Tuesday, September 30, 2008

Payroll freeze

Either the credit markets will seize up in the next few days, or they won't.

Businesses either will get the short-term operating loans they need in the commercial paper market, or they won't. Either they'll get the money somewhere else (old-fashioned banks are back in style), or they won't make payroll and will have to start laying off people.    http://www.stltoday.com/stltoday/news/stories.nsf/editorialcommentary/story/322AD4416780E956862574D30081D731?OpenDocument

I own a small graphic design company that employs thirty people. We depend on credit for everything from payroll to buying supplies.

I have currently frozen salaries and we are trying to find a way to extend our office supplies.     http://news.bbc.co.uk/1/hi/business/7643244.stm

Kansas City cabinet maker Anthony Gallo is in a similar bind. Eighteen months ago Gallo had no debt. Now he's being forced to borrow just to make payroll – just as his chief lender has cut his credit line from $400,000 to $175,000.

"My line of credit has been cut to nothing," said Gallo. "We're all hurting... and wondering what is going to happen."     http://www.signonsandiego.com/news/nation/20080930-1130-financial-mainstreet.html

A shattering moment in America's fall from power

The global financial crisis will see the US falter in the same way the Soviet Union did when the Berlin Wall came down. The era of American dominance is over


And this is where we stand today. The great ship (United States) is sinking. Should we let the band (Hank Paulson) dictate those who get onto the lifeboats first? If we do, we will all face the fate of Jack as he slowly freezes to death in the icy Atlantic. http://www.thecuttingedgenews.com/index.php?article=795&pageid=44&pagename=Slices

We cannot risk another week or another month where American businesses are afraid to extend credit and lend money," Obama said. "That has an impact on housing here in Nevada. That has an impact on a small business owner who has got to make payroll, and if he can't make payroll on Friday, he may lay you off on Monday. If he lays you off on Monday, then that means you may not be able to make your payments to somebody that you just bought something from. It ripples throughout the economy."


Markets around the world are under stress, and that reduces the availability of credit that businesses across America depend on to meet payroll and to ...    http://www.baltimoresun.com/news/nation/bal-te.bailout30sep30,0,1808693.story

If the credit markets should freeze up--which many say is happening and will continue without massive intervention--everyone that borrows money will face a cash crunch. That means companies that take advantage of short-term loans to get by won't be able to buy raw materials or make payroll. Even businesses that don't need short-term capital may defer purchases to preserve capital. http://news.cnet.com/8301-1001_3-10053693-92.html

Kansas City cabinet maker Anthony Gallo is in a similar bind. Eighteen months ago Gallo had no debt. Now he's being forced to borrow just to make payroll – just as his chief lender has cut his credit line from $400,000 to $175,000.

"My line of credit has been cut to nothing," said Gallo. "We're all hurting... and wondering what is going to happen."     http://www.signonsandiego.com/news/nation/20080930-1130-financial-mainstreet.html

It's not a question of the high cost of credit, there's nothing available out there," said Levin, noting that he hears of sales agencies going out of business almost every week.

"The party's over and people don't want to admit it ... I don't want to admit it, but you had to see it coming." FAL

The money markets have completely broken down

``The money markets have completely broken down, with no trading taking place at all,'' said Christoph Rieger, a fixed- income strategist at Dresdner Kleinwort in Frankfurt. ``There is no market any more. Central banks are the only providers of cash to the market, no-one else is lending.''.... http://www.rgemonitor.com/us-monitor/253808/libor_surges_to_nearly_7_but_us_stock_futures_rise_on_bailout_bill_revival_hopes

How EU banks were gaming their regulators through AIG

It's less well known than it should be, but Europeans banks have long been gaming their regulators, having far less than the actual capital reserves that they needed given their balance sheets. AIG filled the hole, selling credit defaults swaps to European banks via which they could tell regulators that they were adequately covered -- at triple-A, no less -- while carrying less cash than required.    http://seekingalpha.com/article/97958-how-the-u-s-saved-europe-s-banking-system?source=more_author_recent_similar_articles

In New York, investment firm executive Marc der Kinderen said that collapsing trust in US financial institutions was potentially the most damaging aspect of the crisis.

