Articles on siv0

Oil and Gas Prices, $ and euro, June 4, 2008, Mark Wyatt

Food for Thought, May, 2008, Niels Jensen

Stagflation and the Fed, February 29, 2008, John Mauldin

Consumers, Credit, and Complications, February 8, 2008, John Mauldin

What Caused the Home Mortgage Market to Go Out of Control?, February 2008, Thomas Tan

Summary of Orange County, California, Structured Investment Vehicle Holdings, January 31st, 2008, Mark Wyatt

Taking Out the Structured Investment Vehicle Garbage, October 21st 2007, John Mauldin

Here are some recent headlines on the collapsing world financial system:

Please follow links to read entire article

We need to dump AIG! This is pure insanity. The federal government support gambling contracts?

AIG hopes to cover all derivatives with plan (Reuters)
Lilla Zuill
December 10th, 2008

American International Group Inc (AIG.N: Quote, Profile, Research, Stock Buzz), the giant insurer bailed out by the U.S. government, is trying to figure out how it can unwind contracts that cover $9.7 billion in trades, without asking taxpayers for more money.

The problem underscores the minefield that AIG has to navigate in trying to stop the heavy financial bleeding it has sustained from bets on mortgage debt before the U.S. housing market collapsed. The company's shares dropped 17 cents, or 8.8 percent, to $1.76 in Wednesday morning trade.

AIG spokesman Nicholas Ashooh said unwinding the $9.7 billion in derivatives trades in question is not as straightforward as unwinding others.

AIG, using derivatives, agreed to protect debt for banks and other parties, in deals that forced the insurer to post large amounts of collateral and ultimately seek government help.

Under the government rescue package that swelled to more than $150 billion last month, many of those derivatives transactions can be ended, because a government fund is buying the debt that AIG had guaranteed for banks and other parties.

But for the $9.7 portfolio in question, the parties that bought credit protection do not own the actual debt obligations, making the deals harder to unwind than other transactions.

BofA shareholders OK Merrill deal(Charlotte Observer)
Christina Rexrode
December 5th, 2008

...“History tells us this: Commercial banking and investment banking do not mix,” said John Moore, a Charlotte shareholder who was one of about ten to take to the microphone. “Exotic derivatives and structured security investment vehicles must never again be allowed anywhere near the mortgage on your daughter's house or your grandfather's certificate of deposit.”...

FDIC: Government idea won't help people in need(Marketwatch)
Ronald D. Orol
Decemmber 4th, 2008

Community Reinvestment Act is not cause of financial crisis, FDIC's Bair said

...Bair criticized the Commodities Futures Modernization Act, passed in 2000, which she argued took the government out of oversight of derivatives market, which she argued was a key contributor to the financial crisis. She contended that Congress should put restraints on leverage used by investors in derivatives investments.

"That [CFMA] was unfortunate because a lot of the leverage occurred through derivatives being priced on mortgages and mortgage default rates," Bair said. "Reinstating some common sense regulation on derivatives trading and more aggressive margin requirements would be a tremendous help," ...

Mexican firms asked to reveal derivatives exposure(Reuters)
Dec 4, 2008

Mexican companies have been asked by regulators to disclose their exposure to derivatives instruments after a number of firms lost billions of dollars in bad currency bets following a steep devaluation of the peso.

Companies listed on the country's stock exchange will have to clarify their derivatives positions in publicly available filings to the stock exchange by Dec. 15, said a spokesman for the National Banking and Securities Commission, or CNBV...

...The government said in October that it would probe whether companies with large losses in derivatives had broken rules by not keeping investors informed.

Getting around tax laws...

Citi's General Growth stake tied to Pershing Square(Reuters)
Dec 4, 2008

Both Citigroup and Morgan Stanley primarily bought shares to reduce their risk in trades they entered with Pershing Square Capital Management, said William Ackman, the fund's founder.

The derivatives trades gave Pershing Square exposure to shares without owning them outright, so the banks essentially bought the stock on behalf of Pershing Square. In a November filing, the fund said it owned about 7.5 percent of General Growth's shares outright.

The derivatives transactions with Morgan Stanley and Citigroup, and a similar deal with UBS AG (UBSN.VX: Quote, Profile, Research, Stock Buzz), use a derivative known as a "total return swap" that give the fund exposure to another 12.5 percent of General Growth's shares.

In the total return swap, Pershing Square pays financing fees to the banks. If the shares go up, the fund receives the gains, but if shares go down, it assumes the loss.

Spokesmen for Citigroup and Morgan Stanley declined to comment, while a UBS spokesman was not immediately available.

Pershing Square could not buy more than 9.9 percent of General Growth's shares outright without falling afoul of special share ownership rules that REITS typically follow to maintain their special tax-advantaged status.

Lawmaker Looks to Regulate Derivatives(NEWSInferno)
November 21st, 2008

prominent lawmaker says financial derivatives like credit default swaps need to be regulated. Sen. Tom Harkin (D-Iowa) said yesterday that he plans on introducing new legislation that would force such derivatives onto futures exchanges.

The unregulated derivatives market has shouldered much of the blame for the current global financial crisis. Derivatives are financial instruments whose value is based on an underlying assets, such as commodities, stocks, residential mortgages, commercial real estate loans, bonds, interest rates, exchange rates, or indices (such as a stock market index or the consumer price index ).

Chasing Value: GE -- the water & power company (Blogging Stocks)
Sheldon Liber
Nov 25th 2008

Much has been written about the trouble General Electric's (NYSE: GE) Financial Services division is having in the current global crises centered on high-risk leveraged loans and multi-leveled derivatives. It is true the company is seeing its share of the pain, and truth be told, I do not think anyone actually knows how deep the total pain will be. Today, GE announced a December 2, 2008 conference call to enlighten investors.

Is The Financial Crisis Getting the Best of Warren Buffett?(iStock Analyst)
November 22, 2008

Through November 21, 2008, Berkshire Hathaway's (BRK.A) year-to-date return was -36.4%. Since last December 11th when Class A shares hit its record high of $151,650, it has lost nearly half its value closing at $77,500 on Thursday; its lowest level since August 2003. This has not gone unnoticed by shareholders. Some investors have lost confidence in the ability of BRK to pay its debts.

After the collapse of AIG driven by derivatives, many investors fear the same could happen to other insurance companies including BRK.A. Berkshire could have to pay as much as $37 billion between 2019 and 2027 under some derivative contracts if the S&P 500 index and three other stock indexes are lower than when Berkshire entered the contracts...

...Derivative exposure is not the only problem facing BRK.A. The stock price of General Electric Co. (GE) and Goldman Sachs Group Inc. (GS), have fallen, rendering Mr. Buffett’s warrants to buy common shares worthless for the time being.

World must brace itself as the US banking sector 'fesses up' to losses(Telegraph UK)
Liam Halligan

It's August. Nothing is meant to happen. Global markets are supposed to be asleep. If only that were true. Last week attention focused, or refocused, on the world economy's much weaker growth prospects. The catalyst was alarming new evidence that the credit squeeze, far from abating, is tightening its vice-like grip.

U.S. and Global Economies Slipping in Unison(NY Times)
Peter S. Goodman
August 23, 2008

Economic trouble has spread far beyond the United States to major countries in Europe and Asia, threatening American businesses with the loss of foreign sales and investment that have become increasingly vital to their sustenance.

Only a few months ago, some economists still offered hope that robust expansion could continue in much of the world even as the United States slowed. Foreign investment was expected to keep replenishing American banks still bleeding from their disastrous bets on real estate and to provide money for companies looking to expand. Overseas demand for American goods and services was supposed to continue compensating for waning demand in the States.

Now, high energy prices, financial systems crippled by fear, and the decline of trading partners have combined to choke growth in many major economies.

Crude Oil Trades Near $119 After Supply Gains, Dollar Climbs(Bloomberg)
By Nesa Subrahmaniyan
Aug. 7, 2008

Crude oil futures traded near $119 a barrel in New York after falling yesterday as U.S. supplies unexpectedly gained amid slowing demand, and the dollar climbed, reducing the appeal of commodities as an inflation hedge.

Crude oil supplies rose 1.61 million barrels last week, and fuel consumption was 2.6 percent lower in the four weeks ended Aug. 1 from a year ago, the U.S. Energy Department said yesterday. New York oil futures fell as low as $117.11 a barrel yesterday, 20 percent below the record $147.27 on July 11, a threshold commonly seen as the start of a bear market.

Gold falls for 4th day on oil drop, dollar gain(AP)
August 6, 2008

Gold closed lower for a fourth straight session Wednesday as another drop in crude prices coupled with a stronger dollar diminished the metal's appeal as a safe-haven asset.

Other commodities traded mostly lower, with corn hitting a four-month low and soybeans also falling sharply.

Gold has faced strong downward pressure in recent weeks — dropping 5 percent in the past month — as dwindling demand for energy and a weakening U.S. economy cuts into the price of crude and other commodities.

AIG Falls After Insurer Posts Third Straight Loss on Writedowns(Bloomberg)
Hugh Son
Aug. 7, 2008

American International Group Inc., the world's biggest insurer, fell 7.9 percent in extended trading yesterday after housing-related writedowns wiped out profit for a third straight quarter.

The loss of $5.36 billion, or $2.06 a share, in the second quarter was worse than analysts expected and renewed concern that the New York-based company may need more capital. AIG earned $4.28 billion, or $1.64 a share, a year earlier.

``It was a pretty horrific quarter, just scary,'' said Donn Vickrey, analyst at research firm Gradient Analytics Inc., who has the equivalent of a ``sell'' rating on AIG. ``Operations suffered across the board; I don't think you can rule out another capital raise.''

The results intensify pressure on Chief Executive Officer Robert Willumstad to turn around AIG, which declined 50 percent in New York trading this year before today and posted three quarterly losses totaling more than $18 billion. Willumstad, 62, promised to reveal a plan by late September to fix the company after replacing Martin Sullivan on June 15.

Freddie Mac’s Big Loss Dims Hopes of Turnaround(NY Times)
August 6, 2008

The gloom over the nation’s housing market deepened on Wednesday as Freddie Mac, the big mortgage finance company, reported a gaping quarterly loss and predicted that home prices would fall further than previously projected.

Freddie Mac’s chief executive, Richard Syron, told analysts that home prices had declined faster than anticipated.

The announcement disappointed those hoping that the housing market might be bottoming out and heightened worries that the government could be forced to rescue Freddie Mac and the other mortgage finance giant, Fannie Mae. The news also signaled that mortgage rates were likely to rise.

HK's Bank of East Asia H1 net profit falls 52.4 pct on CDO valuation losses(Trading Markets)
August 05, 2008

Bank of East Asia said its first-half net profit dropped 52.4 pct from a year earlier to 894 mln hkd due to valuation markdowns on its collateralised debt obligations (CDO) holdings.

Gordian Knot says $30 bln Sigma fund solvent(Reuters)
Aug 6, 2008

Sigma Finance, the $30 billion structured investment vehicle managed by Gordian Knot, said the fund is solvent and paying its debts fully and timely.

"Sigma is solvent and both senior debt and capital notes of Sigma continue to be paid in full and on a timely basis," Gordian Knot said on Sigma's Web site.

...Sigma said it has $2.95 billion of medium term notes due by Sep. 30th, substantially less than the $8.3 billion reported by analyst research notes, including Moody's Investors Service.

Sigma creditors name advisors, may form committee(Reuters)
Elena Moya
Aug 5, 2008

Creditors of structured investment vehicle Sigma Finance have appointed advisors and may join forces to discuss the future of the $30 billion fund amidst concerns about Sigma's abilities to pay its debt.

Joint advisers accountancy firm Deloitte [DLTE.UL] and law firm Orrick will lead a conference call on Thursday, said Mark Fennessy, partner at Orrick in London.

"The purpose of the call is to listen to what investors have to say, and if appropriate, to form a creditors' committee," Fennessy told Reuters on Tuesday.

Wall Street Report Tries to Dissect Financial Meltdown(NY Times)
August 6, 2008

A group of Wall Street executives released a report on Wednesday that outlined how the industry failed to foresee the financial meltdown of the last year and what companies can do to improve risk management.

The 172-page report, written by chief risk officers and senior executives at banks like Lehman Brothers, Merrill Lynch and Citigroup, also provides suggestions about technical issues at the same time as it offers a bit of a mea culpa.

“Virtually everybody was frankly slow in recognizing that we were on the cusp of a really draconian crisis,” said E. Gerald Corrigan, a managing director at Goldman Sachs and a chairman of the Counterparty Risk Management Policy Group III , which released the report.

Wall Street failed to anticipate how wide-reaching problems with mortgage bonds would spread into seemingly distant corners of the financial markets, the report said. Awash in easy money, banks doled out credit without sufficiently charging for the risk. Wall Street also created complex structures that masked connections between asset classes as well as compensation incentives that pushed traders to take risky steps for short-term gain. The industry’s failings have now translated into pain for the broader economy, the report said.

Fed banks on ongoing banking emergency Aid extended to international financial system(Financial Post)
Hugh Anderson
August 05, 2008

Stock jockeys rarely have to pay much attention to what's going on in the often murky dealings between the U. S. Federal Reserve and the country's banks and other financial institutions - in reasonably untroubled times, that is.

But these are not untroubled times, of course. Some of us even worry that the financial industry has not been so troubled since 1930. One hopes these worries are overblown, but we won't know until afterward.

Meanwhile, eager buyers of financial stocks especially should note that the Fed does not seem to agree that the worst is over. The evidence? Late last week, it opened the emergency lending tap even wider. It also extended the so-called temporary program until the end of January. The cynical among us might say that everything starts out as emergency action and then becomes standard practice. Remember those "temporary" income taxes to pay for the war. Which war was that again?

The Fed's official reason for these moves was "continued fragile circumstances in financial markets."

So it has extended the precedent-shattering access for investment banks to its primary last-resort lending window, introduced in March as investment bank Bear Stearns foundered. Previously that window was open only to regular banks.

The Fed will also make available 84-day loans for the first time under another emergency loan program introduced earlier as an alternative to the traditional overnight window. Previously only 28-day loans were available.

The Fed is not alone in these changes. Its announcement made clear that this is a joint operation, even including with the online version helpful links to similar announcements by two other central banks.

The European Central Bank will make available 84-day loans at its dollar auctions, as will the Swiss National Bank. The Fed said it will help the European Central Bank pay for this change with a US$5-billion increase to US$55-billion in its swap line of credit with the European bank.

Rhinebridge backers set to recover 55% of investment (Irish Times)
Thursday, August 7, 2008

THE BACKERS of debt fund Rhinebridge, one of the first Dublin-based casualties of the credit crunch in international markets, are set to recover some 55 per cent of their $1.1 billion...investment under a distribution and partial redemption finalised yesterday by the receivers of the fund.

Receivers Deloitte and Touche said last night they had concluded the sale of the portfolio of debt securities held by the collapsed fund, which defaulted last year. Senior investors in its commercial paper stand to recover 55 per cent of their money, but junior-ranking creditors will receive nothing.

Central banks fire new round at credit crisis(Reuters)
Jul 30, 2008
Glenn Somerville

The U.S., European, and Swiss central banks on Wednesday extended emergency lending facilities for investment banks and expanded other liquidity programs to ease credit market strains that have weighed on the global economy for nearly a year.

The joint measures helped lift share prices in the United States and Europe, and were a factor in pushing up U.S. bond yields and the U.S. dollar.

The U.S. Federal Reserve said it was prolonging the emergency credit facility for primary dealers to January 30 which had been due to expire in mid-September.

The Fed said it acted "in light of continued fragile circumstances in financial markets," and said it would close down the lending program once it determined credit market conditions were no longer "unusual and exigent."

The Primary Dealer Credit Facility was launched in March after the near bankruptcy of Bear Stearns and it marked the first time since the Great Depression that the Fed had opened its emergency lending to investment banks.

Merrill Lynch 2007 CDOs under water: consultant(Reuters)
Jul 30, 2008

Merrill Lynch & Co Inc repackaged debt deals from 2007 have all performed poorly, which the bank should have predicted based on what was going on in the mortgage market at the time, consultant Janet Tavakoli said on Wednesday.

Tavakoli said in a report to clients that of the 30 collateralized debt obligations (CDOs) Merrill sold in 2007, every one has either had its best-rated portion cut to junk, is in technical default, is being liquidated, or is in danger of being liquidated.

The poor performance suggests that Merrill was underwriting deals it knew or should have known were bad, Tavakoli said. That underwriting, combined with similar moves from other banks -- has shaken investor faith in CDOs, Tavakoli wrote in the report. Her company is Tavakoli Structured Finance Inc.

Merrill Lynch spokesman Mark Herr declined comment.

"Investment banks have a huge credibility problem when trying to explain that they 'didn't know the gun was loaded," Tavakoli wrote.

Additional disclosure of loan data is not enough to jump start the securitization market, Tavakoli said, adding that the risks embedded in these securities were disclosed in the prospectuses.

"It is one thing to have documents that disclose risks ... it is quite another to bring deals to market that you knew or should have known were overrated and deeply troubled the day the deal closed," Tavakoli wrote.

Bank of America, Wells Fargo Say Loan Changes Rising (Update3) (Bloomberg)
July 25 2008
Alison Vekshin

Bank of America Corp. and Wells Fargo & Co., the top mortgage lenders, told Congress they have accelerated the pace of loan modifications to avoid foreclosures amid criticism they are slow to help keep people in their homes.

Both banks added staff and contacted more homeowners to reduce loan rates or to arrange repayment plans to cut monthly payments, executives said today at a House Financial Services Committee hearing in Washington. Bank of America doubled its modifications in the first half of this year from the second half of 2007, and Wells Fargo increased staffing fivefold.

``Bank of America remains committed to helping our customers avoid foreclosure whenever they have a desire to remain in the property and a reasonable source of income,'' said Michael Gross, the Charlotte, North Carolina-based lender's managing director for loss mitigation, mortgage, home-equity and insurance services.

F.D.I.C. Takes Over 2 Banks (NY Times)
July 27, 2008

Federal regulators on Friday closed two banks operating in Arizona, California and Nevada: First National Bank of Nevada and First Heritage Bank, N.A.

The 28 branches of the banks, owned by First National Bank Holding Company, based in Scottsdale, Ariz., are scheduled to reopen on Monday as branches of Mutual of Omaha Bank, the Federal Deposit Insurance Corporation said.

What Hath Merrill Wrought? Tally of Likely Fallout from CDO Writedown Rises (Updated)(Naked Capitalism)
Wednesday, July 30, 2008

Merrill's surprising, mere ten days after its last investor combo writedown/fundraising announcement still has financial analysts toting up the collateral damage. Remarkably, the US stock market staged a peppy rally, clearly choosing to ignore the implications.

The cause for pause was the sale of $30.6 billion in face amount of super senior CDOs at a ostensible price of 22 cents on the dollar. But the sale was 75% financed, non-recourse, and could almost be characterized as a call rather than a sale. Worse, the CDOs were mainly 2005 vintage, and thus should have better quality underlying assets than 2006 and 2007 deals.

Barry Ritholtz argues that the real sales price was 5.47%, the amount paid in cash. That's debatable (you'd need to look at the financing terms and do a bit of math), but the general point is well taken: the real number is lower than 22%. But even that figure has knock-on consequences.

Has Deleveraging Even Begun? (Not For the Fainthearted)(Naked Capitalism)
Monday, July 28, 2008

It no doubt seems absurd to question the idea that deleveraging in underway. We've had three heroic central bank interventions, starting in August 2007, to reverse seize-ups in the money markets. The asset backed commercial paper market has been almost in run-off mode. Leveraged buyout loans have been scarce to non-existent. Banks have cut home equity credit lines and credit card borrowing limits. Commercial and industrial loans have fallen. The private mortgage securitization market is a shadow of its former self.

Yet the macro level data, at least as far as the US is concerned, tells a dramatically different, indeed troubling story...

Cheyne’s fire sale has begun to set a floor for ABS prices(Euro Week)
July 22, 2008

Last week Cheyne Finance, the defaulted structured investment vehicle, sold a fifth of its assets in an open auction, partly to set a value for its restructuring. The bids were not high — 44% of par was the most anyone would offer for a slice of the portfolio — but this was a genuine sale which paves the way for other auctions and goes some way to establishing a bottom for ABS values.

This was on the front page of the Los Angeles Times today.

Why the Oil Crunch May Grow Worse(LA Times)
Elizabeth Douglass
July 22, 2008

The fear is that all the easy-to-reach crude has been found. These may be 'the good old days,' one expert says.

With gasoline and oil costing once-unthinkable barrels of cash, the notion that things in our petroleum-addicted world soon will get worse -- maybe much, much worse -- is spreading fast.

...But behind today's oil mania lies a deeper dread: that the world has found all the easy-to-reach oil, and the daily supply of the essential black goo will fall further and further behind escalating global demand.

"As much as you're uncomfortable with today's oil prices, these are going to be the good old days," oil expert Robert L. Hirsch told a recent Santa Barbara gathering of policymakers and environmentalists. "We're talking about pain here that is unimaginable."

This one takes a more optimistic perspective

The Oil Price How Long Can It Go on Rising?(Red Orbit)
Pamela Ann Smith
July 20, 2008

IN AN EXCLUSIVE INTERVIEW WITH THE MIDDLE EAST, ROBERT MABRO, A WORLD-RENOWNED EXPERT ON OIL AND GAS, TALKS TO PAMELA ANN SMITH Robert Mabro is widely regarded as one of the world's foremost experts on oil and gas...

In this wide-ranging interview with The Middle East, Mabro explains why he feels it is the banks and hedge funds, rather than Opec, that are driving the oil price to record highs, and why he believes, sooner or later, it will come down.

This does not portend well for Orange County, California, who hold several hundred billion in SIV investments.

Little comfort in SIV Portfolio asset auction(Financial Times)
Anousha Sakoui
July 17 2008

A benchmark auction of distressed debt assets has given investors a gloomy guide to the prospects of recovering cash from the troubled structured investment vehicles that have been at the heart of the credit crunch.

The assets auctioned from a $7bn (£3.5bn) SIV formerly known as Cheyne Finance this week drew bids that would pay only 44 cents in the dollar if investors opted for a cash exit from the vehicle, it was revealed on Thursday.

Merrill Posts Another Loss; Write-Downs Keep Coming(WSJ)
July 18, 2008

...The brokerage firm's second-quarter loss of $4.65 billion, or $4.95 a share, was one of the worst in Merrill's history and more than twice as steep as the loss for which analysts had been bracing. Already clobbered by subprime-related write-downs of more than $30 billion in the previous three quarters ended in March, Merrill took an additional $9.7 billion hit in the second quarter, which caused the bulk of the company's net loss.

The results underscore why Merrill is parting with valuable assets, such as its 20% stake in news and data provider Bloomberg LP, which is being sold back to the news and information provider's parent Bloomberg Inc. for $4.4 billion. Merrill also announced Thursday its plan to sell Financial Data Services Inc., valued at $3.5 billion.

Banks Fight EU Plan for Credit Derivatives Reserves (Update1)(Bloomberg)
John Rega and Neil Unmack
July 17

The financial industry is fighting a European Commission plan to boost capital requirements on credit- default swaps and other instruments used to transfer risk in response to the market turmoil of the last year.

Banking groups object to a draft from the European Union that broadens new capital rules beyond asset-backed securities to cover syndicated corporate debt as well as the $62 trillion market for credit-default swaps. The plan would force banks to maintain a 10 percent stake in any such instruments they sell.

The initiative, which isn't yet a formal proposal, seeks to give banks more incentive to make safe loans. Policy makers argue that standards loosened as banks sold off their loans, leading to U.S. mortgage defaults that touched off a credit crunch and more than $423 billion of losses and writedowns at banks.

Home construction marks slowest pace since 1991(Biz Journal)
July 17, 2008

Construction of single-family homes fell nationwide in June to its slowest pace in 17 years.

The U.S. Commerce Department reported Thursday that construction of single-family homes dropped 5.3 percent from June 2007 to June 2008 to a seasonally adjusted annual rate of 647,000 units, the weakest performance since January 1991.

Construction of multifamily units, however, surged by more than 43 percent in the year-to-year comparison, driven by a change in New York City building codes that spurred a wave of apartment construction. Taken together, single-family and apartment construction rose by 9.1 percent to an annual rate of 1.07 million units.

Banks expected to feel pain until 2010(Financial Times)
James Mackintosh
July 16 2008

Traders are betting that the credit crunch will still be hurting banks at the end of 2010 with financial institutions expected to be scrambling for cash to shore up their end-of-year balance sheets.

A popular so-called butterfly trade in the money markets is showing expectations of three to four times the stress at the end of 2010 as before the credit crisis started to bite last summer, although it implies the situation will have improved sharply compared with today.

Oil tumbles for 3rd day following natural gas(AP)
Adam Schrek
July 17, 2008

Oil prices fell sharply Thursday following two days of declines, dragged down further by a massive sell-off of natural gas.

The slide accelerated amid growing concerns about the weakening U.S. economy.

Light, sweet crude for August delivery was down $4.08 at $130.52 a barrel before midday on the New York Mercantile Exchange. Prices have fallen about $14 in just the past three days.

"This market is acting much different than it has during this entire bull run," said James Cordier, president of Tampa, Fla.-based trading firms Liberty Trading Group and "I think it's because the fundamentals are finally turning from extremely bullish to slightly bearish. But slightly bearish is enough to tip the market."

Natural gas futures for August delivery fell as much as 8.2 percent in the day, the biggest one-day drop in nearly a year. Natural gas fell 13.8 percent on Aug. 20, 2007, according to Nathan Golz, researcher at Wachovia Securities in St. Louis.

Prices for the key heating, cooking and power generation fuel have tumbled more than 20 percent since their peak before the Fourth of July, and are now trading at their lowest point since April.

Wachovia Securities hit with inspection in probe(Reuters)
Jul 17, 2008
Carey Gillam

Securities regulators from six U.S. states mounted a surprise inspection Thursday of the headquarters of Wachovia Corp's (WB.N: Quote, Profile, Research, Stock Buzz) brokerage affiliate, as part of a probe into the firm's sales of auction-rate debt.

The office of Missouri Secretary of State Robin Carnahan said a team of 10 regulators went to the St. Louis headquarters of Wachovia Securities, seeking information about sales practices, internal evaluations of the auction-rate securities market and marketing strategies.

The move came after Wachovia Securities failed to comply with information requests from Missouri securities regulators, state officials said. More than a dozen subpoenas were also issued, according to the state.

The $330 billion auction-rate securities market normally allows issuers such as municipalities to borrow money for the long term, but at lower, short-term rates.

Roughly half of the market remains frozen after a February meltdown in which brokerages abandoned their role as buyers of last resort. Investors flooded dealers with paper backed by bond insurers whose credit ratings were in question, forcing many issuers to pay uncommonly high interest rates.

UBS Stops Offshore Banking Services for U.S. Clients (Update3) (Bloomberg)
Ryan J. Donmoyer and Elena Logutenkova
July 17 2008

UBS AG, the world's largest wealth manager, will stop offering offshore-banking services to U.S. clients through non-U.S. branches, said Mark Branson, chief financial officer of UBS's global wealth-management unit.

``We have decided to exit entirely the business in question,'' Branson said today in Washington. ``UBS will no longer provide offshore banking or securities services to U.S. residents through our bank branches. Such services will only be provided to residents of this country through companies licensed in the United States.''

Branson disclosed the step during testimony to a U.S. Senate subcommittee that's investigating tax compliance by banks in so-called tax havens. UBS, the biggest Swiss bank, is cooperating with tax-evasion probes by U.S. prosecutors and regulators; tax evasion through offshore accounts robs the U.S. Treasury of $100 billion annually, the subcommittee said.

``One of the things that current management is trying to do is maintain the reputation of the core Swiss business, and that has been undermined'' during the U.S. tax probe, said Derek Chambers, an equity analyst at Standard & Poor's in London, who rates the stock ``hold.'' The decision to close the U.S. business is ``fairly drastic,'' he said.

2nd UPDATE: JPMorgan 2Q Net Down 53% On Credit Woes, Markdowns(CNN Money)
Matthias Rieker and Mike Barris
July 17, 2008

With more than $2 billion in second-quarter profit, JPMorgan Chase & Co. (JPM) again demonstrated that it can manage even a tough market and credit environment.

Nevertheless, not all was well at JPMorgan Chase, and Chairman and Chief Executive James Dimon, known for his bluntness about all things good or bad, didn't hold back from a frank assessment of the company's rise in prime mortgage losses.

JPMorgan posted a 53% plunge in second-quarter net income Thursday morning. Credit-loss provisions more than doubled, and its investment bank cut the value of leveraged-loan and mortgage-related securities by an additional $1.1 billion.

However, JPMorgan's earnings per share, at 54 cents, beat analysts' average expectations of 44 cents, as calculated by Thomson Reuters. Revenue of $18.4 billion for the quarter exceeded expectations of $16.55 billion. JPMorgan's stock was up 10% in morning trading.

Did Goldman Traders Manipulate Bear, Lehman Stock?(Naked Capitalism)
July 16, 2008

Has Goldman gone over the line of permitted behavior, particularly now that the SEC has decided to go after firms who may have contributed a bit too actively to share price declines of troubled brokerage firms and banks? The Wall Street Journal, in "Goldman Is Queried About Bear's Fall," says that the CEOs of Bear and Lehman thought so...

FACTBOX: How "naked" short selling happens(Reuters)
Emily Chasan; Editing by Andre Grenon
July 16, 2008

U.S. securities regulators issued an emergency rule on Tuesday to limit certain types of short selling in major financial firms, including Fannie Mae and Freddie Mac.

Investors who sell securities "short" profit from betting that a stock is overvalued and its price is likely to fall. Short-sellers borrow shares, then sell them, waiting for the stock to fall so that they can buy the shares at the lower price, return them to the lender and pocket the difference.

The emergency rule, which takes effect on Monday and could last up to 30 days, specifically works to prevent investors from making "naked" short sales, which occur when an investor sells stock that has not yet been borrowed. If "naked" shorting is done intentionally it is illegal.

The following explains how a "naked" short sale occurs:

*When investors call a broker to arrange to borrow stock to short, they are aware that short sales are subject to a standard three-day settlement period. This means the sell-side broker has three days to deliver the shares to the investor.

*The broker is supposed to locate shares available to short prior to executing a short sale and make a determination that the shares will be delivered to the investor within the three- day settlement window. However, there are certain exceptions to that rule...

...The agency identified the following securities affected by its order:

[consolidated]...BNP Paribas Securities Corp, Bank of America, Barclays Plc, Citigroup Inc, Credit Suisse Group, Daiwa Securities Group Inc, Deutsche Bank Group AG, Allianz SE, Goldman Sachs Group Inc, Royal Bank ADS, HSBC Holdings Plc ADS, JPMorgan Chase & Co, Lehman Brothers Holdings Inc, Merrill Lynch & Co Inc, Mizuho Financial Group Inc, Morgan Stanley, UBS AG, Freddie Mac, Fannie Mae.

Bush lifts executive ban on offshore drilling(Marketwatch)
Laura Mandaro
July 14, 2008

President Bush said Monday afternoon he had ordered a reversal of an executive ban on oil and natural gas drilling in offshore U.S. waters, adding it was now up to Congress to turn his decision into law.

"The executive branch's restrictions have been cleared away," said Bush in a news conference, which was broadcast. "Now the ball is squarely in Congress' court."

Treasury Acts to Save Mortgage Giants (NY Times)
Stephen Labaton
July 14, 2008

Alarmed by the sharply eroding confidence in the nation’s two largest mortgage finance companies, the Bush administration on Sunday asked Congress to approve a sweeping rescue package that would give officials the power to inject billions of federal dollars into the beleaguered companies through investments and loans.

In a separate announcement, the Federal Reserve said it would make one of its short-term lending programs available to the two companies, Fannie Mae and Freddie Mac. The Fed said that it had made its decision “to promote the availability of home mortgage credit during a period of stress in financial markets.”

An official said that the Fed’s decision to permit the companies to borrow from its so-called discount window was approved at the request of the Treasury but that it was temporary and would probably end once Congress approved Treasury’s plan. Some officials briefed on the plan said Congress could be asked to extend the total line of credit to the institutions to $300 billion.

The actions, which taken together could provide an overwhelming surge of capital to the companies, were the second time in four months that the housing crisis had prompted the government to scramble over a weekend to rescue a major financial institution. Last March, the Treasury Department engineered the sale of Bear Stearns to prevent it from going into bankruptcy and cause a shock to the financial system.

The plan was disclosed on Sunday evening to calm jittery markets overseas and on Wall Street in advance of a debt sale by Freddie Mac on Monday morning. Officials said that after talking to senior lawmakers through the weekend, they expected that Congress would attach the proposals to a housing bill that could be completed and sent to the White House for approval as early as this week.

Fannie and Freddie fears, oil over $147 hit Wall St(Reuters)
Kristina Cooke
July 12, 2008

U.S. stocks tumbled on Friday as fears about the stability of the top two home financing providers, Fannie Mae and Freddie Mac, combined with oil at a record above $147 to cloud the economic outlook.

Friday's slide capped a tumultuous week in which the S&P 500 joined the Nasdaq and the Dow in a bear market. It was the Nasdaq and the S&P 500's sixth straight weekly decline, their longest weekly losing streaks since 2004.

The broad market ended Friday's session down 1 percent as investors worried that the two pillars of the U.S. housing market could run short of capital, placing the fragile U.S. economy at even greater risk.

Fannie Mae and Freddie Mac traded erratically and ultimately ended lower. Pressure mounted for the U.S. government to act more swiftly to prevent the housing crisis from dragging down the nation's top mortgage finance agencies, as Treasury Secretary Henry Paulson indicated that a bailout was unlikely.

The anxiety surrounding the health of the financial system was heightened all the more late Friday when U.S. banking regulators swooped in to take over mortgage lender IndyMac Bancorp Inc., the second-largest bank failure in U.S. history and the fifth bank to close this year.

A jump in U.S. crude oil prices to a record above $147 per barrel further soured investor sentiment on concerns about the impact of higher fuel costs on corporate profits and consumer spending.

"The bottom line is that we're in the middle of a financial tsunami. This is a storm the likes of which this country hasn't seen," said Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey.

Latest victim of mortgage crisis, IndyMac taken over(Marketwatch)
Jonathan Burton & John Letzing
July 11, 2008

IndyMac Bancorp Inc. became the biggest casualty of the subprime mortgage crisis on Friday, as federal regulators shut down the troubled Pasadena, Calif.-based savings bank in one of the largest U.S. bank failures ever.

...The Federal Deposit Insurance Corp. said in a statement it will take over operations of IndyMac (IMB:IndyMac Bancorp Inc which will open for business on Monday as IndyMac Federal Bank. The thrift had total assets of $32.01 billion as of March 31...

...Regulators said the "immediate cause" of IndyMac's failure was a deposit run in recent days that began after a June 26 letter to the OTS and the FDIC from New York Senator Charles Schumer was made public. The letter voiced concerns about IndyMac's soundness.

Lehman, bank shares caught in mortgage storm(Marketwatch)
John Spence, Market
July 11, 2008

Shares of Lehman Brothers and some of America's best-known financial firms continued to crumble Friday on growing concern the federal government will need to bail out government-sponsored mortgage giants.

Lehman Brothers was under pressure again amid the rout in financial stocks. Shares of the embattled investment bank were off more than 16%.

Shares of mortgage buyers Fannie Mae ended the session down after volatile trading Friday. Freddie stock turned briefly positive Friday afternoon although the rally fizzled heading into the closing bell.

Freddie shares were on a wild ride Friday and closed down more than 3%, while Fannie lost over 22%.

Foreclosures Rose 53% in June, Bank Seizures Triple (Update2) (Bloomberg)
Dan Levy
July 10

U.S. foreclosure filings rose 53 percent in June from a year earlier and bank repossessions rose the most on record as deteriorating property values and higher rates on adjustable mortgages forced more people to give up their homes.

Movers roundup: Lehman Brothers, Columbia Banking (CNN Money / AP)
July 10, 2008

Lehman Brothers Holdings Inc. shares plunged as much as 19 percent Thursday as continued credit fears shook Wall Street, and government policy makers again reiterated that no bank is too big to fail.

Protection costs soar for less secure Fannie, Freddie debt(Reuters)
Jul 10, 2008
Anastasija Johnson

The difference between credit spreads on less secure subordinated debt and safer senior debt of Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) hit a record on Thursday amid a fresh wave of anxiety over solvency of U.S. mortgage giants.

Credit spreads on the subordinated debt of Fannie Mae and Freddie Mac are widening faster than on senior debt amid increased worries about the ability of the two major U.S. mortgage finance companies to get the capital they need to survive.

Stoking concerns, former St. Louis Federal Reserve President William Poole said the two major U.S. mortgage finance companies were insolvent and may need a U.S. government bailout, according to Bloomberg News.

The outlook was so dire that Bush administration officials were meeting with regulators to discuss contingency plans should they be unable to raise funds and support the worst housing market since the Great Depression, according to a report in The Wall Street Journal.

"There is a lot of fear about the solvency of these companies," said Tim Backshall, chief credit strategist at Credit Derivatives Research.

Fannie, Freddie `Insolvent' After Losses, Poole Says (Update1)(Bloomberg)
Dawn Kopecki
July 10

Borrowing at Fannie Mae, the U.S. government-sponsored mortgage company, has never been so expensive and it may not get better any time soon.

Fannie Mae paid a record yield relative to Treasuries on the sale of $3 billion in two-year notes yesterday amid concern the biggest provider of financing for U.S. home loans won't have enough capital to weather the worst housing slump since the Great Depression. The company's credit-default swaps show traders are treating the AAA rated debt as if it were five steps lower. Fannie Mae shares tumbled 13 percent yesterday in New York to the lowest level in almost 14 years.

Chances are increasing that the U.S. may need to bail out Fannie Mae and the smaller Freddie Mac, former St. Louis Federal Reserve President William Poole said in an interview.

``Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer,'' Poole, 71, who left the Fed in March, said in the interview yesterday.

Fannie, Freddie Downgraded by Derivatives Traders (Update4) (Bloomberg)
Shannon D. Harrington and Dawn Kopecki
July 9

Fannie Mae and Freddie Mac, ranked Aaa by the world's largest credit-rating companies, are being treated by derivatives traders as if they are rated five levels lower.

Credit-default swaps tied to $1.45 trillion of debt sold by the two biggest U.S. mortgage-finance companies are trading at levels that imply the bonds should be rated A2 by Moody's Investors Service, according to data compiled by the firm's credit strategy group. The price of contracts used to speculate on the creditworthiness of Fannie Mae and Freddie Mac and to protect against a default doubled in the past two months.

Traders are overlooking the government's implied guarantee of the debt as credit losses grow and concern rises that the companies don't have enough capital to weather the biggest housing slump since the Great Depression. Washington-based Fannie Mae fell 73 percent in the past year on the New York Stock Exchange and McLean, Virginia-based Freddie Mac lost 60 percent.

Iran tests missiles, vows to hit back if attacked(Reuters)
Jul 9, 2008
Zahra Hosseinian and Fredrik Dahl

Iran test-fired nine missiles on Wednesday and warned the United States and Israel it was ready to retaliate if they attacked the Islamic Republic over its disputed nuclear projects.

Washington, which says Iran seeks atomic bombs, told Tehran to halt further tests if it wanted the world to trust it. Iran, the world's fourth largest oil producer, insists its nuclear program aims only at generating electricity.

Rising tensions have rattled financial markets. Oil prices, which had slipped from record highs, rebounded about $2 a barrel after Wednesday's tests.

Speculation that Israel could strike Iran has mounted since its air force staged an exercise last month that U.S. officials said involved 100 aircraft. The United States has not ruled out military action if diplomacy fails to resolve the nuclear row.

Hedge funds stumble in first half of '08 The industry endures the worst half-year performance on record, dragged down by woes in the broader market.(CNN Money)
David Ellis
July 9, 2008

Hedge funds delivered their worst performance on record during the first half of 2008, revealing that the industry has not been immune to the broader market turmoil.

Hussman "The Likelihood of $60 Oil"(Naked Capitalism)
July 8, 2008

The oil bulls will take offense at Hussman's contention that high oil prices will break, and probably break pretty seriously. Note we think high oil prices would be desirable if phased in over several years via a carbon tax to discourage use, but as everyone know from direct experience, a sharp runup is destabilizing, and if prices did fall back sharply, that would discourage the push for alternative energy sources (as well as plain old conservation).

Mercedes to cut petroleum out of lineup by 2015(Green Yahoo)
Jaymi Heimbuch
Jun 26

In less than 7 years, Mercedes-Benz plans to ditch petroleum-powered vehicles from its lineup. Focusing on electric, fuel cell, and biofuels, the company is revving up research in alternative fuel sources and efficiency.

Moody's Loses a Key Player Amid Probe About Error(WSJ)
Aaron Luccetti
July 2, 2008

Bond-rating firm Moody's Investors Service said Noel Kirnon, a key figure in what had been its fast-growing "structured finance" business, was leaving amid an internal investigation.

At issue is how his department handled a modeling error that affected ratings of about $1 billion in complex credit products.

...The revelations followed an internal investigation by law firm Sullivan & Cromwell LLP that began in May and focused on an error in Moody's models that affected 11 debt products known as constant-proportion debt obligations, or CPDOs.

After the error was detected, Moody's found through model testing that correcting the error would have lowered triple-A ratings given to the 11 CPDOs to double-A territory -- or a reduction of one to three notches.

...Some Moody's employees involved with CPDOs could be terminated for breaking company rules, Moody's said. Specifically, committee members aren't allowed to consider the potential impact of rating changes on Moody's or other market participants when determining a rating.

