Markets Go Down On Bad News

Lords a' Leaping Day

Elaine Meinel Supkis

Just want to thank everyone for the new systems here. I stopped cartooning for a while because of so many malfunctions. It was very disturbing, trying to do things that jerked around or didn't even show up. Now, all is easy and smooth! If only our economy were that easy to repair! Everyone who has no idea what is going on, is aghast at the stock markets of the world all going down as the US Titanic sinks. The Bernanke rate cuts aren't cutting it anymore.

Here is the MarkIt web page that was set up to let the banks learn how well their various funds were doing in a real-time market:

Oh my god. The investors holding these AAA, AA and A bonds were supposed to make a profit if it rose above 100. If it fell, their losses accumulated very rapidly. Losing is very dangerous in this derivative game! And they lost. Big time. The plunge was very rapid from the end of July till the end of October. Then, Bernanke stepped in first, with the usual magic wand waving of rate cuts. Then he went in for a massive injection of funds to stop this decline. Incidentally, the stock market's nightmare ride downwards had barely begun at this point! After all, it reached its all-time high [excluding inflation, of course] of 14,100 in early October, 2007.

So basically, we went from a record market to a complete melt down in less than three weeks. The fact that these funds started floating or rather, deflating rapidly in July when the DOW was at 12,000, is a sign to us that the fall here isn't due to commerce ending or even slowing down. Consumer spending was still forging ahead, after all. The only things that were different were all banking-related. The Basel II Accord rules were taking effect and the banks, who were pretending for the previous year to have great equities in their vaults had to suddenly expose all of this to the cruel light of day. They had to open the books. And all the 'off the books' accounts had to be put on the books. This was the doom that cast everything into the depths of despair!

From Culture of Life News back when the Fed tried to save these markets, November 16, 2007:

Yesterday was a busy day for us Doom Meisters. Today, the landscape is littered with the various CDO corpses that crawled out of various Dark Lagoons. Now the attention of the money magicians turns back to that pesky business of the FOREX situation. The destabilization of international commerce and finance caused by the dying dollar is causing many cascading events which look unconnected at first but actually are all part of the same system. If we look at all this as if it is Götterdämmerung and the Bifrost Bridge is collapsing and Valhalla is being repossessed by the Frost Giant/dragon, Fafner, we can guess what will happen next: the Fat Lady Will Sing.

Fed makes biggest temporary injection since '01

The Federal Reserve on Thursday pumped its biggest temporary daily infusion into the U.S. banking system since just after the September 11, 2001 attacks as short-term lending rates rose on both sides of the Atlantic.

The banks cannot give more loans if they have no reserves and if their existing equities are losers, they have to add reserves, not make more and more loans. They cannot make money totally out of thin air. They have to have a pay-back system somewhere. As well as some savings. Once they were forced to start telling the truth, the whole thing has been impossible. Look at those charts! The losses are staggering. All the AAAs, AA and A ABX CDOs are all moving towards the same place: zero. The BBB papers are now at slightly higher than 10¢ to the dollar. But the others are barely better. All but the AAA papers are now below 30¢ to the dollar. They stabilized briefly from the Bernanke money injection day in mid-November and desperately clung to life until the second half of February. This is when all systems, the Stock Markets, the muni bond markets, the interbank lending markets, you name it, all have decisively turned downwards. The news that the Federal Government was going to hand out a bundle of goodies temporarily buoyed up the markets, the financiers, the bankers, but now that has faded. Even the Japanese are now accepting the idea that the $150 billion Xmas gift from Santa won't save the global economy.

So the ABX funds fell. I give them another month, maybe two, but probably less, to hit zero once and forever. This is how Mother Nature takes care of excess: it is burned. It vanishes into smoke. These ABX charts are not about all the money out there that will vanish in the next two years, it is more like a heart monitor. The patient is dying. When all these funds hit zero, they will be flatlined.

From October, 2006 to October, 2007, the DOW jumped over 2,000 pts. Since then, it has fallen twice as fast as it rose and has now lost in only 4 months, nearly 2,000 pts. Always, the collapse of markets are much faster than the rises.

Ambac Cuts Dividend, Suspends Asset-Backed Insurance

Ambac Financial Group Inc., the AAA rated bond insurer seeking to avoid a crippling downgrade, cut its dividend and will suspend writing guarantees on new asset- backed securities for six months to bolster capital.

The dividend will be reduced to 1 cent from 7 cents, New York-based Ambac said today in a statement. Halting the asset- backed business will free up $600 million in capital, Ambac said.

Ambac is in talks with banks to raise $3 billion to satisfy Moody's Investors Service and Standard & Poor's that it deserves its AAA credit rating. Moody's today gave the company more time and said the extra money may be enough to meet its target. Ambac and MBIA Inc. came under scrutiny over the past three months after losses on asset-backed securities such as collateralized debt obligations.