"The worst thing that is happening right now is that there is absolutely no trust, no faith in the system as a whole," der Kinderen told AFP.

"That makes a horrible way for companies to do business with each other ... Banks are the infrastructure of finance, like a highway system, and right now, every ramp to the highway system has effectively been shut down."     http://www.breitbart.com/article.php?id=080930072942.bkkh6c8f&show_article=1

Market rebounds

Lawmakers scramble to revise bailout bill...
Obama calls on Americans to support rescue plan...
Bush warns of 'painful and lasting' damage...
Many vulnerable lawmakers said 'no'...
Clinton: 'It Sounds Dire, But Commerce Could Stop'...
Corporate America lost value size of Indian economy....
Western world will become significantly less wealthy...

WSJ: Congress Lives Up to Its 10% Approval Rating...
Harvard economist: Bankruptcy is right answer...
PAPER: 'Bailout marks Karl Marx's comeback'...
Talk radio holds firm over 'socialist' bailout...
EU Bank rescues spread...
FDIC asks for temporary hike in $100,000 cap on insured deposits...
Euro Declines Most Against Dollar Since Inception...

Euro drops by largest since inception on EU bank failure fear

http://www.bloomberg.com/apps/news?pid=20601087&sid=aXeu_kATieSo&refer=home Sept. 30 (Bloomberg) -- The euro fell the most against the dollar since the introduction of the shared currency in 1999 after France and Belgium led a state-backed rescue of Dexia SA, as the widening financial crisis forces governments to prop up financial institutions across Europe.

Sept. 30 (Bloomberg) -- U.S. stocks rose as growing expectations that lawmakers will salvage a $700 billion bank- rescue package helped the Standard & Poor's 500 Index recover more than a third of yesterday's 8.8 percent plunge.http://www.bloomberg.com/apps/news?pid=20601087&sid=a.lG6SHwRN2o&refer=home

Monday, September 29, 2008

Fed pumps record 630 billion

http://www.bloomberg.com/apps/news?pid=20601087&sid=a9MTZEgukPLY&refer=home Fed Pumps Further $630 Billion Into Financial System

http://www.marketoracle.co.uk/Article6530.html "A well-known cynical New York short-seller observes: "This morning, Mr. Buffett referred to the 'economic Pearl Harbor ' that would occur if the Federal government did nothing. Well…given that Mr. Buffett's Berkshire Hathaway has written almost $40 BILLION in equity puts…one Pearl Harbor would certainly arrive in Omaha !"


Sunday, September 28, 2008

Hedge Funds reel in losses – should Fed defend the dollar?

There are advantages to the depreciation option for the US: foreign debt is denominated in US currency so that a depreciation does not cause valuation effects on the stock or the service of the debt, and the economy is relatively closed which considerably mutes the effect of the exchange rate on inflation.

After a depreciation, US assets would seem extraordinarily cheap from a foreign perspective, but current holders of US assets would be wiped out (measured in currencies different from the dollar) and this in itself could discourage them from dumping these assets onto the market.    http://www.rgemonitor.com/latam-monitor/253761/should_the_united_states_defend_the_dollar_or_let_it_go

That's just "collateral damage".

It's because if they do, the $68 Trillion chain reaction could start.

What does this mean?

• The $700 billion WILL be approved, there is no question about that.

• The Fed will keep interest rates far below the rate of inflation, to stimulate an increase in house prices.

• House prices will rise.

• The US Government will effectively guarantee all RBMS's against default.

• So, no more defaults on RMBS's.

• The dollar will fall

• Disaster will have been avoided.


One hedge fund said: "We've produced 15 per cent returns for 10 years. This year has been bad and our funds under management have been reduced from $2billion to just $300m. This is decimation."

Not a single hedge fund strategy has produced positive returns so far this month, with convertible arbitrage and distressed securities down an estimated 7.96 per cent and 7.34 per cent, respectively, according to Dow Jones Hedge Fund Indexes. Equity market-neutral funds, which often short a stock in one sector and go long on another in the same sector, are down 1.85 per cent.    http://www.nakedcapitalism.com/2008/09/hedge-funds-face-record-redemptions.html

http://www.dailymail.co.uk/news/article-1063356/Credit-crunch-banker-leaps-death-express-train.html The City was in shock last night after the apparent suicide of a millionaire financier haunted by the pressures of dealing with the credit crunch.