Moody's disciplines staff over ratings breach(Times Online)
Tom Brawden
July 1, 2008

The US ratings agency initiated disciplinary proceedings following a review of its rating process for CPDOs Tom Bawden Moody’s Investors Service has ousted the head of a key division and pledged to discipline other staff after an investigation concluded that employees at the credit agency knowingly rated about $1 billion-worth of securities incorrectly.

...The inquiry concluded that about $1 billion-worth of CPDOs were wrongly given the top AAA credit rating, four notches higher than the AA that they merited, because of a computer error. When some senior staff became aware of the mistake early in 2007, they chose to change the rating methodology, to mask the error, rather than assigning a lower rating, the investigation found.

Oil market oversupplied: Qatar(Qatar Times)
June 30, 2008

Oil markets are oversupplied but it would not be wise for any OPEC exporter to tighten the taps given the risk of exacerbating prices, Qatari Oil Minister Abdullah Al-Attiyah said yesterday. Attiyah's remarks came after Libya's most senior oil official said on Thursday he was studying the possibility of reducing output in response to a US threat to sue OPEC members, although he said the North African country had no concrete plans to do so for now. "It is not wise today to cut supplies even though there is a surplus because we do not want to create a psychological problem," Attiyah told Reuters. "I'm not in favor of it at all. We want to try to help to ease the psychological heat.

UPDATE 1-S&P, Moody's raise Countrywide after BofA takover(Reuters)
July 1, 2008 8:45pm

Two rating agencies on Tuesday raised their debt ratings on Countrywide Financial Corp. after the largest U.S. mortgage lender was acquired by Bank of America.

S&P raised Countrywide's counterparty rating to "AA," the third-highest investment-grade level, from the highest junk level of "BB-plus" to align it with ratings of Bank of America. The upgrade reflects expectations that Bank of America will honor Countrywide's debt, S&P said in a statement.

...Fitch Ratings, kept its "BBB-minus" Countrywide rating on review until details of the new corporate structure are announced.

Tower of Babel Economy(The Trumpet)
Robert Morley
July 1, 2008

The economy resembles a financial tower of Babel. And it is starting to crumble.

...According to the bis, the number of outstanding derivative contracts in the global marketplace soared by double-digit percentages last year. Anything going up by double digits should elicit interest in and of itself, but in this case it is the sheer magnitude of the numbers involved that raises red flags.

The bis reported the total amount of outstanding derivatives has reached a practically incomprehensible $1.28 quadrillion. Yes, you read that correctly—quadrillion! And as astounding as this astronomically huge number is, the actual totals are even bigger because this number does not include derivatives related to the commodity markets (which the bis says it can’t track because values aren’t available).

A quadrillion dollars is hard to wrap your mind around. It takes a thousand trillion to make a quadrillion. Start with 1 million and multiply by 1,000, then multiply by 1,000 again, then multiple by 1,000 yet a gain—and then finally you get to 1 quadrillion. You can think of it as more than 92 times the value of all goods and services produced in America during 2007, or almost 20 times global gross domestic product.

Don’t be surprised if you haven’t heard of derivatives. Outside of banking circles they are less known, but you can think of them as essentially unregulated, high-risk credit bets.

...The danger now becoming evident is that the derivatives market isn’t just farmers and other business people trying to protect against risk. The market is increasingly dominated by industries of “investors” and hedge funds that only exist to make money through derivative speculation. And a big part of that speculating is done with borrowed money.

“Unlike the earnest farmer … many of today’s institutions use futures, forwards, options, swaps, swaptions, caps, collars and floors—any kind of leverage device they can cook up—to bet the h- - - out of virtually anything,” confirms DeMeritt (emphasis mine throughout).

But when you play with borrowed money, the risk of getting burned beyond recovery increases rapidly.

According to DeMeritt, the majority of the $1.28 quadrillion in derivatives is “owned” on somewhere near 95 percent margin!

That has got to be “one of the scariest phenomena in economic history,” he says.

...But making this derivatives tower of Babel all the more dangerous is the fact that, instead of reducing risk, a growing number of analysts warn that derivatives traders are actually concentrating it—and concentrating it here in America.

Out of the top 10 commercial banks with derivatives (as of last September), nine are American. Of the top 25, all but five are U.S. corporations.

...“It’s going to get far worse than anyone wants to admit. Even respected newsletter writers hesitate to suggest the truth,” says economic analyst Bob Moriarty. “It’s the end of the financial system, as we know it. Central banks might be able to paper over a few trillion dollars but the fraud is 10 times what they can paper over.”

The Short View: Credit fears resurface(Financial Times)
Jamie Chisholm
June 25 2008

Fears are mounting that conditions are set to deteriorate markedly in credit markets.

Lehman Brothers warned this week that spreads on credit default swaps, which track the cost of insuring corporate debt against default, could soon spike beyond the levels seen at the time of the Bear Stearns rescue in March.

Spreads tightened a touch on Wednesday as the market hoped the £4.5bn ($8.9bn) secured by Barclays augured well for raising capital in the banking sector. However, the trend since mid-May has been disturbing.

The Markit iTraxx Europe index of investment-grade debt has crept back up from the recent low of 66 basis points to 96bp today. Across the Atlantic, the CDX has moved over the same period from 91bp to 130bp.

Sentiment has soured as investors have become more worried that the fallout from the subprime debacle is increasingly infecting the real economy.

A data-rich week has offered little solace. Private sector output in the eurozone has contracted for the first time in five years, while consumer confidence and housing metrics in the US continue to be dire.

Sharply rising input prices that can’t easily be passed on will further crimp business profit margins, increasing the risk of corporate failure.

Adding to the woe are more ratings downgrades for the monoline bond insurers, crucial cogs in the financial system.

The Death of Securitized Mortgages(Naked Capitalism)
Yves Smith
June 29, 2008

In yet another example of synchronicity, Jim Hamilton provides a chart from Peter Hooper that illustrates why the housing market is in the doldrums: securitized credit has all but vanished. This topic came up in the previous post as a explanation of why the real estate market is coming to look like a war zone.

Back to the Great Depression?(Times Online)
David Smith and Dominic Rushe
June 29, 2008

Wall Street has had its worst June since 1930. How much worse could the world economy get?

When Wall Street slumped on Thursday, in response to the oil price surging above $140 a barrel and renewed fears about the banking system, the alarm bells rang more loudly than usual.

Barring a miraculous recovery tomorrow, the Dow Jones industrial average is heading for its worst June since 1930, when it plunged by almost 18%.

That month is ingrained in the Wall Street psyche. After the crash of October 1929, the stock market continued to slide through the winter. By the spring the worst seemed to be over. Then shares lurched low in June 1930, signalling deep problems for the economy and the stock market.

America entered depression and the stock market went into a deep freeze that lasted a quarter of a century, taking until 1954 to get back to its precrash high. Are there any parallels with today?

What we can do in this dangerous moment(Financial Times)
Lawrence Summers
June 29 2008

It is quite possible that we are now at the most dangerous moment since the American financial crisis began last August.

Staggering increases in the prices of oil and other commodities have brought American consumer confidence to new lows and raised serious concerns about inflation, thereby limiting the capacity of monetary policy to respond to a financial sector which – judging by equity values – is at its weakest point since the crisis began. With housing values still falling and growing evidence that problems are spreading to the construction and consumer credit sectors, there is a possibility that a faltering economy damages the financial system, which weakens the economy further.

Preparing the Battlefield(New Yorker)
Seymour M. Hersh
July 1, 2008

The Bush Administration steps up its secret moves against Iran.

Operations outside the knowledge and control of commanders have eroded “the coherence of military strategy,” one general says.

Late last year, Congress agreed to a request from President Bush to fund a major escalation of covert operations against Iran, according to current and former military, intelligence, and congressional sources. These operations, for which the President sought up to four hundred million dollars, were described in a Presidential Finding signed by Bush, and are designed to destabilize the country’s religious leadership. The covert activities involve support of the minority Ahwazi Arab and Baluchi groups and other dissident organizations. They also include gathering intelligence about Iran’s suspected nuclear-weapons program.

...The Joint Chiefs of Staff, whose chairman is Admiral Mike Mullen, were “pushing back very hard” against White House pressure to undertake a military strike against Iran, the person familiar with the Finding told me. Similarly, a Pentagon consultant who is involved in the war on terror said that “at least ten senior flag and general officers, including combatant commanders”—the four-star officers who direct military operations around the world—“have weighed in on that issue.”

BIS slams central banks, warns of worse crunch to come(Telegraph)
July 1, 2008
Ambrose Evans-Pritchard

The central bankers' bank renews fear of second depression...

A year ago, the Bank for International Settlements startled the financial world by warning that we might soon face challenges last seen during the onset of the Great Depression. This has proved frighteningly accurate.

The venerable body, the ultimate bank of central bankers, said years of loose monetary policy had fuelled a dangerous credit bubble that would entail "much higher costs than is commonly supposed".

In a pointed attack on the US Federal Reserve, it said central banks would not find it easy to "clean up" once property bubbles have burst.

If only we had all listened to the BIS a long time ago. Ensconced in its Swiss lair, it has fired off anathemas for years, struggling to uphold orthodoxy against the follies of modern central banking.

Bill White, the departing chief economist, has now penned his swansong, the BIS's 78th Annual Report, released today. It is a disconcerting read for those who want to hope the global crisis is over.

...Dr White says the US sub-prime crisis was the "trigger", not the cause of the disaster. This is not to exonerate the debt-brokers. "It cannot be denied that the originate-to-distribute model (CDOs, CLOs, etc) has had calamitous side-effects. Loans of increasingly poor quality have been made and then sold to the gullible and the greedy," he said.

Nor does it exonerate the watchdogs. "How could such a huge shadow banking system emerge without provoking clear statements of official concern?"

...After almost two decades of this experiment - more or less the Greenspan years - the game is over. Debt has reached extreme levels, and now inflation has come back to life.

...If there are going to be more bail-outs on both sides of the Atlantic - as there will be - the "socialised risks" should be taken on by political systems, and not dumped on the books of central banks.

"Should governments feel it necessary to take direct actions to alleviate debt burdens, it is crucial that they understand one thing beforehand. If asset prices are unrealistically high, they must fall. If savings rates are unrealistically low, they must rise. If debts cannot be serviced, they must be written off.

"To deny this through the use of gimmicks and palliatives will only make things worse in the end," he said.

Barclays warns of disaster as Fed loses all credibility(The Telegraph / GATA)
Ambrose Evans-Pritchard
June 27, 2008

Barclays Capital has advised clients to batten down the hatches for a worldwide financial storm, warning that the US Federal Reserve has allowed the inflation genie out of the bottle and let its credibility fall "below zero."

"We're in a nasty environment," said Tim Bond, the bank's chief equity strategist. "There is an inflation shock under way. This is going to be very negative for financial assets. We are going into tortoise mood and are retreating into our shell. Investors will do well if they can preserve their wealth."

Barclays Capital said in its closely-watched Global Outlook that US headline inflation would hit 5.5pc by August and the Fed will have to raise interest rates six times by the end of next year to prevent a wage-spiral. If it hesitates, the bond markets will take matters into their own hands. "This is the first test for central banks in 30 years and they have fluffed it. They have zero credibility, and the Fed is negative if that's possible. It has lost all credibility," said Mr Bond.

Wall Street Sold Auction-Rate Debt, Warned Issuers (Update1) (Bloomberg)
Darrell Preston and Michael McDonald
June 26 , 2008

Yanping Cui, 57, says she invested in auction-rate bonds last December at the urging of a broker at UBS AG in Long Beach, California. The same month, UBS told one of the issuers of those securities, a New Hampshire student-loan agency, that the $330 billion market was in danger of failing.

That's exactly what happened in February, when mounting mortgage losses forced dealers who underwrote and managed the market for more than 20 years to stop acting as buyers of last resort. Cui was told she wouldn't get her money back until the market recovered.

``He said it's very safe and as liquid as possible,'' Cui said of the advice she received from UBS broker Brian Meehan. ``I'm so angry. That's my bloody money.'' Meehan, now at Wells Fargo Investments in Newport Beach, declined to comment.

Cui is one of dozens of investors who say they were sold auction-rate securities as a low-risk alternative to cash at the same time underwriters, including UBS and Citigroup Inc., were telling issuers that demand was softening, bond documents and interviews with investors show.

The chronology shows that dealers ``knew they didn't have enough demand,'' said Christopher ``Kit'' Taylor, executive director of the Municipal Securities Rulemaking Board from 1978 to 2007, who now consults investor groups on financial markets and regulation. ``They were not telling the other side of the story.''

Oil costs force P&G to rethink supply network(Financial Times)
Jonathan Birchall and Elizabeth Rigby
June 26 2008 23:33

Soaring energy prices are forcing Procter & Gamble to rethink how it distributes its products, with the world’s biggest consumer goods company shifting manufacturing sites closer to consumers to cut its transport bill.

Keith Harrison, head of global supply at P&G, the maker of Tide detergent, Crest toothpaste and Pampers, said the era of high oil prices was forcing P&G to change.

The Shrinking Influence of the US Federal Reserve(Der Spiegel)
Gabor Steingart
June 26, 2008

Humiliation for Mr. Dollar: Ben Bernanke, the chairman of the United States Federal Reserve Bank, faces a general investigation by the International Monetary Fund. Just one more example of the Fed losing its power.

Fed, SEC Near Accord To Redraw Wall Street Regulation (WSJ)
June 23, 2008

The Federal Reserve and Securities and Exchange Commission are finalizing a formal agreement that will start the process of redrawing how Wall Street is regulated in the wake of Bear Stearns Cos.' near collapse.

...Since mid-March, the Fed has placed staff inside the four largest investment banks to assess their risk by looking at liquidity, capital requirements and banks' ability to test their own systems, areas the SEC examines.

Its on-site presence has dwindled to one or two examiners from as many as six, people familiar with the matter say, while the SEC conducts its supervision over the phone and with periodic visits.

The Fed has wanted on-site access so that it can better understand the risk that a bank may pose to the entire financial system.

Treasury has also taken the position that the Fed must maintain some presence at the investment banks if it continues to lend money to those institutions.

MBIA Credit Rating Downgrades Prompt $7.4 Billion of Payments (Bloomberg)
Christine Richard
June 23

MBIA Inc.'s credit rating downgrade by Moody's Investors Service is likely to trigger $7.4 billion of payments and collateral postings.

The company's stock dropped 13 percent on June 20 after Moody's reduced MBIA's insurance financial strength rating five levels to A2 from Aaa. Armonk, New York-based MBIA issued a statement June 20 saying it had $15.2 billion of assets to meet the posting requirements.

The payments are required for the company's asset-management unit, which oversees $25 billion for investors, including municipalities. After the downgrade, MBIA's asset management business is on the hook to protect the value of guaranteed investment contracts, or GICs, by posting collateral. The obligation highlights another part of MBIA's business that has come under stress since the collapse of the subprime mortgage market.

``MBIA is leveraged through their own rating and that can make a downgrade very harsh,'' said Matt Fabian, a senior analyst with Municipal Market Advisors. ``It's very hard for an outsider to piece together the impact of these downgrades.''

Corn Rises With the Waters(Barrons)
Debbie Carlson
June 23, 2008

Cresting floodwaters ruin corn crop, sending futures prices over the roof.

Hope for bumper U.S. corn and soybean crops has been washed away by historic flooding in the heartland, and the best farmers can wish for is normal weather -- with fingers crossed for a late frost.

RBS issues global stock and credit crash alert(Telegraph)
Ambrose Evans-Pritchard
June 18, 2008

The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks.

"A very nasty period is soon to be upon us - be prepared," said Bob Janjuah, the bank's credit strategist.

A report by the bank's research team warns that the S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as "all the chickens come home to roost" from the excesses of the global boom, with contagion spreading across Europe and emerging markets.

Such a slide on world bourses would amount to one of the worst bear markets over the last century.

The "Enron Loophole"(Economist's View)
June 17, 2008

Michael Greenberger used to run the ... [Division of Trading and Markets for the Commodities Futures Trading Commission. He now teaches law at the University of Maryland.]

Ryssdal: Why is it so hard to figure out what's going on in commodities markets -- oil specifically?

Greenberger: Well, the reason it's hard to figure out is about 30 percent of our crude oil energy futures are traded in what is called a dark market -- that is a market that was deregulated in December of 2000 at the behest of Enron. Prior to that legislation..., all energy futures traded in the United States or affecting the United States in a significant fashion were regulated ... under a very careful regime that had been perfected over about 78 years and many observers believe that because those markets are not being policed, malpractices are being committed and traders are able to boost the price virtually at their will.

Ryssdal: You're not really telling me that seven years on, we're still paying the price for Enron, are you?

Greenberger: Well, this has been called the "Enron Loophole" and there are many legislators working very hard to close that loophole ...[and] bring the speculation under the kind of time-tested controls that were used until Enron had its way and amended the law...

...Greenberger: From my own experience as a commodity regulator, I believe that if the Bush Administration were serious about its regulation, we could begin seeing prices drop within a month. If we don't get the kind of regulation that has been done for decades and the market proceeds along the pace its proceeding, we will have to go through a very, very serious recession. The question is do you want to deflate the bubble by that kind of suffering or do you want to deflate the bubble by applying tight U.S. regulatory controls? ...

SIV civilisation(FT)
June 18 2008

The deal to restructure the $7bn investment vehicle formerly known as Cheyne Finance is a breakthrough. The backlog of broken and insolvent financial structures has been a dead weight on credit market confidence; now there is a successful model of how to resolve them. Whether the deal can solve the wider problem - properly valuing the instruments that Cheyne invested in and building liquid markets in them - will depend on the auction system at its heart.

Cheyne Finance was a structured investment vehicle, or SIV. It borrowed short term in order to buy longer-term bonds backed by mortgages. When the price of mortgage-backed bonds fell last year, Cheyne, and many others like it, were un-able to service their debts as investors demanded their money back.

...For the wider market, however, a crucial question will be the price at which Cheyne's assets are liquidated or transferred. That will be determined by an auction among other investment banks.

One of the central problems in the credit squeeze has been the difficulty of, first, finding a market price for asset-backed securities and, second, finding somebody willing to trade in volume at that price...

It would be desirable, therefore, if Goldman's auctions could sell a significant amount of Cheyne assets to establish a market clearing price...

Goldman completes $7 billion SIV restructure(Reuters)
Jun 17, 2008

Goldman Sachs Group Inc has completed a long-awaited rescue of a $7 billion structured investment vehicle, the receivers said on Tuesday, paving the way to clear up more troubled mortgage assets.

The deal to restructure the SIV, formerly run by British hedge fund Cheyne Capital, comes as Wall Street's biggest investment bank beat expectations by avoiding major losses on assets, though quarterly earnings dropped by 11 percent.

"We are delighted ... we are in a position to sign a restructuring agreement in respect of the Cheyne Finance portfolio today," said Neville Kahn, of accountancy firm Deloitte and Touche LLP DLTE.UL, who act as receivers.

Under the restructuring, Deloitte will price the assets in the market, selling a minority part of the portfolio to the group of creditors who want to cash out, the parties involved said in an official statement.

That will allow Deloitte to sell the rest of the assets to the remaining creditors -- who have already agreed to reinvest that money in a newly established vehicle set up by Goldman Sachs -- which will hold the rest of the portfolio.

The sale of the securities is expected to be completed on or about July 17, Deloitte said in the statement.

Other SIVs, including Golden Key, Whistlejacket and Rhinebridge, are expected to follow Cheyne's model, being restructured by Goldman, said Stephen Peppiatt, at Bingham McCutchen, a legal advisor to a Cheyne senior creditor.

UPDATE 1-U.S. mortgage refinance applications plunge -MBA(Reuters)
June 18, 2008

Applications for U.S. home mortgages dropped for the fourth week in the last five as soaring interest rates choked off refinancing opportunities and soured the housing outlook, an industry group said on Wednesday.

Morgan Stanley's profits take a tumble: Earnings drop 57%, hurt by slower investment banking, fixed income activity; stock slumps.(CNN Money)
David Ellis
June 18, 2008

Ambac to End Contract For Ratings From Fitch(WSJ)
Lauren Pollock
June 18, 2008

Ambac Financial Group Inc. will terminate its ratings contract with Fitch Ratings, three months after larger bond-insurer MBIA Corp. asked Fitch to withdraw its ratings on the company.

Goldman Sachs does it again(CNN Money)
David Ellis
June 17, 2008

Wall Street powerhouse books $2.1 billion profit, topping forecasts and proving yet again that it is largely avoiding credit crunch pain.

China: can't you see how fine the emperor's clothes are?

U.S. Tells China Subprime Woes Are No Reason to Keep Markets Closed (NY Times)
Steven R. Weisman
June 18, 2008

Bush administration economic officials, frustrated over the pace of change in China, warned Chinese leaders Tuesday not to let American regulatory failures in the subprime mortgage crisis become an excuse for not deregulating Chinese markets and opening them to foreign investment.

Lieberman Seeks Limits to Reduce Speculation( NY Times)
June 12, 2008

A prominent Washington lawmaker said Wednesday that he would propose next week to ban large institutional investors, including index funds, from the nation’s booming commodity markets.

The idea is one of several outlined by Senator Joseph I. Lieberman, independent of Connecticut, who is chairman of the Senate Homeland Security and Governmental Affairs Committee. That committee will hold a hearing on June 24 to continue examining whether financial speculation is affecting the prices of crops and fuel.

“There is excessive speculation in the commodity markets that is driving up the cost of food and energy,” the senator said in an interview. “The question is, do large institutional investors play a positive role?” His concern, he said, is that they do not.

Fixed-rate mortgage rates at highest since October Renewed concerns about inflation prompt rates to rise: economist (Marketwatch)
Amy Hoak, MarketWatch
June 12, 2008

Rates on fixed-rate mortgages rose to their highest levels in almost eight months this week after Federal Reserve officials expressed concern about inflation, Freddie Mac's chief economist said on Thursday.

United to charge for checked luggage(CNN Money)
June 12, 2008

Citing higher fuel prices, United Airlines said Thursday it will begin charging domestic passengers $15 each way for one checked bag.

...The $15 service fee will not apply to customers flying in United First or United Business or who have premier status with United or Star Alliance airline network, the carrier said.

Retail sales rise much more than expected(Reuters)
Jun 12, 2008

Total sales at U.S. retailers rose a full percentage point in May as many consumers had more spending cash in their wallets from government rebate checks, a report on Thursday showed.

Citigroup to Shut Hedge Fund Co-founded by CEO: Report (Reuters)
June 12, 2008

In a blow to Citigroup Inc. Chief Executive Vikram Pandit, the bank plans to close a hedge fund he co-founded and will buy what is left of its assets, the Wall Street Journal reported on Thursday [June 12].

Spitzer’s Next Act: Distressed Real Estate(AP)
June 10, 2008

Forced out of office by a sex scandal, former New York governor Eliot Spitzer is reportedly considering his next act — in distressed real estate.

The New York Sun reports that Mr. Spitzer is proposing to start a vulture fund that would buy distressed real estate around the country and then flip it for a profit. Mr. Spitzer, whose father manages a real estate company in New York, is proposing to invest pension money from labor unions, according to the newspaper.

OCC’s Dugan Takes Aim at HOPE NOW’s Workout Claims(Housing Wire)
Paul Jackson
June 11, 2008

After first requiring servicers to report loan level data to his agency in early March, Comptroller of the Currency John Dugan said Wednesday that the OCC had released a new, comprehensive report on mortgage performance during the fourth quarter of 2007 and first quarter of 2008.

What the report found is telling, to say the least. The OCC study seems sure to create the latest firestorm among industry participants, coming at stark odds with the workout claims made recently by the HOPE NOW coalition, which has been reporting on the voluntary industry groups’ loss mitigation efforts since the early part of this year — disparities that clearly underscore just how difficult obtaining data can be in an industry where one firm’s Alt-A mortgage is another’s subprime loan.

Exchanged-traded derivatives near $700 trillion (efinance news)
Tom Fairless and Renée Schultes
June 9, 2008

The value of derivatives traded on exchanges surged 30% to a record $692 trillion (€438 trillion) in the first quarter compared to the same period a year earlier, as investors regained their enthusiasm for bets on short-term interest rates.

Lehman Loss Deepens Fears On Credit Market(Washington Post)
Tomoeh Murakami Tse
June 10, 2008

Lehman Brothers stunned analysts Monday by reporting that it expects a quarterly loss of $2.8 billion and would raise $6 billion in capital to shore up its balance sheet, signaling that turmoil in the credit market is far from over.

Saudi calls for talks; oil experts see no change(AP/Yahoo News)
Donna Abu-Nasr

Saudi Arabia will call for a summit between oil producing countries and consumer states to discuss soaring energy prices, Information and Culture Minister Iyad Madani said Monday.

The kingdom will also work with OPEC to "guarantee the availability of oil supplies now and in the future," the minister said following the weekly Cabinet meeting, held in the seaport city of Jiddah.

Madani said that the kingdom has informed "all oil companies it deals with as well as countries that consume oil that (the kingdom) is ready to provide them with any additional oil they need."

..."There is no justification for the current rise in prices," he said.

Why gas costs more, more, more(Mercury News)
Matt Nauman
June 8, 2008

More reasons for higher gas pricesThis much is certain: Gas will never be cheap again. Weeks of record-setting prices for gasoline - which reached $4.42 a gallon in California on Saturday - have helped cement that notion.

Less than 10 years ago, gas was 99 cents a gallon. But since May 2004, when the U.S. average first topped $2, the upward movement has been fairly steady. The $3 plateau was topped in September 2005, and the U.S. average could rise above $4 this week - even as it moved closer to $5 in the Bay Area.

The price of gas is directly tied to the cost of oil, with experts agreeing that every time the oil goes up $1 a barrel, gas goes up about 2.5 cents a gallon.

I guess I am an "expert" now. In my June 4th article, Oil and Gas Prices: Dollar and Euro, I calculated that every time a barrel of oil goes up $1, the price of gasoline goes up $0.0276 (about $0.025).

SEC reportedly probing AIG's swaps: Insurer says it has 'consistently and promptly' updated value of positions (Marketwatch)
Riley McDermid & Alistair Barr, MarketWatch
June 6, 2008

American International Group Inc. is being investigated by federal regulators about whether the giant insurer overstated the value of derivatives partly linked to subprime mortgages, The Wall Street Journal reported on Friday, citing unidentified people familiar with the matter.

The Derivatives Market is Unwinding!(OpEd News)
George Washington
June 4, 2008

A couple of months ago, a financial analyst who sells derivatives told me that fears about a meltdown in the derivatives market were unfounded.

Yesterday, he told me - with a very worried look - "THE DERIVATIVES MARKET IS UNWINDING!"

What does this mean? What are derivatives and why should you care if the market is unwinding?

Bond sell-off in focus(Reuters)
Sun Jun 1, 2008

Investors will be closely watching bond markets this week after a sharp sell-off that has raised the prospect of higher borrowing costs for governments, companies and, ultimately, consumers.

At the same time, markets will be hoping for new guidance on the state of the world economy -- with a focus on lagging growth and rising inflation -- with a raft of central bank meetings, economic outlooks and key data.

These culminate on Friday with the monthly U.S. jobs report for May, a pointer to everything from economic growth to consumer sentiment and interest rate expectations.

It is the bond market, however, that should grab most of the limelight, particularly at the beginning of the week...

"It is a delicate moment for bond markets," said Ken Adams, head of global strategy at Scottish Widows Investment Partnership. "The extent of the (yield) rise has been very rapid. You have headline inflation in the developed world rising at clip."

Paulson Says Dollar Pegs Don't Worry Mideast Leaders (Update5)(Bloomberg)
John Brinsley
June 1

U.S. Treasury Secretary Henry Paulson said Middle East leaders haven't indicated concerns with their fixed exchange rates to the dollar and understand that abandoning the peg would have little impact on rising prices.

``There's quite an awareness that the dollar peg does not influence inflation to a significant degree,'' Paulson told reporters en route to Abu Dhabi after meeting with Qatari central bank Governor Abdullah Bin Saud al-Thani and Prime Minister Sheikh Hamad bin Jasim bin Jaber al-Thani in Doha. ``Ending the peg is not the solution to the inflation problem.''

Asked whether he was ruling out any change to the peg by Gulf nations, he said: ``I'm not ruling anything out. I don't want to characterize it. This is their sovereign decision.'' At an earlier press conference in Doha, Paulson said: ``I haven't heard anyone say to me that the peg is a problem.''

Liquidity levels hit funds of hedge funds (Financial Times)
Sharlene Goff
May 30 2008

Investing in funds of hedge funds should, in theory, smooth out the volatility of financial markets and generate a steady stream of returns. But, in reality, a rather different picture has emerged in recent months.

Some hedge fund managers have classed the first quarter of this year the worst on record. Very few have met their performance targets and many have fallen into negative returns.

British court ruling supports O.C(OC Register)
Ronald Campbell
May 29, 2008

Whistlejacket receivers must treat county, other creditors equally.

A British appellate court has reversed a ruling that could have cost Orange County $80 million.

The court said receivers of Whistlejacket Capital must treat the county and other senior creditors equally.

A lower court had ruled in March that creditors must be paid in the order their notes come due. That would have put the county, whose investment matures in late January 2009, behind at least 75 other cash-hungry creditors.

"From the legal standpoint, it seems to be the best possible outcome," Senior Deputy County Counsel John Abbott said of the latest ruling.

Still unclear, however, is whether Whistlejacket will be able to pay all the billions it owes.

First Comes the Swap. Then It’s the Knives. (NY Times)
Gretchen Morgenson
June 1, 2008

Investors don’t often get a peek inside the vast, opaque and unregulated world of credit default swaps, those privately traded insurance contracts that essentially allow participants to bet on or against a debt issuer’s financial condition. (Remember, these are the same instruments that played such a pivotal role in the collapse of Bear Stearns.)

But the legal battle between UBS, the Swiss investment bank, and Paramax Capital, a group of hedge funds in Stamford, Conn., is giving investors a gander at how this freewheeling market works.

The view is instructive, given the unknowns in the huge and growing credit default swap market and the unease about its potential to wreak havoc on the financial system. Experts say the legal case is also the first of what will probably be a flood of disputes between the big banks and hedge funds that typically strike swaps deals.

The conclusion of the authors is that what is needed is "more innovation, not less". The conclusion of siv0 is that we need to Take Back the Fed, and rework our financial system.

Derivative thinking(Financial Times)
Gillian Tett
May 30 2008

Just over a decade ago, a british banker made a small piece of financial history. day an unusual trade crossed Reoch's desk: one of his clients wanted to buy a contract which would effectively protect him from the chance that any one of three government bonds might turn sour... "...I guess you could call it one of the first credit derivatives,” Reoch proudly recalls, noting that the trade was so “cutting edge” that the team only sorted out the legal documentation several weeks later. ...Reoch's dance has taken a new twist. Before turmoil took hold of the global credit markets last summer, his consultancy spent most of its time advising clients how to get into credit derivatives. Now he is swamped by investors who want to extricate themselves from derivatives-linked messes, or simply to understand the products that came out of the past few years of intense financial innovation... To outsiders, this tale might smack of everything that is dubious about modern finance. In the past 10 years, as an extraordinary wave of innovation has swept through the industry, many bankers have become wealthy by creating ever-more complex products. ...some in the banking industry argue that restricting innovation is the wrong thing to do...If you believe the bankers, the best response to the current crisis is more innovation, not less.

Bear's top economists won't join JPMorgan(Reuters)
May 30, 2008

Bear Stearns' two top economists, David Malpass and John Ryding, will not join JPMorgan Chase & Co, which is set to close its purchase of Bear, a source familiar with the situation said on Friday.

It was not known whether Malpass and Ryding have accepted positions at another company, according to the source.

Malpass and Ryding declined to comment. JPMorgan also declined to comment.

Bob Barr, ex congressman, and current Libertarian candidate for president made this comment on the Glenn Beck show on May 22nd.

Glenn talks with Bob Barr(Glenn Beck)
May 22, 2008

[Bob] BARR: ...If I could wave a magic wand and the Federal Reserve Bank would disappear tomorrow, I would do so. It's a group of unelected governors that are not answerable to or accountable to the people of this country and yet they wield considerable influence over the economy...

Credit Default Swap Clearing Facility Debuts (Hedgeworld)
Emma Trincal, Senior Financial Correspondent
May 29, 2008

After months of anticipation, a centralized clearinghouse that would guarantee payments on credit default swaps is finally a done deal. The Clearing Corp. and the Depository Trust & Clearing Corp. said Thursday morning [May 29] that they have reached an agreement whereby The Clearing Corp. will provide central counterparty clearing services for credit default swaps traded over-the-counter. Eligible contracts will have to be registered in the Depository Trust & Clearing Corp.'s trade information warehouse. The service will be launched in the third quarter.

"Through the use of multilateral netting, margin collateral, and daily marking-to-market of positions, [the Clearing Corp.'s] clearing facility will improve capital efficiency, increase regulatory transparency, lessen direct counterparty risk and reduce systemic risk relating to the multi-trillion dollar market in credit default swaps" said Michael Dawley, chairman of The Clearing Corp. in a statement.

Cayne Apologizes as Bear's Takeover Approved(Hedgeworld)
May 29, 2008

Bear Stearns Cos. Inc. Chairman James Cayne told employees and shareholders he was sorry for the demise of the 85-year-old investment bank, as shareholders voted on Thursday [May 29] to sell the company to JPMorgan Chase & Co. for less than $10 a share.

In a five-minute meeting at Bear's Manhattan headquarters, Mr. Cayne apologized and said a "hurricane" in the markets brought down the bank, according to attendees.

Members of the press were excluded from a session that attracted roughly 400 shareholders, many of them employees whose personal wealth was gutted by the collapse of Bear's stock price.

"I personally apologize," Mr. Cayne said, according to shareholders who attended the meeting. "Words can't describe the feelings that I feel."

No Dice for Bear Bankruptcy in Caymans(Hedgeworld)
Christopher Faille
May 29, 2008

A federal district court in Manhattan has upheld a ruling by the bankruptcy court there, refusing to recognize the Chapter 15 filing by liquidators of two Caymans-registered Bear Stearns hedge funds.

It's been a year now since the two funds failed due to the subprime debacle, and it's been nine months since bankruptcy judge Burton R. Lifland declined to treat the funds' bankruptcy filings in the Cayman Islands as either the ‘main' or ‘non-main' proceedings for the purposes of protecting their assets from civil lawsuits and liabilities in the United States.

The official liquidators, Simon Whicker and Kristen Beighton, appealed Mr. Lifland's order to U.S. District Court Judge Robert W. Sweet. They argued that Congress' intent in enacting Chapter 15 of the U.S. Bankruptcy Code was to foster comity and cooperation between courts in the United States and those of other jurisdictions.

Intermediate Capital assuming UK and US recession as core income surges(Telegraph)
Peter Taylor
May 29, 2008

The collapse last year of the sub-prime mortgage market was "merely a catalyst" to end a credit bubble that would have burst regardless, according to the head of Europe's pre-eminent mezzanine finance house.

Unveiling a 2pc increase in annual pre-tax profits yesterday, Intermediate Capital managing director Tom Attwood said the company now assumed there would be a recession in the UK, US and Spain in evaluating potential investments.

US and European debt markets flash new warning signals(Telegraph)
May 29, 2008

The debt markets in the US and Europe have begun to flash warning signals yet again, raising fears that the global credit crisis could be entering another turbulent phase.

The cost of insuring against default on the bonds of Lehman Brothers, Merrill Lynch and other big banks and brokerages has surged over the last two weeks, threatening to reach the stress levels seen before the Bear Stearns debacle. Spreads on inter-bank Libor and Euribor rates in Europe are back near record levels.

Credit default swaps (CDS) on Lehman debt have risen from around 130 in late April to 247, while Merrill debt has spiked to 196. Most analysts had thought the coast was clear for such broker dealers after the US Federal Reserve invoked an emergency clause in March to let them borrow directly from its lending window.

Bush 'plans Iran air strike by August'(Asia Times)
Muhammad Cohen
May 28, 2008

The George W Bush administration plans to launch an air strike against Iran within the next two months, an informed source tells Asia Times Online, echoing other reports that have surfaced in the media in the United States recently.

Two key US senators briefed on the attack planned to go public with their opposition to the move, according to the source, but their projected New York Times op-ed piece has yet to appear.

The source, a retired US career diplomat and former assistant secretary of state still active in the foreign affairs community, speaking anonymously, said last week that the US plans an air strike against the Iranian Revolutionary Guards Corps (IRGC). The air strike would target the headquarters of the IRGC's elite Quds force. With an estimated strength of up to 90,000 fighters, the Quds' stated mission is to spread Iran's revolution of 1979 throughout the region.

New surveys on August quant meltdown: Investors have learned a lesson. But have managers?(All About Alpha)
May 28, 2008

“We essentially have 10,000 Ph.D.s looking at the same data.”

That’s how Vadim Zlotnikov, CIO for growth equities at AllianceBernstein described the world of quant funds to the Annual Meeting of the CFA Institute last week in Vancouver. Zlotnikov was talking about the findings of a new paper by the Research Foundation of the CFA Institute based on a survey of asset managers, consultants and investors.

A press release announcing the study confirms what is now commonly believed, that August’s mayhem was mainly the result of quant hedge funds yelling “Fire!” and running for the exits (see related posting).

Ambac writes down $228 million in CDOs in April(
May 28, 2008

Bond insurer Ambac Financial Group Inc. said Wednesday it continued to take millions of dollars in charges in April tied to its credit derivative and investment portfolios.

Net write-downs on its credit derivatives holdings totaled $176 million in April, with the bond insurer taking a write-down of $228 million on the value of collateralized debt obligations. Those write-downs were partially offset by $52 million in gains among other credit derivative holdings.

So-called CDOs are complex financial instruments that combine various slices of debt, many of which include subprime mortgage-backed securities.

AIG Falls as Citigroup Sees Need for More Capital (Update2) (Bloomberg)
Hugh Son
May 28

American International Group Inc., the world's largest insurer, fell 4.9 percent in New York trading after Citigroup Inc. analyst Joshua Shanker said it may need more capital beyond the $20.3 billion already collected.

AIG may seek $5 billion to $10 billion rather than let its credit ratings be cut again and risk higher borrowing costs and lower sales, Shanker said yesterday in a research note. Standard & Poor's, Fitch Ratings and Moody's Investors Service downgraded New York-based AIG this month after the company posted a $7.81 billion first-quarter loss.

``The ramifications of another downgrade would be devastating,'' Shanker, who rates AIG ``hold,'' said in a note published after the close of regular U.S. markets. ``A downgrade would be so detrimental to AIG that it will not allow this to happen.''

U.S. Ethanol Isn't Up to Brazilian Smackdown: Alexandre Marinis(Bloomberg)
Alexandre Marinis
May 27, 2008

Sometimes two things look pretty much the same, like a Cartier diamond and a Home Shopping Network cubic zirconia.

There's a world of difference between the two.

The same is true of ethanol made in the U.S., mainly from corn, and ethanol from Brazil derived from sugar cane. They look the same, though that's where the similarities end between what I like to call ethacorn and ethacane.

Although ethacane doesn't produce a fraction of the negative economic, environmental and social problems that ethacorn does, as international food prices soar and environmental concerns mount, both are being thrown into the same pinata to get hammered. Ethacorn deserves the beating, not ethacane.

Monoline Death Watch: CDO Unwind Disputes(Naked Capitalism)
May 28, 2008

Reader Abdul sent me a piece that ran in the New York Post on simmering disputes between investment banks trying to unwind CDOs and monolines that provided credit enhancement. Yes, I know the Post isn't the usual place to see what amounts to breaking financial news, but it was the first out with some stories on quant meltdowns, so it isn't completely unheard of.

Fed Keeps Watch on Wall St. -- From the Inside(Washington Post)
Neil Irwin
May 27, 2008

In the two months since the government rescue of Bear Stearns, the Federal Reserve has built on the fly a new system of monitoring investment banks, radically redefining the central bank's role overseeing Wall Street.

New York Fed employees are working inside major investment banks every day, alongside the Securities and Exchange Commission staff members who are the firms' main regulators. The Fed employees are trying to gather information the central bank can use to make sure the billions of dollars it is lending the investment firms, through a special emergency loan program enacted in March, are not being put at undue risk.

Libor Cracks Widen as Bankers Struggle With Reforms (Update2) (Bloomberg)
Gavin Finch and Ben Livesey
May 27

...Libor Exposed

Every morning the BBA, an unregulated trade group, asks member banks how much it would cost them to borrow from each other for 15 different periods, from overnight to one year, in currencies from dollars to euros and yen. It then calculates averages, throwing out the four highest and lowest quotes, and publishes them at about 11:30 a.m. in London. Three-month dollar Libor was set at 2.64 percent today. ...Rates `a Lie'

In the first four months of 2007, the difference between the highest and lowest rates for three-month Libor didn't exceed 0.02 percentage point, according to JPMorgan. In the same period this year, it was as wide as 0.17 percentage point.

The BIS said in a March report that some lenders may have ``manipulated'' rates. Strategists such as Bond at Barclays went as far as calling the reported rates a ``lie.''

The BBA said on April 16 that any member deliberately understating rates would be banned. The cost of borrowing in dollars for three months rose 0.18 percentage point to 2.91 percent in the following two days, the biggest increase since the start of the credit squeeze in August.

Lesley McLeod, a BBA spokeswoman in London, would only say the association's review is ``ongoing'' and a ``robust process.''

George Soros: rocketing oil price is a bubble(Telegraph)
Edmund Conway
May 2, 2008

Speculators are largely responsible for driving crude prices to their peaks in recent weeks and the record oil price now looks like a bubble, George Soros has warned.

