April Fool's Day 2008
Elaine Meinel Supkis
World stock markets rose on the anticipation of UBS and Lehman making more money appear even as it vanishes from their computer terminals. This is a tricky business when we consider the fact that all the real wealth in the Sovereign Wealth Funds are no longer flowing so fast into these collapsing investment banks. The Citigroup example still smarts as the Saudis glare in fury as their oil wealth loses value. The dollar is going up again based on the notion that the banking crisis is over and all is well. This foolish idea keeps popping up every three weeks. Then the depressionary forces suck down more funny money. This is why all charts for depressions show huge rises based on the hopes that central banks and bankrupt governments can bail out a collapsing speculative bubble.
UBS Says Ospel Resigns After $19 Billion Writedowns
UBS AG, battered by the biggest writedowns from the collapse of the U.S. subprime mortgage market, reported a 12 billion-franc ($11.9 billion) quarterly loss and said Chairman Marcel Ospel will step down.The bank will seek 15 billion francs in a rights offer to replenish capital, on top of 13 billion francs raised from investors in Singapore and the Middle East. UBS will write down $19 billion on debt securities, bringing the total to almost $38 billion since the third quarter of 2007. Zurich-based UBS also said today it will cut jobs at the investment bank.
In other words, after sopping up $19 billion in SWF, UBS needs to double this amount and then they are 'out of the woods'. Except this is a false hope peddled in the hopes that this false dawn is the sun rising and not the moon. The problem with the SWF rescue is simple: the interest rates they wanted in return for this rescue are fairly stiff. Even as the central bankers of the G7 nations drop interest rates and offer sweetheart loans to these misbegotten investment banks, it is never enough. The black holes that have opened on all these bottom lines of the ledgers in the bookkeeping sections of these banks can't be so easily filled. As more and more future wealth vanishes, investors pull their funds and go elsewhere, seeking to beat inflation. So they need more and more money from someone to keep afloat.
The central bankers would dearly love to simply make up money on the spot using their nifty computers that can go to infinity in no time flat. But they see the example of Zimbabwe. I will note that Zimbabwe is barely mentioned in American news. Darfur, a backwater desert tribal battle over scarce resources, has enjoyed massive news coverage. But Zimbabwe with their attempt to outdo the Germans [very hard to do] after WWI with the Weimar Republik tried to make money grow faster than it was disappearing. Any central banker tempted to go to infinity has a shining example today. Inflation in Zimbabwe is 400,000%. And showing no signs of stopping. Of course, when inflation hits multi-trillion% then money vanishes totally. Right now, the place has been reduced to barter trade.
Inflation in Europe is now rising to a sixteen year high. This global inflation isn't due to inattention. It is caused by the central banks of the great nations dropping interest rates as low as they dare. In the case of the Japanese, to 0%. Interest rates on lending in real estate and buy-out deals has risen even as the central banks drop their rates. The commodities markets soared thanks to money fleeing other investment destinations. But that is also causing inflation to blaze higher, faster. The more money flees to commodities, be it oil or gold or wheat, the higher inflation rages. And if the central banks drop rates at the same speed that commodities rise, this feeds the commodity fires since the investors will rush to get loans from the central banks and then dump them into commodities and this causes inflation to shoot upwards where it matters the most: in the marketplace. And rising commodity prices kill manufacturing which has higher costs. Which they fix the same way Japan fixed higher material and energy costs: ruthless slashing of wages of workers. The US is very heavily involved in this process. Workers who can't buy things and who are seeing growing inflation for the things they need to stay alive go deeper into debt in order to keep up. This is a deflationary cycle. Instead of growing, everything burns up. Increased spending due to food and energy shooting up isn't a good thing. I have pointed this out in the past when our rulers would celebrate the rise in spending as if this signaled a healthy economy rather than a forest fire raging out of control.
