Bonds That Untie

February 15, 2008

Elaine Meinel Supkis

More information is coming out about what happened at the muni bond sale. This is so classic to all depressions, we must examine this more closely. Bernanke, a fool if there ever was one, thinks he figured out how the Great Depression worked and the solution: the Fed makes super cheap loans. This is going to continue no matter what: he will 'cut rates' and the real rates will rise. There is NEVER any 'easy' solution to depressions. It isn't a matter of just putting people into houses or jobs, these things are all about the collapse of equity value and the dire need for the banking balance to reset with more savings. Whether we want it or not, these savings will be forced on us no matter how we try to evade this. The bond business is always bear territory. And bond traders tend to be a grim lot. And in Fortress Japan: the rulers there are madly moving offshore their operations while they have decided to shut down Japan itself and simply have a grim world of declining health, population and hope. They intend to show us this future that involves a diminishing working class pushed over the edge. Like in Russia.

Bernanke Open to a Sizable Rate Cut

Mr. Bernanke hinted that officials may soon start discussing an endpoint to the rate cuts. He said the Fed would have to assess whether policy is "properly calibrated" and whether the recent rate cuts "are having their intended effects." Because interest-rate changes take more than six months to work through the economy, Mr. Bernanke said the Fed's near-term policy decisions must take into account improvement expected in the economy later this year.

Both Messrs. Bernanke and Paulson drew criticism throughout the hearing from lawmakers on both sides of the aisle who suggested the recent efforts were too late or insufficient. "When you see something coming, don't put it off," Republican Sen. Jim Bunning of Kentucky told Mr. Bernanke. "Take action immediately. This housing market has been coming to us for a year, year and a half, and we didn't react properly to it."

Democratic Sen. Christopher Dodd of Connecticut, who chairs the committee, praised Mr. Bernanke's recent interest-rate cuts, though he had misgivings about the Fed's regulatory action. Administration officials have been "timid" in responding to the housing troubles, and "just seem not to understand the depth of this or willing to accept it," he told reporters.

There are so many things wrong with this lead story today. One of the top things is the housing bubble: we all knew there was a bubble. The bubble made many people very, very happy. Everyone thought they were getting richer and richer due to this bubble. I warned about this 'wealth' when I explained that rising housing costs would eat up people's incomes paying for ever-higher housing costs. Using houses as ATM machines was very dangerous because it increased the debt load and reduced savings. The housing bubble, launched by ridiculously low rates by the Fed right when the US decided to go to war with bin Laden and Saddam, was a bad economic choice. Cutting taxes while launching wars causes inflation. This is also bad. During wars, we are supposed to save money and work hard for the future. All wars must have enforced savings or the country at war goes bankrupt. As we saw with the Vietnam War. We tried to have 'guns and butter' and play games while dropping bombs. This spawned an entire generation of 'stagflation' as we had to reduce war spending while the inflation launched by the war roared through the economy.

Congress and Bush both encouraged the housing bubble. When Greenspan enabled this, they praised him to the heavens. I remember them doing this. One said, 'We don't want you to go.' Another said, 'We could have you carted in even after you are dead and you will make the economy boom.' Or words to that sort, I heard it on TV. They were delighted with the easy money during war. They were happy that no one was stopping the rise in the budget overdrafts. As trillions of overdrafts grew, they and Greenspan were very happy. Now, they are all frowning and Greenspan is pretending he isn't responsible. Bush, who pushed for lower standards in lending, isn't responsible. Bernanke, with his helicopter, isn't, either. Indeed, many want to blame all the online 'bears' who pointed out the obvious these last 7 years!

Last summer, Paulson, Bernanke and every branch of our government were all playing the same harp: our economy is sound, there will be no recession and the housing mess was clean. Already, the joy across the land from the constant rise in housing values had turned to gloom. But as I keep pointing out, the banking crisis happened very, very fast. Not that there were no warning signs, there were a lot of obvious warning signs. But the sudden banking collapse was not caused by a 10% drop in housing values in LA and Las Vegas. That had barely begun to bite.

It was a collapse of the interbanking/exobanking system. Exobanking is the modern rise of entities that are naked reconstructions of the notorious 'Trusts' of the 1920's. These are organizations that borrow money and then use it to buy up corporations or buy bonds. Many of the bonds they bought using loans were housing bonds. These turned out to be bombs and they caused the primary loans which came mostly from Japan, to fail! It is the failure of these loans that triggered the global banking collapse. The CDOs, SIVs, ABXs, etc. were purchased with loans. They were not repositories for savings. They were repositories for loans. In the 1930's, this sort of 'finance' was outlawed for the obvious reason, it causes terrible banking collapses.

