Money Matters: SIVs Shrink Smaller Than Cheap Cotton Dress In Hot Water

Illustration from 1933 children's book in Germany [We fled to this single pine tree to escape the storm].
11/15/7

Elaine Meinel Supkis

Wells Fargo calls our housing bust, the worst since the Great Depression. Meanwhile, more and more hedge funds sink like ships in a hurricane. And the SIV overall values has plunged to 69.7%. And MarkIt is sold to some Goldman Sachs guy who will try to fix this game site so it does better rather than showing ABX funds falling faster than the WTC o n 9/11. GE and GMAC both are losing their shirts in the lending markets. They thought they could morph into banks but instead, morphed into bankruptcy. And no one has the faintest idea how many debts were created in this 7 year mega-debt creation cycle. I guess we will find out, the hard way.

SIV Asset Values Decline to 69.7 Percent of Capital:

The net asset value of structured investment vehicles, companies that borrow short term to buy higher yielding securities, has fallen to 69.7 percent as the credit slump erodes their holdings, Fitch Ratings reported.

The amount that would be left after selling SIV assets and repaying debt dropped from 71 percent in the past month, data compiled by Fitch show. SIV holdings of nonprime U.S. mortgages and debt guaranteed by so-called monoline insurers fell the most, Fitch said.

``The worst offenders have been monoline-wrapped bonds, as well as investment bank debt and commercial mortgage-backed securities,'' said Patrick Clerkin, a senior director at Fitch Ratings in an interview.

OK! Today is another historic magic number day. 11/15/7, a dire month, this eleventh month of the seventh year of this century. All the funny money situations are now unwinding before midnight when the Golden Goose turns into a Pumpkin from Hell. So far, the losses are already quite staggerin. A drop from 71% to 69.7% in one month is significant. A 1.3% drop a month over one year equals another 15.6% drop which means we will be lucky if the amount drops to 54.1% next November. Only things don't drop in this fashion. Already, we lost 30% of the value? A steep cliff, I might add. Actually, this drop from the previous month is smaller than it would be if there was no major government and central banking interventions. These papered over the worst of the fall so we get this step-like falling action rather than an off-the-cliff event.

But in the ABX markets, it has been off the cliff. These SIVs aren't mere investments. They represent double dipping debts. They are based on debts and are bought by entities investing in them using loans from places like the Bank of Japan, a major source of global speculative funds. So if the value of these SIVs drop, the people who used them as collateral for other things, just for example, now have to raise funds or take on even more debt to cover the difference.

This is why depressions are so stubborn. The people who went into debt to speculate in various markets can't afford to take even minor losses if they are in debt up to their eyeballs. It doesn't matter if the Bank of Japan drops their rates back to 0% again. The fact that they even did this in the first place is right where all global banking went off the rails. I can't emphasize this enough! This is one of the most neglected corners in the economic debates. In the case of people collecting profits off of this insane low rate, they want this to continue and hope no one figures out where El Dorado lies, namely, in Tokyo. The rest of us are supposed to expend our fury on easy targets like China or OPEC or even Bernanke.

GE suffers bond fund damage, lets outsiders exit

General Electric Co (GE.N: Quote, Profile, Research) said on Wednesday its short-term bond fund ran into trouble amid losses on asset-backed securities and that all its outside investors have liquidated their holdings.

The diversified manufacturing company's money management arm, GEAM, which oversees the $5 billion GEAM Trust Enhanced Cash Fund, is still invested in the fund, but GE warned last week that it would sell holdings amid tough mark

I remember when GE was hailed as some sort of genius. They didn't need to make light bulbs! Or sell anything humans might find useful. Instead of concentrating on research like in the very old days, way back in Mr. Edison's time, my grand dad was named after him, by the way, by his parents who loved light bulbs. Instead of this, GE went into the funny money business. I was puzzled by this at first. Why go to GE when we go to banks for loans?

But then, everyone was not going to banks for loans. This is because the funny money out of Japan was flowing into other sectors. Banks here couldn't tap into it due to Federal laws passed in the Great Depression. But these laws didn't apply to nonbanks. The fact that GE now is selling off their loans...at a discount, of course...means that they HAD to do this. Why would they do this if they were simply holding these things?

And the answer is easy to see: these asset-backed securities were purchased via loans from the Bank of Japan and have been called in. The Japanese are increasingly nervous about all this because if GE were to go bankrupt, they will be hammered by this. They will be like the Bank of England when Germany went under in 1929. So far from the banking crisis ending, as I said in the past, it is just beginning. And it will get worse. One problem with these collapses is the refusal to face facts or even state facts. This includes the true costs of empire. Especially that.