Thursday, September 25, 2008

WaMu collapses


JPMorgan Chase Acquires Banking Operations of Washington Mutual

FDIC Facilitates Transaction that Protects All Depositors and Comes at No Cost to the Deposit Insurance Fund

September 25, 2008

Media Contact:
Andrew Gray (202) 898-7192


JPMorgan Chase acquired the banking operations of Washington Mutual Bank in a transaction facilitated by the Federal Deposit Insurance Corporation. All depositors are fully protected and there will be no cost to the Deposit Insurance Fund.

"For all depositors and other customers of Washington Mutual Bank, this is simply a combination of two banks," said FDIC Chairman Sheila C. Bair. "For bank customers, it will be a seamless transition. There will be no interruption in services and bank customers should expect business as usual come Friday morning."

JPMorgan Chase acquired the assets, assumed the qualified financial contracts and made a payment of $1.9 billion. Claims by equity, subordinated and senior debt holders were not acquired.

"WaMu's balance sheet and the payment paid by JPMorgan Chase allowed a transaction in which neither the uninsured depositors nor the insurance fund absorbed any losses," Bair said.

Washington Mutual Bank also has a subsidiary, Washington Mutual FSB, Park City, Utah. They have combined assets of $307 billion and total deposits of $188 billion.

Thursday evening, Washington Mutual was closed by the Office of Thrift Supervision and the FDIC named receiver. WaMu customers with questions should call their normal banking representative, service center, 1-800-788-7000 or visit www.WaMU.com. The FDIC's consumer hotline is 1-877-ASK-FDIC (1-877-275-3342) or visit www.fdic.gov.

# # #

Congress created the Federal Deposit Insurance Corporation in 1933 to restore public confidence in the nation's banking system. The FDIC insures deposits at the nation's 8,451 banks and savings associations and it promotes the safety and soundness of these institutions by identifying, monitoring and addressing risks to which they are exposed. The FDIC receives no federal tax dollars – insured financial institutions fund its operations.

FDIC press releases and other information are available on the Internet at www.fdic.gov, by subscription electronically (go to www.fdic.gov/about/subscriptions/index.html) and may also be obtained through the FDIC's Public Information Center (877-275-3342 or 703-562-2200). PR-85-2008



Regulators Said to Broker Rescue of WaMu

U.S. financial institutions borrowed a record $187.75 billion per day

NEW YORK (Reuters) - U.S. financial institutions borrowed a record $187.75 billion per day on average directly from the Federal Reserve in the latest week, showing the central bank went to extremes to keep the financial system afloat amid the biggest crisis since the Great Depression.    http://www.reuters.com/article/ousiv/idUSTRE48O98920080925

China halts capital flows to US

http://www.reuters.com/article/companyNewsAndPR/idUSPEK16693720080925 The Hong Kong newspaper cited unidentified industry sources as saying the instruction from the China Banking Regulatory Commission (CBRC) applied to interbank lending of all currencies to U.S. banks but not to banks from other countries.

http://www.washingtonpost.com/wp-dyn/content/article/2008/09/24/AR2008092402799.html?nav=hcmodule "Ironically, the intervention could even trigger additional failures of large institutions, because some institutions may be carrying troubled assets on their books at inflated values," Orszag said in his testimony. "Establishing clearer prices might reveal those institutions to be insolvent."

"It's not based on any particular data point," a Treasury spokeswoman told Forbes.com Tuesday. "We just wanted to choose a really large number." http://www.forbes.com/home/2008/09/23/bailout-paulson-congress-biz-beltway-cx_jz_bw_0923bailout.html

Wednesday, September 24, 2008

Since 1981, 423 U.S. companies with assets of more than $500 million filed for bankruptcy

"Since 1981, 423 U.S. companies with assets of more than $500 million filed for bankruptcy," with total assets exceeding $1.5 trillion.


"Billion-Dollar Lessons" is an insightful and crisply written book, one that offers wisely chosen and well- narrated case studies but also good advice, such as urging companies to appoint an in-house "devil's advocate" to challenge the unhealthy unanimity that accompanies many major decisions.