Unlike bank collapses caused by a recession due to a drop in consumption, this near-universal banking collapse which ravaged all the G7 nations, was swift and relentless. Spending in America had barely dropped. Stocks were soaring, not falling. The new record of the DOW was well after the banking collapse became obvious. Therefore, I must suggest that housing didn't cause this, excess use of 'leverage' by financial speculators caused this. This banking collapse is CAUSING the recession. And this won't be a recession but a depression precisely because this is a banking collapse. The collapse didn't happen because stocks used as collateral lost value. It happened because the bonds held by investors using 99/9% debts to buy bonds, were unable to turn these over. For they have to keep turning these over since they mostly if not always, use short-term loans.

These chiselers get a cheap but short, such as one year or three month or even one month loan from a place with super-low lending rates like Japan. They didn't get the fabulous 1% loans, these are only for Japanese businesses. But they all got the 2.5% loans. When US CDOs and SIVs, etc were running on systems giving everyone a 5% to 6% return, this meant the differential between the Japanese loan and the American bond were an easy 2.5%-3% profit. And if one was very clever, one could up that to a fabulous double profit. Which is why there was this sudden proliferation of exotic pools and gambling schemes. Every day, a new one was spawned and sold to investors. When the differential vanished, so did the casinos.

Muni Regulators Seek Disclosure on Auction-Rate Bonds

U.S. banks and securities firms may be forced to disclose more information on bidding for auction- rate bonds after dealers stopped buying the securities, triggering more than $20 billion of failures this week that squeezed local governments nationwide.

The U.S. municipal bond market's main regulator, the Municipal Securities Rulemaking Board, plans to seek comment on whether dealers should reveal the number of bidders and disclose how often auctions fail in the $330 billion market for the securities, whose rates are set periodically at auctions, said Executive Director Lynnette Hotchkiss.

Much of money making rests on keeping as much as possible, occult. This is why all the raw details we must know about any contract or deal always dwells in the 'fine print.' This print is fine due to the desire to have no one read it. After various scandals due to this need to hide information, the government sets up rules and regulations as to the size of the print, etc. Then the scam artists resort to tricks like putting the fine print on the back of piles of paper documents. Then they discovered, they could print it in light grey ink. There are other tricks like putting in big red letters, the lies, then putting the truth in smaller print on the back, in grey. And so on. The trick is to trick people. This is why, during good times, these cheaters will go to the government and overturn most of the rules and regulations that prevent them from cheating people.

Usually, many bribes and strange media productions later, they get what they want. As soon as this happens, they rush off to create a bubble/panic/depression. Why this is allowed to happen annoys me a lot. We know history! We know they will get their wishes and this will destroy any economic system. Yet it happens over and over again. The government is eliminating yet another service online that allows us to track the economy. Just like when Bernanke and Greenspan managed to kill off the vital M3 information, across the board, there is this burning desire to keep us in the dark. When these dark messes emerge into daylight, they will pretend, no one knew this would happen. Thanks to the internet, they are shown to be abject liars.

Bloomberg:

Banks including Goldman Sachs Group Inc. and Citigroup Inc. allowed more than 100 auctions to fail this week after they were unable to attract bidders and decided not to buy unwanted securities. The failure nearly doubled borrowing costs on $15 million of bonds sold by Harrisburg International Airport in Pennsylvania to 14 percent, said executive director Tim Edwards. The Port Authority of New York & New Jersey's rate reset at 20 percent on $100 million of debt, up from 4.3 percent a week ago.

``Obviously, auction-rate trading is a big issue right now,'' Hotchkiss said in an interview late yesterday.

Goldman Sachs is a pirate organization that runs the Treasury. They also run huge hunks of the government. They are now punishing us by forcing up muni rates so they can get them with huge, huge bonuses. 20% for New York bonds means the New York taxpayers will be reamed out and the executives of Goldman Sachs will boast that they are very smart, have been clever dealers and will hand out huge bonuses to each other next Xmas. They lost their shirts in the real estate and buy out markets so they will make their fortunes charging a fortune to hold our bonds. This will destroy the economy for this is a TAX on the people of America. Even as Bernanke drops the cost of them borrowing from the Fed, they will turn around and hammer us in the bond market. Normally, the bond market is supposed to drop, not shoot to the moon. But this isn't normal times. This is the first signs of a depression.

Bank Risk Soars on Concern Bond Insurer Breakup May Fuel Losses

The cost of protecting banks from default soared on concern a proposal to break up bond insurers MBIA Inc. and Ambac Financial Group Inc. may trigger further credit market losses.