The billionaire investor's comments came only days after the oil price soared to a record high of $135 a barrel amid speculation that crude could soon be catapulted towards the $200 mark.

In an interview with The Daily Telegraph, Mr Soros said that although the weak dollar, ebbing Middle Eastern supply and record Chinese demand could explain some of the increase in energy prices, the crude oil market had been significantly affected by speculation.

Global Derivatives Market Hits USUS$596 Trillion (Stockhouse)
Kanaga Raja
May 26, 2008

The global market for over-the-counter (OTC) derivatives showed a relatively steady growth in the second half of 2007 - amid the turmoil in global financial markets - with notional amounts of all categories of OTC contracts rising by 15% to US$596 trillion at the end of December 2007, following a 24% increase in the first half of the year.

Everybody’s Business Running Out of Fuel, but Not Out of Ideas(NY Times)
May 25, 2008

...In my humble view, we are now in a short-term oil bubble. It will pass and correct, as bubbles do. And speculators will make millions, whichever way it goes. But the long run is terrifying. If we are at or past peak oil, if oil states stop or even hesitate to send us the juice, if Canada decides not to fill our needs, we are in overwhelming trouble.

So, what to do? First, we do not kill the geese — the big oil companies — that lay the golden eggs. We encourage them and cheer them on to get more oil. They need incentives, not hammer blows.

BUT most of all, we treat this as a true crisis. As my pal Glenn Beck, the conservative commentator, says, we need a new moon-shot mentality here. We need to turn coal into oil into gasoline, to use nuclear power wherever we can, and to brush aside the concerns of the beautiful people who live on coastal pastures (like me). And we need to drill on the continental shelf, even near where movie stars live. This must be done, on an emergency basis. If we keep acting as if the landscape were more important than human life, we will make ourselves the serfs of the oil producers and eventually reduce our country to poverty and anarchy.

In that long message sent to Congress 35 years ago, there was an outline of what we needed to do on coal-to-oil and shale-to-oil, as well as wind, solar and wave power. For a generation plus, we have done next to nothing. The hour is late. The clock of destiny is ticking out, as the Rev. Dr. Martin Luther King Jr. said. Let’s roll.

UPDATE 1-FASB changes accounting rules for US bond insurers(Reuters)
May 23, 2008

In a move that could hurt U.S. bond insurers, the U.S. accounting rulemaker on Friday said it is changing standards for when the insurers have to set aside money for expected losses.

Under the new rule by the Financial Accounting Standards Board, insurers that have guaranteed bonds must boost their claims liabilities, or funds set aside to cover expected losses, when the bonds' credit quality has deteriorated.

At least some bond insurers currently set aside reserves only when they believe they can estimate the losses, and the losses are likely to take place. The new rule would force those insurers to set aside money sooner.

Merrill Trader Is Suspended After Derivatives Review (NY Times)
May 24, 2008

Merrill Lynch is investigating one of its trading desks in London and has suspended a trader after discovering that he may have overstated the value of some of the bank’s equity derivatives. “The firm routinely reviews the marks our traders set,” a Merrill spokesman, Jezz Farr, said Friday, referring to the values given to securities. ”Our preliminary review determined that one desk used marks that appear to be outside of our accepted policy.” Merrill declined to identify the trader.

Senior Bear Departures: Signs of Valuation Headaches for JP Morgan?(Naked Capitalism)
May 24, 2008

When the consensus was that JP Morgan got a screaming deal in its acquisition of Bear Stearns, I thought it was way too early to make that call. Yes, it certainly looked like the New York bank pulled a master stroke in getting the Fed to eat $29 billion of exposures, guaranteed to be the worst stuff that Morgan could hoover up.

But Bear also had a very large derivatives book, and as we well know, was a large credit default swaps protection writer. Those contracts are traded bi-laterally; JPM would not have particularly strong insights (its role as Bear's clearing bank wouldn't be of much help) and a mere weekend was clearly not enough time to do more than have a few key questions answered in the heat of putting a deal together. Similarly, Bear had two valuable assets: its headquarters building and its prime brokerage operation. The building, though still a good investment, will be worth less as Wall Street fires more people and Class A vacancies rise. Moreover, Bear was losing market share in prime brokerage, and in a period of deleveraging, it's the riskiest exposures that get cut deepest (and don't kid yourself, the real money in prime brokerage is in the lending).

...Update 3:45 AM: Alert reader Steve wrote to tell me another shoe has already dropped, and has been curiously gone largely unnoticed. JP Morgan's option to buy the headquarters is being contested by the ground lease holder. This is a huge oversight. I can't imagine someone at Bear didn't know that this is the sort of thing that its acquirer would want to know, but hey, you pay a knocked-down price in haste, it's your obligation to know what exactly you are getting. At a minimum, this is pretty embarrassing. I assume that the bank will have to pay the plaintiff to go away. Wonder if they'll be able to avoid disclosing the amount.

OCC Chief Warns on Second Liens(Housingwire)
May 23, 200

Mounting losses in home equity loans and lines of credit have officials at the Office of the Comptroller of the Currency taking notice, with OCC chief John Dugan warning yesterday that banks need to build reserves for losses in the area and suggesting that many need to “return to the stronger underwriting standards of past years.”

The call for tighter underwriting standards from OCC officials would seem to contrast pretty sharply with the relaxing of underwriting standards now quickly taking place at Fannie Mae (FNM: 26.64, -3.44%) and Freddie Mac (FRE: 24.86, -3.38%), both of whom this week nixed long standing so-called declining market policies in the face of consumer criticism.

Why derivatives are getting much more dangerous(Moneyweek)
May 23, 2008

Sometimes when you’re scouring the news, you see a statistic that renders you almost speechless. You can't quite get your head around what it really means, you just know that it’s a knockout number.

One such figure came up yesterday. The total ‘value' of global derivatives - financial instruments which are priced on the back of the underlying assets that they track - has now reached a breathtaking $596 trillion, after a mammoth rise over the previous twelve months.

That started the warning lights flashing…

So what, apart from containing more noughts than a normal human being can cope with, is this titanic number all about?

Merrill Lynch sets up group to shed bad assets(Reuters)
May 23, 2008

Merrill Lynch & Co Inc is setting up a group to get rid of troubled or underperforming assets and named U.S. fixed income sales head Doug Mallach its head, according to an internal memo.

The group will help the brokerage figure out what to do with assets such as collateralized debt obligations that have been hammered by the subprime mortgage crisis. Mallach is putting together a team to figure out whether to sell, restructure, or hold onto these assets, a person briefed in the matter said.

Moody's Cuts AIG Rating(WSJ)
Kevin Kingsbury
May 23, 2008

Moody's Investors Service lowered the senior unsecured debt rating of American International Group Inc. and several subsidiaries "whose ratings have relied on material support from" AIG and those "with significant exposure to the U.S. residential-mortgage market."

The move follows the insurance giant's first-quarter report issued two weeks ago, in which AIG disclosed a net loss of $7.8 million and said it plans to raise billions more in capital.

Hey what a coincidence!

Iraq could have largest oil reserves in the world (Alternative Energy Investor)
Sonia Verma
May 20, 2008

Iraq dramatically increased the official size of its oil reserves yesterday after new data suggested that they could exceed Saudi Arabia’s and be the largest in the world.

The Iraqi Deputy Prime Minister told The Times that new exploration showed that his country has the world’s largest proven oil reserves, with as much as 350 billion barrels. The figure is triple the country’s present proven reserves and exceeds that of Saudi Arabia’s estimated 264 billion barrels of oil. Barham Salih said that the new estimate had been based on recent geological surveys and seismic data compiled by “reputable, international oil companies . . . This is a serious figure from credible sources.”

Megabubble waiting for new president in 2009(Marketwatch)
May 20,2008

'Numbers racket' exposes potential disaster for economy, markets

...No matter who's elected president, America will soon see a massive statistical curtain pulled back, exposing a con game of historic proportions. And when that happens, you and I will suffer another ear-splitting global meltdown, bigger than today's housing-credit crisis, dragging us deep into a recession and bear market for years. ...

Confidence is lost in the ratings agencies. Confidence is lost in the Fed. Now confidence has been lost in the LIBOR. The finacial banks and others are trying to create alternatives: It's a bit like rearranging the deck chairs on the Titanic.

ICAP to Release U.S. Version of LIBOR (Hedgeworld)
Emma Trincal
May 22, 2008

ICAP plc, a London inter-dealer broker, is prepping a U.S. alternative to the London Interbank Offered Rate (LIBOR). The firm is in a final round of talks with the New York offices of multiple global banks to release the rate, to be called the New York Funding Rate, this month. "It's certainly going to be released this month," Lou Crandall, ICAP's New York-based chief economist, told HedgeWorld on Wednesday [May 21]. "We've talked with about 40 banks. We're talking to their U.S. offices but these are global banks. In fact, those banks constitute the same makeup as the LIBOR panel."

The implications of the emergence of an alternative short-term lending rate to LIBOR could be enormous for the derivatives market, and consequently for hedge funds. LIBOR is the most widely used benchmark, or reference rate, for short-term interest rates. LIBOR measures the rate at which large banks lend to each other in the London market across 10 currencies and 15 lending periods ranging from overnight to one year. It is a leading global credit benchmark used to price mortgages, bonds, loans and derivatives, and to set the rate at which banks make unsecured loans to one another.

...ICAP's initiative follows press reports last month that questioned the reliability of the daily quotes the BBA obtains from banks, which is uses to calculate LIBOR Previous HedgeWorld Story. Given the credit crunch, many argued that LIBOR rates were too low to be factual.

This is pretty negative, but let's not dismiss it out of hand. We really need to get going on developing alternate energy sources.

'Squawk Box' Guest Warns of $12-15-a-Gallon Gas (Business and Media)
Jeff Poor
May 21, 2008

Robert Hirsch an energy advisor, says CNBC morning show prediction was a citation of the 'Dean of Oil Analysts.'

It may be the mother of all doom and gloom gas price predictions: $12 for a gallon of gas is “inevitable.”

Robert Hirsch, Management Information Services Senior Energy Advisor, gave a dire warning about the potential future of gas prices on CNBC’s May 20 “Squawk Box”. He told host Becky Quick there was no single thing that would solve the problem, due to the enormity of the problem.

“[T]he prices that we’re paying at the pump today are, I think, going to be ‘the good old days,’ because others who watch this very closely forecast that we’re going to be hitting $12 and $15 per gallon,” Hirsch said. “And then, after that, when oil – world oil production goes into decline, we’re going to talk about rationing. In other words, not only are we going to be paying high prices and have considerable economic problems, but in addition to that, we’re not going to be able to get the fuel when we want it.”

Hirsch told the Business & Media Institute the $12-$15 a gallon wasn’t his prediction, but that he was citing Charles T. Maxwell, described as the “Dean of Oil Analysts” and the senior energy analyst at Weeden & Co. Still, Hirsch admitted the high price was inevitable in his view.

Fed losing appetite for more rate cuts(Marketwatch)
Greg Robb
May 21, 2008

Forecasts for inflation this year soar on high gasoline, food prices

As they have watched oil and food prices swirl ever higher, Federal Reserve officials have lost their appetite for more interest-rate cuts, even if the economy sinks into recession, according to the minutes of their last policy meeting released Wednesday.

Blame Wall Street for $135 Oil on Wrong-Way Betting (Update2) (Bloomberg)
Alexander Kwiatkowski and Grant Smith
May 22

Oil's rally to a record above $135 a barrel came as traders bought crude to cover wrong-way bets that prices would decline, according to data from the New York Mercantile Exchange.

The number of outstanding futures contracts, known as open interest, fell 8.1 percent in a week to 1.36 million at the same time that prices rose 2.6 percent, the data show. Falling open interest and rising prices are signs that traders are buying to exit so-called short positions that would profit if oil fell, and lose money as they rose.

``In a market like today, which is trending higher while open interest is falling, it's a sign that money is moving out of the market,'' said Stephen Schork, president of Schork Group Inc. in Villanova, Pennsylvania. Open interest in Nymex crude futures peaked this year at 1.5 million on March 13.

Look for more trouble in credit default swaps.

Lehman, Merrill debt protection costs rise(Reuuters)
May 22, 2008

Debt protection costs on U.S. brokers, including Lehman Brothers Holdings Inc (LEH.N: Quote, Profile, Research) and Merrill Lynch & Co (MER.N: Quote, Profile, Research), rose on Thursday after analyst Richard Bove downgraded several banks, saying they may perform poorly this summer.

Mark to market in play. If the value of MBS and other ABS starts dropping, things could go from bad to worse in a hurry. This all feeds back into the CDS issue, market confidence in the ratings agencies, then gets transferred into municipal bond auctions, etc.

Sale of Bank Hapoalim MBS Portfolio Says Prevailing Valuations Too High(Naked Capitalism)
May 22, 2008

Reader Baruch sent us this tidbit from Reuters: Bank Hapoalim, the second largest bank in Israel, sold its entire portfolio of MBS to Pimco for 75 cents on an already-written-dollar (or in this case, shekel). Note that the previous writedowns were at least $90 million on an portfolio valued before the sale at $3.42 billion.

Here we see anopther story of great interest. Remember those AAA rated securities used in sivs, cdos, etc? Well apparently there getting rated so high was a "computer glitch".

Moody’s error gave top ratings to debt products(Financial Times)
Sam Jones, Gillian Tett and Paul J Davies
May 20 2008

Moody’s awarded incorrect triple-A ratings to billions of dollars worth of a type of complex debt product due to a bug in its computer models, a Financial Times investigation has discovered.

Internal Moody’s documents seen by the FT show that some senior staff within the credit agency knew early in 2007 that products rated the previous year had received top-notch triple A ratings and that, after a computer coding error was corrected, their ratings should have been up to four notches lower.

News of the coding error comes as ratings agencies are under pressure from regulators and governments, who see failings in the rating of complex structured debt as an integral part of the financial crisis. While coding errors do occur there is no record of one being so significant.

Moody’s said it was “conducting a thorough review” of the rating of the constant proportion debt obligations – derivative instruments conceived at the height of the credit bubble that appeared to promise investors very high returns with little risk. Moody’s is also reviewing what disclosure of the error was made.

Don't blame us for prices - oil execs(CNN Money)
Steve Hargreaves
May 21, 2008

A Senate Judiciary Committee seeks answers from Big Oil execs for rising oil prices on day that crude crossed $130 a barrel.

... "We cannot change the world market," said Robert Malone, chairman and president of BP America Inc. "Today's high prices are linked to the failure both here and abroad to increase supplies, renewables and conservation."

Malone's remarks were echoed by John Hofmeister, president of Shell.

"The fundamental laws of supply and demand are at work," said Hofmeister. The market is squeezed by exporting nations managing demand for their own interest and other nations subsidizing prices to encourage economic growth, he said.

In addition, Hofmeister said access to resources in the United States has been limited for the past 30 years. "I agree, it's not a free market," he said.

UN alert: One-fourth of world's wheat at risk from new fungus(World Tribune)
May 13, 2008

The United Nations Food and Agriculture Organization (FAO) warned in March that Iran had detected a new highly pathogenic strain of wheat stem rust called Ug99.

The fungal disease could spread to other wheat producing states in the Near East and western Asia that provide one-quarter of the world’s wheat.

The FAO warned stated east of Iran — Afghanistan, India, Pakistan, Turkmenistan, Uzbekistan, and Kazakhstan to be on high alert. Scientists and international organizations focused on controlling wheat stem rust have said 90 percent of world wheat lines are susceptible to Ug99. The situation is particularly critical in light of the existing worldwide wheat shortage.

Credit Default Swaps Losses Estimated at $150 Billion(Naked Capitalism)
Tuesday, May 20, 2008

A story on Bloomberg this morning uncharacteristically lacks a news hook but gives a good deal of color on counterparty risk in the credit default swaps market.

The story argues that the other shoe may finally drop in the $62 trillion CDS market due to rising junk bond defaults. We've long seen that market as a disaster in the making. With economic exposures estimated at 2% of notional amount, $1,2 trillion is at risk, making it larger than the subprime market. Thus the $150 billion in losses estimated by BNP Paribas analyst Andera Cicione is plausible.

ICI Lauds Davis Decision on Municipal Bond Funds(On Wall Street)
Andrew Ackerman, Peter Schroeder
May 20, 2008

Market participants hailed yesterday's long-awaited but widely expected Supreme Court decision that upheld 42 states' preferential tax treatment of their bonds as a "resounding victory" for the municipal securities market.

The near-unanimous support for the 7-to-2 decision in Department of Revenue of Kentucky v. Davis — from fund managers, attorneys, state officials, and industry groups alike — reflected the dire consequences for the market had the high court ruled differently.

...The court in effect upheld the status quo in the muni market by overturning a Kentucky appeals court's 2006 decision that said the state's long-standing practice of taxing the interest on bonds issued out of state while exempting from taxation the interest on bonds issued in state was unconstitutional. Forty-nine states filed friend-of-the-court briefs in support of Kentucky, a factor that appeared to weigh heavily on the court's thinking.

Among other things, yesterday's ruling saves states from having to consider as much as $3 billion in potential tax refunds, said Christopher Trower, the solo practitioner who argued the case before the Supreme Court on behalf of Kentucky.

Wall Street Brokerages Look To Shed Light on Dark Pools(WSJ)
Donna Kardos
May 20, 2008

Goldman Sachs Group Inc., Morgan Stanley and UBS AG announced a series of deals that will allow their clients to share access to all three firms' pools of non-displayed liquidity as they try to address the growing complexity of market fragmentation amid so-called dark pools.

The moves come as dark pools -- the secretive electronic trading networks that match buyers and sellers anonymously -- are booming in popularity as big institutional investors look for ways to trade blocks of stock without triggering ripples in the share price, as can happen on traditional stock markets such as the NYSE and Nasdaq Stock Market.

But all that darkness is causing nightmares on Wall Street because there are now so many that using them is increasingly frustrating and time-consuming.

German Investor Confidence Unexpectedly Fell in May (Update4) (Bloomberg)
Christian Vits
May 20

Investor confidence in Germany unexpectedly fell for a second month in May on concern faster inflation, the stronger euro and fallout from the U.S. housing slump will hurt economic growth.

AIG to raise roughly $20 billion in capital: Giant insurer originally planned to raise about $12.5 billion(Market Watch)
Alistair Barr
May 19, 2008

American International Group will end up raising roughly $20 billion selling a variety of securities, much more than the giant insurer originally planned.

On Friday, AIG completed public offerings of new shares and other securities, raising about $13.5 billion, Chris Winans, a spokesman for the company, said in an email on Monday. AIG is also selling hybrid securities. That offering is still taking place, with some securities sold in U.S. dollars and others in euros and U.K. pounds.

"We expect that when completed our total program including the hybrids will generate proceeds of approximately $20 billion," Winans said.

Earlier this month, AIG reported a quarterly net loss of almost $8 billion and unveiled plans to raise $12.5 billion by selling new shares, equity-linked securities and fixed-income securities with a large equity component included.

Bush: No Bail Outs, But Quiet on Housing Package(Housing Wire)
Paul Jackson
May 19, 2008

Ahead of the scheduled markup of a housing package by the Senate Banking Committee this Tuesday, President Bush reiterated his stance that he would veto any housing package deemed a “bail out” of irresponsible borrowers or lenders. After meeting with Treasury Secretary Hank Paulson, Bush said Monday that he was committed to housing programs that “help people refinance and help people get the financial help necessary to stay in homes.”

ECB's Trichet says worst of crisis may be ahead(Telegraph)
Angela Monaghan
May 20, 2008

Jean-Claude Trichet, the head of the European Central Bank, has indicated that the worst of the credit crisis may not be behind us.

Mr Trichet said that we were seeing "an ongoing, very significant market correction."

He compared the recent hikes in energy and food prices to the oil crisis of the 1970s, when higher wages undermined Europe's ability to compete, resulting in widespread unemployment.

He warned that despite the economic slowdown, central banks should not be tempted to cut interest rates because that could lead to more serious problems.

Oil Producers Mask Decade's Worst S&P 500 Profit Drop (Update3) (Bloomberg)
Michael Tsang and Darren Boey
May 19

Take away Exxon Mobil Corp., Chevron Corp. and ConocoPhillips and profits at U.S. companies are the worst in at least a decade.

Buffett Says U.S. Is Less Than Halfway Through Credit Crisis(Bloomberg)
Josh P. Hamilton
May 19

Billionaire Warren Buffett said the U.S. economy is less than halfway through a credit crisis that already sent home foreclosures to a record and sparked the collapse of Wall Street's fifth-largest securities firm.

``I don't necessarily think we're halfway through or necessarily a quarter of the way through the effects throughout the general economy,'' Buffett, 77, told reporters today in Frankfurt, Germany. ``The initial effects are felt by the people who really did the silliest things, but you can have a whole bunch of domino-type effects that eventually can get to people who are doing fairly sound things.''

Diverging Views on Inflation(Naked Capitalism)
Tuesday, May 20, 2008

Just as we pointed out yesterday that different markets had differing implicit forecasts of inflation, not surprisingly, so too do analysts.

What makes the outlook for inflation a legitimately a difficult call is not merely weighing the inflationary and deflationary factors, but also considering how the various actors might respond. The focus has been on what central banks might do, but an equally important question is to what extend can and will companies pass along increases in input prices.

JPMorgan to Close or Spin Off Most Bear Funds(Hedgeworld/Reuters)
May 16, 2008

JPMorgan Chase & Co. expects to liquidate or spin off much of the asset management arm of Bear Stearns Cos. Inc. after it takes over Bear next month, people familiar with the situation said on Thursday [May 15].

Bear Stearns Asset Management (BSAM), which during the past year generated more bad news than revenues, has about 400 employees and managed $39 billion in investments at the end of February.

On Monday, JPMorgan Chief Executive Jamie Dimon told a UBS investor conference he expected the bank would close down "big parts of Bear's asset management business."

Paint Lipstick on this Pig(Wall Street Examiner)
May 15th, 2008

Freddie Mac issued its quarterly “report” and gave clues as to how to paint lipstick on pigs and actually get away with it. The trick is to put $157 billion (from $32 billion before) over to Level 3, where absolutely no haircut is then reported. Readers may recall that Level 3 essentially allows the reporter to make up their own prices separate from market prices. In the case of Freddie, management has determined that “market prices don’t make any sense”, hence the move. This writer would argue that the quasi-official institutions like the GSE and foreign central banks themselves are creating massively distorted Soviet Union style prices that if anything makes even the market prices that Freddie dismisses too high. Notice the Orwellian answer, “no it is not” to the analyst’s straight forward question. From the conference call:

Analyst: There is a headline out there that you have level 3 assets of $157 billion. I was just wondering is that true and is that related at all to the markups of the 1.2 billion gain?

Freddie Mac: No, it is not Paul. We made a determination in the first quarter that given how widely the pricing we were getting on the abs portfolio [varied] that it no longer made sense to leave that into level two. So we essentially moved the entire abs portfolio into level three.

One of the readers posted this graph. Note that Freddie Mac is leveraged 50 times!

Freddie Mac vs. Other Large Financial Corporations: Leverage Ratios

The following article is critical. Satyajit Das writes the books on derivatives. This article is from a few days ago, but worth reading. Here is a pratial list of his books:

Traders, Guns & Money: Knowns and unknowns in the dazzling world of derivatives

The Swaps & Financial Derivatives Library: Products, Pricing, Applications and Risk Management, 3rd Edition Revised (Boxed Set) (Wiley Finance)

Credit Derivatives: CDOs and Structured Credit Products (Wiley Finance)

Structured Products Volume 1: Exotic Options; Interest Rates & Currency (The Swaps & Financial Derivatives Library) (Wiley Finance)

Risk Management and Financial Derivatives: A Guide to the Mathematics

Credit Derivatives and Credit Linked Notes (Wiley Frontiers in Finance)

Swaps and Financial Derivatives: Products, Pricing, Applications and Risk Management (4 Volume Set) (Wiley Finance)

Swap and Derivative Financing: The Global Reference to Products, Pricing, Applications and Markets, Revised Edition

Nuclear De-Leveraging(Euro Intelligence)
Satyajit Das

Equity markets believe the worst is over. Banks also seem to have convinced themselves that the worst is behind us. An alternative and, arguably, better view of the current state of the financial crisis is that stated by Winston Churchill: “… this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”

There is acknowledgement that an extraordinary level of debt and leverage precipitated the problems. However, there is limited recognition of the massive de-leveraging of the global financial system that is under way. Leverage amplifies returns but also accelerates de-leveraging.

Trading at ICE temporarily halted by power shutdown(
May 15, 2008

Trading on Intercontinental Exchange markets was halted for several hours Thursday when the securities exchange shut down its system due to what it called a power issue.

Power was out for nearly an hour following the emergency shutdown at ICE's primary data center in Chicago at mid-morning, spokeswoman Kelly Loeffler said from the exchange's Atlanta headquarters. It took over two more hours before futures markets were up and running again at 2 p.m. EDT.

The outage caused all orders to be suspended.

Loeffler did not provide further details about the cause. The exchange kept customers informed with brief updates on its Web site.

Rubenstein Says `Enormous' Bank Losses Unrecognized (Update2)(Bloomberg)
Ryan J. Donmoyer and Alison Fitzgerald
May 12

U.S. and European banks and financial institutions have ``enormous losses'' from bad loans they haven't yet recognized and may have a harder time wooing sovereign-fund rescuers, Carlyle Group Chairman David Rubenstein said.

``Based on information I see,'' it will take at least a year before all losses are realized, and some financial institutions may fail, Rubenstein said at a breakfast meeting of the Institute for Education Public Policy Roundtable in Washington. He didn't name any companies.

``The sovereign wealth funds are not likely to jump into the fray again to bail out these institutions,'' Rubenstein said. ``Many financial institutions aren't going to be able to survive as independent institutions.''

For Retailers, It's Black Tuesday(Forbes)
Tom Van Riper

For major retailers, the week of darkness has arrived. With $4 gasoline and tight credit keeping consumers' wallets shut, it's time to announce dismal profits. Unless you're a discounter or a seller of hip clothing really ahead of the fashion curve, forget about it. Wall Street is braced for the worst.

Foreclosures Climb 65% as Loan Workouts Fall Short (Update3) (Bloomberg)
Dan Levy
May 14

U.S. foreclosure filings climbed 65 percent and bank seizures more than doubled in April from a year earlier as mortgage industry efforts to modify loans fell short.

More than 243,300 properties were in some stage of foreclosure, the highest monthly total since RealtyTrac Inc., a seller of default data, began in January 2005. One in every 519 households received a filing and Nevada, California and Florida had the highest rates. Filings rose 4 percent from March.

The worst housing slump since the Great Depression may push the U.S. economy into a recession. Falling home prices, which dropped the most in 29 years in the first quarter, are making it tougher for homeowners to refinance, and voluntary programs to change loan terms for at-risk borrowers haven't helped enough people, said Ira Rheingold, executive director of the National Association of Consumer Advocates in Washington.

``Loan modification isn't working,'' Rheingold said. ``It's extremely difficult for a homeowner to talk to a servicer and even if they do, it's hard to get the servicer to change the terms. You get voice-mail hell, they don't return calls, you can't get a live person on the phone.''

Still No Evidence of Silver Market Manipulation, Says CFTC (Hedgeworld)
Jacob Bunge
May 14, 2008

The silver markets continue to draw scrutiny from analysts and traders who insist that prices are being held down by short sellers, and once again the Commodity Futures Trading Commission has stepped in to reassure participants that everything is alright.

For the second time in four years, the CFTC's Division of Market Oversight issued a report detailing a multi-year analysis of silver markets, and in particular those short sellers that are alleged to be depressing the price of the precious metal. The conclusion, as in May 2004 when the regulator last addressed the issue, was that there remains no evidence of price manipulation in the silver markets.

Survey: Goldman, Morgan Stanley rated tops in OTC derivatives trading (Financial Weeek)
May 13, 2008

Wall Street powerhouses Goldman Sachs Group and Morgan Stanley led the pack in Greenwich Associates’ ranking of the best firms to trade over-the-counter derivatives, driven by new customers flocking to the handful of dealers that have historically dominated the market.

The 2008 Global Commodities Research Study, which surveyed users of the OTC synthetics, ranked derivatives brokers in four categories. Goldman Sachs and Morgan Stanley tied for first for best overall service quality.

UPDATE: Morgan Stanley CFO Sees Market Stress Ahead(CNN Money)
Jed Horowitz
May 13, 2008

Morgan Stanley (MS) on Tuesday joined the chorus of investment banks offering cautious words about the prognosis for their recovery.

"It is unclear to us what is going to lie ahead," Chief Financial Officer Colm Kelleher told investors at a conference sponsored by UBS AG (UBS) that was broadcast over the Internet. It will take "at least several more quarters" to remove uncertainty about further credit losses, asset sales and loan extensions to clients, he said.

Kelleher, who is part of a new management team that Morgan Stanley Chief Executive John Mack installed late last year, said the company is having healthy discussions with institutional clients about raising capital and doing deals. But talk isn't translating into business.

Dark pool volume greatly exaggerated, says Morgan Stanley exec:(Financial Week)
One trade can be counted four times, Silverman notes; off-market exchanges eager to show large trading volumes
Darla Mercado
May 6, 2008

The dark pools of liquidity may be shallower than they seem, according to a Morgan Stanley trading executive.

Accounting processes and competition may have exaggerated the volume figures from more than 40 so-called dark-pool trading venues, Andrew Silverman, managing director of Morgan Stanley, warned at the Reuters Exchanges and Trading Summit in New York yesterday.

Dark pools are private trading networks that allow firms to match buy and sell orders anonymously through internal systems. Big investors favor dark pools because they allow them to keep their trading intentions hidden from the open market.

MBIA posts huge loss on credit derivatives(Guardian)
May 12 2008

MBIA Inc, the world's largest bond insurer, posted a quarterly loss of $2.4 billion on Monday as it took charges on billions of dollars of exposure to bonds linked to subprime mortgages.

But MBIA's beaten-down shares rose as much as 12 percent as the potential for charges had been telegraphed well in advance and the company said its new business volumes appear to be rising in the current quarter.

The charges wiped out 40 percent of MBIA's net worth, but the company said most of the charges did not represent actual expected losses, and the insurer is well capitalized.

The first-quarter loss amounted to $13.03 per share, versus a profit of $199 million, or $1.46 per share, a year earlier.

The global slump of 2008-09 has begun as poison spreads(Financial Times)
Ambrose Evans-Pritchard

The avalanche of bankruptcies has begun. Six US companies of substance have defaulted on bonds over the past fortnight, against 17 for the whole of last year.

As a "non-believer" in the instant rebound story, I am not easily shocked by gloomy reports. But the latest note by Standard & Poor's - The Bust After The Boom - gave me a fright.

The sick list is varied, though most for now are victims of the housing crash: Linens 'n Things, ($650m), Kimball Hill ($703m), Home Interiors ($310m), French Lick Resorts ($142m), Recycled Paper Greetings ($187m), and Tropicana Entertainment ($2.49bn).

As the Fed's latest loan survey makes clear, lenders have dropped the guillotine. With the usual delay, the poison is spreading from banks to the real world.

Diane Vazza, S&P's credit chief, says defaults are rising at almost twice the rate of past downturns. "Companies are heading into this recession with a much more toxic mix. Their margin for error is razor-thin," she said.

Two-thirds have a "speculative" rating, compared to 50pc before the dotcom bust, and 40pc in the early 1990s. The culprit is debt. "They ramped it up in the last 18 months of the credit boom. A lot of deals were funded that should not have been funded," she said.

Some 174 US companies are trading at "distress levels".

Wachovia Securities in auction-rate securities probes(Triangle Business Journal)
May 12, 2008

Wachovia Securities has received subpoenas and inquiries from the Securities and Exchange Commission and regulators in several states requesting information on auction-rate securities, according to a Wachovia Corp. filing with the SEC.

Regulators have requested data concerning the underwriting, sale and subsequent auctions of municipal auction-rate securities and auction-rate preferred securities, the filing states.

Charlotte-based Wachovia says it will cooperate fully in the probe.

Bond Insurers See Ratings A Key Driver For New Business(CNN Money)
May 12, 2008

In the world of bond insurance, the strong are getting stronger at the expense of the weak.

As subprime woes mount for insurers of municipal and loan-backed bonds, potential customers are voting with their feet. They're largely shunning firms like MBIA Inc. (MBI), Ambac Financial Group Inc. (ABK) and Security Capital Assurance Ltd. (SCA), which are struggling with subprime exposure. Meanwhile, a select few firms that avoided the subprime crisis, such as a unit of Berkshire Hathaway Inc. (BRKA BRKB) and Assured Guaranty Ltd. (AGO), are grabbing premiums and market share.

The results show how the subprime crisis is providing an opportunity for new entrants - and for older players that avoided the lure of complex businesses that, for a stretch, were boosting competitors' reported results.

Meruelo Maddux Tumble Puts Los Angeles on Sale at 65% Discount (Bloomberg)
Peter J. Brennan
May 11

A package of Los Angeles real estate on sale for 35 cents on the dollar is attracting investors to the depressed shares of Meruelo Maddux Properties Inc., the biggest private landowner in the city's four-square-mile downtown.

The stock has plummeted 85 percent since an initial public offering 15 months ago as the global credit crisis threatens to disrupt refinancing of $200 million in mortgage debt coming due in the next 12 months, as well as completion of the city's tallest downtown residential tower.

Bubble Isn't Big Factor in Inflation: Economists Blame Food, Fuel Run-Ups On Fundamentals(WSJ)
Phil Izzo
May 9, 2008

The global surge in food and energy prices is being driven primarily by fundamental market conditions, rather than an investment bubble, say the majority of economists in the latest Wall Street Journal forecasting survey.

The de facto nationalization of the global financial system(RGE Monitor)
Brad Setser
May 8, 2008

The US housing bubble. Bursting.

The “the triple bubbles in property prices, mortgage debt, and the shadow banking system.” Burst.

Soros' thirty year super-bubble in leverage and financial assets. Bursting. Perhaps.

The bubble in Chinese stocks. No longer bursting. Who knows, China's policy makers might even do enough to cause a bit of froth -- if not a bubble -- to reemerge.

Oil. Still going up. Maybe way up. And perhaps not a bubble. Perhaps the bubble that burst was the assumption that the supply of conventional (i.e. low-cost) oil was as elastic as it seemed to be in the 1990s. We still don’t know.

Emerging market government financing of the US and Europe? Still very bubblicious.

China eyes overseas land in food push(Financial Times)
Jamil Anderlini
May 8 2008

Chinese companies will be encouraged to buy farmland abroad, particularly in Africa and South America, to help guarantee food security under a plan being considered by Beijing.

A proposal drafted by the Ministry of Agriculture would make supporting offshore land acquisition by domestic agricultural companies a central government policy.

Citigroup considers $400bn asset sales(Financial Times)
Francesco Guerrera
May 9 2008

Citigroup on Friday confirmed that at least $400bn in non-core assets could be sold as part of plans to reduce costs and restore profit growth to double-digit rates.

At a long-awaited meeting with Wall Street analysts, Vikram Pandit, Citi’s chief executive, also plans to confirm his pledge, first disclosed in the Financial Times, to cut Citi’s cost base of more than $60bn by about 20 per cent.

What if we'd been on the gold standard?(Econobrowser)
May 09, 2008

If the U.S. had decided to go back on the gold standard in 2006, where would we be today? That's a question my friend Randy Parker recently asked me. Here's how we both would answer...

...And how could the U.S. respond to such a speculative attack? We'd have two choices. One would be to say to the speculators, you're right, this idea of driving interest rates up at a time of financial crisis was a dumb one. Dollars are no longer convertible to gold at the old fixed rate.

Or the other option would be to say, no, we really mean it this time, honest, we're serious about this whole gold standard thing. So, we drive interest rates higher and watch the deflation mount. Outstanding debt that is denominated in dollars becomes more and more costly for people to repay, and we'd see a really impressive level of bankruptcies and business failures. The cycle would continue until the politicians who promised to stay on the gold standard are driven out of office and the deflation spiral could finally be ended by the new leaders choosing option 1 after all.

Now, I know that the gold-standard bugs are howling at this point, "but that's not how a gold standard would actually work, because..." But what I just described was not a hypothetical scenario. Instead, in my opinion it's a pretty accurate description of what happened in the United States during the Great Depression of 1929-33.

Blame the models(Vox EU)
Jon Danielsson
8 May 2008

In response to financial turmoil, supervisors are demanding more risk calculations. But model-driven mispricing produced the crisis, and risk models don’t perform during crisis conditions. The belief that a really complicated statistical model must be right is merely foolish sophistication.

ECB, BOE Keep Main Rates Unchanged to Fight Inflation (Update1) (Bloomberg)
John Fraher and Christian Vits
May 8

The European Central Bank and the Bank of England kept interest rates unchanged today, trying to balance the risk of faster inflation against the danger that higher credit costs will drag down economic growth.

Soros Says Impact of Crisis on Economy Just Starting (Update3)(Bloomberg)
Ian Katz
May 7

Billionaire investor George Soros said the ``acute phase'' of the financial crisis is ``largely behind us'' even as the U.S. economy is only now starting to feel the effect.

The damage done to the global financial system ``has to affect, in my opinion, the real economy,'' Soros, 77, said in a question-and-answer session in Washington today. ``The effect of that is only beginning to be felt. There is a certain time lag.''

Congress looks at SEC oversight of Wall St banks Congress examining possible tighter oversight of investment banks by SEC (CNN Money)
May 07, 2008

Amid distress in the credit markets, Congress is examining the regulation of Wall Street investment banks by the Securities and Exchange Commission and considering whether it should be tightened.

Following the near-collapse in March of Bear Stearns Cos., which had been the fifth-largest U.S. investment bank, several lawmakers criticized the market watchdog agency for what they said was its failure to detect warning signs of the meltdown.

The Federal Reserve arranged a $30 billion rescue of the firm with a loan for its acquisition by rival JP Morgan Chase & Co.- a move that Fed and Bush administration officials said was needed to avert a disaster for the U.S. economy and the global financial system.

Bear Stearns was one of five major Wall Street banks whose cash positions and balance sheets were monitored by SEC examiners after the subprime mortgage crisis erupted last year...

Commercial banks, by comparison, are more tightly supervised by their federal regulators such as the Federal Reserve and the Federal Deposit Insurance Corp...

Lawmakers may consider a proposal that would subject investment banks to the same, stricter, requirements for the amount of capital held against risk as commercial banks. Regulators such as the SEC and the Federal Reserve would be empowered to intervene possibly to shut them down when investment banks failed to meet the requirements.

The SEC itself may require big investment banks to maintain bigger cash cushions in times of market disruption, agency Chairman Christopher Cox has said.

Doubts Raised on Big Backers of Mortgages (NY Times)
Charles Duhigg
May 6, 2008

As home prices continue their free fall and banks shy away from lending, Washington officials have increasingly relied on two giant mortgage companies — Fannie Mae and Freddie Mac — to keep the housing market afloat.

But with mortgage defaults and foreclosures rising, Bush administration officials, regulators and lawmakers are nervously asking whether these two companies, would-be saviors of the housing market, will soon need saving themselves.

...But some financial experts worry that the companies are dangerously close to the edge, especially if home prices go through another steep decline. Their combined cushion of $83 billion — the capital that their regulator requires them to hold — underpins a colossal $5 trillion in debt and other financial commitments.

The companies, which were created by Congress but are owned by investors, suffered more than $9 billion in mortgage-related losses last year, and analysts expect those losses to grow this year. Fannie Mae is to release its latest financial results on Tuesday and Freddie Mac is to report earnings next week.

The companies are sitting on as much as $19 billion in additional losses that they have not yet fully acknowledged, analysts say. If either company stumbled, the mortgage business could lose its only lubricant, potentially causing the housing market to plummet and the credit markets to freeze up completely.

And if Fannie or Freddie fail, taxpayers would probably have to bail them out at a staggering cost.

Goldman Forecasts Oil to Reach $150-$200 a Barrel(Naked Capitalism)
May 6th, 2008

Goldman foresees a continue rise in oil prices due to continuing capacity constraints and continued strong demand from emerging economies. From Bloomberg:

"Crude oil prices may rise to between $150 and $200 a barrel within two years because of a lack of adequate supply growth, Goldman Sachs Group Inc. analysts led by Arjun N. Murti said in a report...."

Countrywide Falls as Analyst Says Bank of America Should Walk(Bloomberg)
David Mildenberg and Eric Martin
May 5, 2008

Countrywide Financial Corp., the largest U.S. mortgage lender, declined the most in four months after Friedman, Billings, Ramsey & Co. said Bank of America Corp. should abandon its takeover.

Bank of America, the second-biggest U.S. bank, may have to write down the value of Countrywide's loans by as much as $30 billion because of declining home prices, analyst Paul Miller of Friedman, Billings said in a report today. He cut his rating on Countrywide to ``underperform'' from ``market perform'' and lowered his price target to $2 a share from $7.

``Bank of America should completely walk away from the Countrywide deal, as Countrywide's loan portfolio will prove a drag on earnings and could force Bank of America to raise additional capital,'' Miller wrote.

Countrywide's credit rating was cut to junk on May 2 by Standard & Poor's, which cited doubt about whether Charlotte, North Carolina-based Bank of America will back the home lender's debt after a pending takeover...

Bank of America May Not Guarantee Countrywide's Debt (Update6) (Bloomberg)
David Mildenberg
May 2, 2008

Bank of America Corp., the second- biggest U.S. bank, said it may not guarantee $38.1 billion of Countrywide Financial Corp.'s debt after taking over the mortgage lender, increasing the likelihood of a default.

Prosecutors in NY form subprime task force(Yahoo Nrews/Reuters)
May 5
Martha Graybow

Federal prosecutors in New York have formed a task force together with other government agencies to examine the collapse of the market for risky home loans, a spokesman for the U.S. Attorney's Office in Brooklyn said on Monday.