AAA is supposed to be strong and healthy not dying on your feet, crawling in the dust, hissing, 'My Precioussssss....' The banks need Ambac and Ambac needs the banks and they are clinging to each other's straws here. Ambac was supposed to supply the life boats when any Titanics were threatening to sink. But when the people piloting these super-huge ships tried to jump into these life rafts, the boards broke and into the ocean of red ink, these life rafts fell, spilling everyone out. The Fed has bailed out the banks who are trying to bail out the life boats. But more ships are sinking and ditto, the life boats. Bailing is no good when there is a gaping hole in the bottom of the boat.

Citigroup Underwrote $6.9 Billion of Ambac's Most Troubled CDOs

Citigroup Inc. helped create at least $6.9 billion of securities insured by Ambac Financial Group Inc. that have tumbled in value and may require the insurer to pay claims, according to research by Tavakoli Structured Finance Inc.

Of the $22 billion of collateralized debt obligations linked to the mortgage market and insured by Ambac, about $7.5 billion were underwritten by Citigroup, which is among banks seeking to help Ambac raise capital. Of those CDOs, $6.9 billion, or 92 percent, are experiencing so-called events of default, Tavakoli said. Such events signal the most-senior classes may not be paid in full.

OK, let's get this straight: Citigroup wrote nearly $8 billion in bad loans. Loans that had a 92% default rate and this means in another two months, it will be probably 100%. We look at the two ABX charts and we can see they are collapsing into total default now. So Citibank is finding money--too bad the yen is even stronger today, no?---this is hard. Finding money when the carry trade is gone. Citibank is begging for money so Ambac can do what? Pay back Citibank? HAHAHA. Isn't that a cute one. Namely, Citibank wants LOANS so they can give this to Ambac so Ambac can pay insurance on the 100% bad loans written by Citibank! This is robbing Peter to pay Peter! Why bother with this fiction? Why not simply have Citibank get loans and pay up?

But then, they can't write loans until they get these wheezing, dying CDOs off the books and discharging them to Ambac who then hands over some cash is the only way to keep in business. If Citibank is alive next year, I will be amazed. Of course, they will run screaming to the Fed for help. They cannot go screaming to the King of Saudi Arabia. He wants to cut their heads off. No golden parachutes from him. They beat people to death for drinking coffee with the wrong sex over there. Losing all of the King's money is far greater. Buried up to the neck in the desert and left for the ants to eat, I might guess?

Financial Firms Face $600 Billion of Losses, UBS Says

Financial firms will likely see their losses reach at least $600 billion as the crisis triggered by the collapse of subprime mortgages batters banks, brokers and insurers, UBS AG analysts said.

Banks and brokers stand to lose $350 billion, according to estimates from the global banking unit of UBS, the world's largest wealth manager. Financial institutions have so far disclosed more than $181 billion of writedowns and credit losses.

This is a lot of money. And this is just real estate. Always, the biggest losers are corporations and governments. When they begin to fall, this is when we get full-scale depressions. Inflation surges when we have a growth in the money supply. What we are seeing is an epic collapse in the money supply. I noted last fall that the central banks injected over $600 billion. This hasn't revived much of anything. But I suspect it kept things afloat for a short while. But it can't fix the leaking ships. They will still sink.

AIG Says Cassano Leaving After Losses on Derivatives

American International Group Inc. said the head of its financial products unit, Joseph Cassano, is stepping down after the insurer reported $11.1 billion in losses on contracts sold to fixed-income investors.

Cassano co-founded the unit in 1987 and built it into a business providing financial guarantees on more than $500 billion of assets at year-end, including $61.4 billion in securities tied to subprime mortgages. He will be replaced on an interim basis by William Dooley, 54, a senior vice president of the New York-based insurer's financial services division.

Cramer ran around ranting, 'There is BLOOD in the STREETS' back when he and his goofy friends were wailing for huge interest rate cuts. They then celebrated all of these cuts. Only they work out less and less well each cycle. The massive 1.25% rate cut barely increased much of anything. Note the amounts here, by the way: $500 billion in assets? And what are their reserves? $20 billion? Note how the Wunderkind of 20 years ago is suddenly the Bad Boy of today. I bet the team Mr. Cassano led happily wrote more and more contracts to protect goofy lending deals by others and thus ended out on the same limb as their customers.

This is very similar to sitting on a tree branch and sawing it off on the side next to the trunk. Or chainsawing the bottom of life boats and then dropping them into the water. Actually, many people died on the Titanic because of the lack of reserves: passengers far outnumbered spaces in the lifeboats. The ship's owners believed it was unsinkable so they didn't bother with enough reserves. This sort of goofy thinking is what happened in our financial markets. I remember them all boasting that their hedges and derivatives would protect them no matter what.

Goldman, Bear Stearns Bankers Targeted in Muni Criminal Probe

Goldman Sachs Group Inc. and Bear Stearns Cos. bankers are under investigation in the U.S. Justice Department's criminal probe of the municipal derivatives business, regulatory documents show.

