MF Global Ltd. in London. Oil “could go up further if it's shut for some time.””

As of 7:00 AM this morning, two of the four lines have been re-opened. Crude has given back some of the gains.

““All our lines are shut down until we can safely start up the system,” Denise Hamsher, a spokeswoman for Calgary-based Enbridge, said today by telephone. “At least one or two lines will be shut down for quite sometime.”

The leak and explosion occurred at the No. 3 pipeline, which was undergoing maintenance, according to Enbridge.

U.S. refineries operated at 89.4 percent of capacity, the highest since the week ended Sept. 14, the energy department said. Refiners usually start in November units that were shut during the previous two months for repairs after the summer driving season ends and before demand for heating oil picks up.

OPEC has no plan to raise oil output when it meets next week in Abu Dhabi because the market is well supplied, Qatar's oil minister said yesterday.”

There isn’t much slack in the system here. With pipeline troubles, even an OPEC production hike wouldn’t matter in the least.

Wednesday, November 28, 2007

Just Another Short Covering Rally

U.S. Stocks Stage Biggest Two-Day Rally Since 2002; Banks Gain: “U.S. stocks staged the biggest two- day rally in five years, led by financial shares, after Federal Reserve Vice Chairman Donald Kohn buttressed expectations for another interest rate cut.

Citigroup Inc., Lehman Brothers Holdings Inc., Morgan Stanley and Goldman Sachs Group Inc. rose more than 5 percent as banks and brokerages in the Standard & Poor's 500 Index gained the most since 2002. EBay Inc. and Inc. helped push the Nasdaq Composite Index to a 3.2 percent gain after Sanford C. Bernstein & Co. forecast a “strong” fourth quarter for both.

“Kohn's comments just add to a perception that the Fed is embarking on a sustained path of easing,” said Michael Metz, the New York-based chief investment strategist at Oppenheimer Holdings Inc., which manages $60 billion. “There's also huge relief that the worst of the financial crisis may be behind us.””

It’s a little crazy to think the Fed would cut by 50 basis points in December…

“Traders boosted wagers that the Fed will cut its benchmark lending rate when it meets Dec. 11. Odds of a half-point cut rose to 8 percent today from 2 percent yesterday, while the likelihood of a reduction of any size remained 100 percent.”

A 50 basis point cut would destroy the US dollar, spike oil over $100 and send gold to $1000. Far more probably is a 25 basis point cut and a 50 basis point cut in the discount window to narrow that spread still further.

Kohn Sees Risk of Reduced Credit From Market Upheaval (Update7): “Federal Reserve Vice Chairman Donald Kohn said market “turbulence” may reduce credit to businesses and consumers, reinforcing investors' expectations the central bank will cut interest rates again next month.

“The degree of deterioration that has happened over the last couple of weeks is not something that I personally anticipated,” Kohn said in response to a question following a speech to the Council on Foreign Relations in New York. “We are going to have to take a look at'' the stress in credit markets “when we meet in a couple of weeks,” he said.”

It was Kohn speech that prompted traders to increase their bets on a 50 basis point cut in December. This in turn burned the shorts who scrambled to get out of their positions in financials.

U.S. Economy: Home Sales Slide More Than Forecast; Durable Order Decline (Update5): “Sales of previously owned U.S. homes fell more than forecast in October and orders for cars, planes and other durable goods dropped for a third month, the longest slump in 3 1/2 years.

The figures came as Federal Reserve Vice Chairman Donald Kohn signaled he's open to lowering interest rates again given “the degree of deterioration” in financial markets. Stocks rose as Kohn's remarks cemented forecasts for a rate cut next month to help keep the economy from sliding into recession.

Falling “consumer confidence and the slowing in capital- goods orders does bring us closer to recession,” said John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina. “I take Kohn's remarks as a good sign that the Fed is looking at the credit market issues, as well as the economic data, and deciding to react.”

… and the market melted up. There may have been some bargain hunting. That much is for sure. The rest however, was pure short covering.

Tuesday, November 27, 2007

Citigroup Raises $7.5 Billion

Citigroup to Raise $7.5 Billion From Abu Dhabi State (Update2): “Citigroup Inc., the biggest U.S. bank by assets, will receive a $7.5 billion cash infusion from Abu Dhabi to replenish capital after record mortgage losses.”