US President George W. Bush, who is also attending the UN General Assembly, had telephoned Chinese President Hu Jintao on Monday to brief him about the financial turmoil and his administration's bid to stage a 700 billion dollar Wall Street bailout to stem the crisis.

Hu told Bush that China welcomed Washington's efforts to stabilize the US financial markets and hoped they succeed, according to Beijing's state media.

But as Wen spoke Wednesday at the United Nations, the Bush administration remained locked in a dispute with the US Congress over the massive bailout package aimed at buying distressed mortgages and mortgage-related securities from financial institutions.    http://afp.google.com/article/ALeqM5icLgpv_1Z5eHh6UMqzSDY-6v8bRQ

How Wall Street Lied to Its Computers

How Wall Street Lied to Its Computers

New York Times (09/18/08) Hansell, Saul

Most Wall Street computer models radically underestimated the risk of complex mortgage securities, partially because the level of financial distress is "the equivalent of the 100-year flood," says Capital Market Risk Advisors president Leslie Rahl. Rahl, and others, say that the people who ran the financial firms chose to program their risk-management systems with overly optimistic assumptions and to provide those systems with oversimplified data, preventing the systems from detecting the problem before it was too late. Top bankers cannot simply ignore computer models, because after the last round of significant financial losses, regulators required financial institutions to monitor their risk positions. If a model says a firm's risk has increased, the firm must either reduce its risk or provide more capital as a cushion should things turn south. "There was a willful designing of the system to measure the risks in a certain way that would not necessarily pick up all the right risks," says RiskMetrics' Gregg Berman. "They wanted to keep their capital base as stable as possible so that the limits they imposed on their trading desks and portfolio managers would be stable." Berman says one way this was accomplished was to make sure the computer models looked at several years of trading history instead of just the last few months, which made the computers slow to report that risk had increased as defaults started to rise because the markets had been placid for several years.


Tuesday, September 23, 2008

The financial system indeed lies in ruins

The financial system indeed lies in ruins. In the last year, Wall Street has shed 200,000 jobs. The bailout comes on the heels of the failure of the nation's investment banks, including Bear Stearns (purchased by J.P. Morgan Chase), Lehman Brothers (bankruptcy), Merrill Lynch (purchased by Bank of America), Morgan Stanley, and Goldman Sachs (both converted to bank holding companies). ....200,000 JOBS!!!!    http://www.marketoracle.co.uk/Article6428.html

Lehman Brothers in Britain collapsed with a mammoth £100 million black hole in its staff pension fund, it emerged last night. The deficit means that many former staff in Britain may not have their retirement promises met in full. Trustees of the fund wrote to the Pension Protection Fund (PPF), the industry lifeboat, last week seeking assistance, as The Times revealed on Saturday. http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article4806169.ece

WASHINGTON (AP) -- The Federal Reserve made it easier Monday for private equity firms and other types of investors to take minority stakes in banks, a move that could usher new capital infusions to cash-hungry banks and help them cope with credit stresses. http://biz.yahoo.com/ap/080922/fed_banking.html

The news that Goldman Sachs and Morgan Stanley are in the process of becoming Bank Holding Companies (BHCs) doesn't come as a complete surprise. If these firms were to remain independent, they had to radically reposition their balance sheets by bolstering capital and lengthening debt maturities. Further, the trend towards greater transparency is already afoot, so the kinds of disclosures required under the BHC Act were in the offing, anyway. Finally, by become a BHC you have access to the Fed window, access of some consequence given today's tumultuous market conditions. So by becoming a Bank (with a capital B) in the regulatory sense of the word, Goldman and Morgan Stanley are choosing life, with the chance of remaining independent. The question is - what kind of a life will it be? http://www.informationarbitrage.com/2008/09/on-bank-holding.html

Monday, September 22, 2008

Chaos has descended on Wall Street

The death of the investment banks. The ban on short selling. The unrelenting pain for anyone who needs to borrow money. Chaos has descended on Wall Street, and at least one hedge fund manager isn't going to take it anymore.