When inflation rages AND CENTRAL BANKS DROP INTEREST RATES, savings drops through the floor and vanishes. Banks struggling to continue without savings soon find themselves in the fix UBS and Lehman finds themselves today. When global inflation eats up the ordinary savings of the masses of humanity, we see a full collapse of the banking system. So far, the biggest bankers are hoping the commodity wealth nations will bail everyone out. They are giving up on the Chinese bailing them out. China is busy at home. The ferocious winter storms and now, insurrections, are keeping them occupied. And China is furious about global inflation. All of the commodity selling nations are, too. They want to have prices go up in sales outside but the flood of funny money is causing inflation at home. This feeds the commodity inflationary cycle as they raise prices to deal with the collapsing dollar. Or they use euros instead, increasingly. Which destabilizes Europe's trade.
Trade in manufactured goods is stumbling, world wide. The frantic search for cheaper labor to make up for rising commodity prices is running out of stable governments to protect manufacturers. Vietnam is one of the last destinations of such labor. Hardy peasants willing to slave for hours for pennies are getting harder and harder to find. There are such people in lands that are undergoing ethnic/tribal warfare. But they are not useful in this regard. The teeming masses in oil producing nations can't work like Asian peasants. The nature of oil pumping is, the ease at which this is done and the need for little capitalist manufacturing since oil brings in wealth. Money is spent on military to protect the oil. The nation is either a welfare state or a military dictatorship.
Oddly enough, the US/EU/UK isolation of Iran is forcing them to build up their own manufacturing processes! Not what we want. One of history's ironies. Back to UBS in Switzerland and Lehman Brothers in the US: both have been rapidly sinking ever since 7/17/7.
This chart [click on image to enlarge] shows how the stock market and UBS and Lehman all were tracking together just fine but suddenly, right when the Japanese carry trade began its long collapse in mid-July, the biggest banks began their sudden, shocking decline! When the yen rose to beyond the 100 yen to 1 dollar floor, these banks nearly totally collapsed. Both were saved by various schemes that are doomed in the long run. Unless that pesky carry trade in Asia is restarted.
Lehman Brothers Holdings Inc. is selling at least $3 billion of new shares to bolster capital and squash speculation about a cash shortage that pushed the stock down 42 percent this year.Lehman, the fourth-biggest U.S. securities firm, will offer 3 million convertible preferred shares, the company said in a statement today. Demand for the shares was already three times greater than the amount offered as of 6:30 p.m. in New York, according to a person familiar with the offering who declined to be identified before the sale is completed tomorrow.
*snip*
The stock fell 2.8 percent $36.60 in New York trading after the market's official close, while credit-default swaps declined, showing investors believe Lehman's ability to pay debts has improved. Lehman closed at $37.64 during the regular session. Credit-default swaps tied to Lehman's senior unsecured bonds narrowed 15 basis points after the announcement to 285 basis points, according to broker Phoenix Partners Group in New York. A decline signals improvement in investor confidence.Terms of the offering include a coupon payment of 7 percent to 7.5 percent. The conversion premium will be 30 to 35 percent above the current stock price, according to people familiar with the offering who declined to be identified.
``They have to make their balance sheet stronger in this environment,'' said CreditSights Inc. analyst David Hendler. ``Banks and brokers need to write down their weak positions, and they need capital in order to do that.''
The capital increase will provide ``financial flexibility,'' the firm said in the statement.
The central banks have been diluting the value of their currencies by making it easier for them to lend money to the investment bankers. And in turn, these guys are diluting the value of their existing stocks by printing up more pieces of paper that say, 'This is a SHARE in the value of the company.' Doing this while a company is declining in value is what we call 'inflation'. Inflation is when money loses value and more is made to cover costs so it loses value, a vicious cycle once it is launched and let to run out of control. A company that dilutes its stocks as it declines in profit usually ends with that organization going under. There are many people who are betting both UBS and Lehman will go under. Issuing stocks backed by declining profits certainly is a bad sign, not a good sign. If all companies in trouble simply has to issue more stocks, we would never see any bankruptcies! But of course, they can't do this for obvious reasons.