Bear Stearns's Stephen Salvadore and former JPMorgan Chase & Co. banker James Hertz are targets of the antitrust investigation of Wall Street's sales of derivatives and investment contracts to state and local governments, Financial Industry Regulatory Authority records show. Goldman's Shlomi Raz also disclosed to Finra that he is being investigated, without saying whether he is a target.

U.S. prosecutors and the Securities and Exchange Commission have been searching for more than a year for evidence of rigged bidding and other misconduct by banks that sell investments and derivatives, such as interest-rate swaps, tied to municipal bonds. This week Wachovia Corp. and Piper Jaffray Cos. also disclosed in SEC filings that employees were targeted.

The Governor of New York is Eliot Spitzer. He used to prosecute guys on Wall Street. Now he is going after them yet again and he is very much like a shark in this regard. I expect arrests. The good people of New Jersey should get on their own governor's case! He used to be the President of Goldman Sachs! Note how he hasn't been all that noisy about the coup at the muni bond sales. That whole business stank to high heaven, by the way. I look forward to the arrests.

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Comments

[icemann]

The monolines are toast, the municipal governments will probably bail out and go with Buffett as soon as possible. His offer to Ambac et al was a great way to get FREE publicity. Don't let the grandfatherly image fool you, the man is a shark.

[CK]

http://www.berkshirehathaway.com/letters/2007ltr.pdf
Smart shark.
The pdf above is the annual letter to the shareholders.

[John East]

Congratulations, Elaine, that is your best post ever, far more informed than anything I've yet seen on the MSM. You have set the scene for the next few months trading, and it will be bloody.
I will have a good laugh on Monday when I see the inevitable CNBC feature, "Is it time to start buying into the financials yet" which they've been running in various forms for the last couple of weeks now.

[aprilzi]

USS "Kitty Hawk" for India? Will the USA sell it?

[Elaine Meinel Supkis]

I think I may have landed a radio job here! Will give details next week. This will be great. A morning show? WOW.

[Chris]

Grats Elaine! Pls make sure your radio programs are available as podcast, or that we can hear them over the net! ^_^

[EL JOHNNY]

Anyone seeking to assess the financial health of any FDIC insured bank in the US can do so by connecting to the FDIC website and then typing the name of the financial institution one wants to assess in their search bar.

Every and all reports of each insured bank is on this FDIC website.

[Elaine Supkis]

Yes, the show will be podcast. I hope to set up a in-home studio in my spare bedroom upstairs. I need to have a room where the dogs, cats and husband can't just mill around in while broadcasting.

[GMG]

Dear Elaine,

Do you think it is even necessary to have monolines in the first place? Why not have the US Govt write the insurance and provide payment in the event of default? The taxpayers could earn the profit. MBIA and Ambac remind me of a "brother-in-law" business. By that I mean someone in the publice debt market figured out how a company (a relative,perhaps) could make a very easy buck. MBIA, Ambac, ACA- they simpley blew it. Essentially, they couldn't lose if the insured just munis, but they got greedy and stupid. By the way, in the options market (the marked-to-market kind) the analog to this is selling puts with not enough capital in reserve and no hedges in place. Not good.

GMG

[CK]

GMG
Whenever there is a surplus in a governmentally run thing, that surplus is spent by the government for its own purposes. It is never returned to the taxpayers nor used to write down the rate of taxation on the taxpayers. For reference check the social security administration's handling of the surpluses that once were in that big old account. Now those surpluses have been loaned to the government to support whatever war or theft the government wishes to fund without raising taxes. The money is replaced with promises to pay.
No bureaucrat was ever promoted for lowering the budgets of his operation. The motivation in government is to have the largest budget largest staff most warm bodies hanging around doing nothing ( except voting for larger budgets ).
There exists a quantifiable risk across all municipalities of bankruptcy. That risk is insureable because it is random, in the same way that lightning strikes are random or high winds. Buffett has made a nice income insuring muni's and not bothering with the derivatives and CDO and other such trash. Substituting governmental greed and stupidity which is only limited by the size of government for individual greed and stupidity is not a good answer, but it probably is a vote getter.

[Elaine Meinel Supkis]

And that purpose always ends up being graft and WAR.

[CK]

War is the health of the government.
Graft is the health of the government's employees.
Politics is the entertainment division of the Military Industrial complex.

[Cato]

Speaking of Goldman. The rumor is that up to 25% of their global workforce could be laid-off. Somebody knocked over their printing press. Besides, financial engineering is so yesterday. They love commodities now and want to startup a new competitor to the Chicago futures exchange. Is Fairway, Key Food and Zabar's next? A name change is in order: Goldman "paper or plastic?"

[Elaine Meinel Supkis]

Of course, all the pirates are getting loans and driving up commodities which is why we have global inflation.

[New York Home Loans]

The market goes up and down mostly because of unsurity about the future, or a big news story that could shape world affairs. when you sell it dosen't necessarily mean someone is buying it. The market dropped from 14k to 9k a lot of wealth was lost into thin air.