It allowed the handful of institutional investors who put money alongside GE's assets to get out first, letting them redeem at 96 cents on the dollar.

I am not the Attorney General [torture is fun?] nor do I head the Security and Exchange Commission. But I do know this reeks of insider trading, insider deal making! While selling their services to others and representing themselves as a healthy organization, I remember all the promises that all was well just last August! Instead, the top dogs were biting GE in the rump, demanding their money be saved. So GE escorted them to the lifeboats hanging over the side of the listing deck and let them row off, losing only 4% of their initial investments.

We must remember, these investors put money in these funds in the first place to beat inflation. They didn't put it in a secure place because the official rate of growth in these funds is held below the water level. Now, the secure accounts like the ones run by regular banks look like a wonderful deal in retrospect. But the real problem remains: if the US insists on not counting inflation properly, then we will see this sort of exo-banking systems spring up, luring in the gullible with promises of easy wealth.

If I were an investor in GE, I would be suing them for this business. Why, they should have told ALL their investors this deal! Now, if these stupid things are going for 69.7%, this is considerably less than 96%.

GE warned it would soon pull $250 million out of the fund and planned to "begin to sell certain securities held in the Fund which will result in realized losses and likely bring the Fund's yield to zero."

The top executive of GE, the genius behind all this, ran off to Home Depot and wrecked it and is now ravaging Chrysler. Note how they are turning nasty and threatening to drop the value to $0. This means the smaller investors who couldn't muscle GE back in August and September will be left holding a skunk in a bag. Isn't this charming? And the con men pulling this still collect fabulous paychecks. Are they getting paid $0 this year for this mess they allowed? Eh? HAHAHA. Right! They still want their pay as if they are geniuses, hard working money making men and women!

A Bear Stearns investment fund hurt by the decline in the subprime mortgage market and facing creditors' complaints about its management asked a Delaware judge to allow it to dissolve and liquidate its assets.

Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Fund LP was linked to a Cayman Islands-based fund shutting down because of the collapse in value of investments tied to subprime mortgages, the investment firm's lawyers said Nov. 13 in a filing in Delaware Chancery Court in Wilmington. New York-based Bear Stearns is the fifth-largest U.S. securities firm by market value.

One by one, they are going bankrupt. The Accounting of the 15th of November has barely begun! Reminds me of Caesar. 'Beware of the Ides of November!' croaks the old soothsayer. The flood of bankruptcies at the top of the financial food chain will impact us all. Like an elaborate bridge over a chasm, as one section falls, the others teeter and then come crashing down, too. By the way, the state of Delaware turned itself into a nice haven for these con men. They have few laws protecting investors or the public which is why many corporations have the titular headquarters there. They have to have a presence in the US in order to sell here and this is the most convenient place to set up shop. The state of Delaware should be ashamed of themselves for doing this.

ResCap Credit Swaps Soar on Concern It May Default

The risk of Residential Capital LLC defaulting on its debt soared on concern the biggest privately held U.S. mortgage lender may violate bank loan agreements, trading in credit-default swaps show.

Traders are speculating that Cerberus Capital Management LP and General Motors Corp. may allow the Minneapolis-based mortgage unit of GMAC LLC to fall into bankruptcy as the U.S. housing slump continues to deepen.

Like with GE, GMAC was the profitable part of the automaker's business empire. And like GE, it fell into the easy loan trap. People turned down by banks could run off to these entities and do their business there, no questions asked, literally. The fact that this private equity entity, ResCap Credit Swaps, was allowed to grow at a gross rate is proof we need to re-establish traditional banking rules which grew out of many horrible banking collapses in the past. Every major collapse leads to more regulations and this is good, not bad. One of the sad things about Ron Paul, for example, is his infantile belief that we are over-regulated. These rules are made in bloody crashes. Like seat belts and rules on the road, we must have them in order to keep ourselves safe and alive. Allowing anyone to make any loans they want and then sell this as 'securities' is pure insanity. Thus, the rules and regulations. And only by forcing them to follow these rules are the losses being finally accounted for. These losses began back in 2006. So we are seeing a backlog of losses right now.

But the future losses! Those are even greater! Anyway, if GMAC's executives violated bank loan agreements, put the bastards in jail.