Credit-default swaps on the Markit iTraxx Financial index of 125 banks and financial institutions jumped 6 basis points to 100 at 11:45 a.m. in London, according to JPMorgan Chase & Co. The Markit iTraxx Japan index rose 4 basis points to 86, Morgan Stanley prices show.

All systems are seizing up and the government which depends on cheap loans to get government things done, is being hammered mercilessly now. All the systems that need turnovers in loans will be hammered and look at this: the US has a $9.3 trillion debt that is growing and as we turn over these, over time, we will be paying more and more in interest. This will be turned into debt and will cause it to grow faster. When spending drops BUT INTEREST PAYMENTS GROW, you go bankrupt. Credit card companies know this. This is why they charge over 30% interest plus fees for the few months a bankrupt runs up the bills to far. So if the fund dies, they are still ahead. This is only 10% lower than the bonds went for yesterday! This is, of course, usury.

And the government must deal with this just as FDR had to back in 1933. Ruthlessly. May I remind everyone, one of the tools he had to use was the seizure of gold hoards.

Credit Problems Far From Over

As a result of recent turmoil in the credit market, investors have largely withdrawn from the weekly auctions, causing the interest rate on the securities to soar. The major problem is that a lot of the ARS are insured by the troubled monoline insurers. In addition it is highly likely that a large number of investors are just avoiding complex securities that are not well understood, and are gravitating to more basic investments.

As a result of the turmoil, what was viewed as a highly-liquid instrument is turning out to be difficult to sell, and over $10 billion of ARS have been frozen including borrowings for Deerfield Academy, Carnegie Hall and De Young Museum. In addition the Michigan Higher Education student Loan Authority had to stop making student loans, affecting more than 100 Michigan colleges and universities. The Port Authority of New York and New Jersey found its interest rate jumping to 20% from 4.2% the prior week. Corporations, too, are major holders of these instruments. US Airways stated that the airline’s cash fund held $411 million ARS that failed to settle at auctions. Importantly, the ARS are yet another off-balance sheet asset of the banks that they may have to shift onto their books.

At the same time the monoline insurers are not out of the woods. Today, Moody’s cut the rating of FGIC by six levels from Aaa to A3, and said they may have to cut again. FGIC is the 4th largest monoline, and their rating was cut by Fitch last month. The ratings agency said that FGIC was $4 billion short of the amount of capital needed to justify an Aaa rating. Moody’s indicated that their assessment of MBIA and Ambac would probably be complete in the next few weeks. New York governor Eliot Spitzer today gave the leading monolines 3-to-5 days to come up with capital or face a breakup by state regulators. This would essentially strip them of their safe and profitable municipal bond insurance business and leave them with the toxic structured finance mess.

FGIC can't find any capital because there is little capital available. The honest-to-goodness truth about the West and the economic systems we create is, we MUST have capital. And capital is 'profits'. And profits depend on labor as well as sales. And if you crush labor, you get lousy sales so if a capitalist system wants to spiral down into a depression, all they have to do is make it impossible for the working class to buy things. And raising the cost of energy and food while dropping wages and raising the interest rates charged to the lower classes which is NEVER around 2%-5% but is usually around 30%, this kills the working class and they cease buying and the system unravels. Penny pinching the people at the bottom always causes a collapse of the pyramid of wealth which is why we see this rhythm of ups and downs.

The clearing of the backlog of debts usually is fixed via looting expeditions, wars or revolutions. All previous loans and debts vanish in blazing fires. Usually, millions of people die, too. Which is why we have to figure out how to balance profits and labor. Out of balance=destruction. The banks will be fine if they are one of the legs of the economic table and no one saws off the working class legs. Then the table falls down, crash!

U.S. Industrial Output Probably Rose in January on Utilities

Industrial production in the U.S. rose in January, led by higher utility output that was pushed up by colder-than-normal temperatures, a survey of economists indicated before a report today.

Production at factories, mines and utilities rose 0.1 percent, according to the median forecast in a Bloomberg News survey of 79 economists before a Federal Reserve report. Some economists, such as Ethan Harris at Lehman Brothers Holdings Inc. in New York, estimate that manufacturing, which makes up four-fifths of industrial output, fell as the economy slowed.