But the news has to sound good so this dire news has been greeted by the investment community as a wonderful thing! Note how this offering isn't a share, actually. It is an attempt to get loans for less than 10%, I guess. Heh. To attract the SWF, they need to offer shares that will pay back 7%? That is well above the Fed's emergency window rates which is less than 3% for ordinary banks and JP Morgan. OLD JP MORGAN IS ONE OF THE FOUNDERS AND OWNERS OF THE FEDERAL RESERVE LLP. So of course, they can hand over a fistful of 30% of value SIVs and CDOs and get 95% value with their own central bank! But this is very incestuous and extremely inflationary. They then are turning around and trying to profit from all this by investing this ill-gotten gains in...guess where?
The commodities markets! For a few days after this pirate deal concerning Bear Stearns, they resisted this temptation in order to make it look like inflation was going down by not buying commodities. Commodity markets had a brief collapse. Now they are roaring back.
Dollar Advances Most in Almost Two Weeks as UBS Seeks Capital
The dollar rose the most in almost two weeks against the euro after UBS AG said it will raise about $15 billion, signaling the world's biggest financial institutions can ride out the freeze in credit markets.The U.S. currency also appreciated against the yen after a Bank of Japan report showed a slump in business confidence in March. The euro also weakened after Deutsche Bank AG said it will take a record $3.9 billion writedown and described market conditions as ``significantly more challenging.''
The Japanese are absolutely hysterically desperate to get the yen to collapse in value. The Nikkei, as always, shot up when the yen fell down. So they are happy. They desperately want one way trade with the US. It is very queer, watching the dollar rise and fall against other currencies. The US trade deficit has barely improved at all. The unbalanced flow of trade and finances has not ended at all. What we are seeing is an attempt at restarting the old status quo that collapsed. And it collapsed because there is no realm where endless red ink doesn't cause a total collapse! The rank attempts at getting things back to 'normal' will all fail! Utterly! If they get restarted for a while, this means the US will continue its industrial/financial decline and the pit of bankruptcy simply is dug deeper and deeper. Eventually, it will swallow up the entire US economy and everything will plummet down this fiduciary sinkhole.
If the yen is falling on news that they can't ship even more Toyotas to the US, this means they will have cheaper Toyotas thanks to the falling yen and then can resume flooding our markets. This will then cause the yen to rise in value. This riddle upsets the Japanese who are desperate for some solution that allows the floods of exports to come into the US while keeping the yen weak. They will arrive at some sort of trick. And of course, the carry trade: this has to restart, too! This is why UBS, Lehman and the other pirate banks are desperate for the yen/dollar status quo they need which happens to be 130 yen to the dollar. Then the flood of 'free funny money' they tapped for 7 years can resume!
But this is why we have global inflation! Which is hammering them and everyone, especially workers who can't buy the products of mass industrial production thanks to inflation. The Horns of Dilemma are obvious here.
UBS and Lehman raise funds through rights issues
The desperate scrabble for cash among the world’s best-known banks continued last night as UBS prepared to raise about SwFr13 billion (£6.5 billion) and Lehman Brothers about $3 billion through rights issues.UBS is raising the new cash to plug a gap in its balance sheet that has been left by a further $18 billion of sub-prime mortgage-related losses in the first quarter.
The new share issue would come only weeks after UBS agreed a SwFr 13 billion cash injection from GIC, a Singapore Government sovereign wealth fund, and an unnamed Middle Eastern investor. UBS’s first capital injection was needed to fill another $18 billion loss, relating to the fourth quarter of 2007.
Meanwhile, in a sign of just how jittery investors have become about almost any group with exposure to the credit markets, Lehman said that it did not actually need the money that it is planning to raise.
Instead, Lehman, which is widely rumoured to be the most cash-strapped bank on Wall Street, said that it was issuing three million preferred convertible shares for purely psychological reasons.