From one of the readers and posters at this news service:

CDS IndexCo (the purveyors of the mystical ABX, CMBX, CDX indexes, among others) was sold yesterday (Nov14th) to Markit Investments, the hand-in-glove marketer of the information on the web for these prices. The Chairman of the board of CDS IndexCo, Brad Levy, (also the Managing Director of eBusiness Group at Goldman Sachs)will be likely to continue in his post of "managing conflicts of interest" for both Goldman and the ABX et al indicies.

Posted by: Tommy Two Tone | November 15, 2007 at 11:31 AM

Thank you for the tip. I scour the news services and even with an eagle eye, I miss 50% or more of what is going on. I appreciate the links. Yes, this story is true and has some background to it. Since the MarkIt ABX market was launched online, I have happily tracked it weekly or even more often. This is a peek under the blanket that covers the banking messes. I remember when it was launched. The expectation was, everyone would bid UP the value of the listings. There was great cheerfulness and dreams of sugar plum fairies. Then, in March, things went awry. At first, they thought it was a small glitch caused by China raising interest rates and the Bank of Japan raising rates from .25% to .5%.

But in mid-July, all these funds suddenly nose-dived. Even as this was unfolding, the MarkIt guys were creating new funds to track and had a long list on the left hand side of the page. Then, one by one, these were cancelled as the earlier main funds collapsed. Now, it is grim reading. The top AAA ones have lost over 30% of their value and the BBBs have lost 80% or more. This is why all the similar, unlisted, funds are collapsing. The ones that are held and not traded on a daily basis are now being dumped and they are desperately seeking buyers, anyone, to buy these stinkers.

Now for a blast from the past:
CDS IndexCo and Dow Jones Indexes Announce Final Portfolio Weightings of the Dow Jones CDX Emerging Market and Emerging Market Diversified Indexes Which Are Set to Roll on March 20, 2006

CDS IndexCo LLC and Dow Jones Indexes, publishers of the Dow Jones CDX family of credit derivative indexes, today announced the final portfolio weightings of the Dow Jones CDX Emerging Market Index (DJ.CDX.EM) and the Dow Jones CDX Emerging Market Diversified Index (DJ.CDX.EM Diversified). Both indexes are set to roll on March 20, 2006. The portfolio selection and weightings process was conducted by Markit, the index administrator, with input from the member banks of the CDS IndexCo consortium and approved by Dow Jones Indexes.

The member banks that are part of the CDS IndexCo consortium include: ABN AMRO, Bank of America, Barclays Capital, Bear Stearns, BNP Paribas, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan, Lehman Brothers, Merrill Lynch, Morgan Stanley, UBS, and Wachovia.

This is beginning to look like a police line up, eh? Look at those names! The same names crop up again and again in this banking mess. Namely, the biggest wheeler-dealers are also the biggest rats jumping ship, the biggest losses are the biggest guys. The most irresponsible are the biggest players. The launched this business hoping to lure in more outside investors. If they didn't need these outsiders, they would have happily run these funds secretively. But they knew they needed outsiders so they could SHORT them.

And the MarketIt site should be investigated by the SEC along with Goldman Sachs. The average investor doesn't see these conflicts of interest easily. And few people can find the information easily online even with search engines. The conflicts should be in bold letters at these investment sites. But we are allowed to keep this information hidden. Finding the truth is hard work which is why I call all markets 'insider trading' when the big shots wheel and deal, buying and selling. Especially the very well-connected goons running Goldman Sachs.

MARKIT ACQUIRES INTERNATIONAL INDEX COMPANY AND AGREES TO ACQUIRE CDS INDEXCO

Markit Group Limited ("Markit"), the leading provider of independent data, portfolio valuations and OTC derivatives trade processing, today announced it has acquired International Index Company Limited ("IIC") and has also agreed to acquire CDS IndexCo LLC ("CDS IndexCo") . Markit and CDS IndexCo expect the transaction to complete by the end of the year.

IIC owns the iTraxx Europe and iTraxx Asia credit derivative indices as well as the global family of iBoxx bond indices. CDS IndexCo owns the CDX credit derivative indices and the synthetic structured finance and loan indices ABX.HE, CMBX and LCDX.

The iTraxx funds are doing badly, too. I visit that place, too. It is online, after all. And iBoxx. Looks like there are traxx leading away from the boxx where the ABX papers are shrinking in size. This Pandora's boxx is a Venus Fly Trap for investors. Love the sexual imagery, eh? Ouch.