...The task force is working with representatives from the Federal Bureau of Investigation, the U.S. Postal Inspection Service, the U.S. Secret Service, the Federal Deposit Insurance Corp. and the U.S. Securities and Exchange Commission, Nardoza said.

He said the task force is focusing on mortgage activity in the New York area, where many financial services firms are located or do business.

It is working with representatives from the New York State Banking Department, New York City's Department of Investigation and the Office of the New York State Attorney General.

The task force is also working with federal prosecutors in Manhattan, Nardoza said.

"A lot of the districts in the country are taking similar action," he said. This task force was formed "to focus on the problem in our district," which includes the New York City boroughs of Brooklyn, Queens and Staten Island, as well as Long Island.

Falcon Investors Sue Citi in Florida(Hedgeworld)
Christopher Faille
May 05, 2008

Babbitt, Johnson, Osborne & Le Clainche PA has filed a class action lawsuit in federal district court in south Florida on behalf of investors in Falcon Strategies Two B LLC, a hedge fund marketed by Citigroup Alternative Investments LLC.

The lawsuit alleges that Falcon Strategies has been marketed to potential investors "as an extremely low-risk investment that offered low volatility and tax-protected distributions [because] complex hedge strategies would be utilized to minimize or eliminate any risk of loss of principal."

The lead plaintiff in the action is A. Robert Zeff, a Florida resident who invested $500,000 in Falcon Strategies in April 2007, and had his wings clipped as a consequence. The fund lost 53% of its value in the fourth quarter of 2007, and is now down about 75% overall.

The lawsuit has been brought, using the standard class-action language, on behalf of Mr. Zeff and "all others similarly situated."

In February, Citigroup consolidated Falcon's assets and liabilities on its own balance sheet Previous Reuters Story.

Negative Equity in Auto Loans and the Bust of the Auto Bubble(RGE Monitor)
Nouriel Roubini
May 4, 2008

We have been worrying for a while about the collapse of home sales, the free fall in home prices, reckless lending practices that occurred in mortgages and now millions of households being “under water” or with negative equity on their mortgages.

But guess what? The same kind of credit mess did occur in auto sales and auto loans. The latest auto sales for April have been an unmitigated disaster...

So auto sales are free falling and desperate car makers are cutting on prices and providing further price cuts via loose financing terms. But at the same time a time bomb of negative equity in auto loans is emerging. For the last few years auto loan lenders sharply loosened their lending standards, used aggressive, deceptive and predatory lending practices, allowed households to buy cars with little equity in them (as zero down-payment deals became the norm) and thus caused a bubble in car production and in car sales (individuals with cars too big and too many cars each) that was financed with a reckless lending bubble.

Sounds familiar? The car lending bubble was as reckless as the subprime and mortgage bubble. And now this credit bubble is going bust leading to rising default rates, significant negative equity in car loans (25% of all car loans are “under water”), massive losses to auto loan firms and a severe recession in the auto industry.

Is the Credit Crisis Really Over? Minsky Would Say No(Naked Capitalism)
May 4, 2008

...the overwhelming counterevidence in the form of the increase in the Term Auction Facility by $50 billion and expanding the types of assets that can be pledged for the TSLF to include asset backed securities consisting of auto loans and credit card receivables. This may be a direct effort to stand in for the moribund asset backed commercial paper market. Oh, and in case you somehow missed it, the ECB joined in with a $20 billion addition, bringing the size of its program to $50 billion and Swiss National Bank increased its facilities by $6 billion to a new total of $12 billion. If things are so hunky dory, why is the officialdom throwing large amounts of money at a problem that is over?

Fed Announces Measures to Address `Liquidity Pressures:' Text (Bloomberg)
May 2

The following is a reformatted version of a statement released by the Federal Reserve Board in Washington.

``Central banks have continued to work together and to consult regularly on liquidity conditions in financial markets. In view of the persistent liquidity pressures in some term funding markets, the European Central Bank, the Federal Reserve, and the Swiss National Bank are announcing an expansion of their liquidity measures.

Federal Reserve Actions

The Federal Reserve announced today an increase in the amounts auctioned to eligible depository institutions under its biweekly Term Auction Facility (TAF) from $50 billion to $75 billion, beginning with the auction on May 5. This increase will bring the amounts outstanding under the TAF to $150 billion.

In conjunction with the increase in the size of the TAF, the Federal Open Market Committee has authorized further increases in its existing temporary reciprocal currency arrangements with the European Central Bank (ECB) and the Swiss National Bank (SNB). These arrangements will now provide dollars in amounts of up to $50 billion and $12 billion to the ECB and the SNB, respectively, representing increases of $20 billion and $6 billion. The FOMC extended the term of these reciprocal currency arrangements through January 30, 2009.

In addition, the Federal Open Market Committee authorized an expansion of the collateral that can be pledged in the Federal Reserve's Schedule 2 Term Securities Lending Facility (TSLF) auctions. Primary dealers may now pledge AAA/Aaa-rated asset-backed securities, in addition to already eligible residential- and commercial-mortgage-backed securities and agency collateralized mortgage obligations, beginning with the Schedule 2 TSLF auction to be announced on May 7, 2008 and to settle on May 9, 2008. The wider pool of collateral should promote improved financing conditions in a broader range of financial markets. Treasury securities, agency securities, and agency mortgage-backed securities continue to be eligible as collateral in Schedule 1 TSLF auctions.''

Gulf States May End Dollar Pegs, Kuwait Minister Says (Update4) (Bloomberg)
Fiona MacDonald and Matthew Brown
May 1

Gulf states are considering dropping their pegs to the dollar after the U.S. currency's decline stoked inflation across the region, Kuwaiti Finance Minister Mustafa al- Shimali said.

``Yes, there are some'' Gulf Cooperation Council states considering dropping their pegs to the dollar, which has fallen 13 percent against the euro in the last 12 months, al-Shimali said in an interview in Kuwait late yesterday without naming the countries. ``Some countries will do what we are doing.''

Al-Shimali's comments may restoke speculation of a change in Middle East currency systems that eased after the United Arab Emirates and Qatar last month ruled out any revaluation or dropping the dollar peg in the short term. The issue will remain a key issue as long as inflation remains high.

Let's hope this does not change.

UPDATE 2-Venezuela says will not abandon dlr in oil sales(Reuters)
Apr 30, 2008

Venezuela will not abandon the dollar as a currency for oil sales, Energy Minister Rafael Ramirez said on Wednesday, despite the OPEC member's trend toward asking for payments in euros for certain contracts.

Asked if Venezuela would stop relying on the greenback, Ramirez said "We are not going to that and we are not currently doing that.

"We have been doing some transactions in euros, we are trying that out ... it is not significant enough to say there has been a qualitative change," he said.

This is bad news. If Venezuala follows, then everyone else does, this is a major blow to the US. I am not sure how the US government will view this incident.

Iran conducts all crude trade in euro, yen(Reuters)
Apr 30, 2008

Iran, the world's fourth-largest oil producer, is conducting all its crude trading in euro and yen, instead of the U.S. dollar, an Iranian official was quoted as saying on Wednesday.

Iran has been reducing its exposure to the dollar as the United States has ratcheted up sanctions because of a dispute over Tehran's nuclear programme. In December, an official said 90 percent of its oil export earnings were outside the dollar.

"All of Iran's oil trading is being done with euro and yen," Hojjatollah Ghanimifard, international affairs director of the National Iranian Oil Company, told Fars News Agency.

"We agreed with all the buyers of Iran's crude to trade oil in currencies other than dollar," he said. "In Europe, Iran's crude is being sold in euro, in Asia in euro and yen, and trading with yen has not only been in Japan."

Ghanimifard could not be immediately reached to confirm the report.

BAI Condemns 'Short and Distort' Tactics in Germany, with a Caveat (Hedgeworld)
Martin de Sa'Pinto
April 30, 2008

However, BAI director Aleksander Kluzniak was eager to clarify what the lobbying group meant by "distortion" in the context of market manipulation. "Hearsay and the discussion of information with academics, journalists and market participants and so on are all part of market activity," he said in an interview. "Manipulation is when investors influence the development of stock prices by spreading false rumors."

Recently, Icelandic banking firms in particular have been the object of a number of rumors suggesting that the banks may have capital adequacy issues. Coupled with Iceland's currently weak currency, rising inflation and flat projected economic growth for this year, the rumors have forced up the credit default swap spreads of the banks in question. This has happened in spite of the fact that the banks have minimal, if any, exposure to U.S.-originated subprime securities, according to Richard Portes, professor of economics at London Business School and founder and president of the Centre for Economic Policy Research, a European economic research body. He spoke with HedgeWorld earlier this week. "They also have among the best capital adequacy ratios in Europe," he added.

Countrywide Reports $893 Million Loss From Bad Loans (Update4) (Bloomberg)
David Mildenberg and Ari Levy
April 29

Countrywide Financial Corp., the mortgage lender that Bank of America Corp. plans to buy, reported a third straight quarterly loss as late payments and home foreclosures escalated.

The net loss was $893 million, or $1.60 a share, compared with a profit of $434 million, or 72 cents, in the year-earlier period, the Calabasas, California-based company said in a statement today.

UPDATE: Archer Daniels Defends Ethanol In Wake Of Rising Food Costs(CNN Money)
April 29, 2008

Archer Daniels Midland Corp. on Tuesday countered criticism that biofuel production is driving up food prices and defended the industry as the answer to meeting the world's rising energy demand. costs are being driven primarily by higher energy costs, said Archer Daniels (ADM) Chairman and Chief Executive Patricia Woertz, which is the result of a tight energy supply -- not increased biofuel production.

"And I actually find it sad, and maybe even a little ironic, that these misguided attacks on biofuels is directed at the one alternative we actually have today for...increasing the fuel supply," she said...

Credit Derivatives and the Great Avalanche: Hannah Montana and The Peloponnesian Wars(Elliot Wave)
Robert Folsom
28 Apr 2008

What will it take to push the "Hannah Montana's Nekkid Back" story out of the headlines?...

...The thing is, the conditions that led to Bear Stearns' demise (and to the scale of foreclosures) are growing worse, whether the media draws attention to the numbers or not.

And even a cursory glance at the debt market math suggests that yonder Great Avalanche hath barely begun to move. For all the problems created by the subprime debacle, there remains at least one large corner of the debt market that is still in the midst of over-the-top growth and extreme psychology -- namely in credit derivatives contracts. This market amounted to $62 trillion (with a "T") at the end of 2007, up 44% from the previous year and greater by a multiple of 10 over 2003.

Chewing gum versus credit derivatives(FT Business Blog)
John Gapper

If Warren Buffett does team up with Mars to buy Wrigley for more than $22bn, it will be not only a quintessential Buffett deal but a reminder of where value lies in a downturn.

...He [Buffett] has more faith in chewing gum than credit derivatives.

A little good news for Orange County, California who still hold $150 million of Sigma notes. They recently did mature $50 million.

Money Funds Out of the Woods as Threat From Final SIV Sigma Fades(Crane Data)
28 APR2008

It's now almost a certainty that no money market mutual funds will "break the buck" or drop below $1.00 a share due to the past 9 months of subprime and SIV liquidity crisis. While at least 20 advisors have been, or likely will be, forced to take protective action to support the handful of securities that are in or threaten default, the threat from structured investment vehicle, or SIV, debt is fast receding and approaching resolution. Sigma, the last and largest of SIVs, continues to make payments and remain robust, and it sounds as if senior debtholders of Cheyne, Axon, and Orion will soon receive most, if not all, of their remaining outstanding debt.

This article on peak oil is pretty good. Take a look at it.

Are We Nearing The Peak Of Fossil Fuel Energy? Has Twilight In The Desert Begun?

What is left out is the real possibility of producing liquid fuels from coal- something we have an abundance of in the US. The only thing stopping it is the so called green house gas controversy. First, it may be possible to produce the coal fuels and capture the CO2. Secondly, the whole global warmming issue may well turn out to be incorrect. In either case, coal fuels are quite possible, especially with oil > $100/barrel. Coal fuel producers talk about $45/barrel as potential costs (could go up with higher petroleum prices). Coal and Liquid Fuels (2005)

Loan Derivatives Index Soars as Banks Find Takers for LBO Debt (Bloomberg)
Shannon D. Harrington and Pierre Paulden
April 25

A gauge of investor confidence in the U.S. leveraged-loan market is headed for its biggest monthly increase since being created last year as banks find ways to sell loans they have been stuck with the past 10 months.

The LCDX index is rallying as Citigroup Inc., Deutsche Bank AG and the rest of Wall Street whittle down their leveraged-loan liabilities to about $91 billion from a peak of $237 billion in August, according to Bank of America Corp. strategists led by Jeffrey Rosenberg in New York.

Fed likely to cut U.S. rates, could signal pause(Reuters)
Ros Krasny
Apr 27, 2008

The U.S. Federal Reserve is expected to put an exclamation point on its string of interest- rate cuts with a small reduction this week and may signal that its rate-cutting cycle is done for now.

< ahref="" target="_blank">Wachovia part of probe into Latin drug money: report(Reuters)
Apr 26, 2008

Wachovia Corp (WB.N: Quote, Profile, Research) is being investigated by federal prosecutors as part of a probe into alleged laundering of drug proceeds by Mexican and Colombian money-transfer companies, The Wall Street Journal reported on Saturday.

Something fishy in subprime crisis(The Age)
David Hirst
April 25, 2008

...John Olagues, a leading authority on options trading, recounts deeds concerning Bear Stearns and the mystery surrounding its demise.

"On or prior to March 10," he wrote, "2008 requests were made to the options exchanges to open new April series of puts with exercise prices of 20, and 22.5, and a new March series with an exercise price of 25. Between March 11-14 inclusive, there were 20,000 contracts traded in the April 20s, 3700 contracts traded in the April 22.5s, and 8000 contracts traded in the April 25s. In the March 25s, there were 79,000 contracts traded between March 11-14, 2008.

"Since there was very little subsequent trading in the call with exercise prices of 20, 22.5 or 25, it is certain that the requests were made with the intentions of buying substantial amounts of the puts. The exchanges accommodated their requests, knowing that the intentions of the requesters were to buy puts. They indeed bought massive amounts of puts."

Looking at these activities, Olagues assumes insiders collapsed the stock and he recounts the machinations requiring oversight from those who should have been attentive.

Summarised, "if an insider had $100,000 and he knew that Morgan would buy Bear Stearns at 2, he could make five-10 times more on the $100,000 by buying the newly introduced March puts. This is so because the soon to expire far out-of-the-money puts were far cheaper than the July or October out-of-the-money puts. And that is why the illegal inside traders requested the exchanges to introduce the far out-of-the-moneys just days before the crash."

But, Olagues adds, this scenario has serious implications. "This means that the deal was already arranged on March 10 or before. That contradicts the scenario that is promoted by SEC chairman Cox, Fed boss Bernanke, Bear CEO Schwartz, Jamie Dimon of JPMorgan (who sits on the board of directors for the New York Federal Reserve Bank) and others that false rumours undermined the confidence in Bear Stearns, making the company crash, notwithstanding their adequate liquidity days before."

"Did," Olagues wonders, "the exchanges aid and abet the insider-trading scheme?"

The derivatives blow-out appears to be coming into public view.

Commercial Banks Heading for Huge Derivatives Losses- Credit Crisis Turning into Credit Armageddon (The Market Oracle)
Apr 21, 2008

...the Federal Reserve is reporting a big contraction in short-term debts.

...the Comptroller of the Currency (OCC) is reporting havoc in the derivatives market.

...In recent decades, derivatives have grown far beyond any semblance of reason. But in its latest report , the OCC reveals that in the fourth quarter of 2007 ...
For the first time in history, the notional value of derivatives held by U.S. commercial banks plunged dramatically — by $8 trillion ...
For the first time in history, U.S. banks suffered a massive overall loss on their derivatives — $9.97 billion, and, again ... These numbers do not yet reflect this year's disasters at Bear Sterns and other institutions.

...until the third quarter of last year, U.S. commercial banks had been making consistent profits from their derivatives quarter after quarter.

Their total revenue from these and related transactions...never dipped into negative territory ... rarely suffered a significant decline ... and was even making brand new highs through the first half of 2007.

Then, suddenly, in the fourth quarter of last year, we witnessed a landmark game-changing event: For the first time ever, U.S. commercial banks lost big money in derivatives in the aggregate...

Again, if this were part of a planned retreat by the banks to more prudent trading approaches, it would be a positive. But it's anything but!

Indeed, the OCC specifically states in its report that the sudden and unusual reduction in derivatives was due entirely to the turmoil in the credit markets.

...the International Monetary Fund (IMF) predicts that this crisis is barely ONE-THIRD over!

In its Global Financial Stability Report(see Executive Summary ), the IMF predicts that the total losses from the subprime and related credit crises could reach $945 billion, or more than triple the already-huge losses that have been announced so far.

The IMF further warns that ...

“There has been a collective failure to appreciate the extent of the leverage taken on by a wide range of institutions — including banks, monoline insurers, government-sponsored entities, and hedge funds — and the associated risks of a disorderly unwinding.” Now, both the OCC and the Fed reports confirm that this “disorderly unwinding” is already beginning.

“The transfer of risks off bank balance sheets was overestimated. As risks have materialized, this has placed enormous pressures back on the balance sheets of banks.” Now, the OCC report confirms that “the transfer of risk” (with credit swaps) has often failed.

“Notwithstanding unprecedented intervention by major central banks, financial markets remain under considerable strain, now compounded by a more worrisome macroeconomic environment, weakly capitalized institutions, and broad-based deleveraging.” ...Looking ahead, the IMF also warns about...

“Deep-seated balance-sheet fragilities and weak capital bases, which mean the effects [of the crisis] are likely to be broader, deeper and more protracted.” “A serious funding and confidence crisis that threatens to continue for a significant period.”

Buy Side Seeks Independent Valuation Providers for OTC Derivatives After Credit Crisis(Wall Street and Tech)
Ivy Schmerken
April 22, 2008

With the credit markets in turmoil over OTC derivatives valuations, buy-side firms are tapping vendors to avoid the conflict of interest inherent in broker-determined prices.

Citi, DSP arms take sub-prime knock (The Economic Times)
24April 2008 (India time)

MUMBAI: The effect of the subprime on Wall Street firms is also now being felt on its Indian operations. Two companies belonging to DSP Merrill Lynch have been downgraded while the rating outlook on Citigroup’s non-banking finance companies has been lowered to negative from stable.

This is the first instance of the sub-prime crisis impacting local operations of global firms. Both these firms, globally, have been among the worst hit as a result of this crisis. Since the prices of the debt paper issued by the entities will fall following the move, mutual funds with exposure to such paper will show lower net asset values.

...Other major firms, which are still to be rated, include GE Capital Services, GE Money Financial Services and GE Money Housing Finance. The long-term ratings on DSP Merrill Lynch and DSP Merrill Lynch Capital have been downgraded to ‘AA ’ from ‘AAA’, and the outlook for these ratings has been revised to negative from stable.

It has also revised outlooks on long-term ratings of four Citigroup companies (Citicorp Capital Markets, Citicorp Finance India, Citicorp Maruti Finance, and CitiFinancial Consumer Finance India) to negative from stable.

Ambac Assurance credit default swaps hit record high(Reutghers)
Apr 23, 2008

The cost to insure the securities guaranteed by Ambac Financial Group's (ABK.N: Quote, Profile, Research) top rated bond insurance arm surged to a record on Wednesday after the company reported a wider-than-expected first-quarter loss.

Ambac, which struggled to raise capital earlier this year, posted a surprisingly wide loss after setting aside $1 billion to cover future payouts on mortgage bonds.

Credit default swaps on Ambac Assurance Corp started trading for the first time at an upfront cost of 11 percent, in addition to annual premiums of 500 basis points, according to data provider CMA DataVision.

The jerry-built derivative structure will have to go(Financial Times)
John Dizard
April 22 2008

Credit market people and their regulators have been so preoccupied with defusing the more visible unexploded bombs in Wall Street that the more serious, long-term structural problems have been put off for later attention. Much later attention, in the case of those structural problems that could cause career or biography damage for senior policy people.

The epicentre of all the problems is the financial system's dependence on over-the-counter derivative contracts, which made possible all the other bubbles that have been revealed and will be revealed soon. I believe that it will be necessary to dismantle carefully most of this jerry-built structure, and replace the bank-to-bank-to-dealer-to-dealer contract structure with central clearing houses for risk instruments.

Given that these are international markets of unimaginable size, this will take multilateral official co-operation to put into effect. The US government's involvement in the Bear Stearns work-out, far from marking the end of the credit crisis, shows how any resolution to the larger systemic issues will need to have official backing.

Regulators Back Away From Changes to Commodity Hedging(NY Times)
April 23, 2008

Faced with widespread complaints from the agricultural industry, federal regulators are backing away from two proposals that would have allowed institutional investors to expand their stake in the turbulent commodity futures markets.

The Food Chain: Price Volatility Adds to Worry on U.S. Farms (April 22, 2008) With the explosive increase in crop prices, those markets are attracting a flood of capital from hedge funds, pension funds and commodity index funds. Those index funds have become a popular way for individual investors to speculate on the soaring prices in food, fibers and fuel markets.

The proposed rule changes would have raised the size of the market stake that financial speculators could hold, and exempted commodity index funds from those higher limits.

But Walter Lukken, acting chairman of the Commodity Futures Trading Commission, announced at a packed hearing on Tuesday that those ideas are being put on hold.

“Given current market conditions and the uncertainty surrounding additional speculative money in these markets, I will be very cautious about moving forward with such initiatives at this time,” Mr. Lukken said.

Fed auctions another $50 billion to banks(AP)
April 22, 2008

Battling to relieve stressed credit markets, the Federal Reserve has provided a total of $360 billion in short-term loans to squeezed banks since December to help them overcome credit problems.

The central bank on Tuesday announced the results of its most recent auction — the 10th since the program started in December, where commercial banks bid to get a slice of another $50 billion in the short-term loans.

Load Up the Pantry(WSJ)
pril 21

I don't want to alarm anybody, but maybe it's time for Americans to start stockpiling food.

No, this is not a drill.

You've seen the TV footage of food riots in parts of the developing world. Yes, they're a long way away from the U.S. But most foodstuffs operate in a global market. When the cost of wheat soars in Asia, it will do the same here.

Reality: Food prices are already rising here much faster than the returns you are likely to get from keeping your money in a bank or money-market fund. And there are very good reasons to believe prices on the shelves are about to start rising a lot faster.

I guess this is an improvement. Last quarter it was 95%!

Bank of America Net Income Falls 77% on Writedowns (Update4) (Bloomberg)
David Mildenberg
April 21

Bank of America Corp., the second- largest U.S. bank, said profit dropped for a third straight quarter as the company set aside $6.01 billion for bad loans.

First-quarter net income declined 77 percent to $1.21 billion from $5.26 billion a year earlier, the Charlotte, North Carolina-based bank said today in a statement. Results included $1.31 billion in trading losses and $2.72 billion in costs for uncollectible loans. Earnings per share shrank to 23 cents from $1.16, falling short of analysts' estimates and sending the bank's stock down as much as 2.6 percent in New York trading.

BoE unveils 50-bln-pound banking asset swap scheme UPDATE(Forbes)

The Bank of England today confirmed it will allow UK banks to swap mortgage-backed assets for secure government bonds in an attempt to jump-start debt markets paralysed since last summer by the global credit crunch.

Unveiling details of the plan, the BoE said the initial size of the scheme is likely to be around 50 billion pounds, although central bank governor Mervyn King later added that there would be 'no arbitrary limit' to the amount it was prepared to swap.

Business economists gloom on economy rising(Reuters)
Apr 21, 2008

Business economists are turning pessimistic about the U.S. outlook and increasingly fear economy will slip into a recession in coming months.

The National Association for Business Economics said on Monday that the 109 members who responded to its quarterly survey between March 24 and April 8 were "notably downbeat" about their first-quarter experience and about near-term prospects.

"For the first time in five years, reports of falling profit margins outnumbered reports of rising margins in the first quarter of 2008, while demand at respondents' firms grew more weakly than at any time since the recession of 2001," said Ken Simonson, chief economist for Associated General Contractors of America.

About 30 percent of respondents expected gross domestic product, the broadest measure of national economic activity, to decline in the first half of 2008 and most others thought growth will be below an annual rate of 1 percent.

The Contrarian, Looking Beyond the Bailout
David Dreman

The market right now is as tricky a one as we've seen since the implosion of the high-tech bubble eight years ago. Federal Reserve Chairman Ben S. Bernanke has a problem on his hands: a very wide-ranging panic surrounding financial institutions. This is a problem that mere cuts in interest rates cannot cure.

The panic is writ large in the prices of financial stocks, whether of brokerage firms, banks or steeply leveraged real estate investment trusts. The exceptionally low interest rates of the early and mid-2000s created enormous temptations to buy assets with borrowed funds. Some of the assets were subprime and Alt-A (almost prime) mortgages, now worth less, often considerably less, than their par value. Other purchases were of derivatives constructed atop these mortgages.

Now there's a desperate race to deleverage at almost any price. But buyers have grown scarce. One subprime index, the ABX-HE-BBB-- 06-2, was trading at 100 in July 2006 and hit a low of 10 this March. Bear Stearns closed at $57 on Mar. 13 and is now in the process of being sold to JPMorgan Chase for $10, and that's with $29 billion of Bear's mortgage portfolio being guaranteed by the Fed. We are in a liquidity crisis the magnitude of which we haven't seen since before World War II.

Bank of America May Miss 20% Profit-Gain Forecast, Analysts Say (Bloomberg)
David Mildenberg
April 20

Bank of America Corp. Chief Executive Officer Kenneth Lewis will fail to fulfill his pledge to increase profit by 20 percent this year because of rising losses on home-equity loans and credit cards, analysts say.

Nine of 14 analysts predict unchanged or lower profit this year at the second-largest U.S. bank, according to Bloomberg data. The average estimate has declined 28 percent to $3.16 a share since Jan. 22, when Lewis said he expected earnings ``to be well above $4'' this year.

Many Investors Seem To Think the Worst Is Over(Seeking alpha)
Grace Cheng
April 19, 2008

This week the markets ended on a positive note after generally positive earnings data from major companies like Intel (INTC), JP Morgan (JPM), Caterpillar (CAT), Google (GOOG) and Coca Cola (KO). The Dow rose 4.3% for the week and is down around 3.1% for the year; the S&P 500 is up 4.3% for the week and down around 5.3% for the year, and the Nasdaq is up 4.9% for the week but still off 9.4% for the year.

Surprisingly, financials outperformed the overall market for the week. Citigroup (C), AIG (AIG) and JP Morgan (JPM) were up around 10% this week. Even more surprisingly, this was due in large part to those terrible numbers from Citi which announced $16 billion in writedowns, $5.1 billion in losses and around 9,000 job cuts. With such huge writedowns and the bank trying to “come clean” on its losses, investors hope that the worst may soon be over. On Thursday, after Merrill Lynch (MER) announced $6.5 billion in writedowns and that it would axe around 3,000 employees, investors showed the same optimism and the stock rose an astonishing 7%.

All of this despite a worsening outlook with Citi expecting a 20% drop in home prices, of which 9% has already occurred, and Citi’s CFO Mr. Crittenden saying that “if historical trends were to repeat, there is a potential for higher loss in our cards portfolio into 2009.”

Here is an optimistic article. Mr. Droke does not mention the possibility that the Libor rate is artificially low, as the WSJ did (see article below from April 16th)

Forget the Headlines, Listen to the Bond Market!(Goldseek)
Clif Droke, Gold Strategies Review
16 April 2008

Let’s turn our attention to something that isn’t often discussed, namely bonds.

I know what some of you are saying already: “But bonds are boring!” Yes, they may well be boring in most instances. But this isn’t one of those times. Actually, the message of the bond market is one of the more exciting and optimistic messages being sent anywhere in the financial markets right now and it behooves us to pay close attention to what bonds are saying.

The collective message of the bond market is one that is being almost entirely ignored by the financial press. While millions of investors are caught up in the past, cowering under their beds waiting for the next financial bomb to drop, the bond market is screaming to all that will listen, “The worst is over – the economy will improve!”...

...The combined message of this action is that not only is the liquidity crisis a thing of the past, but the widespread fears of further economic deterioration are without foundation. The bond market is saying, “Look forward, not backward. Better times are coming!”

Economy weakens further in sales, housing, credit, and jobs(AP)
April 16
Jeannine Aversa

The country's economic health deteriorated further in the early spring as shoppers buckled under the strains of the housing and credit debacles and a weaker employment climate.

Manufacturers and others businesses, meanwhile, were walloped by zooming prices for energy and other raw materials. However, their ability to jack up retail prices to customers was mixed, with some companies restrained by competitive pressures, according to the Federal Reserve's new snapshot of nationwide economic conditions released Wednesday.

"Economic conditions have weakened," the Fed report stated.

Bear Stearns Reaped a Profit Before JPMorgan Takeover (Update1) (Bloomberg)
Josh Fineman
April 14

Bear Stearns Cos., the investment bank being acquired by JPMorgan Chase & Co., eked out a profit in the three months leading up to its demise in March.

First-quarter net income fell 79 percent to $115 million, or 86 cents a share, from $554 million, or $3.82, in the year- earlier quarter, Bear Stearns said today in a filing with the U.S. Securities and Exchange Commission.

"Aftershock" or Shockwave? What Comes After the Next Bear Wave

(Seeking Alpha)
Etoile Brilliant
April 15, 2008

Now that we have seen that the Fed will act as the lender of last resort for all and sundry (regardless, in the case of Bear Stearns (BSC), whether they have paid their dues or not), pundits have been scrambling for their dictionary looking for words that describe the next bear wave driven by the consumer downturn and the resulting loss of earnings. "Aftershock" seems to be the word de jour (for example, see the headline of Stephen Roach's article in yesterday's FT).

Let's not deal in semantics, but even Chambers Online defines aftershock as "a small earthquake that follows the main shock of a large earthquake... ." If commentators think that the follow-through will be small in comparison to the main shock, they've another thing coming. The word they should be reaching for is "shockwave," as in nuclear explosion...

BlackRock Profit Misses Estimates as Hedge Funds Fall (Update7) (Bloomberg)
Sree Vidya Bhaktavatsalam
April 16

BlackRock Inc., the biggest publicly traded asset manager in the U.S., reported first-quarter earnings that fell short of analysts' estimates because of declines in hedge-fund and real-estate investments.

Net income rose 24 percent to $241.7 million, or $1.82 a share, from $195.4 million, or $1.48, a year earlier, the New York-based company said today in a statement. Excluding some items, profit was $1.90 a share, missing the $2 average estimate of nine analysts surveyed by Bloomberg.

BlackRock, run by Chief Executive Officer Laurence Fink, has increased profits for six straight quarters, though it hasn't been immune to falling global markets. The company was forced to mark down the value of investments made alongside clients in its own hedge funds and real-estate pools...

...BlackRock was picked March 24 by the Federal Reserve to oversee $30 billion of Bear Stearns Cos.' investments after the fifth-largest U.S. securities firm agreed to be acquired by JPMorgan Chase & Co. BlackRock was called in last year to temporarily manage a Florida state money fund, after investors pulled money because of concerns about possible losses on subprime-related securities.

Bankers Cast Doubt On Key Rate Amid Crisis(WSJ)
April 16, 2008

One of the most important barometers of the world's financial health could be sending false signals.

In a development that has implications for borrowers everywhere, from Russian oil producers to homeowners in Detroit, bankers and traders are expressing concerns that the London inter-bank offered rate, known as Libor, is becoming unreliable.

Libor plays a crucial role in the global financial system. Calculated every morning in London from information supplied by banks all over the world, it's a measure of the average interest rate at which banks make short-term loans to one another. Libor provides a key indicator of their health, rising when banks are in trouble. Its influence extends far beyond banking: The interest rates on trillions of dollars in corporate debt, home mortgages and financial contracts reset according to Libor.

In recent months, the financial crisis sparked by subprime-mortgage problems has jolted banks and sent Libor sharply upward. The growing suspicions about Libor's veracity suggest that banks' troubles could be worse than they're willing to admit.

The concern: Some banks don't want to report the high rates they're paying for short-term loans because they don't want to tip off the market that they're desperate for cash. The Libor system depends on banks to tell the truth about their borrowing rates. Fibbing by banks could mean that millions of borrowers around the world are paying artificially low rates on their loans. That's good for borrowers, but could be very bad for the banks and other financial institutions that lend to them.

Activity robust in credit derivatives(Financial Times)
Gillian Tett and Paul J Davies
April 15 2008

Activity in credit derivatives has continued to explode in spite of investors’ and regulators’ growing concern that recent events such as the Bear Stearns’ implosion have highlighted potential weaknesses in the infrastructure of this market.

The total volume of outstanding credit derivatives contracts stood at $62,200bn at the end of last year, up from $34,500bn a year earlier, the International Swaps and Derivatives Association will announce at its annual conference in Vienna today. This is 10 times the level of four years ago.

Credit Default Swaps and Bank Leverage(Naked Capitalism)
16 Apr 2008

The Financial Times reports that that $45 trillion figure that most of us have been using for the size of the credit default swaps market is woefully dated. The International Swaps and Derivatives Association will announce today that outstanding contracts now total $62 trillion, up from $34.5 trillion a year ago.

Pleae visit, read the proclamation, and click on the link to Congressman Ron Paul's Bill HR 2755

Bailing Out Banks(Hawaii Reporter)
Congressman Ron Paul, R-Texas

There has been a lot of talk in the news recently about the Federal Reserve and the actions it has taken over the past few months. Many media pundits have been bending over backwards to praise the Fed for supposedly restoring stability to the market. This interpretation of the Fed's actions couldn't be further from the truth.

The current market crisis began because of Federal Reserve monetary policy during the early 2000s in which the Fed lowered the interest rate to a below-market rate. The artificially low rates led to overinvestment in housing and other malinvestments.

When the first indications of market trouble began back in August of 2007, instead of holding back and allowing bad decision-makers to suffer the consequences of their actions, the Federal Reserve took aggressive, inflationary action to ensure that large Wall Street firms would not lose money.

It began by lowering the discount rates, the rates of interest charged to banks who borrow directly from the Fed, and lengthening the terms of such loans. This eliminated much of the stigma from discount window borrowing and enabled troubled banks to come to the Fed directly for funding, pay only a slightly higher interest rate but also secure these loans for a period longer than just overnight.

After the massive increase in discount window lending proved to be ineffective, the Fed became more and more creative with its funding arrangements. It has since created the Term Auction Facility (TAF), the Primary Dealer Credit Facility (PDCF), and the Term Securities Lending Facility (TSLF). The upshot of all of these new programs is that through auctions of securities or through deposits of collateral, the Fed is pushing hundreds of billions of dollars of funding into the financial system in a misguided attempt to shore up the stability of the system.

The PDCF in particular is a departure from the established pattern of Fed intervention because it targets the primary dealers, the largest investment banks who purchase government securities directly from the New York Fed. These banks have never before been allowed to borrow from the Fed, but thanks to the Fed Board of Governors, these investment banks can now receive loans from the Fed in exchange for securities which will in all likelihood soon lose much of their value.

The net effect of all this new funding has been to pump hundreds of billions of dollars into the financial system and bail out banks whose poor decision making should have caused them to go out of business. Instead of being forced to learn their lesson, these poor-performing banks are being rewarded for their financial mismanagement, and the ultimate cost of this bailout will fall on the American taxpayers. Already this new money flowing into the system is spurring talk of the next speculative bubble, possibly this time in commodities.

Worst of all, the Treasury Department has recently proposed that the Federal Reserve, which was responsible for the housing bubble and subprime crisis in the first place, be rewarded for all its intervention by being turned into a super-regulator. The Treasury foresees the Fed as the guarantor of market stability, with oversight over any financial institution that could pose a threat to the financial system. Rewarding poor performing financial institutions is bad enough, but rewarding the institution that enabled the current economic crisis is unconscionable.

Blood On The Floor At WaMu(Forbes)
Miriam Marcus

Washington Mutual investors have been bracing themselves for big losses and a change in management. Tuesday afternoon, they got what they were waiting for.

After the close, Washington Mutual reported a first-quarter net loss of $1.1 billion, or $1.40 per diluted share, as it doubled its bad loan provisions to $3.5 billion.

Crude Oil Trades Above $113 as Investors Turn to Commodities(Bloomberg)
Christian Schmollinger
April 16

Crude oil was little changed above $113 a barrel in New York after touching a record yesterday as investors purchased commodities because their returns have outpaced stocks, bonds and other financial instruments.

Oil climbed to $114.08 a barrel yesterday, the highest since futures began trading in 1983. Rising global demand for raw materials and a weakening U.S. dollar have led to record prices this year for commodities...

``This move we've seen for the past week is an investment- flow move,'' said Jonathan Kornafel, a director for Asia at Hudson Capital Energy in Singapore. ``What the East is doing, these developing nations, completely eclipses any slight demand drops in the West.''

Groups suggest that hedge funds need greater transparency: One public official describes the recommendations of the two panels as a 'virtual farce.' (LA Times)
April 16, 2008

Hedge funds should increase their transparency and improve their risk management, two advisory groups assembled by the Bush administration said Tuesday.

Treasury Secretary Henry M. Paulson Jr. said the voluntary guidelines proposed by the panels would send "a strong message that heightened vigilance is necessary and appropriate and that all stakeholders have an important role to play."

But Richard Blumenthal, attorney general of Connecticut, where many hedge funds are based, called the recommendations a "virtual farce" that would do little to halt abuses. He called for government regulation of the industry, which manages about $2 trillion of assets in an estimated 8,000 funds.

"Hedge funds have become too big and too important to remain outside the rules," Blumenthal said in a statement.

Merrill Lynch to write down further $6-8 bln: report(Reuters)
Tue Apr 15, 2008

Merrill Lynch (MER.N: Quote, Profile, Research) will announce a further $6 billion to $8 billion of asset writedowns in its quarterly results this week, the Wall Street Journal reported on Wednesday, citing a person familiar with the matter.

The Journal said in its online edition that the writedowns would take the total since October to more than $30 billion and lead to a third straight quarterly net loss at Merrill, the longest such losing streak in its 94-year history.

U.S. Foreclosures Jump 57% as Homeowners Walk Away (Update4) (Bloomberg)
Dan Levy
April 15

U.S. foreclosure filings jumped 57 percent and bank repossessions more than doubled in March from a year earlier as adjustable mortgages increased and more owners lost their homes to lenders.

More than 234,000 properties were in some stage of foreclosure, or one in every 538 U.S. households, Irvine, California-based RealtyTrac Inc., a seller of default data, said today in a statement. Nevada, California and Florida had the highest foreclosure rates. Filings rose 5 percent from February.

About $460 billion of adjustable-rate loans are scheduled to reset this year, according to New York-based analysts at Citigroup Inc. Auction notices rose 32 percent from a year ago, a sign that more defaulting homeowners are ``simply walking away and deeding their properties back to the foreclosing lender'' rather than letting the home be auctioned, RealtyTrac Chief Executive Officer James Saccacio said in the statement.

``We're not near the bottom of this at all,'' said Kenneth Rosen, chairman of Rosen Real Estate Securities LLC, a hedge fund in Berkeley, California and chairman of the Fisher Center for Real Estate at the University of California at Berkeley. ``The foreclosure process will accelerate throughout the year.''

World leaders call for action on food prices(Financial Times)
Krishna Guha, Chris Giles and Chris Bryant
April 14

World leaders yesterday called for urgent action to tackle soaring global food prices, while promising to quickly implement measures to strengthen the international financial system and prevent a repeat of the credit crisis.

Retailing Chains Caught in a Wave of Bankruptcies (NY Times)
April 15, 2008

The consumer spending slump and tightening credit markets are unleashing a widening wave of bankruptcies in American retailing, prompting thousands of store closings that are expected to remake suburban malls and downtown shopping districts across the country.

Since last fall, eight mostly midsize chains — as diverse as the furniture store Levitz and the electronics seller Sharper Image — have filed for bankruptcy protection as they staggered under mounting debt and declining sales.

GE Stuns Investors With Profit Miss, Cut in Earnings Forecast (Bloomberg)
Rachel Layne
April 12

General Electric Co. stunned investors after Chief Executive Officer Jeffrey Immelt unexpectedly cut the annual profit forecast yesterday and quarterly earnings fell for the first time in five years.

GE's market value plunged by $47 billion yesterday after Immelt said 2008 earnings will fall short of his $2.42 per-share forecast and first-quarter profit dropped at four of the six biggest units. The 13 percent stock decline was the largest for GE since the stock market crash of 1987.

Immelt, who had repeated the 2008 forecast on March 13 and called it ``in the bag'' in December, blamed the lower earnings on the collapse in credit markets. Investors grilled Immelt about GE's ability to shield itself from further fallout, and analysts at Goldman Sachs Group Inc., Credit Suisse Group, Deutsche Bank AG and Citigroup Inc. cut their ratings on the shares.

Britain could be hardest hit by financial crisis, says IMF(Telegraph)
Edmund Conway in Washington and Robert Winnett

Britain could be hardest hit by the global credit crisis as banks in this country have racked up bigger losses than anywhere else in the world, a new International Monetary Fund analysis shows.

The IMF expects British banks to lose more than £20billion - equivalent to three per cent of GDP

American banks, which had been thought to be bearing the brunt of the credit crisis, will lose £72 billion - equivalent to only 1.4 per cent of US GDP. By contrast Japan's losses are £5 billion and China's £1.5 billion.

European countries using the single currency have lost £61.5 billion - 1.7 per cent of GDP.