HAHAHA. I include this Times of London story because it is funny. Lehman is raising money at 7% for PSYCHOLOGICAL reasons? HAHAHA. Next, they will be buying $4000 an hour prostitutes in order to feel better about themselves. So, they actually don't need the money? They just want it to look at it? Is it going to go under their beds? Then, like so many misers, they can haul it out and count it? Right.
So long as our biggest banking houses act like little children or inmates in psycho wards, nothing will be fixed and the collapse will continue. When reality bites, acting like an infant is stupid. But then, look at the governments involved here! 'Infantile' is being generous. 'Fetal' is more like it.
Extraordinary General Meeting of UBS AG
At the Extraordinary General Meeting on 27 February 2008, the shareholders of UBS AG approved the proposal by the Board of Directors to create conditional share capital for the issuance of mandatory convertible notes. They also approved the Board of Directors’ proposal to replace the cash dividend with a stock dividend. The special audit proposed by Ethos and Pictet Funds S.A. into UBS AG’s exposure to the US mortgage market failed to gain an absolute majority. 6,454 shareholders attended the Extraordinary General Meeting, representing 710,145,376 votes.
Note how this UBS news release mentions the replacement of 'money' with pieces of paper that are basically IOUs drawn against future earnings of UBS. Instead of being able to take money out of UBS, the unlucky saps who invested in it can only get shares that are automatically diminishing the value of all other shares. Aren't they lucky? Then, they may take THESE and sell them on the stock market! And of course, this drives the price of ALL the stocks lower! And so they are in a trap: sell and everyone takes a big hair cut or hold and pray this banking collapse doesn't go all the way to zero.
Here are some charts from UBS Quarterly Report for the first quarter of 2008:
Uniformly, bad news. Their capital flows have gone strongly negative ever since July when the Japanese free money for nothing system began to break down.
UBS Cuts 5% From Clients' Auction-Rate Bond Valuation
UBS AG has cut the value of the auction-rate securities its customers have in their accounts by about 5 percent following more than a month of market upheaval.``This is the right thing to do,'' said Michelle Creeden, a UBS spokeswoman, in a prepared statement. ``It is in the best interest of our clients to provide them full transparency regarding their account. Given current market dislocations, this is the next logical step for any committed wealth manager.''
UBS will inform clients of the reduced value of their holdings via their online statements, Briefing.com said, citing a Dow Jones report. UBS customers had maintained full value without any discount that could reflect bondholders' inability to sell their holdings.
UBS's action comes after auction-rate bond failures rose to about 71 percent this week, up from about 69 percent last week, according to data compiled by Bloomberg. The $330 billion auction-rate securities market originally attracted borrowers by offering financing for 20 years or more at variable costs determined through periodic bidding.
As usual, all the indicators of financial health are headed downwards. Not the bond failures are not only continuing but getting worse, not better. The bidders on these things have vanished. Hedge funds, badly burned by their own gambling debts, can't run off to Japan and get armloads of more money to play this game. The eternal, endless window through which money poured into these guys pockets is gone. And the world will deal with this by having temporary inflation. But since this mess was created by the gamblers, the deflation cycle will replace all this and the central bankers said, they will not allow this to clean up the mess. they want this previous inflation to hang out here...FOREVER. Naturally, they also want to fix things by resurrecting the Japanese carry trade which caused this in the first place. Since they still refuse to talk about or analyze the dire effects of the Japanese carry trade, we won't see anything fixed in the foreseeable future.
All we know is, UBS and Lehman and everyone in the system won't attract any savers so long as they offer negative returns on investments. And the positive flow has to be more than inflation. Which is impossible right now. Let's look at some slightly older news from the beginning of this collapse.
NYSE Regulation fined 14 of its member firms a total of $10.4 million in fines for failing to deliver trade confirmations to their clients and other violations.