Subprime mortgages, subprime currency

By John Lee

It came as Bernanke told Congress that estimates that set the total losses from subprime mortgages at about $150 billion were probably "in the ballpark".

Given that the Fed and European Central Bank have already injected well over $150 billion since August, Bernanke obviously lied about his ballpark figure. But just how big is this subprime mess?
*snip*
How about interest rates? Hiking interest rates on US debts is like giving a discount on mad-cow tainted beef: it’s not going to make a difference or help it sell.

John Lee is always a good read and this article is no exception. He ask pertinent questions. How much money was created in the lending frenzy we just passed through, anyway? Eh? Does anyone have the slightest idea? This is a primary question. Central banks struggle with this. They can't answer it because so many financial machines were set up in various Elizabethan islands that pay no taxes and we have no access to these accounts and today's rules about revealing this sort of information seems dead in the water. Only bit by bit are the organizers of these things admitting to losses they knew about long ago.

Already, we know by next year, it won't be a mere $150 billion loss. We just saw the major world central banks of the US, Europe and Japan frantically trying to keep the world's monetary system afloat since August by injecting an unknown amount that certainly exceeds $500 billion into the financial money stream. And we know the dollar has plunged due to this. So something is afoot! The sudden surge of the loonie of Canada to 1.09 to the dollar and then falling back to 1.03 in just three days is a sign of huge instability in the present world financial systems. One that can't be ignored since Canada's biggest trade partner is the US!

If this pie chart is true, we could see a complete collapse of the global banking system in the West. Of course, reality may be much worse! We don't know. I say, send the US navy to all those private islands used as tax havens. Seize their computers.

Canadian Shoppers Demand Wal-Mart Price Cuts as Loonie Soars:

Christopher Smith, co-owner of a bookshop in Ottawa, says his customers got angry when the Canadian dollar hit parity with the U.S. currency. If the two were of equal value, they complained, the same book shouldn't cost 30 percent more in Canada than in the U.S.

``There was a shift in attitude,'' Smith said. ``People said point-blank this was unacceptable.''

The chaos grows, doesn't it? A relative values of currencies shoot up or down, this destabilizes world trade, doesn't it? It takes time to physically deliver stuff, to take it from warehouses to store shelves. It takes time to write contracts and then conduct business under these. So if the currencies in question are as changeable as the weather outside, this causes trade to break down. It causes a loss of good will, too. It means someone is going to get cheated due entirely to the fluctuations of fiat currencies changing value capriciously. This means people will be reluctant to sign contracts or make promises if they have no idea what will be worth how much in the near future. The US can't conduct foreign trade this way for too much longer. Soon, everyone will demand all trade be done in their own currencies.

And this ends the rule of the dollar as the standard for world trade! The Chinese are already pretty steamed about all this. The OPEC nations are getting very restive. Europe is very worried. And the US can't act like Japan. Japan is NOT the destination of world trade. It is the #2 world economy and has designed its system to NOT attract trade at all. But the US can't do this. We will be hammered if we do. And dropping trillions of useless dollars into the world's markets is one way we can be punished. Unlike the paper assets at the top of this story, dollars can be held forever if the holder wishes. But they may decide not to bother.

And a final word about linking to people. Some readers are kind enough to send me links to sites like Calculated Risk. I appreciate all sites that are sent to me. But when I quote an article, I give the URL and link to the main source of information. Many posters running blogs like to put up articles and then have 'look at this!' as most of their commentary. Sometimes, they have a tiny bit more than that. If I quote the guys running these blogs directly, I provide a link. If they are simply echoing a news story, I don't. I also don't expect anyone to link to me unless they are quoting what I am actually saying. We all use the major media a lot. So I hope no one who reads Calculated Risk rags on me if I don't link to him directly every time. I have been attacked over this in the past and it irritated me so much, I said I would not link to him.

He and I know each other. Like the crew at Angry Bear, he got bored with me talking about Japan's central bank, FOREX reserves and the military/industrial complex's attachment to Zionism. Indeed, if one wants to be blacklisted, this is the way to go: talk about the stuff I talk about. And these guys running these other economic blogs have shunned me because I don't echo them. So all I can say is, let's all just get along and till our own fields and enjoy the sun set.

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Comments

Re: Ron Paul and regulation.

You're both right. We're regulated in lots of ways that are silly and counterproductive. And we're not regulated in many the ways we truly need to be. Funny, how the big money gets its regulations waived or struck down, while the small fish see the hassles grow larger every year.

Posted by: John | November 16, 2007 at 03:44 AM