Fed finds less demand from banks for its funds(Financial Times)
Krishna Guha in Washington
April 11

Demand for Federal Reserve liquidity support from investment banks and other primary dealers has fallen in recent days, the US central bank revealed yesterday, indicating that financial pressures on these institutions are easing.

Direct borrowing from its new primary dealer credit facility fell $8bn from $34bn (£17bn) to $26bn in the week to April 9, the Fed said. Meanwhile, the central bank also said that its latest swap auction of Treasury securities was undersubscribed.

The Fed offered to swap up to $50bn of Treasuries in return for securities including top-rated private label mortgage-backed securities for a period of 28 days under its new securities lending facility. But investment banks and other primary dealers submitted bids for only $34bn of Treasuries at the minimum fee of 0.25 per cent.

Mortgage Insurers (Quietly) Downgraded: CDS Spreads Scream Trouble(Financial Ninja)
Wednesday, April 9, 2008

More important downgrades done ever so quietly…

S&P downgraded four mortgage insurers, MGIC Investment, Old Republic, PMI Group, and Radian Group and nobody really noticed. All those hedges the hedgies, major investment houses and banks put on through these firms are increasingly likely to be WORTHLESS. Expect more massive write downs this quarter as that reality starts to sink in.

I’ve put up the Credit Default Swap (CDS) spread charts up. To keep it simple, high spreads are bad. The higher the spread, the greater the cost of buying insurance against default. Big, sudden spikes represent the rapid deterioration of perceived credit quality. Any spreads near 1000 start to get problematic. When spreads are high enough, sellers of insurance will demand the spread plus an up front lump sum. This lump sum is not represented on these charts. Consequently, these charts UNDERSTATE current credit risk.

Notice how things have improved somewhat? Well, don’t get too giddy with Bullish optimism. The spreads have not come back nearly enough for that.

Notice how the credit stress isn’t just concentrated among the Guarantee companies, but spread nicely among everybody from the Banks, Brokers, Builders, and REITS? That’s why it’s called a GLOBAL credit bubble and a GLOBAL credit crunch.

Citi may write down another $17 billion for Q1, research firm says(Financial Week)
Other big U.S. banks will report sizable write-downs as well, predicts CreditSights
By Marine Cole
April 8, 2008

Banks’ first-quarter earnings will deliver more bad news, reflecting higher loan loss provisions and lower revenue from fees.

...CreditSights estimated that Citigroup will likely report the biggest write-downs for Q1. The write-downs could range from $15.2 billion to $16.8 billion, CreditSights reckons, depending on whether valuation reserves related to financial guarantors are included in the tally. The bulk of write-downs would still be in collateralized debt obligations made of asset-backed securities.CreditSights estimates that write-downs at Bank of America could range from $8.8 billion to $9.9 billion. At J.P. Morgan, the hit could be around $7.5 billion.

Hardly cheery stuff, but the news is not all bad. UBS’s $19 billion write- down for the first quarter brought the Swiss bank’s tally to about $37 billion. But the announcement of the first-quarter write-down also sent the bank’s share price up 12%.

Similarly, CreditSights believes Q1 write-downs for U.S. banks may be met by a positive, “end-is-near-type reception.”

Buyout CLOs May Be Used for Fed Loans, Analysts Say (Update2)
Jody Shenn and Pierre Paulden

April 9 (Bloomberg) -- Wall Street firms may be bundling high-yield, high-risk corporate loans into securities to use as collateral to borrow from the U.S. government, according to a report by Morgan Stanley analysts.

Securities firms can borrow against collateralized loan obligations at the Federal Reserve's Primary Dealer Credit Facility, the analysts said. The Fed set up the facility last month, its first extension of credit to non-banks since the Great Depression.

The creation last month of CLOs comprised of loans for private-equity buyouts or other leveraged loans to larger companies totaling $11.4 billion ended ``the deep freeze'' in the market, and many arose from unusual motives, today's report said. ``At least one'' recent CLO was probably done to take advantage of the Fed's new facility, it said.

``It's not cheap to finance loans today in the market,'' Vishwanath Tirupattur, a Morgan Stanley analyst in New York, said in a telephone interview.

Lehman Brothers Holdings Inc., the fourth-largest U.S. securities firm, last month created the $2.8 billion Freedom CLO, the largest this year, out of loans that couldn't be readily sold to investors, such as for buyouts of payment processor First Data Corp. and power producer TXU Corp. JPMorgan Chase & Co., Deutsche Bank AG and Barclays Plc also underwrote CLOs in March, according to data complied by Bloomberg.

Citigroup: Hoping for a Thaw(Seeking Alpha)
April 09, 2008

A deal was reported this morning that will take $12 billion of leveraged loans off of the balance sheet of Citigroup (C) and move them to private equity investors. Citi had originated the loans in order to facilitate the leveraged buyout boom, with the intention of selling the loans to investors shortly after, but when the credit crunch took hold last summer these assets became unsellable and remained with Citi.

Citi was at the forefront of lending for the leveraged buyouts boom, and thus had a lot of LBO debt. Citigroup has been systematically trying to lessen their exposure to the risky assets, and as of the beginning of the year Citi had $43 billion of exposure.

The loans were very illiquid and the value of the loans themselves continued to fall. They reached a low in February of about 86 cents on the dollar, and still that was not cheap enough to generate substantial interest. Citi had previously written these loans to 70 cents on the dollar for their own books. The price of these loans have rebounded some, as the most liquid of the loans were sold for an average price of 90.47 cents on the dollar.

Citigroup is trying to get the deal finalized before they report quarterly results on April 18.

Pioneers of structured investments fight for survival of flagship fund(IHT)

Neil Unmack and Sree Vidya Bhaktavatsalam
April 8, 2008

Gordian Knot Ltd. founders Stephen Partridge-Hicks and Nicholas Sossidis, who started the $400 billion market for structured investment vehicles that crashed last year, are fighting for the survival of their flagship fund.

Gordian's Sigma Finance Corp. must refinance $20 billion of debt by September in a market where even the biggest banks are struggling to borrow, according to Moody's Investors Service. Moody's cut the $40 billion fund's Aaa rating by five levels to A2 last week because of concern about Sigma's ability to weather the credit crunch. Standard & Poor's downgraded Sigma on Monday to AA- from AAA. The inability to replace the debt may cause Sigma to dissolve.

A Global House of Cards: Interview with Josh Rosner(IRA)
April 7, 2008

...The IRA: So what is the Rosner view of the world? The party line in Washington and on Wall Street is that everything's fine and we'll return to normal growth in the second half of 2008.

Rosner: I see troubles radiating outward. What I mean specifically is that there is no functional change in the problems in the mortgage markets. What is really making us feel OK, at the moment, is the fact that banks are destroying shareholder capital and that they are raising new money. That's all well and good, but we still have not changed the underlying reality, namely that most of the losses taken so far are due to mark to market issues. We have not yet really seen the bulk of the underlying credit losses...

Has the moment come to replace the US dollar? (Daily Star)
By Kenneth Rogoff
April 07, 2008

As the world's financial leaders meet in Washington this month at the World BankCorporate-Governance-Ira-Millstein -International Monetary Fund annual meeting, perhaps they should be glad there is no clear alternative to the dollar as the global currency standard. If the euro were fully ready for primetime, we might well be seeing its dollar exchange rate jump to over 2.00, and not just to 1.65 or 1.70, as it seems poised to do anyway. You can't treat your customers as badly as the United States has done lately if they can go elsewhere.

Federal Reserve staff move into offices of investment banks to monitor activities(Times Online)
Tom Bawden and Dearbail Jordan
April 4, 2008

The US Federal Reserve has sent staff into some of Wall Street’s biggest firms and its New York branch is gathering evidence on key traders’ activities as America’s central bank raises its scrutiny of risk to an unprecedented level.

Fed staff have set up shop in Goldman Sachs, Morgan Stanley, Lehman Brothers, Merrill Lynch, and Bear Stearns to monitor their financial condition just days after Henry Paulson, the US Treasury Secretary, proposed that the Fed become the financial industry’s “risk czar”.

This is the first time in more than a decade that the Fed has put staff in securities firms and is a response, in part, to its decision to extend to investment banks the “discount window” of cheap loans traditionally offered only to the commercial banks. The Fed argues that if it is to act as lender of last resort to the securities firms, it should keep a closer eye on their activities.

The move comes as the central bank’s New York branch separately compiles a list of names and numbers of key traders in specific, esoteric securities such as auction rate preferred securities. These obscure instruments can be traded only at auctions and demand for them has virtually evaporated in recent weeks.

A Letter From Senator Grassley to the SEC re: Bear Stearns

April 2, 2008

The Honorable David Kotz
Inspector General
US Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549-2736

Dear Inspector General Kotz:

According to regulatory filings and a December 2007 Wall Street Journal article, the SEC Enforcement Division declined to bring a case against Bear-Stearns for improperly valuing mortgage-related investments. Given the later collapse and federally backed bail-out of Bear-Stearns, Congress needs to understand more about this case and why the SEC ultimately sought no enforcement action.

Moreover, I am particularly interested in this case in light of the SEC's failed investigation of Pequot Capital Management. As you know, in the final report of the Senate's inquiry into that matter, we found that senior SEC officials showed extraordinary deference to a particular witness because of his "prominence" as the head of Morgan Stanley.

Request for Investigation

In light my earlier investigation I need to know whether the same problems identified in the Pequot investigation were repeated in the Bear-Stearns case. Accordingly, I request that you conduct a thorough investigation into the facts and circumstances surrounding the decision to not pursue an enforcement action against Bear-Stearns. Please provide a final report on whether there was any improper action or misconduct relating to SEC investigation of Bear Stearns and its decision to close the investigation. The report should also describe and assess:

1. the nature, extent, and propriety of communications between Bear-Stearns executives or their representatives and senior SEC officials;

2. the decision-making process which led to the SEC's failure to bring an enforcement action following the drafting of a Wells notice;

3. the reasons for declining to proceed with an enforcement action; and

4. the degree to which more aggressive action by the Enforcement Division may have led to an earlier and more complete understanding of the issues that contributed to the collapse of Bear Stearns.

Request for Audit

In addition to this investigative request, I would also like your office to follow-up on previous audit work relevant to issues surrounding Bear Stearns. The Division of Trading and Markets (Division) is responsible for regulating the largest broker-dealers and the associated holding companies. Offices within the Division are staffed with accountants and economists who are responsible for reviewing the market and credit-risk exposures of the broker dealers. Their review includes assessing broker-dealers' quarterly financial filings, ensuring broker-dealers are meeting net-capital requirements and that other financial ratios, such as liquidity ratios, are adequate. There is a special emphasis in reviewing the five very large broker-dealers, including Bear Stearns, known as the Consolidated Supervised Entity (CSE) Program. The Division staff exercises additional oversight of these firms and examines their risk models.

I understand that the OIG conducted a prior audit of these responsibilities in 2002. Please provide an update of the previous findings, determine whether earlier recommendations were implemented, and analyze the current function of these offices. The review should include a description and assessment of their missions, how the programs are run, their policies and procedures, the adequacy of any reviews conducted regarding Bear Stearns, and recommendations for improvements in the process.

Charles E. Grassley
Ranking Member

Mortgage securities back Fed loan to Bear Stearns(WSJ)
02 Apr 2008

The securities backing a $29bn (€18.6bn) Federal Reserve loan to Bear Stearns consist primarily of "mortgage-backed securities and related hedge investments," the US Treasury Department said.

The disclosure, in a letter to the Senate Finance Committee staff, is the first official comment on the securities behind the controversial loan, made March 16 to facilitate JP Morgan Chase's takeover of Bear.

...The Fed will lend $29bn to the entity, and JP Morgan will lend $1 billion. Under the deal's terms, the Fed will be repaid first from proceeds of the sale or maturity of the securities, and JP Morgan will be paid last, so it will bear the first $1bn of losses.

...Senate Finance Committee Chairman Max Baucus (D., Mont.) and ranking Republican Charles Grassley of Iowa are pressing for details of the deal.

The committee's inquiry is one of several on Capitol Hill. Fed chief Ben Bernanke is expected to be grilled on the Bear Stearns rescue Wednesday by the congressional Joint Economic Committee, which is led by Sen. Charles Schumer (D., N.Y.).

BIS: Some Instruments Face Extinction(Hedgeworld)
Christopher Faille
April 02, 2008

The structured credit market is likely to survive the ongoing market turmoil, according to a report on credit risk transfer from the Bank of International Settlements issued Tuesday [April 1]. But the market for asset-backed securities' collateralized debt obligations will shrink dramatically, and may disappear altogether. The report comes specifically from the "Joint Forum," a group under BIS auspices that has met three times a year since 1996. As its name implies, the JF is designed to bring together the insights of banking, the insurance industry and securities regulators.

The JF found that over the period 2005–2007, market discipline in the credit risk transfer market loosened as investors in ABS CDOs in particular failed to look through the complexity of the instruments to understand the underlying risks.

They found, unsurprisingly, that much has gone wrong lately as a result. "Originators saw little incentive, financial or reputational, to monitor the quality of subprime mortgages that could be sold so easily into the securitization market," the authors wrote.

Investors relied too much on the credit ratings from the ratings agencies, thus doing minimal in-house due diligence.

Furthermore, there were risk management failures at several large banks and securities firms that "took assets on their balance sheets or extended credit to off-balance sheet entities" without anticipating the drain on liquidity that would result.

Angry investors risk losing savings(
Victims' money 'commercial paper'
John Bermingham
April 03, 2008

After selling her home, Victoria paralegal Jill O'Hara put $250,000 in a 90-day investment vehicle that would return 4.25 per cent per year and was guaranteed.

It was called a "structured-investment vehicle." But what O'Hara didn't realize was that her money had gone into commercial paper.

"A lot of us were not told what it was," said O'Hara, who was among 200 small investors from around B.C., many of them seniors, who packed into a Vancouver hotel yesterday -- demanding their money back.

Here Come the Suits
Karen Donovan
Apr 3 2008
A tsunami of mortgage-related securities class actions has started already.

As the subprime mess morphed from crisis to near panic, class-action lawsuits have started to flood in. And this time the targets are not dodgy companies that collapsed in accounting scandals but first-rank firms on Wall Street.

Investors and their lawyers filed 70 securities-fraud class actions in the first quarter—almost the same number that were filed in the first half of 2007, according to NERA Economic Consulting, which tracks the filing of these complaints.

The increase in filings continues a trend that began in the second half of last year, NERA says. That spike pushed class-action filings up 58 percent in 2007, compared with the year earlier. Plaintiffs filed 207 cases last year, versus 131 in 2006.

"Right now, the upswing we are observing is related to the subprime meltdown," NERA consultant Svetlana Starykh says. The targets aren't only obvious ones like mortgage lenders and credit-rating agencies, either. They now include securities underwriters and mutual funds.

NERA says 26 of the 70 new cases are tied to subprime lending. Aside from the most obvious target—Bear Stearns, whose stock fell more than 90 percent in value during the last 15 months—the subprime-related class-action suits include cases against J.P. Morgan Chase, Lehman Brothers, Regions Morgan Keegan funds, and TD Ameritrade, as well as two class actions against Morgan Stanley. Altogether, 19 companies have been named in class action suits related to subprime lending.

Wall Street banks trying to separate bad assets: report
Apr 3, 2008

NEW YORK (Reuters) - Wall Street banks are looking at ways to separate bad assets from the rest of their balance sheets to restore investors' confidence in the financial sector, the Financial Times reported on Thursday.

Wall Street banks could move at least some troubled assets off their balance sheets by shifting them into funds and selling large stakes in the funds to outside investors, the FT said, citing people familiar with the matter.

But getting banks to agree on a coordinated solution will likely be difficult, the FT said. Disagreements over terms prevented banks from successfully putting together a fund to bail out structured investment vehicles last year.

Bankruptcy overhaul fades from US Senate housing bill
Apr 3, 2008
Kevin Drawbaugh

WASHINGTON, April 3 (Reuters) - The U.S. Senate on Thursday moved toward rejecting a Democratic proposal to give bankruptcy judges the power to ease mortgage payment terms for distressed borrowers as it started debating a housing market rescue plan.

Jobless claims: Highest since Katrina Labor Department says number of claims surges to 407,000 - the highest level since September 2005.
Kenneth Musan
April 3, 2008

NEW YORK ( -- New filings for unemployment claims surged in the latest week to the highest level since September 2005, according to a government report released Thursday.

The Labor Department said applications for unemployment benefits rose to 407,000 in the week ended March 29, up from a revised 369,000 claims in the previous week.

The last time claims were this high was in the week ended Sept. 17, 2005, just after Hurricane Katrina hit the Gulf Coast.

Corporate Bond Prices Imply High Defaults, S&P Says (Update3)
Patricia Kuo and Paul Gordon

April 3 (Bloomberg) -- Investors are pricing in defaults on corporate bonds twice as high as projected by rating companies, said Deven Sharma, Standard & Poor's president.

``The markets are pricing in a default rate of 9 or 10 percent for high-yield corporate debt, which is a lot higher than we're forecasting,'' Sharma said in an interview with Bloomberg Television. ``There is a recession and the recovery will be somewhat slower than we anticipated.''

Only way is up for banks hit by crunch(Guardian)
Julia Finch
April 2 2008

Amid the turmoil of the credit crunch it is a rare and splendid thing to hear some good news. Yesterday UBS confirmed a new $19bn (£9.6bn) writedown related to the US property market and derivatives based on it. The Swiss bank's total sub-prime-related writedowns are now more than £18bn.

UBS also unveiled a SFr15bn (£7.5bn) emergency cash call to rebuild its balance sheet and the departure of its chairman Marcel Ospel, once one of the most respected names in world banking.

The bank now expects a net loss of SFr12bn in its first quarter and announced it was setting up a new unit to hold "certain currently illiquid US real estate assets". UBS's shares, which have lost more than 40% of their value this year, soared 12%.

Confused? You should be. This catalogue of disaster, the market decided yesterday, was tip-top news. UK bank shares across the board motored ahead, closing about 6% higher. The optimism was shared across Europe and the US.

The theory traders were working on was that UBS was no longer in denial, that its kitchen sink job marks the nadir of the sub-prime fallout and that, from here, the only way is up.

I do not think this next article is an April Fools Day joke

Fed eyes Nordic-style nationalisation of US banks(Telegraph)
Ambrose Evans-Pritchard

The US Federal Reserve is examining the Nordic bank nationalisations of the 1990s as a possible interim solution to the US financial crisis...

...A senior official at one of the Scandinavian central banks told The Daily Telegraph that Fed strategists had stepped up contacts to learn how Norway, Sweden and Finland managed their traumatic crisis from 1991 to 1993, which brought the region's economy to its knees.

...Scandinavia's bank rescue proved successful and is now a model for central bankers, unlike Japan's drawn-out response, where ailing banks were propped up in a half-public limbo for years.

...Norway ensured that shareholders of insolvent lenders received nothing and the senior management was entirely purged. Two of the country's top four banks - Christiania Bank and Fokus - were seized by force majeure.

"We were determined not to get caught in the game we've seen with Bear Stearns where shareholders make money out of the rescue," said one Norwegian adviser.

"The law was amended so that we could take 100pc control of any bank where its equity had fallen below zero. Shareholders were left with nothing. It was very controversial," he said.

Stefan Ingves, governor of Sweden's Riksbank, said his country passed an act so it could seize banks where the capital adequacy ratio had fallen below 2pc. Efforts were also made to protect against "blackmail" by shareholders.

Mr Ingves said there were parallels with the US crisis, citing the use of off-balance sheet vehicles to speculate on property. All the Nordic banks were nursed back to health and refloated or merged.

Doubts Greet Treasury Plan Regulation(NY Times)
April 1, 2008

As Treasury Secretary Henry M. Paulson Jr. laid out an ambitious plan to overhaul the regulatory apparatus that oversees the nation’s financial system on Monday, lawmakers and lobbyists from an array of industries opposed to the plan predicted that most of it would be dead on arrival.

While the plan promotes a long-term goal of reducing an alphabet soup of regulatory agencies, in the shorter run it may actually do the opposite. One of the blueprint’s few short-term goals is the creation of a mortgage commission that would set new minimum standards for mortgage brokers and otherwise unregulated financial institutions that sell mortgages. The new commission could be formed only by Congress, and some lawmakers predicted it might be adopted this year.

Officials said that, as part of the Paulson plan, President Bush was preparing to issue an executive order soon to expand the membership and reach of an interagency committee called the President’s Working Group on Financial Markets. The group was created after the stock market plummeted in 1987. The group is also expected to consider ways to broaden the authority of the Federal Reserve to lend money to nonbanks as needs arise.

The Working Group, headed by the Treasury Secretary, consists of the top officials from the Federal Reserve, the Securities and Exchange Commission and the Commodity Futures Trading Commission. Under the proposal, it would be enlarged to include the heads of the three other agencies, including one, the Office of Thrift Supervision, that the plan proposes eventually to abolish.

Tables Turn Quickly on Chinese Developers After Buying Up Land
Firms Can't Raise Enough Cash to Build
March 26, 2008

HONG KONG -- Just six months ago, Chinese property developers were on a shopping spree, dipping deep and borrowing heavily to snap up more, and more expensive, pieces of land.

How quickly things have changed.

Three months into 2008, China's property developers are under siege. Property prices are showing signs of weakness in many of the country's key markets, and capital markets have all but seized up for these -- and other -- offerings. The Chinese government is on a high-profile campaign to clamp down on new bank loans, hoping to curb inflation, rising at its fastest clip in a decade.

Companies that leveraged big last year are now strapped for cash, unable to build on the land they have accumulated. Beijing is breathing down their necks, having pledged earlier this year to tax and seize hoarded land.

Massachusetts Sectretary Galvin subpoenaed UBS, Merrill, Bank of America (CNN Money) March 28, 2008

Massachusetts' Secretary of State William F. Galvin Friday said he issued subpoenas to UBS (NYSE:UBS) ' UBS Securities, Merrill Lynch (OOTC:MERIZ) & Co. Inc., Pierce, Fenner & Smith Inc., and Bank of America's (NYSE:BAC) Investment Services Inc. for documents and testimony on their sales practices in selling auction rate market securities to Massachusetts retail investors.

Through his inquiry, the official is looking to determine whether investors were properly informed of the risks that their investments might become illiquid. In addition, the Securities Division is investigating whether these investments were suitable for those investors. It will also try to determine the role the investment banks that sold the securities had in the events that caused the auctions to fail.

Assured Guaranty Re-Examining Countrywide Loans It Insured
March 27, 2008

As the U.S. housing downturn continues, Assured Guaranty Ltd. (AGO) is re-examining lending documents for some of the $2.1 billion in guarantees it wrote for home equity lines of credit issued by Countrywide Financial Corp. (CFC) to see if the loans meet Countrywide's stated terms.

If they don't, Assured Guaranty will ask Countrywide to make good on the loans either by taking them back or replacing them with better loans.

The examination revolves around "representations and warranties" in the contracts themselves, Bob Mills, Assured Guaranty's chief financial officer, said Thursday. "We are evaluating that situation and documentation."

Shaken Citigroup continues shakeup (Crain's New York)
The investment bank replaced several key executives, and one analyst says Citi will have to cut its dividend and post a first-quarter loss.
Tommy Fernandez
March 28. 2008

Beleaguered investment bank Citigroup Inc. is looking at even tougher times ahead: One analyst says the bank will need to cut its dividend yet again in the first quarter, just as Citi announced the latest shakeup of key executives.

Oppenheimer & Co. analyst Meredith Whitney said Citigroup will likely have to make a second dividend cut because it faces a first quarter loss of $1.15 per share on over $13 billion in write-downs. Her estimates compare with Wall Street predictions of a first-quarter loss around 40 cents per share.

Citi will likely write down $9 billion in collateralized debt obligations, nearly $2 billion in commercial mortgage-backed securities and $2.2 billion in leveraged loans, Ms. Whitney wrote in a note to investors Friday. Her estimates are more than 300% lower than her own previous predictions for the quarter.

Wall Street banks face fiscal unknowns as US lawmakers debate tougher regulations (The Associated Press)
March 28, 2008

One of the casualties of the ongoing credit crisis is a long-held notion on Wall Street — that the investment banking community can take care of its own problems.

Everyone from Barack Obama to Treasury Secretary Henry Paulson is floating ideas about how to strengthen oversight of financial institutions after decades of deregulation. And the Federal Reserve is at the center of the debate after intervening to save Bear Stearns Cos. from collapse by engineering its sale to JPMorgan Chase & Co.

Decade Later, John Meriwether Must Scramble Again
LTCM Founder Has Tough Time Stemming Losses at New Funds; A Withdrawal Deadline Nears
March 27, 2008

Ten years after overseeing a hedge-fund collapse that buckled the world's financial markets, John Meriwether again is scrambling to stem losses and keep investors from jumping ship.

Mr. Meriwether is best known as a founder of Long-Term Capital Management, which in 1998 lost $4 billion. That helped foster a global financial crisis and triggered both a Wall Street-led bailout and congressional hearings on the dangers of hedge funds, the freewheeling pools for wealthy investors and institutions that often trade heavily and rely on borrowed money to bolster returns.

Now, Mr. Meriwether's biggest fund, a bond portfolio, has plunged 28% this year; another, broader market fund is down 6%. Both had subpar performances last year.

Some investors in the funds are seeking to get their money out. Mr. Meriwether and his colleagues at JWM Partners LLC -- which he launched in 1999 with LTCM alumni -- are trying to reassure investors in the two funds that they have slashed risk and will use their experience to survive this market crisis, preserving about $1.4 billion in assets.

Fremont General Faces Deadline on Bank Unit(NY Times)
March 28, 2008

Federal and state banking regulators have given the Fremont General Corporation, the financial services company, 60 days to raise new capital or sell its banking subsidiary, the company said Friday.

The Federal Deposit Insurance Corporation and the California Department of Financial Institutions set a May 26 deadline for Fremont General, based in Brea,Calif., to raise capital, according to a filing with the Securities and Exchange Commission.

...Last week, the company announced it agreed to sell the servicing rights to some $1.9 billion of its securitized mortgage loans to a subsidiary of Carrington Capital Management for an undisclosed amount.

The sale followed the disclosure earlier this month that it received default notices on $3.15 billion in subprime mortgages it had previously sold to investors.

Germany's Third Largest Bank Attracts Chinese Buyer(AHN)
March 27, 2008
Vittorio Hernandez

A Chinese financial institution is interested in buying a stake in Germany's third largest bank. The news of a Chinese buy-in offer follows the announcement by Allianz, Dresdner Bank's parent company, that it will create two division out of Dresdner.

Manager Magazin said the first division would focus on retail banking and the second one specialize on investment banking. Detailed plans include merging Dresdner's private banking functions with another German bank, the Postbank, while its investment banking branch, Dresdner Kleinwort, would be sold.

The magazine said the Chinese firm has expressed interest in DK and sent Allianz an offer.

Bear Stearns Chairman Cayne Sells His Entire Stake (Update2)
Yalman Onaran

March 27 (Bloomberg) -- James ``Jimmy'' Cayne, chairman of Bear Stearns Cos., sold his shares in the crippled securities firm for $61 million prior to a vote on the company's pending takeover by JPMorgan Chase & Co.

Cayne sold 5.66 million shares at $10.84 apiece on March 25, according to a regulatory filing today. The value of his stake plummeted from almost $1 billion last year, when the shares peaked at $171.50 before the collapse of the subprime mortgage market toppled two of the firm's hedge funds and prompted a contraction in credit markets worldwide.

Chinese Avoiding Dollar as Invoicing Currency(Naked Capitalism)
March 28, 2008

(quoting Financial Times) Rising numbers of Chinese exporters are shunning the US dollar or devising ways to offset the impact of the falling currency as they confront rising labour and raw material costs at home.

According to, the online company that matches Chinese suppliers with international buyers, the vast majority of their almost 700,000 Chinese suppliers no longer use dollars to settle non-US transactions in order to minimise foreign exchange risk.

"They are moving to euros, pounds, Australian dollars or even quoting prices in renminbi," David Wei, chief executive, told the Financial Times. Moreover, he added, prices quoted in dollars were now often valid for just seven days compared with the 30-60 days common previously.

India’s love affair with gold tarnishing(Naked Capitalism)
March 28, 2008

(quoting Financial Times) As India’s voracious appetite for gold wanes, producers of the precious metal are taking heed.

Indian consumers buy about 25 per cent of the world’s gold, the vast majority of which is imported, making the country the largest market for the metal.

Globally, investors have poured into gold, seeking refuge from?the?deflating dollar...

But with the recent volatility in gold prices, which have hit more than $1,000 per troy ounce, investors have become nervous and sales of gold in India have fallen sharply. Demand for gold in India plummeted 64 per cent year-on-year in the fourth quarter after growing 40 per cent in the first three quarters of last year.

Odd Crop Prices Defy Economics (NY Times)
March 28, 2008

Economists note there should not be two prices for one thing at the same place and time. Could a drugstore sell two identical tubes of toothpaste, and charge 50 cents more for one of them? Of course not.

But, in effect, exactly that has been happening, repeatedly and mysteriously, in trading that sets prices for corn, soybeans and wheat — three of America’s biggest crops and, lately, popular targets for investors pouring into the volatile commodities market. Economists who have been studying this phenomenon say they are at a loss to explain it.

Whatever the reason, the price for a bushel of grain set in the derivatives markets has been substantially higher than the simultaneous price in the cash market.

Icelandic banks face soaring pricetags for credit default swaps(Financial News)
Duncan Kerr
28 Mar 2008

The cost of insuring the debt of Iceland’s three largest banks against default in the credit derivative markets soared to record highs yesterday, with the cost of buying protection on Glitnir slicing through the threshold of 1000 basis points for the first time in history.

According to data from Markit, the cost of Glitnir’s credit default swaps—derivative contracts that offer a type of insurance against default—rose to 1017 basis points from 841 basis points a week ago, underlining heightened fear the bank may run out of cash.

Moody's Unloads on CDOs(WSJ)
March 27, 2008

Moody's Investors Service picked Thursday to unload on the market for collateralized debt obligations, downgrading or warning of possible downgrades on $40.18 billion in CDOs in a stream of press releases over the course of the day.

Fed May Gain Influence From Crisis at SEC's Expense (Update1)
By Craig Torres and Jesse Westbrook

March 27 (Bloomberg) -- America's financial system faces its biggest overhaul since the Great Depression as officials weigh lessons from the credit-market rout and the near collapse of Bear Stearns Cos.

Federal Reserve policy makers are redefining which companies are vital to the flow of credit, an area once the sole domain of commercial banks, and which institutions pose risks to the entire economy if they fail. Treasury Secretary Henry Paulson said in a speech yesterday that the Fed should broaden its oversight to include Wall Street investment firms, now regulated by the Securities and Exchange Commission.

Former regulators predict the changes will see the Fed accrue influence at the expense of the SEC, which was created by President Franklin Roosevelt to make rules for dealers and stock exchanges. The Fed is taking almost $30 billion in assets off Bear Stearns's balance sheet to encourage JPMorgan Chase & Co. to buy the firm, even though Bear's main supervisor is the SEC.

Fed's rescue halted a derivatives Chernobyl (Telegraph)
When the Federal Reserve stepped in to save Bear Stearns, most people had no idea what was at stake, writes Ambrose Evans-Pritchard

We may never know for sure whether the Federal Reserve's rescue of Bear Stearns averted a seizure of the $516 trillion derivatives system, the ultimate Chernobyl for global finance.

"If the Fed had not stepped in, we would have had pandemonium," said James Melcher, president of the New York hedge fund Balestra Capital.

"There was the risk of a total meltdown at the beginning of last week. I don't think most people have any idea how bad this chain could have been, and I am still not sure the Fed can maintain the solvency of the US banking system."

..."We've been worried for a long time there would be nobody to pay on the other side of our contracts, so we took profits early and got out of everything. The Greenspan policies that led to this have been the most irresponsible episode the world has ever seen," he said.

Fed is now the lender of first resort
Commentary: New lending goes beyond what's legally allowed
By Rex Nutting, MarketWatch
March 20, 2008

In a financial crisis, the Federal Reserve has an obligation to become the lender of last resort, making cash available for banks that need it right away to prevent a systemwide meltdown.

But for this crisis, the Fed has become the lender of first resort to a whole new group of financial institutions that are relying on the central bank to boost their profits. Instead of lending only to firms that cannot find money elsewhere, the Fed apparently is lending to firms that can get the money elsewhere, yet at a higher cost than borrowing from the Fed. I say "apparently" because almost everything about the Fed's new primary dealer-lending facility is secret.

100 TeraDollar(Alea)

That’s the notional amount of derivatives JPMorgan has on the books after the Bear purchase.

Or simply $,00

[In American, that is $ 100,000,000,000,000.00 -- Or $100 trillion; roughly 1.5X the worlds 2006 GDP; about 18% of all known OTC derivatives]

Goldman, Lehman outlooks cut to "negative" by S&P
Jonathan Stempel
Mar 21, 2008

NEW YORK (Reuters) - Goldman Sachs Group Inc's and Lehman Brothers Holdings Inc's credit rating outlooks were cut on Friday by Standard & Poor's, which said volatile markets could result in lower profit and revenue.

S&P revised its outlook to "negative" from "stable" on Goldman's "AA-minus" and Lehman's "A-plus" long-term credit ratings, suggesting a possible downgrade in one to two years.

The ratings are S&P's fourth- and fifth-highest investment grades, respectively. Lower credit ratings can result in higher borrowing costs.

Beleaguered German bank IKB Deutsche Industriebank suspends asset sale(The Times)
Miles Costello
March 21, 2008

IKB Deutsche Industriebank, the German bank brought to its knees by the credit crunch, has shelved plans to sell a €3 billion (£2.3 billion) portfolio of investments after the near-collapse of Bear Stearns sent valuations tumbling.

The suspension of the sale, which IKB insisted was temporary, threatens to scupper the German Government’s efforts to restore stability to its banking and financial system.

It also undermines the chances of KfW, the state-controlled banking group that has engineered three bailouts totalling €8 billion for IKB in recent months, successfully selling its stake in the lender.

Alan Greenspan Loses His Mind(Infectious Greed)
March 21, 2008

Judging by a just-released Washington Post interview, ex-Fed chair Alan Greenspan has gone mad. There is an upside, of course, in that he has delivered the quote of the year so far.

Bear’s saviour faces hedge fund mauling(This is Money)
Anthony Hilton
19 March 2008

Stock markets have delivered a massive vote of confidence, or perhaps it was thanks, to JPMorgan Chase for its bailout of stricken investment bank Bear Stearns.

...The flaw in Dimon's grand plan is the assumption that hedge funds will survive this storm in any numbers. Relatively few have gone bust yet, but that is not the point. What matters is that the hedge-fund business model does not work without gearing, and it will be years before debt is as freely and cheaply available again.

The debt is needed because most hedge fund strategies consist of running on to a motorway to pick up pennies. Only if those pennies are leveraged by debt is the return worth the effort. That is why the Carlyle fund that blew up last week had been leveraged 30 times.

That is also why one New York practitioner said yesterday that two-thirds of hedge funds would be out of business by the end of the year.

It's money down the drain, Jamie.

Commodity Prices Head for Biggest Weekly Decline Since 1956
Claudia Carpenter and Millie Munshi

March 20 (Bloomberg) -- Commodities plunged, heading for the biggest weekly decline in more than 50 years, on speculation a slowing global economy will curb demand for energy, metals and grains.

James Cayne risks lawsuit as he seeks counter-offer for Bear Stearns(Business Times Online)
Suzy Jagger and Tom Bawden in New York
March 20, 2008

James Cayne, the chairman of Bear Stearns, is trying to elicit a counter- offer for the stricken investment bank in a move that could lead to him being sued for breach of contract.

Deflation Watch: US Short Term Rates Fall Below Japan's (Naked Capitalism)
Thursday, March 20, 2008

Investors are so nervous that they are willing to take almost nothing in nominal terms, which is tantamount to a meaningful negative real return, to sit in the safety of three-month T-bills, which are now a mere 0.56%.



The Great Unwind has begun, Citigroup warns, Avoid leveraged companies, countries and consumers, bank's strategists say
By Alistair Barr, MarketWatch
March 19, 2008

As markets and economies de-leverage across the globe, investors should avoid companies and countries that have grown to rely too much on borrowed money, they said.

That means favoring public-equity markets over hedge funds, private-equity and real estate, while leaning toward emerging market countries and away from developed nations like the U.S., the bank's global equity strategy team advised.

Within equity markets, the financial-services should be avoided because it's still over-leveraged, while other companies have stronger balance sheets, the strategists said.

"Steady growth, low inflation and rock-bottom interest rates encouraged economic and financial participants across the world economy to gear up over the past few years," Robert Buckland and his colleagues on Citi's global strategy team wrote in a note to clients. "Easy money encouraged many to buy a bigger house, a bigger car or a bigger speculative position."

"But now, any behavior that relied upon continued access to easy money is being dramatically reassessed," they added. "Leveraged banks must lend less, leveraged consumers must consume less, leveraged companies must acquire or invest less, and leveraged speculators must speculate less."

Financial-services companies are the most vulnerable to this reduction of borrowed money across the globe, they said.

..."The banks have a long way to go," the strategists said. "We would continue to avoid the sector while they are de-leveraging."

..."The U.S. shows up as the world's greatest consumer of external capital," Citi noted. So it "has the most to lose as this capital becomes less freely available."

SEC's Bear Stearns Probe Zeroes In on 'Put' Trades(WSJ)
Options to Sell Stock Spiked Before Fall; 'Very Unusual' Bets
March 20, 2008

The Securities and Exchange Commission is investigating the events leading up to the collapse of Bear Stearns Cos., specifically a surge in options contracts betting that the investment bank's share price would drop precipitously, according to people familiar with the matter.

The SEC inquiry focuses on a surge last week in "put" options that came days before the firm's proposed sale to J.P. Morgan Chase & Co. for stock now valued at about $278.5 million, or $2.32 a share, people familiar with the matter say. A put option allows the buyer of the option the right to sell a certain number of shares in the underlying company at a specific price within a set time.

For instance, if a trader bought a put option for Bear at $60, and the stock fell to $50, the trader could buy Bear stock in the market for $50 and have the right to sell it back to the option underwriter for $60 -- making a $10-a-share profit. The more a stock declines, the better off a put holder is.

..."Betting on a 57% decrease in Bear Stearns stock in nine days is very unusual," said Todd Salamone, senior vice president of research at Schaeffer's Investment Research. There was a similar increase in put options that had a strike price of $30.

...Some lawyers say the aggressive selling of put options at $20 and $30 would raise questions about whether they knew something about Bear's inner workings. It could also call into question the statements made by Bear executives. The SEC also is looking at comments made by Bear Stearns in the weeks leading up to Sunday night's announcement of its sale to J.P. Morgan, a person familiar with the matter says.

Fannie, Freddie Surplus Capital Requirement Is Eased (Update7)
By James Tyson

March 19 (Bloomberg) -- Fannie Mae and Freddie Mac agreed to expand their purchases of U.S. mortgages and related securities after the Bush administration reduced the amount of capital the companies are required to hold as a cushion against losses.

Fannie Mae and Freddie Mac had their biggest two-day gains on record in New York Stock Exchange trading as their surplus capital requirement was cut to 20 percent from 30 percent by the Office of Federal Housing Enterprise Oversight. The government- sponsored enterprises, the largest sources of money for home loans, also agreed to raise ``significant'' new capital.

The goal is to ``help restart the housing engine that powers our economy,'' Fannie Mae Chief Executive Officer Daniel Mudd said at a news conference in Washington today. Freddie Mac CEO Richard Syron added: ``This is what the GSEs were put in place for, to deal with situations like this and we will deliver.''

The initiative may immediately pump $200 billion into the mortgage-backed securities market, Ofheo Director James Lockhart said. Combined with a lifting of portfolio caps on March 1 and the companies' existing capabilities, this should allow Fannie Mae and Freddie Mac to buy or guarantee $2 trillion in mortgages this year, Ofheo said.

Gold Falls Most Since June 2006 on Fed's Interest-Rate Decision
By Pham-Duy Nguyen

March 19 (Bloomberg) -- Gold futures plunged the most since June 2006 after the Federal Reserve reduced U.S. borrowing costs less than investors expected and signaled more cuts won't be as aggressive. Silver tumbled more than 7 percent.

...Gold futures for April delivery fell $59, or 5.9 percent, to $945.30 an ounce on the Comex division of the New York Mercantile Exchange. That marked the biggest percentage drop for a most-active contract since June 13, 2006. The metal climbed in the previous six sessions, gaining 3.3 percent.

Gold for immediate delivery dropped $37.54, or 3.8 percent, to $944.70 an ounce at 4:52 p.m. New York time.

Silver futures for May delivery fell $1.515, or 7.6 percent, to $18.445 an ounce, marking the biggest percentage decline since Aug. 16. The price is still up 24 percent this year.

UN's poverty chief turns on greedy 'super-bankers' (The Times)
Rhys Blakely in Bombay

The United Nations representative in charge of eradicating poverty has said that the rapacious pursuit of profits by a new generation of “super-bankers” has triggered an economic crisis that risks delaying anti-poverty targets in the poorest countries.

Kemal Dervis, the head of the UN Development Programme, said that the blame for the three economic ructions of the past decade — the Asian crisis of 1997, the dot-com collapse of 2001 and the present American sub-prime troubles — fell at the feet of an overinfluential and underregulated financial sector.

“It is the super-bankers, hedge fund managers and owners of private equity firms that have become the new barons of 21st-century capitalism,” the former Turkish finance minister and vice-president of the World Bank said in India. “It is almost unbelievable: 40 per cent of total corporate profits in the US in recent years went to the financial sector that in itself does not ‘produce' ... but intermediates and organises' the resources that do produce.”