Citigroup Global Markets received the heaviest fine of $2.25 million for failing to deliver trade confirmation documents in more than a million consumer transactions. Lehman Brothers and DeutscheBank were each fined $1.25 million.Other firms sanctioned included UBS Securities; Bear Stearns & Co.; Credit Suisse Securities (USA) LLC ; Banc of America Securities LLC; Goldman Sachs & Co.; JP Morgan Securities; Wachovia Capital Markets LLC; and Keefe, Bruyette & Woods Inc. Fines levied against these firms ranged from $375,000 to $800,000.
According to the New York Stock Exchange (NYSE) enforcement wing, the violations occurred between July 1, 2003 and Oct 31, 2004. These include failures to ensure delivery of prospectuses to customers who purchased securities and mutual funds, failure to deliver product descriptions to customers purchasing exchange traded funds and failure to establish and maintain appropriate supervisory procedures regarding such activities.
Back when they were all struggling with the downdrafts from the collapse of the Dot Com frenzy, these regal investment houses were playing stupid games. Like not letting anyone know up to date information concerning the finances of these groups! HAHAHA. Like naughty children, they hid the report card from mommy! Despite this, people went back to these dishonest houses of finance for more wealth once daddy Warbucks, Greenspan, started handing out the candy to the naughty children! And investing money was made laughably easy, too. All one had to do was put it in the various companies being fed funds from the US government as military spending doubled thanks to the new wars against virtually disarmed people in Asia Minor.
Lehman Bros. Financial Report 1st Quarter 2008:
If Lehman Brothers think they can get out of the present mess by diluting the value of their stocks and getting 7% or greater loans, they are NUTS. Look at the numbers! The % change goes from 20% losses all the way to 60% losses! OUCH. Would anyone sane park their money in this loser? I seriously doubt it. The fact that Lehman is limping along is a miracle worthy of Lourdes. But not much longer, I would dare suggest. Will JP Morgan devour them, too?
Probably. Though Goldman Sachs may be alarmed by all this. After all, JP is getting a free ride in all this! So Goldman might throw caution to the winds and demand their own cut of the carcass. I have no idea how much Federal Reserve stocks Goldman Sachs holds. We can't tell thanks to the damn SECRECY that enfolds this particular Cave of Death. If so, it will be easy for GS. But if not, then they must depend on Paulson to do the dirty work. Which he will.
Banks Must Better Report Risk, Valuation, Stability Forum Says
Financial institutions must be more transparent in reporting how much risk they carry and decide how they are to value poorly performing assets if the credit squeeze is to pass, a group of international central banks and finance ministries said.``The financial system faces a number of significant near- term challenges,'' the Financial Stability Forum said in a statement released today after the group held talks in Rome. ``While the necessary de-leveraging has been going on since last summer, the process is being complicated by the lack of transparency and valuation difficulties.''
Governments and central banks are seeking an end to a financial crisis in which over $200 billion of losses stemming from U.S. subprime mortgage slump have been written off by banks and securities firms. Banks have stopped lending to all but the safest borrowers as the cost of credit has soared.
This demand should have been made about 4 years ago. Back then, though, everyone was pleased with the balloon beginning to inflate. Now, they are unhappy. Figuring out risk is lunacy if one is hiding significant parts of the truth. And even if we now 'price' things properly according to risk, this is still useless if we leave out the biggest energetic parts of 'risk': the carry trades. As Iceland is discovering belatedly, playing with pirates is dangerous. They are raising interest rates as fast as possible to stop both raging inflation and the drop in value of their krona. But this only attracts more pirates as they seek to move Japanese loans into high-interest loans and at 15%, Iceland is a desirable destination. So the banks of Iceland won't collapse. But this further warps world money flows that are hopelessly out of whack with WORLD TRADE.
The US has to attract most global funds due to our trade deficit. And this makes the deficit worse! And no one can fix this! Not easily.