And this news irritates me! Utility costs should NEVER be part of 'industrial output.' We can plainly see how 'rises in profit' in that sector usually means 'total annihilation' in the manufacturing sector. The only reason these are in the same category is due to the need to lie. The people handing out news to the public have to pretend things are doing well when they are collapsing. So if we hear that gasoline refineries and electric companies are making a killing, they are doing this by destroying everyone else! Just as banks, forcing us to pay 20% on municipal bonds, may be profitable, this is at our collective expense and it wrecks our economic well being. Always, the question must be asked: is increasing profits in this area hurting or helping working stiffs? A simple enough question.

Fear and loathing, and a hint of hope

Understanding the underlying assets is, or should be, at the core of securitisation. Securitisation is really an arbitrage: with surplus collateral, assets can be bundled into an entity with a supercharged credit rating. But if investors fail to spot the jiggery-pokery with credit scores and the outright fraud that permeated the subprime market, that cushion of safety quickly disappears. Witness the speed with which losses have spread into supposedly safe, “super senior” tranches of CDOs.

This points to the third flaw: that some securities were poorly structured, often because their risks were not fully understood. The upper layers of a well-designed securitisation vehicle should be all but impervious to loss. But poorly structured deals, like those stuffed with subprime and marginally less iffy “Alt-A” loans in 2006 and early 2007, have crumbled as the weakness of the collateral becomes clear.

The fourth flaw was the market's over-reliance on ratings as a short cut to assessing risk. In the go-go years, people wrongly assumed that an AAA-rated mortgage bond—even one with a high yield—would never lose value. But the rating agencies, paid for their appraisals by the seller not the buyer, were compromised from the start. Moreover, their quantitative models appear to have ignored “fat-tail” risks—the possibility that large losses are likelier than standard statistical models predict.

I remember the propaganda put out last year. The insurers, the banks and the hell hound hedge funds all were boasting that they have built up this super-structure of derivatives and schemes that would NEVER fail. They had banished 'risk' entirely. I pointed out last year that far from banishing risk, they increased it due to the human tendency, when they think they have no risk, to be irresponsible and wild. Reckless disregard of reality happens when someone thinks they can fly to the sun and not have their feathers fall off as the wax holding it together, melts. The Icarus story is a typical warning from our distant ancestors to beware. The ratings companies all gave AAA ratings because the way things were set up, it was AAA. But once everyone got these AAA ratings, they did wilder and wilder things! This is certainly true of 'hedges'. Hedges were a form of insurance. 'Don't put all you eggs in one basket' sort of insurance. Low-performing systems during good times would become high-performing systems in bad times. Only everyone made money only if all systems ran riot continuously. So every possible hedge, barrier or redundant system set up to protect investments, banks and funds were reset to be as risky as possible. When the last systems were reset to run full steam ahead, all the time, no matter what, when the reserves vanished in many a 60-1 or 100-1 systems instead of the classic 10-1 that keeps an even keel, the whole thing blew apart.

Stripping people of their finances is evil. What bemuses me the most is, the average person can't earn more than 1.75% interest on simple savings in banks and the central bank makes this worse and worse every year yet all the other systems are soaring. So lending costs to the workers go up, bonds that workers pay via taxes go up but savings for the simple people crashes. Then the banks wail, they have no savings to use as a basis for lending! Time to visit Japan, the land where the workers are being totally destroyed.

Job Firms To Help Employers Hire Foreign Staff

TOKYO (Nikkei)--With Japanese companies expanding overseas and the country's population contracting slowly but surely, there is a growing eagerness among domestic employers to hire foreign workers, and the nation's personnel agencies stand ready to help them.
************************************************
Weak Housing Investment Weighs On Growth: BOJ Report

TOKYO (Kyodo)--The Japanese economy is expanding moderately but weak housing investment is weighing on the pace of growth, the Bank of Japan said Friday in its monthly report, maintaining last month's view.
***********************************************
BOJ Fukui: Japan Economic Recovery Cycle Weakening A Bit

TOKYO (Dow Jones)--Bank of Japan Gov. Toshihiko Fukui said Friday the country's economic recovery cycle led by production, income and spending is softening slightly now due to the weakness in housing investment.
***********************************************
Stocks: Nikkei Mixed On Housing Woes, U.S. Risks

TOKYO (Kyodo)--Tokyo stocks closed little changed Friday with overall market sentiment dented by Japan's slumping housing sector and rekindled fears of a slowdown in the U.S. economy.

Japan is in a bind. They need more people but are terrified of foreigners flooding in. So they keep their fortress doors shut. The one thing they fear the most is the possible influx of Korean, Chinese and Southern Asian people. This is because they can't tell them apart from the Japanese populations. It is easy to spot and move around European-descent people and even more so, African-descendants. Instead of improving the lives of the lower classes, they have decided to eliminate them slowly. I don't know how they plan to do all this. They are confused, too.