...He added that herd-minded financiers profit hugely from the inflation of asset bubbles, “but pay very little personal penalty when the bubble bursts”. Instead, ordinary people bear the costs through government bailouts and higher inflation stoked by aggressive cuts to interest rates.

UPDATE: Commodities In Broad Sell-Off As Economic Jitters Return
March 19, 2008

SAN FRANCISCO (Dow Jones) - Prices in a broad range of commodities, from oil to gold to wheat, took a dive Wednesday as skittishness about the global economic picture reemerged and the dollar showed signs of firming.

Goldman, Lehman Reduce Loan Backlog With Discounts (Update2)
By Pierre Paulden

March 19 (Bloomberg) -- U.S. banks from Goldman Sachs Group Inc. to Lehman Brothers Holdings Inc. have whittled their holdings of leveraged buyout loans to $129 billion from $163 billion at the beginning of the year by offering the debt at discounts, according to analysts at Bank of America Corp.

S&P May Downgrade Gordian Knot's Sigma
March 19, 2008

NEW YORK -- Standard & Poor's warned Tuesday it may cut its AAA rating on Sigma Finance Corp., a $41 billion investment vehicle that has $15 billion in debt coming due by June.

O.C. officials trying to recover $80-million British investment
A British firm holding county funds is forced into receivership.
By Christian Berthelsen, Los Angeles Times Staff Writer
March 19, 2008

The Orange County treasury is struggling to recover an $80-million investment in a complex British fund that was forced into receivership last month after it defaulted on payments to creditors, the county treasurer told the Board of Supervisors on Tuesday.

...Whistlejacket has been the biggest casualty thus far in Orange County's rocky foray into structured investment vehicles, complex investment pools that buy credit securities tied to mortgages, credit cards, student loans and other debts.

Bear Run, Why the Fed had to bail out Bear Stearns.
By Elizabeth Spiers
March 18, 2008

...Bear is being bailed out by the Fed via JPMorgan Chase, which is buying the troubled firm for $2 a share...

The alternative would have been to let Bear slide into a Chapter 11 bankruptcy, which would have happened quickly. Among other things, Moody's, S&P, and Fitch all downgraded Bear on Friday, potentially forcing the firm to put up additional collateral to meet the requirements of a credit-default swap triggered by the downgrades—collateral it didn't have. Bear notionally holds $13 trillion in derivatives contracts, and even if credit-default swaps were only a small fraction of that, any sort of credit event would have been catastrophic for both Bear and its buyers, the latter of whom would find themselves holding guarantees from a firm that was not in a position to guarantee anything.

Bear's client assets would also have been frozen in the event of a bankruptcy, crippling not just the brokerage but many of the hedge funds that have collateral at the firm...

Allen L Roland
March 18, 2008

Wall street is a giant casino and Bear Stearn's demise is just the tip of the iceberg of a potential complete financial meltdown led by the collapse of the greatest crap shoot of them all ~ Derivatives : Allen L Roland

As Andrew Leonard wrote yesterday in Salon ~ " A couple of things to bear in mind while we watch and see what transpires this week. First: Bear Stearns was the canary in the coal mine. That canary is now dead. "

Wall street can no longer hide the ugly excesses of the subprime mortgage markets or the present collapse of most major credit markets but the looming tsunami which could bring down the whole house of cards is the collapse of the $172 trillion dollar derivative market.

Martin Weiss, Money and Markets, explains the risk of Derivatives and names the principle players in the greatest Wall Street crap shoot of them all ~ and very possibly the core of the present crisis.

CDS market adds to risks that banks will fail (Reuters)
Mar 18, 2008

The $45 trillion credit derivatives market, created as a way for banks to hedge their lending, is now also contributing to the risks that banks will fail.

The rise of the market over the past 15 years, however, also makes it crucial that a big bank not be allowed to go down.

"Because of derivatives, it gets more probable that a big bank is going to get into trouble, but then there would be intervention to make sure it doesn't fail," said Willem Sels, head of credit strategy for Dresdner Kleinwort.

About two dozen big banks are major broker-dealers in the CDS market, which means they take one side of nearly every contract. The failure of a dealer such as Bear Stearns would threaten the entire CDS market and other derivatives markets.

Credit default swaps (CDS) are bets on whether a company will default on its debts.

...If a fund or investor goes under, banks must deal with another type of risk inherent in derivatives contracts.

A CDS contract is only as good as the financial strength of the counterparty on the other side of the bet.

"It has always been recognized that in any derivatives contract you take on counterparty risk, the mitigation of which is the main reason ISDA exists," said Robert Pickel, chief executive officer of the International Swaps and Derivatives Association.

ISDA has put in a process to prevent a domino effect from taking down the entire market. But each bank must protect itself from counterparties, and banks can have cracks in their risk management systems.

...Other risks come from the banks' packaging of CDS into complex credit products, which started in a big way in 2005.

Banks took positions on hundreds of billions of dollars of CDS contracts solely to create other products to sell. But these products are now discredited.

"The air of suspicion is so deep-rooted given the opacity regarding the size and leverage, type and quality of the structured products that were developed since 2004, that it is causing funds to fail and financial institutions to be bailed out," analysts at Societe Generale wrote in a note to clients.

Banks developed complex mathematical models to manage and hedge against the risks created by some parts of these packaged products that they could not sell.

But price dislocations in the tranche market became so extreme last month that bank models no longer made sense, indicating that all companies would default at once.

UPDATE: Goldman's Liquidity At Record Levels, CFO Says
March 18, 2008
By Jed Horowitz Of Dow Jones Newswires

Goldman Sachs Group Inc. (GS) waved the liquidity flag Tuesday, saying it has better access to funding and cash than at any time in its history to deal with the current credit crisis.

"Our liquidity is stronger than it's ever been because that is the key and lifeblood to everyone in this business," Goldman Chief Financial Officer David Viniar told reporters after declaring "it's very hard to know" when markets, capital flows and credit will return to normal.

Fed cuts key U.S. interest rate by 3/4 point
Mar 18, 2008

The Federal Reserve slashed a key U.S. interest rate by three-quarters of a percentage point on Tuesday, a substantial cut but smaller than many in financial markets had expected, as part of an effort to hold off a deep recession and financial meltdown.

The Fed's action takes the bellwether federal funds rate to 2.25 percent, the lowest since February 2005, and comes two days after the central bank announced the latest in a series of emergency measures to stem a fast-spreading global financial crisis. Many in financial markets had expected the Fed to chop the overnight rate by a full point.

The Fed has now cut rates by 3 percentage points since mid-September, including 2 points since the start of the year. In recent days, the central bank has also unveiled steps not used since the Great Depression to ensure financial institutions have access to liquid funds.

The central bank is pulling out all the stops to provide liquidity to financial markets and put a floor under an economy many analysts believe is in recession.

Dresdner grants $1.5 bln credit line to K2 SIV
Tue Mar 18, 2008

LONDON, March 18 (Reuters) - Germany's Dresdner Bank, part of the Allianz (ALVG.DE: Quote, Profile, Research) group, granted a $1.5 billion mezzanine credit facility to help support its K2 structured investment vehicle, K2 said on Tuesday.

Dresdner also created a backstop facility to purchase investments from K2 if the vehicle cannot get better prices on the open market. These prices will be sufficient to ensure that K2 can repay secured liabilities in full, it said in a statement. K2 said as a result it expected Standard & Poor's and Moody's Investors Service to affirm their ratings on K2. Moody's had said on March 12 it might cut K2's Aaa and Prime-1 ratings due to fears over drops in the value of the SIV's assets.

The vehicle warned however that holders of capital notes were unlikely to receive any payments prior to the repayment in full of all secured debt.

UPDATE 1-Rabobank's Tango SIV sells all assets (Reuters)
Tue Mar 18, 2008

Tango Finance, the structured investment vehicle set up by the Netherlands' Rabobank [RABN.UL], has sold all its assets to raise cash to repay senior debt.

"Rabobank has successfully concluded an orderly sale of Tango's assets as envisaged in December," Sipko Schat, a member of Rabobank's executive board, said in a statement. "This prepares the way for unwinding Tango and the repayment of senior liabilities".

Rabobank in December said Tango had assets of 5.2 billion euros ($8.2 billion), down from 9.7 billion in July. The bank then decided to take the remaining assets of Tango on to its balance sheet.

...Moody's Investors Service on Thursday confirmed the top Aaa and Prime-1 ratings on Tango's senior debt as a result of the asset sales, the agency said on Tuesday. It had previously been considering cutting the ratings.

Ambac Says Has 'Limited' Exposure to Bear Stearns (Reuters)
Tue Mar 18, 2008

Ambac Financial Group Inc., a struggling bond insurer, said on Tuesday it has "limited" exposure to Bear Stearns Cos., and no material exposure in its financial guaranty and financial services businesses.

In those businesses, Ambac has exposure "through special purpose vehicles and, in its capacity as, a servicer, a (credit default swap) counterparty, a remarketing agent or an interest rate swap/cap provider."

New York-based Ambac believes its exposures are "sufficiently structured" to protect it from any material loss. It also expects JPMorgan Chase & Co (JPM.N: Quote, Profile, Research) to assume liabilities of Bear under contracts in which the latter "substantially collateralized" its exposure to Ambac under interest rate and cross-currency swap agreements.

Lehman Net Income Declines 57%, Less Than Estimated (Update5) (Bloomberg)
By Yalman Onaran

Lehman Brothers Holdings Inc., the fourth-biggest U.S. securities firm, reported earnings that beat analysts' estimates and reassured shareholders that it has more than enough capital to survive.

Lehman surged as much as 41 percent in New York trading, more than erasing yesterday's record decline. First-quarter net income fell 57 percent to $489 million, or 81 cents a share, the New York-based company said in a statement today. Analysts had estimated Lehman would earn 72 cents a share.

Chief Executive Officer Richard Fuld is trying to persuade clients and creditors that Lehman will avoid the fate of Bear Stearns Cos., which ran out of cash last week and was forced to sell itself to JPMorgan Chase & Co. at a fire-sale price. Lehman had $30 billion of cash and $64 billion in assets that could easily be turned into cash as of yesterday, Chief Financial Officer Erin Callan said on a conference call with analysts.

Lehman Shares May Still Drop by Half, Options Strategists Say (Bloomberg)
By Jeff Kearns
March 18

Options traders are still betting Lehman Brothers Holdings Inc. could lose most of its market value in the next month even after the shares surged as much as 41 percent in New York trading today.

Open interest, or the number of existing contracts, for April $10 puts increased 18-fold today to 16,948. For those wagers to pay off, Lehman shares would have to lose about three- quarters of their value before the contracts expire April 18. Those puts fell 77 percent to 30 cents.

``The market is still implying some probability that they could still be in trouble before April expiration,'' said Pat Neal, head of equity derivatives strategy at Jefferies & Co. in New York. The price of April $10 puts implies 4 percent odds Lehman will plunge that far, while April $20 puts indicate about 8.5 percent odds the stock will hit that strike price by expiration, Neal said.

``These guys aren't out of the woods yet,'' Neal said.

Till Debt Us Do Part(Goldseek)
Monday, 17 March 2008

The bail out of Bear Sterns has validated all the worst fears and forecasts expressed in these newsletters over the past few years. The Fed has once again verified that it will create whatever new liquidity is required to prevent any particular crisis from developing into a deflationary debt implosion.

The bail out was undertaken not because Bear Stearns was “too big to fail”. It was done because of something called “inter-connectivity”.

What does this mean? It is Fed-speak for concern about the $600 Trillion notional value of derivatives outstanding, with just about every bank in the world participating to greater or lesser extent. By far the biggest player in the derivatives market is J P Morgan.

The problem with derivatives is that these are individual transactions between 2 or more parties. Often the transactions are arbitraged onwards to several other players. Everyone in the chain relies on all the other parties to meet their obligations. If one party in the chain goes bankrupt, it can cause a domino like collapse of all the other parties in the chain – if the bankrupt party is a large player in derivatives. They are all “inter-connected”.

Bear Stearns is known to be a big player in the derivative markets and must have been a major counter party to many transactions with JP Morgan, given Morgan’s huge derivative positions. Hence Bear Stearns had to be rescued because of “inter-connectivity”; to prevent a melt down in the derivative markets. It can hardly be a coincidence that the bail out was routed through J P Morgan.

Let us be clear about where this will end. It will end with the Fed and/or the US Government owning or guaranteeing all the bad debts and losses from all sources in order to preserve the existing system. It has serious implications for the value of the US Dollar, the international monetary system and for inflation. The vast quantity of new liquidity that needs to be created will almost certainly result in runaway inflation.

Gold hovers below $1,030, U.S. troubles support(Global Investor)

LONDON (Reuters) - Gold hovered just below a new record of more than $1,030 per ounce in early European trade on Monday, supported by more troubles in the U.S. economy, analysts said.

Spot gold was quoted at $1,019.40/1,020.20 per ounce at 4:04 a.m. EDT, up from a late New York quote of $996.90/997.70 on Friday, but down from the all-time peak of $1,030.80 it touched in earlier business.

Investors bought gold and other commodities as share prices and the dollar fell after JPMorgan Chase bought fellow U.S. bank Bear Stearns for the discount price of $2 per share, and the Federal Reserve moved to bolster the economy by cutting a key lending rate.

"This prompted a wave of safe-haven buying interest into the commodity complex," analysts at Standard Bank said in a report.

JPMorgan buys stricken Bear Stearns
Mar 17, 2008

LONDON (Reuters) - JPMorgan Chase has bought stricken rival Bear Stearns for a rock-bottom $2 a share, while the U.S. Federal Reserve has expanded lending to securities firms for the first time since the Great Depression.

he shock weekend news has sent European shares tumbling in Monday's early trade, with investors rattled by fears of contagion.

Footsie plunges in fall-out from US crisis(Independent)
Russell Lynch, PA
17 March 2008

The UK's biggest companies plunged into the red today as the fall-out from the cash crisis at troubled US investment bank Bear Stearns shook world markets.

London's FTSE 100 Index fell 2 per cent in early trading as investor nerves over the latest signs of the credit crunch sparked the sell-off.

Bear Stearn's bail-out and acquisition by rival JP Morgan Chase also hit Asian markets, with Hong Kong's Hang Seng down 5 per cent and Japan's Nikkei 225 index off 3.7 per cent.

Terry Smith, chief executive of specialist inter-bank broker Tullett Prebon, said on BBC Radio 4's Today programme: "It does scare me. I have been working in finance in the City and worldwide for 34 years and I have never seen anything like this.

"I don't think anybody alive has seen events of this seriousness and magnitude affecting the financial markets."

Fed Cuts Discount Rate, Expands Loans to Avert Crisis(Update1)
By Scott Lanman and Craig Torres

March 17 (Bloomberg) -- The Federal Reserve, struggling to prevent a meltdown in financial markets, cut the rate on direct loans to banks and became lender of last resort to the biggest dealers in U.S. government bonds.

In its first weekend emergency action in almost three decades, the central bank lowered the so-called discount rate by a quarter of a percentage point to 3.25 percent. The Fed also will lend to the 20 firms that buy Treasury securities directly from it. In a further step, the Fed will provide up to $30 billion to JPMorgan Chase & Co. to help it finance the purchase of Bear Stearns Cos. after a run on Wall Street's fifth-largest securities firm.

``It is a serious extension of putting the Federal Reserve's balance sheet in harm's way,'' said Vincent Reinhart, former director of the Division of Monetary Affairs at the Fed and now a scholar at the American Enterprise Institute in W ashington. ``That's got to tell you the economy is in a pretty precarious state.''

The move is Chairman Ben S. Bernanke's latest step to alleviate a seven-month credit squeeze that's probably pushed the U.S. into a recession. The dollar tumbled to a 12-year low against the yen and Treasury notes rallied as traders increased bets that officials will reduce their main rate by 1 percentage point when they meet tomorrow.

`Race to the Bottom'

``Clearly, the Fed is trying to provide more liquidity to prevent a more vicious cycle and race to the bottom,'' said Gary Schlossberg, senior economist at Wells Capital Management in San Francisco, which oversees $200 billion. ` `The problem is there's so much concern about credit quality that now there are solvency issues, and it's something the Fed has a more difficult time dealing with.''

Goldman Sachs to Unveil $3bn Writedown - UK Paper
Mon Mar 17, 2008

LONDON (Reuters) - Investment bank Goldman Sachs (GS.N: Quote, Profile, Research) will announce asset writedowns of $3 billion when it posts earnings on Tuesday, Britain's Sunday Telegraph newspaper reported, without naming sources.

The company will report a fall of about 50 percent in first-quarter earnings, the newspaper said.

Goldman Sachs was not immediately available for comment.

Goldman will take a hit of around $1.6 billion in its leveraged loan business, $1.1 billion in connection with assets owned by its private equity arm and will have to writedown the value of its stake in Industrial & Commercial Bank of China (ICBC) (601398.SS: Quote, Profile, Research), the story said.

S&P Says End in Sight for Writedowns on Subprime Debt (Update6)
By Jody Shenn

March 13 (Bloomberg) -- Standard & Poor's, the ratings company criticized for missing the beginning of the mortgage collapse, now says the end of subprime writedowns is in sight.

Writedowns from subprime-tied securities will probably rise to $285 billion, or $20 billion more than S&P forecast two months ago, S&P said today in a report. More than $150 billion have been reported already by banks, brokers and insurers, the firm said. S&P raised its estimate as it assumes deeper losses on collateralized debt obligations.

``There'll be plenty of trouble around this quarter, but it's just not going to be as much subprime trouble,'' Tanya Azarchs, New York-based S&P's managing director for financial institutions, said in a telephone interview.

The world's largest banks and securities firms, led by Citigroup Inc., UBS AG and Merrill Lynch & Co., have reported more than $188 billion of mortgage-related losses since the start of last year, according to data compiled by Bloomberg. Subprime writedowns are coming not only at banks, brokers and insurers, but also hedge funds and institutional investors, S&P said.

Did the county treasurer bet on a nag?
The Orange County Register
March 13, 2008

Orange County will probably lose some of the $80 million it sank into a defaulted investment, financial experts say.

It's "very unlikely" that Orange County will get repaid in full when its investments in Whistlejacket Capital mature next January, said Joseph Mason, a finance professor at Drexel University in Philadelphia. "Next January is almost an eternity in terms of how quickly these structures are crumbling."

Named for a famed 18th-century English racehorse, Whistlejacket Capital is limping into receivership. The structured investment vehicle or SIV has lost most of its value since July. It failed to pay off Wednesday on three notes to other investors totaling $300 million.

"You should assume you've already lost a significant amount of that $80 million," said Michael Ehrlich, a SIV expert at the New Jersey Institute of Technology in Newark. "Right now, you're stuck."

But county Treasurer Chriss Street said, "I still think the county will get all its money back."

Drake Considers Shutting Largest Fund After Losses (Update2)
By Katherine Burton

March 12 (Bloomberg) -- Drake Management LLC, the New York- based firm started by former BlackRock Inc. money managers, may shut its largest hedge fund after a 25 percent decline last year, according to a letter to investors.

Winding down the $3 billion Global Opportunities Fund is one option being considered by Drake ``in an attempt to maintain and maximize value for investors during this period of severe market downturn and contraction of liquidity,'' the letter said. About half the fund's investors had asked for their money back.

Dresdner's $16 Billion SIV May Lose Moody's Top Grade (Update1)
By Neil Unmack

March 12 (Bloomberg) -- Dresdner Bank AG's $16 billion structured investment vehicle may be stripped of its top credit ratings by Moody's Investors Service because of the declining value of its assets.

Moody's put Dresdner's K2 Corp. on review for possible downgrade because of ``funding difficulties and declines in the company's portfolio market value,'' the ratings firm said in a statement today.

Moody's said it may confirm the SIV's Prime 1 and long-term Aaa grades if Frankfurt-based Dresdner provides it with a loan facility to repay debt.

Dresdner said last month it would provide the financing ``following the satisfaction of certain conditions.''

The company's portfolio was worth 96 percent of face value on March 6, down from just over 100 percent in July. Further price declines may force it to wind down under rules designed to protect bondholders, Moody's said.

If the value of K2's assets falls by a further two percent, the SIV will enter enforcement, assuming there is no further decline in the market value of its debt, Moody's said.

Court Rules on Payout of Whistlejacket Creditors
Wed Mar 12, 2008

LONDON (Reuters) - A court has ruled that Whistlejacket, a structured investment vehicle (SIV) that went into receivership last month, must pay off creditors that were due to be paid on the day it declared insolvency.

The decision, made last week, may have some impact on how creditors of other troubled vehicles -- Cheyne Finance, set up by hedge fund Cheyne Capital Management, and Rhinebridge Plc, set up by German bank IKB (IKBG.DE: Quote, Profile, Research) -- will be paid.

Deloitte & Touche was appointed as receiver of Whistlejacket on Feb. 12 after a drop in the value of the SIVs assets led its sponsor, Standard Chartered (STAN.L: Quote, Profile, Research), to shelve a plan to rescue it by providing liquidity. The SIV was declared insolvent on Feb. 15.

SocGen Faces Investor Lawsuit Over Losses
Wed Mar 12, 2008
By Paritosh Bansal

NEW YORK (Reuters) - A U.S. shareholder sued Societe Generale (SOGN.PA: Quote, Profile, Research) on Wednesday, alleging the French bank misled investors about its exposure to subprime loans and failed to act on information about trades by Jerome Kerviel.

Phillip Barkett, a Missouri resident who bought SocGen American Depository Receipts, sued the bank, Chief Executive Daniel Bouton and director Robert Day in U.S. District Court in Manhattan, according to the complaint provided to Reuters by the law firm Cohen Milstein Hausfeld & Toll.

The complaint alleges that the defendants made false and misleading statements and concealed material adverse information regarding SocGen's internal controls and exposure to subprime loans and collateralized debt obligations.

Freddie Mac CEO: Home prices will keep falling
South Florida Business Journal
March 12, 2008

Housing prices in the U.S. have only fallen about one-third as far as they're going to drop, the chief executive officer of Freddie Mac said Wednesday.

During a call with analysts, Richard Syron, CEO of the McLean, Va.-based mortgage-finance giant (NYSE: FRE), said the prices still have more falling to do, and from peak to trough will decline 15 percent.

The Federal Reserve said earlier it will provide $200 billion to Wall Street to help improve liquidity. The Fed will accept as collateral federal agency residential-mortgage-backed securities, non-agency AAA-rated MBS and government agency debt.

[Let's see the Fed is accepting AAA rated MBS, and well, read the next story...]

Moody's, S&P Defer Cuts on AAA Subprime, Hiding Loss (Update2)
By Mark Pittman

March 11 (Bloomberg) -- Even after downgrading almost 10,000 subprime-mortgage bonds, Standard & Poor's and Moody's Investors Service haven't cut the ones that matter most: AAA securities that are the mainstays of bank and insurance company investments.

None of the 80 AAA securities in ABX indexes that track subprime bonds meet the criteria S&P had even before it toughened ratings standards in February, according to data compiled by Bloomberg. A bond sold by Deutsche Bank AG in May 2006 is AAA at both companies even though 43 percent of the underlying mortgages are delinquent.

Sticking to the rules would strip at least $120 billion in bonds of their AAA status, extending the pain of a mortgage crisis that's triggered $188 billion in writedowns for the world's largest financial firms. AAA debt fell as low as 61 cents on the dollar after record home foreclosures and a decline to AA may push the value of the debt to 26 cents, according to Credit Suisse Group.

``The fact that they've kept those ratings where they are is laughable,'' said Kyle Bass, chief executive officer of Hayman Capital Partners, a Dallas-based hedge fund that made $500 million last year betting lower-rated subprime-mortgage bonds would decline in value. ``Downgrades of AAA and AA bonds are imminent, and they're going to be significant.''

[Hmmm..., Moodys is maintaining AAA ratings of various mortgage bonds, which is "laughable"]

Citigroup Acts to Bolster Hedge Funds
March 11, 2008

Citigroup, the banking giant, moved Monday to shore up six of its hedge funds pressured by a tightening in the municipal bond market, the newest problem to entangle the struggling company.

The bank has committed to injecting $1 billion across six highly leveraged municipal bond funds with $15 billion in assets, which were sold to wealthy customers under the names ASTA and MAT. About $600 million had been provided as of last week, according to people briefed on the situation, after lenders issued a margin call in response to falling securities values.

Carlyle Capital Dives, Despite Rescue Hopes(Forbes)
Vidya Ram

LONDON - Hopes that the Carlyle Group would come to the rescue failed to save shares in its investment fund Carlyle Capital from plunging on Tuesday.

Shares in Carlyle Capital (other-otc: CARYF - news - people ) dived down 20.4%, or 1.02 euros ($1.56), at 3.98 euros ($6.09) in Amsterdam on Tuesday after Dutch stock market regulator AFM lifted the suspension of trading on the stock. The suspension had been in place since 9:00 a.m. last Friday.

Shares were suspended a day after Carlyle Capital announced it had missed margin calls from lender banks anxious to step up the collateral on a $21.7 billion portfolio of U.S. government agency residential mortgage-backed bonds. Once considered good mortgages, the fall in the asset value of derivatives based on them highlighted the extent to which risk aversion from the subprime crisis has spread. Though the fund thought its liquidity position sound just a week before, it said that it had been inundated with over $400 million in margin calls.\

After trading was suspended Carlyle Capital said that margin calls continued to roll in and creditors may have already liquidated a total of $5.7 billion of assets on the open market. It also warned that an additional $16 billion of assets could be liquidated if an agreement was not reached.

The Credit Collapse of 2008(
by Martin D. Weiss, Ph.D.

The Credit Collapse of 2008 has begun.

The place is every home, business and government.

The time is now.

The credit collapse is not just an ordinary recession that repeats itself with each new business cycle of the 21st century. Nor is it the Great Depression returning to haunt us from the depths of the 1930s.

The credit collapse is a sudden surge in debt defaults by borrowers ... and an equally sudden disappearance of new loans by lenders.

It's an unprecedented surge in home foreclosures ... and an equally unprecedented cutback in new home mortgages.

It's causing unexpected corporate bankruptcies ... plus equally unexpected demands by banks to put up more collateral.

It's threatening to sink businesses, paralyze local governments and gut the investment portfolios of millions of Americans.

It's even starting to sabotage the best laid plans of government — neutralizing the Fed's interest rate cuts ... pre-empting Congress' economic stimulus plan ... and threatening to strip Washington of its traditional powers to fight a recession.


Just in the past three months, we've seen the Credit Collapse of 2008 drive a dagger into the markets for prime home mortgages, commercial mortgages, business loans, student loans, credit cards and municipal bonds.

We've seen the credit collapse rip apart little-known-but-important "structured" securities — Residential Mortgage-Backed Securities (RMBS), Commercial Mortgage-Backed Securities (CMBS), Collateralized Debt Obligations (CDOs), Collateralized Loan Obligations (CLOs), Auction Rate Securities (ARS), Credit Default Swaps (CDS), Structured Investment Vehicles (SIVs) and Variable Interest Entities (VIEs).

And just last week, to the shock of federal authorities, the credit collapse struck bonds issued by Fannie Mae and Freddie Mac. Although not backed by the full faith and credit of the U.S. government, these bonds were thought to be immune from the crisis because of their special status as government "sponsored" agencies. But they weren't.

The New York Times puts it this way: "If investors lose confidence in Fannie Mae and Freddie Mac, which have become the only major remaining source of mortgage financing in recent months, Fed officials fear that homes sales and housing prices could plunge further and foreclosures could climb even higher than they already have."

Plus, there's still another, unspoken fear:

If the Credit Collapse of 2008 can slam into the market for government-sponsored bonds, could it not do the same to government agency bonds like Ginnie Maes, which are backed by the full faith and credit of the U.S. government?


Good luck and God bless!

Bear Stearns Shares Plummet as Moody's Cuts Alt-A Ratings (WSJ)
March 10, 2008

NEW YORK -- Moody's Investors Service downgraded dozens of tranches of securities issued by a Bear Stearns Cos. trust and backed by home mortgages that stand between subprime and prime, a further indication that delinquencies are moving up the ladder of credit quality.

The action is just the latest warning about the credit quality of Alt-A mortgages, which are issued to borrowers who generally have stronger credit than subprime brokers, but who aren't considered prime for reasons including a lack of full documentation of income or assets. Moody's action, by singling out one issuer, fell heavily on Bear Stearns.

ECB's T richet `Concerned' About Euro's Appreciation (Update6)
By Simon Kennedy and Simone Meier

March 10 (Bloomberg) -- European Central Bank President Jean- Claude Trichet said he's ``concerned'' about the euro's appreciation, intensifying his rhetoric after the currency climbed to a record against the dollar.

``We're concerned about excessive exchange-rate moves in the present circumstances,'' Trichet told reporters in Basel, Switzerland today. It's the first time Trichet has specifically expressed worry about the currency since November, when he opposed ``brutal'' moves.

The euro fell as much as 0.3 percent after the comments before rebounding, as investors decided Trichet's ability to weaken the currency is limited. The strongest European inflation in 14 years is preventing the ECB from cutting interest rates while the Federal Reserve is slashing borrowing costs to stave off a recession in the world's largest economy

Carlyle Fund Seeks Halt to LiquidationBy JULIA WERDIGIER
March 10, 2008

LONDON — The Carlyle Group’s troubled mortgage-debt investment fund, Carlyle Capital, said on Monday that it had asked lenders to halt further liquidation of collateral worth as much as $16 billion while the two sides discuss ways to repay debt.

The fund, which invests mainly in triple-A rated mortgage securities issued by Fannie Mae and Freddie Mac, has received $400 million in margin calls, and some of its lenders started to liquidate collateral for $5 billion of debt. Banks are asking for their money back amid concerns the economic climate may deteriorate further.

The Carlyle fund said on Monday that it “requested a standstill agreement whereby its lenders would refrain from foreclosing and liquidating their collateral, and we are awaiting responses.”

Banks are asking for more collateral to cover loans after writing down more than $160 billion in assets linked to the subprime mortgage crisis, and fears of a recession are prompting them to call in some of the loans outright. Costs to protect even the safest bonds are close to a record, and investment funds like Carlyle Capital are finding it increasingly difficult to meet rising demands for collateral as the value of their portfolios declines along with the financial markets.

“At the beginning banks were willing to accept not to trigger margin calls because they feared forced assets sales,” said Philip Gisdakis, a senior credit strategist at Unicredit in Munich, “but now that there is a serious deterioration in the valuation of collateral, they cannot do that any longer and need to protect their loans.”

....Peloton Partners, a London-based hedge fund run by former Goldman Sachs partners, was forced last month to liquidate its largest funds after it failed to reach an agreement with some of its lenders on the levels of collateral. Thornburg Mortgage, the mortgage lender in the United States, also ran into trouble after it failed to meet some margin calls. More funds that used a high level of leverage to buy less-risky assets are likely to face difficulties, Mr. Gisdakis said.

FGIC sues IKB over $1.9bn liabilities(Financial Times)
By Aline van Duyn in New York and James Wilson in Frankfurt
March 10 2008

The fallout from the credit crisis spread on Monday when Financial Guaranty Insurance Company, the New York-based bond insurer, filed a lawsuit accusing IKB, the German bank, and its affiliates of a fraud that left it exposed to potential liabilities of $1.9bn.

In the complaint, filed in New York, FGIC alleged that IKB and its affiliates provided false and misleading information that convinced the bond insurer to assume billions of dollars of potential losses on one of IKB’s off-balance sheet special investment vehicles.

Legg Mason ups cash fund support to $1.5bn
Phil Craig
10 Mar 2008

US asset manager Legg Mason has opened a line of credit worth $150m (€98m) to support a cash fund's holding in UK-based structured investment vehicle Cheyne Finance.

This move increases Legg Mason's support for its money market funds to more than $1.5bn.

Legg Mason has obtained a letter of credit from an unnamed bank to cover the holding, and the fund manager can withdraw assets under certain circumstances, such as if the fund realizes a loss on the investment. The agreement will last a year.


S&P Downgrades $9 Billion in CDOs (Associated Press)

NEW YORK - Standard & Poor's Ratings Services said Monday it slashed its rating on almost $9 billion of collateralized-debt obligations - investments that derive payments from bundles of different types of debt.

S&P downgraded 87 tranches from 15 CDO deals. The downgraded debt totals $8.96 billion.

A CDO funnels payments from a number of different sources into one pool, then slices that pool into tranches. The downgraded tranches derive their payments from bonds backed by certain assets, including home loans.

S&P is reviewing how it rates CDOs in light of the deterioration of mortgage credit quality. Sagging home prices are making it more difficult and less appealing for borrowers to pay off their mortgages, forcing a spike in many pools of home loans.

The ratings agency has downgraded nearly $200 billion in CDOs.

Legg Mason Secures Financing to Prop Up Ailing Money Funds
March 8, 2008

Legg Mason, the asset management company, threw its short-term money funds a new lifeline on Friday by securing a $150 million letter of credit to prop up portfolios exposed to troubled structured investment vehicles.

The asset manager said the money, a loan from Citibank, a unit of Citigroup, would help ensure that investors escape fallout from losses on the housing securities that backed the funds.

“This latest action is consistent with our efforts to support our money market funds in light of the current stresses in the markets,” Legg Mason’s chief executive, Mark R. Fetting, said in a statement.

The money would support about $522 million in asset-backed commercial paper issued by Cheyne Finance, a structured investment vehicle managed by British hedge fund Cheyne Capital Management.

The Croesus Chronicles, Totally Uncharted Waters
Robert Lenzner

It's never been the case that so many financial markets are so seriously troubled and not operating smoothly or, in some cases, at all.

Subprime mortgages and part of the prime mortgage market are AWOL. Collateralized debt obligations and collateralized loan obligations, portfolios of mortgage-backed bonds and leveraged corporate loans are shunned like lepers.

Structured investment vehicles await more drastic write-downs. The municipal bond market suffers. Plain, "vanilla" corporate loans are challenged. Over $300 billion in auction-rate notes have no liquidity.

Business chiefs warn of threat to euro
By Tony Barber in Brussels
March 6 2008

European business leaders warned on Friday that the euro would not survive in the long term if the European Union failed to develop powerful political institutions to balance the European Central Bank.

“There’s an imbalance between the central bank’s power and the power of the European institutions,” said Ernest-Antoine Seillière, president of BusinessEurope, the leading pan-European business association.

“We believe the euro will not survive in the long run in the absence of some kind of political support, by which we mean the eurogroup,” he said, referring to the 15 eurozone finance ministers who at present hold formal meetings once a month.

Mr Seillière was speaking to reporters as the euro continued its record-breaking rise on foreign exchange markets, touching another all-time high of $1.5347.

The euro also reached a record high on Friday against the British pound.

Mr Seillière’s organisation has made no secret of its desire to see a stronger role for the eurogroup in co- ordinating the eurozone’s economic policies.

However, his comments were particularly timely on account of the EU’s growing concern about the euro’s rise against the dollar and Asian currencies such as the yen and Chinese renminbi.

“We have been calling for the eurogroup to have real potential, power and authority when it holds its meetings. We know Prime Minister [Jean-Claude] Juncker has done his best up to now, but we ask for more,” said Mr Seillière, referring to the Luxembourg leader who chairs the eurogroup’s meetings.

“Real co-ordination of national economic policies in the euro area is essential.

“When will we see the head of the eurogroup join with his opposite numbers in Tokyo, Beijing and Washington and open up the discussion among the major actors in the world economy in order to stabilise the world monetary system?” Mr Seillière asked.

“I’m not saying it will be possible next month, but it must be done. Otherwise you’ll see the euro at $1.80 and no action,” he added.

Fed boosts auction size in surprise action
Fri Mar 7, 2008
By Mark Felsenthal

WASHINGTON (Reuters) - The Federal Reserve on Friday announced emergency measures to add $200 billion into the banking system in a bid to ease persistent liquidity strains that are leading to a global credit freeze.

The Fed said it would increase the size of its two term auctions of short-term funding to banks this month to $100 billion from the $60 billion previously announced. It also would start a series of term repurchase transactions with the primary dealers that trade securities directly with the Fed, expected to be worth a total of $100 billion.

The two measures are intended to "address heightened liquidity pressures in term funding markets," the Fed said in a surprise announcement.

The move coincided with unexpectedly somber news that U.S. employers cut 63,000 jobs in February, the second consecutive month of job losses. Senior Fed staff said their announcement was not related to the jobs report but rather a reaction to a broad recognition that financial market deterioration had accelerated in recent days.

Stocks Tumble Following Jobs Report
TIM PARADIS AP Business Writer
March 7, 2008
The Associated Press

NEW YORK — Wall Street ended a dreadful week with another big loss Friday after the government surprised investors with a report that employers eliminated 63,000 jobs last month. The news compounded fears that the U.S. economy, already hampered by an unrelenting credit crisis, is succumbing to recession.

The Dow Jones industrial average fell 146 points, bringing its two-day slide to 370. This week's declines in the three major stock indexes to their lowest settlements since 2006 came despite the Federal Reserve's announcement that it would take steps to aid the credit markets.

The Labor Department's report that employers cut jobs by 63,000 last month _ the most since March 2003 _ unnerved investors worried about the health of the economy and who had been expecting a 25,000 gain in jobs. While the unemployment rate fell to 4.8 percent, the decline reflects people leaving the labor force.

The payroll numbers arrived minutes after the Federal Reserve announced it would take fresh steps to ease credit troubles, including boosting the amount of money it will auction to banks.

The central bank said it will increase the size of its March 10 and 24 auctions to banks to $50 billion each. The auctions had been slated for $30 billion apiece and Fed officials said subsequent auctions could be bigger if need be. The Fed also said that it would begin a series of repurchase transactions expected to reach $100 billion.

Carlyle Group Disrupted by Mortgage Fund's Blowup (Update4)
By Edward Evans

March 7 (Bloomberg) -- The collapse of the subprime- mortgage market has disrupted Carlyle Group, the world's second- biggest leveraged-buyout firm by assets.

Carlyle Capital Corp., the firm's mortgage-bond fund, was suspended from Amsterdam trading today after it failed to repay lenders, who in turn sold assets held as collateral. The fund expects more margin calls, which may deplete capital. The pool may be liquidated and the stock left worthless, Bear Stearns Cos. analyst Keith Baird said in a note to clients.

``This marks a further savage step in the ongoing credit implosion of recent months,'' Baird wrote today.

UPDATE 1-Fitch downgrades CIFG-related bonds after rating cut
Fri Mar 7, 2008

NEW YORK, March 7 (Reuters) - Fitch Ratings on Friday cut ratings of almost 9,000 bonds linked to bond insurer CIFG Guaranty after stripping it of its top "AAA" rating earlier in the day.

Fitch cut CIFG and its affiliates to "AA-minus," the fourth-highest rating, from "AAA" because the company's shareholders "may be less willing to provide further capital support," Fitch said.

The ratings agency lowered 8,895 bond issues insured by CIFG as a result of the earlier rating downgrade, Fitch said.

Moody's Investors Service on Thursday cut its top ratings on bond insurer CIFG Guaranty, citing "significant" exposure to risky residential mortgage-backed securities and collateralized debt obligations.

Moody's cut CIFG's insurance financial strength rating four notches from "AAA" to "A1," the fifth-highest investment-grade rating. The outlook is stable, indicating an additional downgrade is not anticipated over the next 12 to 18 months.

Standard & Poor's still rates CIFG the top "AAA."

Thornburg Falls Some More
Carl Gutierrez

For a company that astute investors consider high-quality, Thornburg Mortgage is having a whole lot of trouble.

The jumbo mortgage lender and real estate investment trust said Friday it does not have enough cash to cover current margin calls and it will restate past financial results to account for a decline in the value of its mortgage securities. Shares of the Santa Fe, N.M.-based mortgage lender dropped 8.5%, or 14 cents, to a meager $1.79, at the close. A year ago, it was a $25 stock.

Thornburg said it has $610 million outstanding in margin calls, which "significantly exceeded its available liquidity." It has already met $1.2 billion in margin calls since the beginning of the year. Margin calls force borrowers to repay loans or put up collateral to secure them. If a borrower is unable to meet the calls, the creditor typically can seize and liquidate assets used as collateral.

Thornburg's situation is colored by a Bill Gross announcement that he has been buying millions of dollars of Thornburg's debt over the last few days. Gross is the chief investment officer of Pacific Investment Management Company, commonly known as PIMCO. The manager of the world's largest bond fund said in television interview on Friday that he has been buying "high quality" rated debt. Gross says the yields are range between 9% and 11%, adding that he expects the paper to ultimately turn close to double-digit returns.

It doesn't stop there. On Thursday evening Moody's downgraded the Thornburg Mortgage because of multiple defaults on financing agreements. Moody's cut Thornburg's senior unsecured debt rating to Ca from Caa2 and its preferred stock ratings to C from Ca. All four ratings are considered junk status. The unsecured debt rating is still on review for another possible downgrade.

...These developments come in the wake of the mortgage lender announcing late-Wednesday that it couldn’t meet a $28 million margin call because of a series of cross-defaults. ...On Monday afternoon Thornburg said it sold nearly $920 million in adjustable-rate mortgages to investors via collateralized mortgage obligations.

FHA boosts home mortgage limits
Kathleen Pender
March 6, 2008

Federal Housing Administration mortgages, which have virtually disappeared from California because of their low dollar limits, will soon become a compelling new option for borrowers in high-cost areas, especially for people with low down payments and tarnished credit histories.

The FHA is a federal Department of Housing and Urban Development agency that insures mortgages for people who can't get conventional financing. This guarantee encourages private-sector lenders to make loans and investors to buy them.