This might be the catalyst to give the financials a little bit of a relief pop.

“With the purchase of a 4.9 percent stake, Abu Dhabi, the largest emirate in the United Arab Emirates, would rank as Citigroup's largest shareholder ahead of Los Angeles-based Capital Group Cos. and Saudi billionaire Prince Alwaleed bin Talal, data compiled by Bloomberg show.

Mortgage writedowns cut Citigroup's “tier 1” ratio, a metric used to assess banks' ability to weather loan losses, to 7.3 percent on Sept. 30. The figure, while above U.S. regulators' 6 percent threshold for a “well-capitalized” bank, was below the bank's 7.5 percent target.

The Citigroup equity units that ADIA will purchase can be swapped for as many as 235.6 million shares starting in 2010. The securities will convert into Citigroup shares at prices ranging from $31.83 to $37.24 between March 15, 2010 and Sept. 15, 2011. Citigroup fell to $29.80 in New York Stock Exchange composite trading yesterday, the lowest price in five years, and traded in Germany at $31.51.

“The structure of the deal suggests that Abu Dhabi is very bullish, effectively participating in the upside beyond $37.24, and sharing in the downside below $31.83,” said George Nikas, who helps manage $1 billion at Deutsche Bank AG in Sydney.

Abu Dhabi will have “no role in the management or governance of Citi, including no right to designate a member” of the company's board, Citigroup said in its statement.”

If the markets can’t build a little bit of positive momentum on this, then that would be a bad sign indeed.

Citigroup Plans Cost Cuts After Mortgage Writedowns (Update1): “Citigroup Inc., the largest U.S. bank, is reviewing ways to cut costs as it seeks a new chief executive officer and grapples with mortgage writedowns that may lead to the first quarterly loss since at least 1998.

Citigroup may cut as many as 45,000 jobs in the next two months, CNBC reported earlier today, citing unidentified people within the company. CNBC also said the bank had “no timetable or set numbers” for the cuts. Citigroup spokeswoman Pretto said “any reports on specific numbers are not factual.””

Maybe the combination of a cash infusion and job cuts can breathe some life into Citigroup for a little while.

U.S. Notes Fall; Citigroup Equity Sale Cuts Demand for Safety: “Treasury two-year notes fell the most in almost a month after Abu Dhabi agreed to invest $7.5 billion in Citigroup Inc. and the Federal Reserve pledged funds needed to avoid a year-end shortage of capital.

The promises calmed investors who drove two-year yields to 2.87 percent yesterday, the lowest since December 2004. The Fed said yesterday it will provide funds to the money markets, while the Citigroup purchase may help the world's biggest bank replenish capital hurt by subprime mortgage-related writedowns.

“The buying pressure on Treasuries has gone away,” said Christoph Kind, a Frankfurt-based fund manager at Frankfurt Trust Investment GmbH, which manages about $9 billion in fixed- income assets. “The news about Citigroup restored confidence a little. There's more value left in other bond markets.”

The “TED” spread, or the difference between three-month bill yields and the London interbank offered rate, narrowed 1 basis point to 1.94 percentage points, still near the widest since Aug. 20. The decline indicates easing willingness among banks to lend to each other. Three-month Libor still rose for a 10th day today to 5.06 percent, the highest in four weeks, the British Bankers' Association said today.”

Yen Declines as Citigroup Stake Sale Revives Carry-Trade Demand: “The yen fell against the world's 16 most-active currencies after Abu Dhabi said it will buy a stake in Citigroup Inc., giving investors confidence to buy higher yielding assets with loans from Japan.

The yen declined the most in two weeks against the dollar after the biggest U.S. bank announced the $7.5 billion cash infusion, which will shore up its capital following record losses related to subprime mortgages. The yen dropped the most against the New Zealand and Australian dollars, favorites of so-called carry trades. The dollar rose versus the euro and the U.K. pound.

“The market has taken this as a positive sign that there is funding out there for these banks should they need it,” said Daragh Maher, London-based senior currency strategist at Calyon, the investment-banking arm of Credit Agricole SA. “This has reduced some of the strain and given carry-trade investors a boost in what is clearly a very jumpy environment.””