How the frozen $330 billion Auction Rate Securities (ARS) market will burn Merrill
Here's a new reason that the brokerage firms are in trouble. The customers who hold Auction Rate Securities (ARS) accounts will take their entire portfolios away from the firms who are currently denying them access to their money. I am not sure which brokers will benefit from this, but I can suggest one that will suffer -- Merrill Lynch & Co. (NYSE: MER).Since I started writing about the $330 billion ARS market last month, my initial post has accumulated 764 comments. ARSs are bonds that were issued by municipalities, such as the Port Authority of New York and New Jersey. The interest rate on the bonds would reset in weekly auctions. But in the last several months, those auctions began to fail so the rates that issuers paid spiked from as little as 3% to 20%. Unfortunately, individual investors were persuaded to put their spare cash in these ARS accounts by brokers who touted their relatively high yields and low risk.
But now those ARS accounts are frozen due to the failure of the auctions. One person about whom I posted earlier this week, has $1.4 million frozen in ARSs and needs to come up with another way to pay the $350,000 he owes in taxes from the sale of the business that generated those proceeds. Today, I read a comment from a person who claims that her account at Merrill is frozen and she plans to take her entire seven figure portfolio away from Merrill as soon as she gets her ARS account unfrozen.
Merrill Lynch will be hung out to dry by the investors as soon as they can unpark their funds. Note how this investment house is acting in a draconian fashion to prevent a bank run: they shut the doors. This is what all bankers and investment houses do when things go bad: they close the doors and hoard other people's money. They tell everyone to go away. And then they want more money? Only an insane person will give it to them! This is why gold shot up in value these last 7 years. Suspicious people decided to hide their money from the banking system. People who trusted the greatest banking/investment houses on earth are being burned.
This refusal to pay back funds can't last more than a few months. Lawsuits are already flying out of lawyer's offices! The fury of savers and investors is rising. This has political as well as economical repercussions.
Here is an example:
3-28-2008 @ 5:24PM
john m. said...We're stuck with $600,000 of ARS. Merril started cramming them into our account in October. Everytime we sold stock they put it in ARS. When I finally noticed a big purchase in January in our February statement I told them to sell. The broker was away for a couple of days including a Valentine dinner. No doubt he was avoiding us. We were looking for a good money market rate and now we're stock holders in a hedge fund!!! Yes hedge fund, who do you think these ARS companies are? We've already pulled our money out and are seeking legal counsel.
Brokers who hide from their own investors! HAHAHA. Again, the picture of the 'bad boy' hiding from mommy when he has to give her his report card comes to mind.
Here is an attempt at cracking the nuts that are screwing the investors:
ATTENTION MERRILL LYNCH BROKERSI'll pay top dollar (4 digits) for the alleged Merrill Lynch handbook or memo which purportedly urged brokers to sell ARS as alternatives to money market funds. My contact information is above.
Full Confidentiality Assured.
Citibank is getting sued Lead Plaintiff is Lisa Swanson
"The collapse of the auction rate securities market ... was a direct result of defendants' unilateral decision to no longer artificially support the auction rate securities market," plaintiff Lisa Swanson, who purchased auction rate securities in 2006, claimed in one suit.
Securities and Exchange Comission response with follow up phone call.
Massachusetts Securities Division Opens investigation in UBS business practices.
Boston Nick wrote...
I received a call from Attorney Gombar at the MA Securities Division this morning.They are opening up a UBS investigation and are issuing a comprehensive document subpoena today.
I was assured that this is a high priority for the MA Securities Division and can expect regular follow-up.
Cat's out of the bag...its only a matter of time before all of the broker dealers start sweating this big time -
could be criminal implications. Regulators are working for us and I think there is healthy competition
amongst each State's Securities Enforcement divisions to be the first to press charges.Small ray of Hope?
Americas Watchdog Demands Banks & Financial Institutions Refund Small Investors Money Placed In Auction Rate Preferred Shares.
THOMAS MARTIN Americas Watchdog 866-714-6466
Thanks to the internet, accumulating information is a lot easier for the lawyers. UBS hopes to hide as much as possible from them. But if investment houses are pirates, lawyers are like crocodiles seeking to eat Captain Hook. They keep on ticking. If investment banks are whales, lawyers are killer whales.
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