Before today, however, FHA could not insure single-family home mortgage loans in the continental United States that exceeded $200,160 to $362,790, depending on location. Because of these low limits, FHA guaranteed only 5,000 loans in California in 2005.

Starting today, FHA can temporarily insure single-family loans up to 125 percent of each area's median price, with a minimum of $271,050 and a maximum of $729,750.

Ambac to raise $1.5 bln selling stock, equity units. New capital may help secure AAA ratings, S&P, Moody's say; Fitch disagrees
By Alistair Barr, MarketWatch
March 5, 2008

Ambac Financial said Wednesday that it plans to raise at least $1.5 billion selling new common stock and equity units as the troubled bond insurer tries to keep its crucial AAA rating.

Ambac shares dropped 13% to $9.27 after the announcement.

The new capital may be enough to secure the company's AAA ratings, Standard & Poor's and Moody's Investors Service, the largest rating agencies, said. Smaller rival Fitch Ratings said that if the insurer successfully raises the new capital, it still won't be enough to secure an AAA rating. The agency is planning to affirm its current AA rating after the offerings are completed.

Ambac (ABK) is aiming to raise at least $1 billion selling common stock and another $500 million selling equity units.

Ambac also said it will stop guaranteeing several different types of structured products, including collateralized debt obligations, all mortgage-backed securities and auto loan and credit card securitizations. Ambac also said that it has written "virtually" no new business so far in 2008. Ambac decided against splitting its more stable muni bond business from its troubled structured finance unit after ratings agencies quashed the idea. Bond insurers like Ambac agree to pay interest and principal on debt in a timely manner in the event of default. The $2.4 trillion business relies on AAA ratings to win new business.

But those top ratings are in jeopardy now because of concerns insurers like Ambac and MBIA (MBI) will have to pay big claims from guarantees they sold on complex mortgage-related securities known as collateralized debt obligations (CDOs).

Many banks have tried to hedge CDO exposures by buying guarantees from bond insurers in the form of credit default swaps (CDS), a type of derivative. If lots of bond insurers are downgraded or if some collapse, these banks may suffer more write-downs because these CDS contracts will be worth less.

Oil surpasses $104 a barrel, gaining more than $5 U.S. inventories drop unexpectedly; OPEC leaves output unchanged

By Moming Zhou & Polya Lesova, MarketWatch
March 5, 2008

Crude-oil futures on Wednesday surged past $104 a barrel for the first time, rallying after data showed U.S. inventories fell unexpectedly and after the Organization of Petroleum Exporting Countries decided to keep its production levels unchanged.

UPDATE 1-US Treasury: sovereign funds can fan protectionism(Reuters)
Wed Mar 5, 2008

WASHINGTON, March 5 (Reuters) - A senior U.S. Treasury Department official said on Wednesday that sovereign wealth funds aid market stability but warned they may fan protectionism if their investment goals are not clear.

"It is my view that protectionist sentiment stems partly from a lack of information and understanding of sovereign wealth funds, which in turn is partly due to a lack of transparency and clear communication on the part of the funds themselves," said Treasury's undersecretary for international affairs, David McCormick.

McCormick was one of a series of officials testifying before a U.S. House of Representatives financial services subcommittee.

...Sovereign wealth funds currently manage an estimated $1.9 trillion to $2.9 trillion, more than hedge funds and private equity funds, and could grow to $15 trillion in the coming eight years, experts have said.

The funds, many of them in the Middle East but also in Russia and China, have arisen as high oil prices and huge U.S. trade deficits have caused enormous accumulations of assets abroad that are being reinvested back in the United States.

Hedge funds face bigger 'haircuts' Renée Schultes and William Hutchings(Financial News)
05 Mar 2008

Banks are forcing hedge funds to reduce their leverage by demanding they make larger cash downpayments to trade across a range of asset classes compared to 12 months ago, as lenders become more conservative and hedge fund failures increase.

Prime brokers, which finance hedge fund trades, demand a downpayment, also known as a "haircut," to cushion their losses if the fund's portfolio declines in value.

The downpayment required to buy certain types of structured credit on a leveraged basis started to rise last summer following the collapse of two hedge funds managed by Bear Stearns in August.

Since then, downpayments on almost all asset classes have increased, according to data from Citigroup.

For leveraged investors buying AA-rated corporate bonds, the average downpayment demanded by prime brokers, has increased from 0% to 3% of the value of the leveraged portfolio in March last year to 8% to 12% this month, according to Citigroup data, based on the bank's best estimates.

That means the maximum leverage has fallen from over 30 times last March to 8.3 times this month.

Similarly, the haircut on high-yield bonds rated BB has increased from between 10% and 15% to between 25% and 40%, reducing leverage from 6.7 times to 2.5 times.

On equities, the haircut has increased from 15% to 20%, which means leverage has fallen from 6.7 times last year to five times.

Oil surpasses $104 a barrel, gaining more than $5 U.S. inventories drop unexpectedly; OPEC leaves output unchanged

By Moming Zhou & Polya Lesova, MarketWatch
March 5, 2008

Crude-oil futures on Wednesday surged past $104 a barrel for the first time, rallying after data showed U.S. inventories fell unexpectedly and after the Organization of Petroleum Exporting Countries decided to keep its production levels unchanged.

UPDATE 1-US Treasury: sovereign funds can fan protectionism(Reuters)
Wed Mar 5, 2008

WASHINGTON, March 5 (Reuters) - A senior U.S. Treasury Department official said on Wednesday that sovereign wealth funds aid market stability but warned they may fan protectionism if their investment goals are not clear.

"It is my view that protectionist sentiment stems partly from a lack of information and understanding of sovereign wealth funds, which in turn is partly due to a lack of transparency and clear communication on the part of the funds themselves," said Treasury's undersecretary for international affairs, David McCormick.

McCormick was one of a series of officials testifying before a U.S. House of Representatives financial services subcommittee.

...Sovereign wealth funds currently manage an estimated $1.9 trillion to $2.9 trillion, more than hedge funds and private equity funds, and could grow to $15 trillion in the coming eight years, experts have said.

The funds, many of them in the Middle East but also in Russia and China, have arisen as high oil prices and huge U.S. trade deficits have caused enormous accumulations of assets abroad that are being reinvested back in the United States.

Canadian Bank Suffers Blow From Subprime(WSJ)

The Bank of Montreal said it won't achieve its fiscal 2008 earnings targets after its first-quarter net income fell 27% on charges related to its U.S. subprime-mortgage market exposure and ailing structured-investment vehicles.

Toronto-based Bank of Montreal also said that if no restructuring agreement is reached, it expects to record a charge of about 500 million Canadian dollars ($505.9 million) related to its remaining exposure to the Apex structured-finance vehicle in the current quarter.

And the bank didn't raise its dividend this quarter, veering from a recent trend of regularly increasing its payout to shareholders.

...Also a potential impact is Bank of Montreal's plan to provide funds for two ailing structured-investment vehicles, a move some had said might lead to the bank placing the SIVs onto its balance sheet.

The Housing Fix
By Robert J. Samuelson
Wednesday, March 5, 2008

Gloom. Doom. Calamity. Home prices are tumbling. We're bombarded by somber reports. But wait. This is actually good news, because lower home prices are the only real solution to the housing collapse. The sooner prices fall, the better. The longer the adjustment takes, the longer the housing slump (weak sales, low construction, high numbers of unsold homes) will last.

It's elementary economics. Pretend that houses are apples. We have 1,000 apples, priced at $1 each. They don't sell. We can either keep the price at $1 and watch the apples rot or cut the price until people buy. Housing is no different.

Even many economists -- who should know better -- describe the present situation as an oversupply of unsold homes. True, there is about 10 months' supply of existing homes as opposed to four months' a few years ago. But the real problem is insufficient demand. There aren't more homes than there are Americans who want homes; that would be a true surplus. There's so much supply because many prospective customers can't buy at today's prices.

By definition, the "housing bubble" meant that home prices got too high. Easy credit, lax lending standards and panic buying raised them to foolish levels. Weak borrowers got loans. People with good credit borrowed too much. Speculators joined the circus.

Moody's Foresees No CDO Recovery in '08(AP)
March 4, 2008

NEW YORK — Moody's Investors Service does not expect a recovery in the market for collateralized debt obligations _ complex pools of debt that have fallen victim to the credit crisis _ in 2008, the ratings agency said Tuesday.

Focus Capital collapse adds to hedge fund fears(Financial Times)
By James Mackintosh in London
March 5 2008

Focus Capital, a $1bn New York hedge fund, has been forced to liquidate its portfolio after missing margin calls from banks, it told investors -yesterday.

The fund, which had produced strong returns by investing in Swiss mid-cap stocks since starting in 2005, is now expected to shut down after losing about 80 per cent of its value.

The collapse is the latest to hit leveraged hedge funds, following the failure of Peloton Partners' $2bn ABS fund last week, and comes as worries are rising that forced sales by hedge funds could drive down prices.

Several other funds specialising in credit are close to crisis, according to investors and consultants, while a few smaller funds have had assets seized by banks or have required rescues by investors or allies.

Credit Default Swaps Signal Brokerage Trouble(Minyanville)

Bennet Sedacca
Mar 05, 2008

Yep. The great credit unwind is upon us. Credit default swaps on all brokers, particularly Lehman (LEH) and Bear Stearns (BSC) are blowing out, big time. Why?

Put it this way. Look at what is happening to Thornburg Mortgage (TMA). It supposedly only has a 0.44% default rate on its mortgage portfolio that it services but the bonds it owns are getting pounded. Result? Margin call. The worst part is that the company went to sell some bonds to settle the margin calls and couldn't. The ultimate Roach Motel.

Enter LEH and BSC. LEH reportedly has two times the capital in CMBS and nearly five times the capital in 'hard-to-price' securities. Hard-to-price in my book equates to hard to sell. If you were TMA's auditor would you sign off on its 10Q? I wouldn't. BSC is actually in worse shape. It has irritated so many clients that its business model is broken.

What would happen if you told it to sell its 'hard-to-price bonds'? The company couldn't. No one has the balance sheet to absorb it. So you can see the vicious cycle developing.

SEC probes municipal derivative deals(Forbes)

Antitrust and securities regulators are considering charges against a handful of large banks, bond insurers and some of their employees as part of an investigation into certain municipal-bond investments.

Bank of America (nyse: BAC), UBS (nyse: UBS ) AG and bond insurer Financial Security Assurance Holdings Ltd. (nyse: FSB ) last month received notices from the Securities and Exchange Commission indicating civil enforcement action may be taken against them for potentially violating federal securities laws about bidding practices on contracts that manage municipal funds.

The 'Wells notices' sent by the SEC, which the companies disclosed in regulatory filings, also give the companies an opportunity to argue why enforcement actions should not be brought.

The Justice Department and IRS also are participating in the probe. The Justice Department in November informed Wachovia Corp. (nyse: WB ) that two if its employees, both of whom are on leave, are targets of the investigation. The bank is continuing to cooperate with the probes, according to Feb. 28 filing to the SEC.

A Justice spokesman on Wednesday said the investigation is ongoing and declined further comment. Spokesmen from the SEC and IRS declined to comment.

Gold Hits Record High on Weak Dollar
March 5, 2008

NEW YORK (AP) — Gold prices shot up Wednesday, surging to a new record just below $1,000 after the dollar tumbled lower and crude oil hit an all-time high, boosting the metal's appeal as a hedge against inflation.

Other commodities traded broadly higher, with wheat, soybeans and energy futures all gaining.

After plunging nearly $18 on Tuesday, gold roared back Wednesday, gaining nearly $30 after the dollar sank to another record low. The greenback's decline came amid a slew of weak economic data highlighting the ailing U.S. economy: U.S. factories saw a sharp drop in demand for products in January, while the U.S. service sector shrank last month.

"Everything is predicated on the U.S. dollar," said Kevin Grady, a gold trader with MF Global in New York. "We're starting to see inflationary pressure coming in, and everything from metals to wheat to natural gas is going higher. We could definitely see $1,000 gold today."

Canadian Bank Suffers Blow From Subprime(WSJ)

The Bank of Montreal said it won't achieve its fiscal 2008 earnings targets after its first-quarter net income fell 27% on charges related to its U.S. subprime-mortgage market exposure and ailing structured-investment vehicles.

Toronto-based Bank of Montreal also said that if no restructuring agreement is reached, it expects to record a charge of about 500 million Canadian dollars ($505.9 million) related to its remaining exposure to the Apex structured-finance vehicle in the current quarter.

And the bank didn't raise its dividend this quarter, veering from a recent trend of regularly increasing its payout to shareholders.

...Also a potential impact is Bank of Montreal's plan to provide funds for two ailing structured-investment vehicles, a move some had said might lead to the bank placing the SIVs onto its balance sheet.

Moody's Foresees No CDO Recovery in '08(AP)
March 4, 2008

NEW YORK — Moody's Investors Service does not expect a recovery in the market for collateralized debt obligations _ complex pools of debt that have fallen victim to the credit crisis _ in 2008, the ratings agency said Tuesday.

Focus Capital collapse adds to hedge fund fears(Financial Times)
By James Mackintosh in London
March 5 2008

Focus Capital, a $1bn New York hedge fund, has been forced to liquidate its portfolio after missing margin calls from banks, it told investors -yesterday.

The fund, which had produced strong returns by investing in Swiss mid-cap stocks since starting in 2005, is now expected to shut down after losing about 80 per cent of its value.

The collapse is the latest to hit leveraged hedge funds, following the failure of Peloton Partners' $2bn ABS fund last week, and comes as worries are rising that forced sales by hedge funds could drive down prices.

Several other funds specialising in credit are close to crisis, according to investors and consultants, while a few smaller funds have had assets seized by banks or have required rescues by investors or allies.

Credit Default Swaps Signal Brokerage Trouble(Minyanville)

Bennet Sedacca
Mar 05, 2008

Yep. The great credit unwind is upon us. Credit default swaps on all brokers, particularly Lehman (LEH) and Bear Stearns (BSC) are blowing out, big time. Why?

Put it this way. Look at what is happening to Thornburg Mortgage (TMA). It supposedly only has a 0.44% default rate on its mortgage portfolio that it services but the bonds it owns are getting pounded. Result? Margin call. The worst part is that the company went to sell some bonds to settle the margin calls and couldn't. The ultimate Roach Motel.

Enter LEH and BSC. LEH reportedly has two times the capital in CMBS and nearly five times the capital in 'hard-to-price' securities. Hard-to-price in my book equates to hard to sell. If you were TMA's auditor would you sign off on its 10Q? I wouldn't. BSC is actually in worse shape. It has irritated so many clients that its business model is broken.

What would happen if you told it to sell its 'hard-to-price bonds'? The company couldn't. No one has the balance sheet to absorb it. So you can see the vicious cycle developing.

SEC probes municipal derivative deals(Forbes)

Antitrust and securities regulators are considering charges against a handful of large banks, bond insurers and some of their employees as part of an investigation into certain municipal-bond investments.

Bank of America (nyse: BAC), UBS (nyse: UBS ) AG and bond insurer Financial Security Assurance Holdings Ltd. (nyse: FSB ) last month received notices from the Securities and Exchange Commission indicating civil enforcement action may be taken against them for potentially violating federal securities laws about bidding practices on contracts that manage municipal funds.

The 'Wells notices' sent by the SEC, which the companies disclosed in regulatory filings, also give the companies an opportunity to argue why enforcement actions should not be brought.

The Justice Department and IRS also are participating in the probe. The Justice Department in November informed Wachovia Corp. (nyse: WB ) that two if its employees, both of whom are on leave, are targets of the investigation. The bank is continuing to cooperate with the probes, according to Feb. 28 filing to the SEC.

A Justice spokesman on Wednesday said the investigation is ongoing and declined further comment. Spokesmen from the SEC and IRS declined to comment.

Gold Hits Record High on Weak Dollar
March 5, 2008

NEW YORK (AP) — Gold prices shot up Wednesday, surging to a new record just below $1,000 after the dollar tumbled lower and crude oil hit an all-time high, boosting the metal's appeal as a hedge against inflation.

Other commodities traded broadly higher, with wheat, soybeans and energy futures all gaining.

After plunging nearly $18 on Tuesday, gold roared back Wednesday, gaining nearly $30 after the dollar sank to another record low. The greenback's decline came amid a slew of weak economic data highlighting the ailing U.S. economy: U.S. factories saw a sharp drop in demand for products in January, while the U.S. service sector shrank last month.

"Everything is predicated on the U.S. dollar," said Kevin Grady, a gold trader with MF Global in New York. "We're starting to see inflationary pressure coming in, and everything from metals to wheat to natural gas is going higher. We could definitely see $1,000 gold today."

Fed Isn't Getting Snookered by Collateral Risk: Caroline Baum (Bloomberg)
Commentary by Caroline Baum
March 4

Ever since the Federal Reserve created a Term Auction Facility in December to ease the strains in the interbank-lending market, the TAF has been a source of agitation in certain conspiracy-prone circles.

The thrust of that argument goes something like this: The Fed, which is first and foremost a counterfeiter, printing money at will, is now accepting low-quality collateral as security for 28-day loans to banks whose anonymity is protected. In the process, the central bank assumes credit risk and lays it at the feet of the U.S. taxpayer.

Maybe it's time to take a look at some of the facts.

The Fed had already taken steps in August to encourage banks to borrow directly from its discount window, compressing the spread of the discount rate over the federal funds rate to 50 basis points from 100 and expanding both the type of collateral it would accept and the terms of the loans to 30 days.

No matter how nicely the Fed asked, banks were unwilling to incur the stigma associated with discount window borrowing, especially at a time when financial institutions were reporting large losses and any intimation of trouble could cause depositors to take flight.

Fed Chairman Ben Bernanke decided to respond to the liquidity crisis with, appropriately, added liquidity. (See ``Federal Reserve'' and ``lender of last resort.'') That didn't stop the yammering about the assumption of credit risk by the central bank.

The misinformation surrounding the TAF has reached such epic proportions, at least in my small world, that I decided to compile my own version of frequently asked questions and answers. Most of this information is publicly available on the Fed's Web site -- in excruciating detail. But hey, never let the facts get in the way of a good conspiracy theory.

... Q: What sort of securities and loans will be accepted as collateral outside of the traditional U.S. Treasury and agency securities?

A: Corporate and municipal bonds, money-market instruments, asset-backed securities, collateralized-mortgage obligations and various consumer, commercial and industrial, agricultural, residential and commercial real-estate loans.

... Q: Some of the collateral the Fed is accepting is exactly what got the banks into trouble. Why will the Fed do a better job of managing risk when it missed the bad-loan problems at banks it regulates?

A: The discount-window officers at the 12 Federal Reserve District Banks have discretion in determining both the fair value of the collateral and the required margin.

If there is no market price for a given security and the discount-window officers and/or bank-supervisory officials at the Fed aren't confident about the value, they can impose a bigger haircut. Alternatively, they can just say no.

In the current environment, it's safe to say the Fed has been erring on the side of too much rather than too little collateral.

Q: What happens if the value of the underlying collateral takes a dive during the 28-day term of the loan?

A: The same thing that happens in the private sector: the borrower gets a margin call. If the value of the collateral deteriorates, the Fed can consider other collateral in the borrower's pool as a backstop for the outstanding loan. Or the Fed bank can immediately reduce the amount of the loan.

The only thing fixed on a TAF loan is the rate. The Fed monitors the collateral on a daily basis. Borrowers that qualified for a loan can un-qualify quickly if the collateral is inadequate.

Q: So you're saying there's nothing to worry about?

A: There's plenty to worry about, including the collapse of the housing market, early signs of decay in commercial real estate, soaring commodity prices, an over-leveraged consumer, losses and potential capital impairment at financial institutions and an economy that's flat-lining. That's enough to keep you up at night without tossing and turning over the Fed's exposure to credit risk.

Citigroup, Wachovia Sued Over Credit-Default Swaps (Update2) (Bloomberg)
By Heather Smith
March 4

Citigroup Inc. and Wachovia Corp. were sued by a hedge fund claiming the banks wrongly forced it to pay more than necessary on insurance derivatives contracts.

VCG Special Opportunities Master Fund Ltd., an Isle of Jersey, U.K.-registered fund, claimed Citigroup asked it to deposit additional sums as collateral for the contracts, eventually costing it about $18 million, according to a lawsuit filed Feb. 14 in Manhattan federal court. The hedge fund, previously called CDO Plus Master Fund Ltd., made similar claims against Wachovia in an earlier complaint.

``It's a similar type of problem of the banks making margin calls which we believe were inappropriate and designed solely to protect the banks' interests,'' Steven Mintz, a lawyer for the fund, said today in a telephone interview.

The lawsuits come as the contracts, known as credit-default swaps, face added scrutiny after financial institutions have disclosed more than $181 billion in writedowns and credit losses. VCG, claiming breach of contract and unjust enrichment, alleged Citigroup, the third-largest U.S. bank by market value, misrepresented the level of risk associated with the contracts. VCG seeks repayment of losses and unspecified punitive damages.

Wachovia, the fifth-largest U.S. bank by market value, knew ``it would simply extract additional collateral under the pretext of writedowns'' to the initial contract, the fund alleged in a separate complaint filed Nov. 28 in New York State Supreme Court in Manhattan.

Ambac decides against splitting
By Aline van Duyn and Ben White in New York
March 4 2008

Ambac, the troubled bond insurer, has decided against splitting in two as it completes a $2bn-$3bn recapitalisation, insiders said.

Under a recent proposal, Ambac, the second biggest bond insurer, or monoline, would have split its operations into a triple-A-rated municipal bond insurance business and a structured finance business with potentially lower ratings. A lower rating on the structured part of its business could have forced banks to reduce the value of guarantees on collateralised debt obligations and on derivative trades.

There was also the possibility of lawsuits by banks and other groups that bought insurance on CDOs and other structured products. Eight banks, led by Citigroup and UBS, which between them bought the most guarantees from Ambac, are together preparing to inject $2bn or more into the monoline, which has been racing to come up with fresh capital to avoid a sharp cut in its triple-A rating.

The capital infusion, which is likely to include other investors beside the banks, could be announced as early as Wednesday, people involved in the talks said. The deal is expected to result in Ambac remaining a single entity with a triple-A rating.

Disquiet on the western front of the credit world By John Dizard
March 4 2008

The credit world is aligning itself into political factions, divided over the right approach to untangling the present mess. On one side are the trader-fundamentalists, with one hand on the Bloomberg keyboard, the other hand on a dog-eared copy of Atlas Shrugged . They believe in the literal interpretation of scripture, which in this case means that an asset is only worth what the bid side says it is. As far as they are concerned, the only way to deal with the excesses of the credit markets is to take the write-offs and start over, having accepted the revealed truth of what bankruptcy sale buyers are willing to pay.

Opposed to them are the would-be managers of systemic risk. They believe that the aggressive application of the mark-to-market rule would result in another Great Depression, only bigger. Their Qum is Washington DC, where the differences between the Republicans and the Democrats are small relative to their agreement that a deep recession, let alone a depression, must be avoided at all costs. One of those costs could be years of stagnation and low growth. You could call them Keynesians, except that Keynes was strongly opposed to currency debasement. As far as this group is concerned, currency debasement to the point of depravity is a good starting point. (Strangely, they still publicly proclaim adherence to a "strong dollar policy", even at $1.50 to the euro. What would a "weak dollar policy" be?)

However, the anti-fundamentalists are not just a Washington group. They also have strong representation at the top of the major dealers and banks. While the dealers' and banks' trading desks are mostly populated by fundamentalists, management people and board members on the upper floors realise that any thorough "liquidation" would include them.

Credit crunch leads to plunge in derivatives trading
Renée Schulte
04 Mar 2008

Trading in listed futures and options declined 21% quarter-on-quarter to a total turnover of $539 trillion (€355 trillion) in the three months to the end of December, as banks refused to lend to each other and liquidity fears intensified, according to a quarterly report from the Bank for International Settlements.

The decline in trading volumes followed a record $681 trillion in the third quarter of last year when turmoil in financial markets heightened hedging needs by financial institutions. That in turn led to greater use of futures and options.

The largest fall in the fourth quarter was in short-term interest rate derivatives contracts, where turnover decreased 24% to $405 trillion in the fourth quarter. Turnover is based on notional amounts, which is the value of leveraged positions.

The BIS said that while turnover in futures and options on three-month eurodollar rates dropped substantially in the fourth quarter, turnover in those on federal funds rates showed an increase.

It said this suggested hedging needs and speculative activity by financial institutions and other investors were skewed toward overnight rates instead of longer-term rates, reflecting expectations of policy rate cuts in the US.

Bernanke Urges Banks to Forgive Portion of Mortgages(Bloomberg)
By Scott Lanman and Steve Matthews
March 4

Federal Reserve Chairman Ben S. Bernanke, battling the worst housing recession in a quarter century, urged lenders to forgive portions of mortgages held by homeowners at risk of defaulting.

``Efforts by both government and private-sector entities to reduce unnecessary foreclosures are helping, but more can, and should, be done,'' Bernanke said in a speech to bankers in Orlando, Florida, today. ``Principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure.''

Bernanke's call goes beyond the stance of the Bush administration and previous Fed comments, indicating that he sees housing as a serious threat to the economy that can't be addressed by fiscal or monetary policy alone. The Fed's Feb. 27 report to Congress called for lenders to ``pursue prudent loan workouts'' through means such as modifying mortgage terms and deferring payments.

Munis Hit as Hedge Funds Keep Selling
March 03, 2008
By Romy Varghese and Michael Aneiro Of DOW JONES NEWSWIRES

Despite attractive yields, fixed-rate municipal bonds remained under pressure Monday morning as hedge funds continued to liquidate their holdings.

It is a soft start to a week that is expected to see about $8 billion in new municipal bonds. Market participants will be watching how the new supply, on top of existing bonds being offered for sale, will fare with investors and if more non-traditional muni buyers snap up the bargains.

"The environment we're in is unprecedented," said Daniel Solender, director of municipal bond management at Lord Abbett.

Muni bonds on Monday were doing "a bit of underperforming," as yields were off five to seven basis points, said Evan Rourke, municipal bond portfolio manager at MD Sass in New York.

Hedge funds were liquidating about $500 million of munis Monday, said Rourke. While individual investors are coming into the market, "the sellers are still overwhelming the buyers," he said. Still, retail investors are clearly stepping into the market. The number of muni trades are at a year-and-a-half high, according to Rourke. Also, non-traditional muni investors such as taxable bond funds and taxable money markets have picked up their buying since the second half of last week, Solender said.

"The market is at an interesting juncture," said R.J. Gallo, portfolio manager at Federated Investors in Pittsburgh. "Yield ratios are a screaming 'buy' and I think that the muni market's dislocation is apt to improve."

CDO Reliance on Ratings May Cause Mispriced Risk, BIS Says
By Neil Unmack

March 3 (Bloomberg) -- Credit ratings on collateralized debt obligations don't reflect how risky the securities are and may cause bondholders to pay too much when they invest, the Bank of International Settlements said.

Moody's Investors Service and Standard & Poor's have downgraded $117 billion of CDOs since July, according to data compiled by Wachovia Corp. in Charlotte, North Carolina. More than $20 billion of the notes have or will be liquidated because of rating cuts on the securities they package.

Peloton to Liquidate ABS Fund After Mortgage Losses
By Katherine Burton and Tom Cahill

Feb. 28 (Bloomberg) -- Peloton Partners LLP, the London- based hedge-fund firm run by former Goldman Sachs Group Inc. partners, is liquidating its ABS Fund after ``severe'' losses on mortgage-backed debt and demands from banks to repay loans.

Credit ratings don't ``fully capture and summarize the risks embodied in structured instruments,'' the Basel, Switzerland- based BIS said today in its quarterly review. Investors' undue reliance on ratings can ``lead to mispriced and mismanaged risk exposures,'' BIS analysts Ingo Fender, Nikola Tarashev and Haibin Zhu wrote.

Peloton, founded by Ron Beller and Geoff Grant in 2005, is seeking buyers for the $1.8 billion fund's assets, according to a letter sent today to investors. Firms including Citadel Investment Group LLC and GLG Partners Inc. have looked at the portfolio, two people familiar with the situation said.

AIG, subsidiaries ratings affirmed with negative outlook - S&P

MUMBAI (Thomson Financial) - Standard & Poor's Ratings Services said it has affirmed its 'AA' counterparty credit rating on American International Group Inc and 'AA ' counterparty credit and financial strength ratings on AIG's core operating units, after the US-based insurer said 2007 net income fell 56 pct to 6.2 bln usd.

The outlook remains negative, reflecting the continued uncertainty around estimating economic losses and fair market values in the US mortgage market, S&P said.

FACTBOX: No longer "subprime" problem for credit markets
Sun Mar 2, 2008

NEW YORK (Reuters) - Loose U.S. mortgage lending standards, rising interest rates in 2006 and falling house prices have resulted in a tsunami of less-creditworthy U.S. borrowers defaulting on their so-called subprime home mortgages and losing their homes, according to industry analysts.

However, many subprime mortgages were packaged into mortgage-backed securities and collateralized debt obligations (CDOs), or bundles of securities with differing yields and credit ratings, which were then sold to hedge funds, banks and pension funds who wanted to diversify their risks.

With the losses on subprime mortgage, the ensuing crisis of confidence in the form of tighter credit conditions has touched many corners of the financial world.

The following is a snapshot of where these markets stand:




Another Orange County, California alert. Orange County had $200 million in medium term notes from Sigma. It appears that the $50 million note maturing this month was successful. See the siv0 report.

Moody's to review Sigma rating (Financial Times)
By Paul J Davies
Published: February 28 2008

Sigma Finance, a $40bn-plus complex debt investment vehicle run by the London-based specialist asset manager Gordian Knot, has been put on review for downgrade by Moody's investors Service, the ratings agency.

The agency said that $27bn (£13.6bn) worth of senior short and medium-term debt issued by Sigma, Gordian's only significant business, were set to lose their top-notch credit ratings because of falling asset values and its inability to issue new debt.

Gordian's founders, Stephen Partridge-Hicks and Nick Sossidis, were pioneers of the structured investment vehicle industry, which has collapsed in the wake of the credit crunch. Sigma has proven more resilient than most vehicles mainly because in 2003 Gordian redefined its rules of operation to scrap the market-value triggers that have led other SIVs towards forced wind-downs.

However, the Gordian vehicle has not escaped the problems experienced by other SIVs related to declining values of financial debt and other complex bonds following the US subprime crisis and to the rush for the exits in the asset-backed commercial paper and other funding markets.

Sigma has shrunk by about $16bn from its peak of $57bn last summer through assets maturing or being sold. It has also managed to raise $22bn of alternative funding through such routes as the use of repurchase - or repo - agreements with banks, according to Moody's.

"Despite these positives, the overall market price deterioration, continued inability to issue senior debt, and reliance on repos have increased the company's risk profile," the agency said.

Moody's review could result in a downgrade of Sigma's long-term rating from triple-A to double-A

UPDATE 1-Proposed U.S. mortgage aid would do harm - Paulson (Reuters)
Thu Feb 28, 2008

WASHINGTON, Feb 28 (Reuters)

Plans for sweeping federal programs that would aid troubled mortgage borrowers would bring unfair relief to speculators and reward investors who made bad bets, Treasury Secretary Henry Paulson said on Thursday.

"So while some in Washington are proposing big interventions, most of the proposals I've seen would do more harm than good," he said in a prepared statement.

Several leading Democratic lawmakers in Washington have proposed multi-billion dollar programs that would help troubled borrowers stay in their homes.

Paulson also had strong words of discouragement for homeowners who may be mulling whether to simply walk away from a home that has slipped in value.

"Being 'underwater' when you can afford your mortgage does not affect your ability to pay your mortgage," Paulson said. "Homeowners who can afford their mortgage should honor their obligations."

Latest acronym VIEs for Wall St notoriety (Financial Times)
By Michael Mackenzie in New York
February 28 2008

Banks working on injecting up to $3bn into Ambac, the bond insurer, in the hope of staving off ratings downgrades and preventing the need for writedowns, might face further losses indirectly related to bond insurers, analysts have warned.

The latest source of concern is variable interest entities (VIEs), another three-letter acronym that now holds toxic properties. This follows the failure of municipal auctions, known as auction rate securities (ARS) in recent weeks, while collateralised debt obligations and (CDOs) collateralised loan obligations (CLOs) continue to loom over the balance sheets of banks and investors.

VIE is an accounting term that covers a multitude of activities in almost any kind of special purpose vehicle - from conduits and structured investment vehicles (SIVs) to individual CDOs themselves. The term VIE refers to the way in which a bank's economic exposure to a vehicle can change, which is key to whether it can be kept off-balance sheet.

Accounting for VIEs has been increasingly in the spotlight since US banks began to reveal more details about their exposure to various vehicles, such as the asset-backed commercial paper conduits used to fund investment in mortgage-backed bonds and other structured debt.

US weekly jobless claims up 19,000; continuing claims at over 2-yr high (CNN)
February 28, 2008

The number of people filing new claims for unemployment insurance rose above expectations in the latest week while continuing claims for unemployment climbed to its highest level in over two years, the Labor Department said today.

The number of first-time claims filed in the week ending Feb 23 rose by 19,000 to 373,000 from an upwardly revised 354,000 claims in the previous week. That's well above the 350,000 claims economists polled by Thomson's IFR Markets had expected.

The unexpected increase in initial claims 'is a move towards levels providing a signal indicating recession,' said Joseph Brusuelas of IDEAglobal.

'The level of claims this week now matches the four-week average recorded at the end of February 2001, immediately before the recession began in March,' said Ian Shepherdson of High Frequency Economics.

Freddie Mac Loss Swells as Mortgage Crisis Deepens (Reuters)
Thu Feb 28
By Al Yoon

NEW YORK (Reuters) - Freddie Mac (FRE.N: Quote, Profile, Research), the second-biggest provider of U.S. residential mortgage funding, said on Thursday its loss widened to a record $2.5 billion in the fourth quarter as the housing crisis worsened.

Freddie Mac, as well as rival Fannie Mae (FNM.N: Quote, Profile, Research), suffered from soaring defaults on mortgages that the two companies guarantee as nationwide home prices declined for the first time since the Great Depression.

The company also warned it expected to lose billions of dollars more in coming quarters as the housing market slump deepens and more borrowers fall behind on payments.

Bernanke: U.S. not facing 1970s-style stagflation (Reuters)
Thu Feb 28, 2008
By David Lawder

WASHINGTON (Reuters) - Federal Reserve Chairman Ben Bernanke said on Thursday the United States would avoid a 1970s-style period of "stagflation" but acknowledged global price pressures could complicate the central bank's effort to lift the economy.

"I don't anticipate stagflation," Bernanke said under questioning by the Senate Banking Committee. "I don't think we're anywhere near the situation that prevailed in the 1970s. I do expect inflation will come down."

HSBC's SIV Rescue May Mean 70% Loss on Asscher Notes (Update1) (Bloomberg)
By Esteban Duarte and Neil Unmack

Feb. 28 (Bloomberg) -- HSBC Holdings Plc's rescue of its Asscher Finance Ltd. structured investment vehicle will mean 70 percent losses for bondholders including a Spanish unit of Credit Suisse Group.

HSBC, Europe's biggest bank by market value, may offer Credit Suisse Gestion new debt worth about 30 percent of the face value of Asscher's bonds, the Madrid-based asset manager said in a Feb. 26 regulatory filing. The company couldn't get more than 5 percent of face value when it tried to sell the so-called mezzanine bonds, which rank below senior notes and above the most junior ranking debt, according to the filing.

``Thirty percent is better than nothing,'' said Harpreet Parhar, a credit analyst at Calyon in London. ``Without the restructuring, it's quite possible that investors in the mezzanine notes of Asscher would have come away with zero.''

Banks from HSBC to Citigroup Inc. are bailing out SIVs with a total $140 billion of assets to avert a collapse after investors stopped buying the short-term debt they relied on to finance higher-yielding assets. SIVs with at least $31 billion of debt have defaulted after losses linked to U.S. mortgages, according to data compiled by Standard & Poor's.

Margin Calls A Thorn In Thornburg's Side (Forbes)
Maurna Desmond, 02.28.08

Thornburg Mortgage is having a rummage sale. The lender is selling some of the mortgage loans it holds to get antsty creditors off its back.

Thornburg shares plunged 16.6%, or $1.92, to $9.62, in midday trading Thursday, after it said it would have to "selectively" sell assets to meet margin calls on a portfolio of securities backed by alt-A mortgages, loans given to relatively creditworthy customers but that fall short of prime status. Thornburg has focused on adjustable-rate jumbo mortgages -- what makes them jumbo is that they are too big to be packaged into securities by the government-sponsored lenders, Fannie Mae and Freddie Mac. Until this month, those agencies could only buy mortgages of up to $419,000, below the price of many homes in affluent regions.

Thornburg said through a filing with the U.S. Securities and Exchange Commission that it had $2.9 billion of exposure to these loans, as of Feb. 15.

A sobering 12-step scenario Legendary bear Nouriel Roubini lays out the case for a global financial meltdown. Pass the Prozac, please. (Financial Week)
By Nouriel Roubini
February 25, 2008
A sobering 12-step scenario (Financial Week) By Nouriel RoubiniFebruary 25, 2008

(Follow link for entire story

1. At this point it is clear that U.S. home prices will fall between 20% and 30% from their bubbly peak...soon enough a few very large home builders will go bankrupt, leading to another free fall in home builders' stock prices.

2. Losses to the financial system from the subprime disaster, estimated to be as high as $300 billion, are now spreading to near-prime and prime mortgages ...about 60% of all mortgage origination from 2005 through 2007 had these reckless and toxic features..

3. The recession will lead-as it is already doing-to a sharp increase in defaults on other forms of unsecured consumer debt: credit cards, auto loans, student loans...

4. While there is serious uncertainty about the losses that monoline insurance companies will take on their insurance of residential mortgage-backed securities, collateralized debt obligations and other toxic asset-backed securities products, it is now clear that such losses are much higher than the $10 billion-to-$15 billion rescue package that regulators are trying to patch together...

5. The commercial real estate loan market will soon enter into a meltdown similar to the subprime one, as lending practices in commercial real estate were as reckless as those in residential real estate...

6. It is possible that some large regional or even national banks that are very exposed to mortgages, residential and commercial, will go bankrupt...

7. Banks' losses will grow as a result of hundreds of billions of dollars of leveraged loans stuck on their balance sheets at values well below par (currently about 90 cents on the dollar, but soon to be much lower).

8. Once a severe recession is under way, a massive wave of corporate defaults will take place...

9. The "shadow banking system" ...will soon get into serious trouble. This shadow financial...system includes: SIVs, conduits, money-market funds, monolines, investment banks, hedge funds and other non-bank financial institutions...

10. Stock markets in the U.S. and abroad will start pricing in a severe U.S. recession-rather than a mild one-and a sharp global economic slowdown...

11. The credit crunch that is affecting most credit markets and credit derivative markets will lead to a drying up of liquidity in a variety of financial markets, including otherwise very liquid derivatives markets...

12. A vicious circle of losses, capital reduction, credit contraction, forced liquidation and fire sales of assets at below fundamental prices will ensue, leading to a mounting cycle of losses and further credit contraction.

PWC chief is raising red flags over red ink (Financial Week)
By Megan Johnston
February 25, 2008

The days of enron, and the solicitous accounting practices of that era, are long gone. That, at least, is the message that Samuel A. DiPiazza Jr., global chief executive of PricewaterhouseCoopers, is sending to banks, insurance companies and even non-financial companies that are dealing with write-downs of illiquid securities stemming from the credit crunch.

"It's not just in banks," Mr. DiPiazza said earlier this month, according to a Reuters report. "These securities sit in cash-equivalent accounts of industrials; they sit in investment portfolios of pensions."

Mr. DiPiazza was referring to auction-rate securities-essentially long-term bonds that used to be treated like cash by many corporate investors because their interest rates reset every seven to 49 days. Last week the market for such securities froze as banks refused to back auctions that subsequently failed.

"We are having to deal with this with thousands of companies, not just a handful of banks," he said, adding that a "first wave" of write-downs would hit in this quarter's audit cycle.

A week after Mr. DiPiazza's comments, it emerged that PricewaterhouseCoopers had challenged American International Group on the valuation and accounting of its credit default swaps portfolio, which led the insurance giant to post a $4.88 billion loss-and suffer an immediate 11% drop in its share price upon release of the news.

Swaps backers rush to prevent 'credit event' (Financial Week)
By Marine Cole
February 25, 2008

In the latest sign of concern that credit default swaps pose a growing risk to the financial system, regulators and market participants are trying to head off potential challenges to the settlement of CDS contracts that may be triggered by defaults.

Such problems involving CDS, which act as insurance contracts against defaults by bond issuers, haven't shown up yet. In fact, the CDS market has been successfully tested several times, including earlier this month when the settlement of CDS referencing Quebecor World, a Canadian printer that defaulted on its debt in January, went smoothly.

However, successful settlements have been limited to corporate debt, which represents only part of the $42.6 trillion in notional amount outstanding as of the end of June, according to the Bank for International Settlements. With some of the rest written against structured finance instruments, such as collateralized debt obligations backed by subprime mortgages and other assets growing more troubled by the day, regulators such as the Federal Reserve Bank of New York, and trade groups such as the International Swaps and Derivatives Assocation, are hoping to ensure rising defaults don't lead to losses by banks that are counting on such protection.

Citigroup May Post First-Quarter Loss, Whitney Says (Update4)
By Bradley Keoun and Charles Penty

Feb. 25 (Bloomberg) -- Citigroup Inc., the biggest U.S. bank by assets, may post its second-straight quarterly loss and fall short of profit estimates for the year because of writedowns on home-equity loans and junk-grade corporate loans, Oppenheimer & Co.'s Meredith Whitney said.