Over at the forums of an English web site, House Price Crash.com, I found this discussion:

Great piece on bond insurance and the monoline scam from Elaine Meinel Supkis today over at Money Matters. It's long, and this ain't all of it. But it's good:

Aside from natural pride that goeth be for the fall, I found the discussion there to be quite interesting and lots of good information. It is worth while to read this string of comments. Often, a group of people can hash out a lot of things, discussing it all. I do enjoy lurking at such places. Thank you,

And since I was out all morning dealing with my truck and snow plow, I am posting this story rather later than usual. And look at the news since noon!

Banks at Risk From $203 Billion Writedowns, Says UBS

The world's banks ``remain at risk'' from as much as $203 billion in additional writedowns, largely because the bond insurance crisis may worsen, UBS AG said.

``Banks have made progress in credit-market related writedowns,'' London-based UBS analyst Philip Finch said in a note to investors today. ``But more are expected,'' he added.

Writedowns for collateralized debt obligations and subprime related losses already total $150 billion, Finch estimated. That may rise by a further $120 billion for CDOs, $50 billion for structured investment vehicles, $18 billion for commercial mortgage-backed securities and $15 billion for leveraged buyouts, UBS said. ``Risks are rising and spreading and liquidity conditions are still far from normal,'' the note said.

The losses this winter are growing, not shrinking. What was supposed to be a $100 billion loss has grown and grown. Now, in the next few weeks, another $200 billion will vanish. And behind all this lurks the gigantic $500 trillion derivatives upside down pyramid! All these losses at the base will slowly but inevitably translate upwards. As we can see, which is why it is nearly impossible to avoid a total financial break down. The opaque and unregulated derivatives market is so risky, it is as safe as swimming into a crocodile's mouth while holding a pack of lions and hyenas on a leash.

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Comments

[Captain Coma]

Just Captain Coma saying ahoy-hoy!

Elaine, you're a touchstone of sanity - please keep up the fabulous work.

[Elaine Meinel Supkis]

I LOVE your commentary and everyone you chat with. Wow. I wish I had the time to hang out. Sorry about that. But keep up the good work, I do recommend my readers check you guys out regularly.

[BigBen]

Elaine:
I would appreciate any input your forum readers can furnish regarding the carry trade loans you discuss in this article. It is clear that the inability of the Western banks and funds to roll over their cheap loans as the derivative products that they re-invested their cheap Japanese loans into started crashing. I fully agree that this is the real underlying cause of the economic free fall that started last July and not the slower developing subprime situation. What I would like to know is what original collateral the Japanese were accepting on these loans. I suspect there is a connection here with the recent Financial Times article hinting that there was a huge overhang of worthless derivatives yet to be reported and the probability that those losses were being held in Japan. I suspect that this huge stinking pile of worthless paper is also connected somehow with the recent drop in SOMA funds at the FED and with the declines in TIC reported for December. Thanks for all your hard work in keeping these issues in the public forum (in spite of your heavy workload as the jack/jill of all trades in your community)

p.s. What online statistic pool are you referring to as about to be removed from public access?

[BigBen]

Elaine:
I would appreciate any input your forum readers can furnish regarding the carry trade loans you discuss in this article. It is clear that the inability of the Western banks and funds to roll over their cheap loans as the derivative products that they re-invested their cheap Japanese loans into started crashing. I fully agree that this is the real underlying cause of the economic free fall that started last July and not the slower developing subprime situation. What I would like to know is what original collateral the Japanese were accepting on these loans. I suspect there is a connection here with the recent Financial Times article hinting that there was a huge overhang of worthless derivatives yet to be reported and the probability that those losses were being held in Japan. I suspect that this huge stinking pile of worthless paper is also connected somehow with the recent drop in SOMA funds at the FED and with the declines in TIC reported for December. Thanks for all your hard work in keeping these issues in the public forum (in spite of your heavy workload as the jack/jill of all trades in your community)

p.s. What online statistic pool are you referring to as about to be removed from public access?

[mike]

Those 20 percent yeilds on bonds mean i break even compared to housing in a mere 14 years if the prices stay at the irrational levels they are at

[mike]

Those 20 percent yeilds on bonds mean i break even compared to housing in a mere 14 years if the prices stay at the irrational levels they are at

[mike]

Those 20 percent yeilds on bonds mean i break even compared to housing in a mere 14 years if the prices stay at the irrational levels they are at

[Elaine Supkis]

Or it means that in a year we will have 20% inflation.

[TIPS ABOUT BUSINESS CREDIT]

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