Whitney, whose downgrade of Citigroup last year triggered an 8 percent decline in the company's stock price, said the bank may report a loss of $1.6 billion, or 28 cents a share, for the first quarter, compared with a profit of about $5 billion, or $1.01, a year earlier. Her prediction today compares with the 45-cent per- share average gain expected by analysts surveyed by Bloomberg. Goldman Sachs Group Inc. analyst William Tanona said Citigroup may have to take a writedown of as much as $12 billion.

Fidelity facing subprime debt fallout (MSNBC)
Tim McLaughlin
Feb. 24, 2008

A $517 million debt vehicle backed by risky subprime mortgages and issued this past summer by Fidelity Investments has run into trouble after credit ratings on some of the securities have been cut to junk status.

The mutual fund giant, which has more than $1 billion in exposure to collateralized debt obligations, now is feeling some of the same subprime pain that has led to more than $100 billion in losses among Wall Street firms and global investment banks. Top credit rating agencies have downgraded or placed on negative watch most of the CDO-related securities issued in July by a Fidelity affiliate.

The Boston company created that little-known affiliate, Ballyrock Investment Advisors LLC, to issue and oversee collateralized debt obligations. Fidelity's push into mortgage-backed securities and other risky credit-oriented products has escaped notice.

Wall Street Bank Run (Washington Post)
By David Ignatius
February 21, 2008

It doesn't look like an old-fashioned bank run because it involves the biggest financial institutions trading paper assets so complicated that even top executives don't fully understand the transactions. But that's what it is -- a spreading fear among financial institutions that their brethren can't be trusted to honor their obligations.

Frightened financiers are pulling back from credit markets -- going on strike, if you will -- to escape the unraveling daisy chain of securitized assets and promissory notes that binds the global financial system. As each financier tries to protect against the next one's mistakes, the whole system begins to sag. That's what we're seeing now, as credit market troubles spread from bundles of subprime residential mortgages to bundles of other kinds of debt -- from student loans to retailers' receivables to municipal bonds.

Investors are nervous because they aren't sure how to value these bundles of securitized assets. So buyers stay away, prices fall further, and the damage spreads.

The public, fortunately, doesn't understand how bad the situation is. If it did, we might have a real panic on our hands.

Dresdner's bail-out of K2 adds to worries over SIVs (Independent)
Nick Clark
22 February 2008

"...K2's board is yet to reply to Dresdner's offer, which was made yesterday, but the bank is confident it will accept the offer."

Florida Schools, California Convert Auction-Rate Debt (Update3)
By Jeremy R. Cooke

Feb. 22 (Bloomberg) -- California, Florida schools and the owner of John F. Kennedy International Airport joined a growing list of municipal borrowers exiting the U.S. auction-rate bond market as record failures push taxpayer costs higher.

Thousands of auctions run by banks to set rates on the debt failed this month as investors shunned the securities and bankers refused to submit bids, sending interest costs to 10 percent or higher on some bonds. Auctions covering as much as $26 billion of bonds a day failed to attract enough buyers since Feb. 13, according to Bank of America Corp.

Florida's Palm Beach County Schools converted $116 million of the securities into fixed-rate debt this week, while the Seattle area's Valley Medical Center refinanced $170 million. The Port Authority of New York and New Jersey, which runs JFK and other airports, bridges, tunnels and sea terminals around New York City, said it would redeem $200 million next month after its weekly interest rates rose as high as 20 percent.

``We expect to be out of the auction-rate market business in six to eight weeks,'' said Steve Coleman, a Port Authority spokesman.

Rates in the more than $300 billion auction market, where local governments, hospitals, museums, student-loan agencies and closed-end mutual funds borrow, are determined through a bidding process every seven, 28 or 35 days. Auctions fail when there aren't enough buyers. That's left bondholders who wanted to sell stuck with the securities and taxpayers or other backers of the debt such as fund holders with higher interest costs.

Almost Two-Thirds Fail

Yesterday's 641 auctions of publicly offered bonds resulted in 395 failures, or 62 percent, according to data compiled by Bloomberg from four auction agents, Deutsche Bank AG, Bank of New York Mellon Corp., Wilmington Trust Corp. and Wells Fargo & Co. Such agents are responsible for receiving orders from broker-dealers and determining the winning rate. They also perform some administrative services for the borrower.

Just 44 failures were recorded between 1984, when the market was created, and the end of last year, Moody's Investors Service said in a Feb. 19 report.

Northern Trust to add capital to funds with losses (Chicago Tribune)
By James P. Miller
February 22, 2008

Northern Trust Corp. said this morning that it will provide capital support to funds that it advises which have exposure to a pair of troubled "structured investment vehicles."

The trust bank said it isn't obligated to provide the support, but did so in order "to provide stability to the funds and investors in the funds."

Each of the funds with which Northern Trust entered into a capital support agreement holds notes and other financial instruments covered by Whistlejacket Capital LLC or White Pine Finance LLC. Both those entities are structured investment vehicles, or SIVs, which issue commercial paper and other debt securities and use the proceeds to acquire long-term debt that is used to collateralize the SIV's debt obligations.

Both SIVs have recently had their credit ratings reduced, the Chicago banking concern noted.

Whistlejacket, an off-balance sheet vehicle established by Standard Chartered PLC, has been forced into receivership because the value of the assets it holds has declined so dramatically, and there is widespread speculation that the SIV may default because Standard Chartered earlier this week abandoned its efforts to provide a financial bailout.

White Pine is an SIV sponsored by JP Morgan, which similarly has been hurt by the decline in value of the asset-backed securities it holds.

Northern Trust said that the capital support agreements it signed could oblige the holding company to make capital contributions totaling $229 million. The funds involved, which have exposure to the troubled debt of the two SIVs as part of their much broader basket of investments, include Northern Institutional Diversified Assets Portfolio; Northern Institutional Prime Obligations Portfolio; Northern Institutional Liquid Assets Portfolio; Northern Money Market Fund; Sterling Fund of the Northern Trust Global Funds PLC; U.S. Dollar Fund of the Northern Trust Global Funds PLC; NTGI Collective Short Term Investment Fund; and the Core Select Pool.

Related: See this announcement.

This is optimistic news for Orange County, California, (assuming Dresdner does not drop their commtment as Standard Charter did).

OC has $200 million invested in this fund.

Dresdner Rescues $19 Billion SIV, Follows Citigroup (Update10) (Bllomberg)
February 21
By Aaron Kirchfeld and Neil Unmack

Dresdner Bank AG, Germany's third- largest bank, rescued its $18.8 billion structured investment vehicle, joining Citigroup Inc. and HSBC Holdings Plc in bailing out funds crippled by the collapse of the subprime mortgage market.

Dresdner, a unit of Munich-based Allianz SE, will provide a credit line to enable the K2 fund to repay all of its senior debt, spokesman Ulrich Porwollik in Frankfurt said in a telephone interview. Dresdner will cut the size of the fund, which has been reduced from $31.2 billion since July, according to an e-mailed statement.

The bank is the last of the world's biggest financial institutions to put capital at risk salvaging a SIV from the seven-month freeze in credit markets. Banks including Citigroup, HSBC, Bank of Montreal and WestLB AG have disclosed plans to support their SIVs with $140 billion of assets.

``This is a potential threat to Dresdner Bank,'' said Thilo Mueller, managing director of MB Fund Advisory in Frankfurt. ``There is little liquidity for some of these assets and with comparative assets continuing to fall, you need to book further writedowns.''

This is not so optimistic news for Orange County, California. This is confirmation of what we have been reporting for over a week. This is for the next three headlines.
OC has $80 million invested in this fund.

Dresdner Rescues $19 Billion SIV, Follows Citigroup (Update10)
By Aaron Kirchfeld and Neil Unmack

Orange County's latest investments in complex financial deals took a turn for the worse Wednesday when a fund in which the county placed $80 million neared default after a major U.K. bank aborted plans for a bailout.

County officials said they expect the fund to miss a principal and interest payment to another investor today.

That, in turn, would drive down the market value of Orange County's holdings.

County treasury officials said they were in the process of writing down the value of the holdings but did not yet know by how much.

Still, they said they would hang onto the notes in the belief they will ultimately recover the county's investment in full, rather than lose money in a fire sale.

The fund, a $7.15-billion structured investment vehicle named Whistlejacket and backed by London-based Standard Chartered Plc., was forced into receivership last week and had its credit rating slashed.

The O.C. treasurer's office sent a memo to county officials Wednesday assuring them it would be able to meet the near-term cash needs of investors in the county portfolio, noting the troubled investments are held in a longer-term fund.

Whistlejacket debt downgraded as Standard Chartered withdraws proposals- Moody's (Forbes)

Moody's Investors Service downgraded the ratings assigned to the debt programmes of Whistlejacket Capital Ltd and Whistlejacket Capital LLC, after Standard Chartered PLC withdrew all proposals to provide liquidity support to Whistlejacket.

Whistlejacket's Euro and US medium term notes worth a total 6.4 bln usd were cut to 'B2/Not Prime' from 'Ba2/Not Prime', while the 376 mln usd capital note programme of White Pine Corp (a sub-portfolio of Whistlejacket) was downgraded to 'C' from 'Ca'.

The agency said the 'B2' rating assigned to the medium term notes reflects the likelihood of a high or full recovery upon the probable liquidation of the collateral portfolio.

The 'C' rating assigned to the capital note programme reflects Moody's (nyse: MCO - news - people ) view that the recovery amount for the notes is unlikely to exceed 25 pct of paid-in capital.

O.C. reaches out to U.K (Daily Pilot)By Brianna Bailey
February 20, 2008

The troubled state of one of the county's investments prompted Orange County Board of Supervisors Chairman John Moorlach to contact the British Consulate after he met Prince Andrew last week at a local luncheon.

Orange County has $80 million invested in the United Kingdom Channel Islands-based Whistlejacket Capital Ltd.

Whistlejacket is a structured investment vehicle that could default this week after the fund failed to repay maturing debt, according to Standard & Poor's. The fund's U.K. roots prompted Moorlach to call his new British friends this week and ask, "Hey, can you help us out," he said.

Moorlach is unsure what the consulate could do, but he said it couldn't hurt to ask.

"This could become an international concern," Moorlach said.

Structured Notes Sales Hold up Despite Credit Crunch (Hedgeworld)
By Bill McIntosh, Senior Financial Correspondent | Wednesday, February 20, 2008

The ongoing credit crunch may have sapped demand for credit derivatives like collateralized debt obligations but the sale of structured notes has only suffered a mild decline, according to new data.

Retail and institutional investors have purchased more than 10,000 structured notes worth more than $170 billion since the start of the credit crunch in August, according to structured note and private placement data and information provider mtn-i. The firm said this marked an 8% fall in sales over the same period in 2006, but noted that the activity levels still rank it among the busiest-ever periods for the structured note market.

"Our data shows that, despite the credit crunch and the collapse of the structured credit market, investors have continued to find yield solutions in structured notes," said Mike Tims, chief executive of mtn-i, in a statement. "Structured notes can offer investors capital protection and transparent exposure to opportunities for growth and higher yields in any sector or asset class. These are key differences which explain why investors have continued to buy structured notes in the wake of the structured credit sector's collapse."

Despite the credit crunch sapping investor confidence, global structured note sales hit a record $452 billion in 2007, comprising more than 27,000 structured note deals in 31 currencies-an increase of nearly 30% over 2006. A near-doubling in the size of the structured note market in the United States last year to $116 billion contributed significantly to the growth.

Note: What is a structured note? See Understanding Structured Products
by Katrina Lamb, CFA


"What about liquidity?

One common risk associated with structured products is a relative lack of liquidity due to the highly customized nature of the investment. Moreover, the full extent of returns from the complex performance features is often not realized until maturity. Because of this, structured products tend to be more of a buy-and-hold investment decision rather than a means of getting in and out of a position with speed and efficiency. "

"Other Risks and Considerations

In addition to liquidity, one risk associated with structured products is the credit quality of the issuer. Although the cash flows are derived from other sources, the products themselves are legally considered to be the issuing financial institution's liabilities. They are typically not, for example, issued through bankruptcy-remote third party vehicles in the way that asset-backed securities are. The vast majority of structured products are from high investment grade issuers only - mostly large global financial institutions such as Barclays, Deutsche Bank or JP Morgan Chase.

Another consideration is pricing transparency. There is no uniform standard for pricing, making it harder to compare the net-of-pricing attractiveness of alternative structured products offerings than it is, for instance, to compare the net expense ratios of different mutual funds or commissions among broker-dealers. Many structured products issuers work the pricing into their option models so that there no explicit fee or other expense to the investor. On the flip side, this means that the investor can't know for sure what the implicit costs are."

Fed Sees Rate Low `for a Time' Then Possible Reversal (Update1) (Bloomberg)
February 21

Federal Reserve officials signaled they are prepared to quickly reverse last month's interest-rate cuts after concluding that borrowing costs need to be kept low for now.

Policy makers cut their 2008 growth forecasts and said that rates should be held down ``for a time,'' minutes of their Jan. 29-30 meeting showed yesterday. They also called inflation ``disappointing,'' and some foresaw raising rates, possibly at a ``rapid'' pace once the economy recovers.

The threat goes beyond remarks by Chairman Ben S. Bernanke, who last week warned that policy will have to be ``calibrated'' over the next year to meet both inflation and growth objectives. Central bankers are wary of past criticism for keeping rates too low, too long and inflating asset bubbles, said analysts including David Greenlaw at Morgan Stanley.

``I don't think there's any question that they've learned from those experiences,'' said Greenlaw, chief fixed-income economist at the firm's New York office. ``That lesson becomes more powerful as you get lower and lower on the funds rate target.''

The minutes did nothing to dispel investor expectations for another half-point cut in the federal funds rate to 2.5 percent at the Federal Open Market Committee's next meeting on March 18. Policy makers lowered the rate by 0.75 percentage point on Jan. 22 in an unscheduled decision and by a half point at the regular meeting eight days later.

O.C. investments lose market value as fund nears default (LA Times)
By Christian Berthelsen, Los Angeles Times Staff Writer
February 21, 2008

Orange County's latest investments in complex financial deals took a turn for the worse Wednesday when a fund in which the county placed $80 million neared default after a major U.K. bank aborted plans for a bailout.

County officials said they expect the fund to miss a principal and interest payment to another investor today.

That, in turn, would drive down the market value of Orange County's holdings.

County treasury officials said they were in the process of writing down the value of the holdings but did not yet know by how much.

Still, they said they would hang onto the notes in the belief they will ultimately recover the county's investment in full, rather than lose money in a fire sale.

The fund, a $7.15-billion structured investment vehicle named Whistlejacket and backed by London-based Standard Chartered Plc., was forced into receivership last week and had its credit rating slashed.

The O.C. treasurer's office sent a memo to county officials Wednesday assuring them it would be able to meet the near-term cash needs of investors in the county portfolio, noting the troubled investments are held in a longer-term fund.

KKR debt delay fans credit fears (BBC)
Wednesday, 20 February 2008

Stock markets have been rattled by fears of fresh credit market turmoil

Delays in debt payments from a fund affiliated to US private equity giant Kohlberg Kravis Roberts have raised fears of more credit market turmoil.

KKR Financial, the firm's listed arm, said it had begun talks with creditors after deferring payment of billions of dollars of debt for a second time.

It had borrowed money to invest in home loans, which have lost value following the crisis in the US housing market.

The news unsettled stock markets and hurt the dollar.

KKR Financial had borrowed to invest in home loans - particularly the Alt-A category of loans that are riskier than mainstream borrowers, but safer than sub-prime loans, the Financial Times reported.

The Fed is Bailing out the Banks

US banks borrow $50bn via new Fed facility
(Financial Times)
By Gillian Tett in London
February 18 2008

US banks have been quietly borrowing massive amounts of money from the Federal Reserve in recent weeks by using a new measure the Fed introduced two months ago to help ease the credit crunch.

The use of the Fed's Term Auction Facility, which allows banks to borrow at relatively attractive rates against a wider range of their assets than previously permitted, saw borrowing of nearly $50bn of one-month funds from the Fed by mid-February.

...However, 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.

"The TAF ... 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 Fed announced the TAF tool on December 12 as part of a co-ordinated package of measures unveiled by leading western central banks to calm money markets.

The measure marks a distinct break from past US policy. Before its introduction, banks either had to raise money in the open market or use the so-called "discount window" for emergencies. However, last year many banks refused to use the discount window, even though they found it hard to raise funds in the market, because it was associated with the stigma of bank failure.

UK nationalises mortgage lender Northern Rock (Reuters)
Sunday February 17 2008

"The UK government announced the temporary nationalisation of troubled British bank Northern Rock on Sunday, rejecting two rival bids to take it over."

Northern Rock was the headline grabber at the beginning of the SIV crisis.

Auction-Rate Bonds Lure Investors With 20% Interest (Update1) (Bloomberg)
By John Glover, Feb. 18

The U.S. market for auction-rate securities that failed to draw enough buyers last week is luring new investors as interest rates soar to as much as 20 percent, Bank of America Corp. analysts said.

Less than a quarter of auctions failed that offered interest above 10 percent, analysts led by Jeffrey Rosenberg in New York wrote. The failure rate was as high as 98 percent at auctions offering 4 percent interest.

Banks including Citigroup Inc. and Goldman Sachs Group Inc. allowed hundreds of sales in the $330 billion market for the securities to fail last week after they couldn't attract bidders and didn't step in to buy unwanted debt. An unsuccessful auction of $100 million of notes sold by the Port Authority of New York & New Jersey raised the rate to 20 percent from 4.3 percent.

``Penalty rates as high as 20 percent making for very attractive investments'' helped bring new investors to the market, Rosenberg and Hans Mikkelsen wrote in the Feb. 15 note.

Auction-rate securities are long-term bonds where the interest is reset at auctions held every seven, 28 or 35 days.

Banks stopped buying the securities for their own accounts to prevent failures after disclosing at least $146 billion of credit losses and writedowns stemming from subprime mortgages.

As banks backed away from the market, failed auctions have left holders unable to sell the securities and boosted interest costs for borrowers from cities to hospitals. An unsuccessful auction almost doubled seven-day borrowing costs on $15 million of bonds sold by Harrisburg International Airport in Pennsylvania to 14 percent.

Orange County, CA, owns $80Million of these (MTN) notes.

Whistlejacket Capital's ICR, MTN rating cut to 'CCC-' on Stanchart action - S&P (Forbes)

MUMBAI (Thomson Financial) - Standard & Poor's Ratings Services said it has cut the structured investment vehicle, Whistlejacket Capital Ltd's, medium-term note (MTN) and issuer credit ratings to 'CCC-' from 'BB', after the receiver (Deloitte) elected not to pay the MTNs maturing on Feb 15.

These notes have a three-day grace period and the payment default will therefore take effect on Feb 21, S&P said.

Will banks down-under go under?

Australia's banks heavily exposed to derivatives (Banking TImes)
by Richard Kilner, February 18, 2008

The combined shareholder value of Australia's banks is $110bn, but their combined exposure to derivatives is a staggering $12.9 trillion.

This means that the derivative exposure outmatches shareholder value by more than one hundredfold.

Indeed, the exposure also dwarfs the banks assets, worth an estimated $2.1 trillion.

The reason behind the massive exposure is thought to be simply that banks can get away with it. Due to their unique position within an economy, banks can and will be rescued by the taxpayer if necessary (as has been seen with UK bank Northern Rock).

However, financial institutions in Australia consider themselves to be excellent at managing risk, and at minimising the potential losses that could be entailed.

It remains to be seen, given the worldwide economic turbulence, how Australia's banks will fare in the long run.

Split-Up of Insurers of Bonds Is Considered (NY Times)
Published: February 16, 2008

Regulators and bankers racing to bolster troubled bond insurance companies are considering splitting the firms into two parts: one for safe municipal debt and the other for riskier mortgage-related securities.

Proponents of the idea say such a step could restore confidence in the financial markets broadly, and specifically in the $2.6 trillion municipal bond market, which provides financing for bridges, airports, museums and other civic projects. But the move would be unlikely to allay the worst fears about losses in mortgage-related securities, these officials acknowledge.

On Friday, one of the three big insurers, the Financial Guaranty Insurance Company, endorsed the idea, ...

"It takes the whole thing out of the hypothetical and into reality," Eric R. Dinallo, the New York State insurance superintendent, said in a telephone interview. On Thursday, he and Gov. Eliot Spitzer told Congress that they were considering encouraging a split in the insurance portfolios as a last resort.

Officials involved in negotiations on another insurer, the Ambac Financial Group, have also been discussing splitting that company's insurance subsidiary in two, according to a person involved in the discussions who was not authorized to speak about them publicly.

If that plan goes forward, the banks involved would inject new capital into the firm that inherits the municipal business while the firm backing mortgage-related securities would keep much of the capital in the existing firm.

But the idea of dividing the companies' insurance portfolios faces opposition from MBIA, the largest of the three insurers. Some large investment banks that have bought protection on mortgage-related securities from the insurers are also expected to oppose a split. The banks are worried that such a move would leave their insurance contracts backed by smaller and less financially stable companies that will not have a top triple-A rating.

Things Not To Say When Your Bear Stearns Hedge Fund Is Imploding (Deal Journal)
February 15, 2008

Kate Kelly, who covers Wall Street for the Wall Street Journal, provides this analysis of newly released transcripts surrounding the Bear Stearns hedge funds.

Snippets of an April 25, 2007 investor conference call held by Bear Stearns Cos. hedge-fund manager Ralph Cioffi, which we link to here, read like a handbook of Things Not To Say When Your Fund Is Imploding. At least, federal prosecutors from the U.S. Attorney's office in Brooklyn might think so.

Brooklyn prosecutors have launched a criminal investigation into whether Mr. Cioffi and his colleague Matthew Tannin engaged in securities fraud by telling fund investors they were optimistic about the prospects for two hedge funds they managed when in fact they worried privately about the funds' future, according to people familiar with the matter. The question they must grapple with: how much Messrs. Cioffi and Tannin really knew when they held that call. Were they truly aware of the deep declines to come? Or foolishly upbeat about their funds' prospects, despite market indications of the pain that was to come?

During the April 25 call, Mr. Cioffi told investors that the two funds, called the High-Grade Structured Credit Strategies Fund and the High-Grade Structured Credit Strategies Enhanced Leverage Fund, were down just slightly for the month. But figures he released to investors about a month later revealed that the Enhanced Leverage fund, which was the riskier of the two, was in fact down 23% through late April, and its sister fund down about 5%.

Nor were investors informed at the time of Mr. Cioffi's early March move of $2 million of his own money out of the Enhanced Leverage fund and into a third fund he managed, Structured Risk Partners, that ultimately proved less risky. (Mr. Cioffi has told associates that the money transfer, which was approved by compliance officers at Bear Stearns Asset Management, was intended to show confidence in the third fund.)

Five weeks after the conference call, around June 5, the Enhanced Leverage fund was gated, or barred from returning investor money. For much of May and June, Messrs. Cioffi and Tannin scrambled to sell billions worth of mortgage-backed securities in hopes of raising cash for lender margin calls. But when they came up short, Merrill Lynch & Co. on June 15 seized the collateral assets attached to its loan. Other lenders quickly followed suit, ultimately forcing the funds to file for bankruptcy in late July.

"The Worst is Just Beginning" (Counterpunch)
Henry Paulsen's Wild Ride on the Economic Hindenberg
February 15, 2008

...Yesterday, at a press conference in Washington, Paulson made this shocking admission in response to a reporter's question:

Reporter: "Sir, is the worst over, yet? Will 2008 have fewer foreclosures?"

Secretary of the Treasury Paulson: "In terms of sub-prime and the resets, the worst isn't over. The worst is just beginning.... There's close to 2 million adjustable rate mortgages where the rate is going to be reset over the next couple of years. These loans are of a vintage where there was the most lax underwriting. So, this is the biggest challenge and this is why this is so important."

Two Citigroup funds have troubles: report
Fri Feb 15, 2008 7:51am EST

Citigroup Inc (C.N: Quote, Profile, Research) has barred investors in one of its hedge funds from withdrawing their money, and a new leveraged fund lost 52 percent in its first three months, the Wall Street Journal reported on Friday.

The largest U.S. bank suspended redemptions in CSO Partners, a fund specializing in corporate debt, after investors tried to pull more than 30 percent of its roughly $500 million of assets, the newspaper said. Citigroup injected $100 million to stabilize the fund, which lost 10.9 percent last year, the newspaper said...

Meanwhile, Falcon Plus Strategies, launched September 30, lost 52 percent in the fourth quarter, after betting on mortgage-backed and preferred securities and making trades based on the relative values of municipal bonds and U.S. Treasuries. Some collateralized debt obligations in the fund trade at 25 percent of their original worth, the newspaper said...

Since June, Citigroup has disclosed some $30 billion of write-downs and losses tied to subprime mortgages, complex debt and deteriorating credit. The problems contributed to a record $9.83 billion fourth-quarter loss. Profit that quarter in the alternative investments unit fell 89 percent to $61 million.

New Trouble in Auction-Rate Securities (NY Times)
February 15, 2008

SOME well-heeled investors got a big jolt from Goldman Sachs this week: Goldman, the most celebrated bank on Wall Street, refused to let them withdraw money from investments that they had considered as safe as cash.

The investments at issue are so-called auction-rate securities, instruments at the center of the latest squeeze in the credit markets.

Goldman, Lehman Brothers, Merrill Lynch and other banks have been telling investors the market for these securities is frozen - and so is their cash.

The banks typically pitch these securities to corporations and wealthy individuals as safe alternatives to cash, investors said. The bonds are, in fact, long-term securities. But the banks hold weekly or monthly auctions to set the interest rates and give holders the option of selling the securities.

Only this week almost 1,000 of these auctions failed. The banks also refused to support the auctions, leaving many investors wondering when they will get their money back.

Japan is the next sub-prime flashpoint (Telegraph)
By Ambrose Evans-Pritchard
12:20am GMT 13/02/2008

There is still $300bn of bad debt out there, and Japan could be hiding most of it. Ambrose Evans-Pritchard reports

Just as battered investors had begun to glimpse signs of recovery in America, the next shoe has dropped with an almighty thud in Japan. Echoes are rumbling across the Far East.

Warnings over auction-rate securities (Financial Times)
By Michael Mackenzie in New York
February 14 2008

The auction-rate securities market, a $330bn slice of the municipal bond sector, could disappear if the credit squeeze remains entrenched, analysts warn.

"The auction-rate securities market is unwinding and most of the market will enter a failed state," said Alex Roever, fixed-income strategist at JPMorgan. "The lack of confidence is the contributing factor and there is a risk this type of structure will go away."

Corporations and wealthy individuals who have placed large deposits of cash with Wall Street banks and dealers are now discovering they are unable to escape this niche because of a buyers' strike that has enveloped much of the credit market.

"With a total size of $330bn and roughly half of that held by individuals, a significant, albeit likely short-lived, liquidity crunch is again emanating out of the credit markets," said Jeffrey Rosenberg, head of credit strategy at Banc of America Securities. He estimated 80 per cent of auctions held on Wednesday had failed. This is in the region of $29bn, traders said.

The spate of failed debt sales has roiled the market, where local government entities and providers of school loans raise debt, much of which is guaranteed by bond insurers. This has temporarily pushed the cost of raising debt sharply higher for many local government issuers ultimately funded by the taxpayer.

Investors have stopped buying securities at regular municipal auctions in recent days because they are concerned about the fate of the bond insurers who guarantee around 80 per cent of the entire market. Compounding matters, banks, who are under no obligation, have stepped back from providing support for the market because of a buyers' strike as they face growing constraints on their balance sheets. UBS told its retail wealth managers on Wednesday that it was no longer participating in the auction process, said a person familiar with the matter.

Other banks to have withdrawn support for recent auctions include Goldman Sachs and Lehman Brothers. "This is not a credit issue, but one of liquidity," said Mr Roever. "Dealers hold more paper than they wish . . . The investor base has backed away and . . . these auctions cannot clear."

Deloitte says named as Whistlejacket SIV receiver (Reuters)
Tue Feb 12, 2008 2:10pm GMT

"Deloitte & Touche said on Tuesday it has been appointed as receiver for Standard Chartered's (STAN.L: Quote, Profile, Research) Whistlejacket structured investment vehicle (SIV).

Standard Chartered said on Monday that a plan to provide liquidity to Whistlejacket had fallen through after a drop in the value of the SIV's assets had triggered a so-called enforcement event, requiring the appointment of a receiver."

The Next Declining Acronym: CLOs (WSJ)
Posted by David Gaffen

The credit crunch has realized a cottage industry of prognosticators predicting where the next shoe will drop - collateralized loan obligations, municipal bonds, leveraged loans, what-have-you. In most cases, they've all been right.

Lately there's been significant stress in collateralized loan obligations, which are losing value, even though these securities, in terms of risk, aren't quite on the level of low-rated subprime debt, but aren't foolproof either. In this case, we're talking about bank loans, which rank higher in the capital structure than debt sold to institutional investors, and whose investors therefore get paid back more quickly.

"CLOs are indeed a cause for concern. Not, perhaps, in a subprime-RMBS-AAA-noteholders-wiped-out way, but more in the way that all banks are vulnerable right now to further writedowns and capital constraints," notes Sam Jones in FT's Alphaville blog.

The LCDX Index shows prices falling and yields climbing. (Source: Markit)

According to Markit, the LCDX Index - which tracks credit-default swaps on such loans (measuring the risk of default), has dropped to an all-time low of 90 of late. However, George Feiger, CEO of Contango Capital Advisors, the wealth management arm of Zions Bancorp, says more commonly traded securities have been marked down to 80 to 85 cents on the dollar, and that threatens lending.

"These are senior secured loans to ordinary middle-market American companies," he says. "You're seeing loans marked in the 80-to-85-cent range but you might be selling them for 70 cents - of course no one is going to originate credit that's worth 70 cents immediately on the dollar," he says.

As assets on bank-loan funds have declined, as the Wall Street Journal reported Monday, interest in the $300 billion CLO market is drying up

Citi to Inject $3.3 Billion to SIVs (WSJ)
February 12, 2008 2:40 p.m.

Citigroup is to inject around $3.3 billion into six of the seven structured investment vehicles it took on balance-sheet last year in an effort to shore up their top credit ratings and protect senior creditors, people familiar with the situation said Tuesday.

Warren Buffett in $800bn bond bail-out (Telegraph)
By James Quinn, Wall Street Correspondent
Last Updated: 3:48pm GMT 12/02/2008

Billionaire investor Warren Buffett is throwing beleaguered bond insurers an $800bn (£408bn) life-line in a bid to prevent further fall-out from the US sub-prime mortgage crisis.

Buffett: 'We are doing this to make money'

Mr Buffett, through his Berkshire Hathaway investment vehicle, has offered the world's three largest bond insurers the opportunity to reinsure $800bn in municipal or tax-exempt bonds

Orange County California, has $80 million riding on this.

StanChart withdraws Whistlejacket support (Financial Times)
By Paul J Davies
February 11 2008

"Standard Chartered is withdrawing support for Whistlejacket, after the assets of its $7.2bn off-balance-sheet investment vehicle fell to less than 95 per cent of face value and triggered automatic receivership.

The UK-listed bank pledged to provide liquidity to the structured investment vehicle less than a fortnight ago and told its own shareholders that it would take it back on balance sheet.

However, StanChart said on Monday that its liquidity facility was only valid so long as asset values were higher than the 95 per cent value threshold.

It said: "Standard Chartered will discuss with the receiver, once appointed, alternative arrangements to provide liquidity"."

This means that $80 million of Orange County, California Debt is now in great jeopardy.

Germany Steps In To Save WestLB
Lionel Laurent, 02.08.08, 12:20 PM ET

The German government is again bailing out its banks because of the subprime fall-out. On Friday, WestLB said it had secured a state-backed lifeline of 5 billion euros ($7.3 billion) to cover potential losses, and it promised to cut up to 1,500 jobs in order to keep its options open regarding a possible government-orchestrated takeover.

The bulk of the financial guarantees will come from the state of North Rhine-Westphalia, which owns WestLB along with local savings bank associations. WestLB said that the lifeline would cover losses stemming from "substantial risks" in its investment portfolio, namely 23 billion euros' ($33.4 billion) worth of primarily asset-backed securities...The realization that so-called subprime loans from the United States had been packaged with investment-grade debt, re-rated and sold to investors all over the world led to a widespread loss of confidence in the debt markets, especially after foreclosures kept mounting and mortgage lenders began to close their doors.

Prosecutors Widen Probes Into Subprime
U.S. Attorney's Office Seeks Merrill Material; SEC Upgrades Inquiry
February 8, 2008

Federal criminal prosecutors are stepping up their interest in Wall Street's mortgage-securities activities.

The Justice Department's U.S. attorney's office in Manhattan, based near Wall Street, has notified the Securities and Exchange Commission that it wants to see information the agency is gathering in its investigation of Merrill Lynch & Co., according to people familiar with the matter. The SEC is examining, among other things, whether the securities firm booked inflated prices of mortgage bonds it held despite knowledge that the valuations had dropped, the people say.

The move by the U.S. attorney's office comes as the SEC has upgraded its Merrill probe to a formal investigation, which requires approval of the full commission and gives the agency broad power to require firms and individuals to produce information.

CME, Nymex Tumble 18% After Justice Antitrust Opinion (Update4) (Bloomberg)
By Matthew Leising

CME Group Inc. and Nymex Holdings Inc. both fell a record 18 percent in New York trading after the Justice Department said the futures exchanges' trade-processing practices may be anti-competitive...Financial futures markets such as CME that clear their own trades may pose a barrier to competitors, Justice's antitrust division said in a legal brief released yesterday. The opinion resulted from a regulatory review initiated last year by U.S. Treasury Secretary Henry Paulson.

``The goose that lays the golden egg is under attack by the regulators, and that is never good news,'' Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York, said in an interview. Forcing companies such as CME to change structure would end their ``monopolistic'' pricing advantage ``and margins would decline,'' Hintz wrote in a note to investors today.

Moody's Posts 54% Fall in Net Amid Weakness in Credit Markets
By Donna Kardos

a speech this week to the American Securitization Forum, US Treasury Under Secretary Robert Steel came out in favour of securitization as a vehicle for risk mitigation. But he added that participants in these markets must take the blame for misuse of these instruments and the resulting sub-prime crisis.

Steel said that there were significant benefits in securitization which enabled investors to improve their risk management, achieve better risk adjusted returns and access more liquidity. But he also said that there were also examples of inappropriate behaviour, including fraudulent or criminal activity, and that this would result in increased regulation in the future such as licensing standards for mortgage originators. In order that this market continued there would also have to be improvement to many of its components such as the involvement of the rating agencies, the processes of mortgage origination, and the securitization and onward selling of these investment instruments.

However, at that same conference, a panel of participants said that the market for structured investment vehicles (SIVs), the wrapper for securitized loans, was effectively dead ...Reuters reported Dominic Swan, a panellist at the conference and a managing director at HSBC Bank, as saying that banks will find it more efficient to hold highly-rated assets on their own balance sheets under Basel II, and that HSBC would be leaving the SIV market.

Ratings agencies move to restore their credibility (Financial Times)
By Saskia Scholtes in New York
Published: February 7 2008 02:00

"Moves today by Standard & Poor's to revamp its governance procedures, analytics and ratings transparency mark the latest in a series of mea culpas from the leading credit rating agencies as they attempt to restore their credibility with investors.

Moody's, Fitch and S&P have in recent months come under intense fire from investors and regulators in the US and Europe after complex structured finance instruments they rated have suffered losses far in excess of the rating agencies' initial expectations."

Banks come under scrutiny for tax practicesBy Vanessa Holder
(Financial Times)
February 7 2008

"The beleaguered banking industry is under fire from a new direction. The world's largest tax authorities are setting their sights on the aggressive avoidance fostered by some banks' structured finance divisions.

This became clear this month when 40-odd government revenue heads discussed tax avoidance at a meeting in Cape Town under the aegis of the Organisation for Economic Co-operation and Development. The general mood of the meeting was conciliatory: they proposed forging an "enhanced relationship" with corporate taxpayers and advisers in the hope they would be more transparent in return for better treatment from the tax authorities."

(If the collapse of value doesn't get them, the taxman will!)

Bond Insurers, Banks: Partners in Misery
S&P ratings explain how credit downgrades of financial guarantors like MBIA and Ambac could force banks to take big writedowns
(Business Week)
by Tanya Azarchs, Scott Sprinzen and Scott Bugie

"...The ripple effects of the still-unfolding subprime lending situation have affected various directly related markets, notably the residential mortgage-backed securities, collateralized debt obligations (CDO), asset-backed commercial paper, and structured investment vehicle markets, as such markets trade in or reference subprime loans or other securities that hold such loans. To date the holders of these instruments, the banks and money-market investors as well as certain hedge funds, are estimated to have suffered more than $130 billion in losses. Now the bond insurers who have insured some of these instruments are also being affected, and the issues are becoming relevant to a broader cross-section of the market.

Bond insurers are suffering as a result of their roles as guarantors of mortgage-related securities, and downgrading them could affect all markets in which they are active, including the municipal bond, commercial mortgage-backed securities (CMBS), and other structured finance areas. In turn, dislocation in those markets could affect banks. Standard & Poor's Ratings Services believes the specific, identifiable effect on banks may be significant and, in a few cases, could lead to downgrades. Large global institutions have direct exposure to the bond insurers in a number of ways.

Hedges at Risk

The area that represents the potential for the highest losses: the hedges that the bond insurers provide for the so-called super-senior CDO tranches. To date, losses banks have reported on their CDO exposures have predominantly been on unhedged exposures. However $125 billion of subprime-related CDOs hedged by bond insurers remains concentrated in the hands of a relatively small number of banks. Few banks have disclosed how great that exposure is..."

RLPC-Hedge funds January results hit by loan losses-bankers (Reuters)
Thu Feb 7, 2008 9:58am EST
Tessa Walsh

"Hedge and credit funds that have invested in European leveraged loans are set to reveal deep losses in January results after heavy falls in the secondary trading value of the loans, senior bankers said on Thursday.

"January is going to be very hard. I have heard some horrendous numbers that will be out soon," a head of loan syndication said. "I know it's going to be bad - as bad a performance as ever seen in credit. The great unknown secret is about to be revealed."

New danger appears on the monoline horizon (Financial Times)
By Paul J Davies
Published: February 6 2008 23:31

"As the bond insurers, or monolines, have seen their seemingly rock-solid AAA ratings begin to buckle, worries have grown about what downgrades for these companies might mean for banks.

Now, one particular type of trade done between banks and monolines is being seen as an extra hidden danger.

The real problem is that almost no one has any idea how significant the profits taken on these trades might be. These trades were profitable because a bond could pay out more in interest than it cost to buy the insurance available in the derivatives market to protect the holder against default. In the world of structured finance, a bank would buy a bond, get it guaranteed, or wrapped, by a monoline to support the bond's AAA rating, but then also pay another monoline to write a default swap on the first monoline, to guard against it defaulting on its guarantee.

The difference between what the bank paid for the insurance and what it received in yield from the bond could be pocketed as "risk-free" profit - and in many cases banks took the entire value of that income over the life of the bond upfront.

One senior industry insider admits that billions of dollars worth of these trades were done, but insists they were mostly restricted to the arena of utility and infrastructure debt. These were attractive both because they were of long maturities and because they were often linked to inflation, which would increase the returns.

"On a £100m deal over 25 years a bank could conservatively book £5m up front - even more if it was index linked," says the senior industry executive.

For the monolines, the trades were also seen as near risk-free profit when taking the position of writing protection on peers.

The same executive insists that monoline activity in CDOs was restricted to the hedging of senior tranches that banks had retained on their books after structuring deals and had nothing to do with negative basis trades.

However, others are less sure. Monoline analysts at some of the banks believe a large amount of negative basis trades in the US were done on super senior CDO tranches, but admit they have no idea what proportion of total CDO business for the monolines that was.

Bob McKee, an analyst at Independent Strategy, a London research house, believes that up to $150bn worth of CDO business done by the monolines could be negative basis trades.

Standard & Poor's, in a note on the potential impact of monolines on banks this week, said it believed some of the CDOs hedged by bond insurers were part of a strategy of "negative basis trades".

The problem is that if monolines are downgraded and their protection becomes ineffective, profits booked up-front need to be reversed. Restating earnings is a very tricky area for investment banks - not least because the traders involved will have long ago pocketed their bonuses."

Recovery for SIVs unlikely given Basel II rules-panelFeb 6 2008 12:39AM EST
By Neil Shah

"The troubled market for so-called structured investment vehicles (SIVs) is effectively dead and likely to stay that way given new international rules for matching banks' reserves to their risks, panelists at a bond industry conference said on Tuesday.

The new Basel II international accord, to be applied to U.S. banks with total assets of $250 billion or more, is likely to make investing through off-balance sheet SIVs less attractive for banks, which are the main sponsors of such vehicles, speakers at the American Securitization Forum conference in Las Vegas said."

MBIA, Inc. Q4 2007 Earnings Call Transcript (Seeking Alpha)
February 04, 2008

A couple of one liners-

(Gregory R. Diamond - Director, Investor Relations) "The rating agencies have been just as stumped by the rapid turn in the housing market as all the other market participants."

"The general market conditions that we see today are generally favorable for the industry."

MBIA is a monoline bond insurer. They got hit because they solidly backed a number of mortgage backed securities, which got derated during the onset of the siv crisis.

COUNTRYWIDE COUNTY RISK LIST: As many of you know, Countrywide has tightened up on lending on first and second mortgages. They have distributed a list of US counties, and rated them by risk from 1 (lowest) to 5 (highest). Download the list HERE.

Thanks to for distributing this list.