Cliff Asness, managing partner of AQR, a $30 billion hedge fund firm,..... http://dailybriefing.blogs.fortune.cnn.com/2008/09/22/hedge-fund-guru-strikes-back/

"This is a major realignment on Wall Street and we are going back to the days of the merchant banking of the 1800s," said Bob Ellis, senior vice president of the wealth management group at Celent, a Boston-based financial research and consulting firm.    http://www.independent.co.uk/news/business/news/wall-st-capitulation-marks-end-of-an-era-939141.html?service=Print

"This is a major realignment on Wall Street and we are going back to the days of the merchant banking of the 1800s," said Bob Ellis, senior vice president of the wealth management group at Celent, a Boston-based financial research and consulting firm.    http://www.independent.co.uk/news/business/news/wall-st-capitulation-marks-end-of-an-era-939141.html

Sunday, September 21, 2008

New paradigm for finance

"A generation grew up that has been very well trained in this new finance theory, very well educated to apply it on a broad scale with the necessary computing power, and off we went," Mayer said.

Recent events, he said, have shown that the basic assumptions that have held sway for a generation or two no longer hold. "This will leave us with a different paradigm," he added. "If I could give it to you, I'd win the Nobel Prize."



"And I'm furious when I see the pictures of Americans who thought they were on the sunny side of life and now have lost their homes and have to live in their cars," Evers said. "I definitely do not feel sorry for the bankers who lost their jobs in the last couple of days. I can't believe that a country like the U.S.A. could have been so careless on a money issue!"

"I was taught that the U.S.A. is the motherland of moneymaking," she added. "And now all I can see is a herd of headless chickens running around on Wall Street." http://www.latimes.com/business/la-fi-euromood20-2008sep20,0,7535469.story

Roubini personally moves funds out of USD


With the current economic and financial turbulence, Roubini Global Economics is providing additional extended analysis of ongoing and breaking events.

Click here to receive full access for a limited time.


Sept. 20 (Bloomberg) -- The Bush administration asked Congress for unchecked power to buy $700 billion in bad mortgage investments from U.S. financial companies in what would be an unprecedented government intrusion into the markets.


Saturday, September 20, 2008

Government bailout

On Monday night, Senate Majority Leader Harry Reid was briefed on the gravity of the situation in a secret meeting with the Treasury Secretary and Federal Reserve Chairman. Reid's remarks are the best summary yet of the events of the last 14 months. He said, ""We are in new territory, this is a different game...No one knows what to do." http://www.counterpunch.org/whitney09192008.html

Money Market victims bury cash near sewers

Putnam, Mellon Spur `Oh, My God' Money-Market Flight (Update2)

By Michael Janofsky

Sept. 19 (Bloomberg) -- Before yesterday, Sheila Bialka, a retired dance and drama teacher in Laguna Woods, California, said she hadn't thought about shifting money out of her money-market account.

Then she learned that Boston-based Putnam Investments LLC closed its $12.3 billion institutional Putnam Prime Money Market Fund and a similar fund run by Bank of New York Mellon Corp. had fallen to less than $1 a share. BNY Mellon's shares fell as much as 36 percent yesterday, then mostly recovered amid a broad market rally and gained as much as 36 percent today.

``Oh, my God,'' said Bialka, 74, whose money is with Fidelity Investments. ``Now I think I will move it. I wasn't concerned before. Now, I am.''

Advisers say larger companies, such as Boston-based Fidelity, have more resources to prop up their money-market funds. Still, fears over potential losses in the low-risk investment accounts have become the latest source of angst for investors as they adjust their portfolios and lifestyles to the tremors of Wall Street.

Investors pulled a record $89.2 billion from money-market funds on Sept. 17, according to data compiled by the Money Fund Report, a newsletter based in Westborough, Massachusetts. The withdrawals totaled a decline of 2.6 percent in money-market assets.

The redemptions countered a trend in which assets in money- market funds increase almost 14 percent, to $3.58 trillion, from January to the beginning of September, according to IMoneyNet Inc., the research firm that publishes the Money Fund Report.

First in 14 Years

U.S. Treasury Secretary Henry Paulson said the government would take ``hundreds of billions'' of troubled assets from banks to try to repair the worst credit crisis since the 1930s. In addition, the U.S. Treasury said today that it would use as much as $50 billion from the government's Exchange Stabilization Fund to temporarily protect investors from money-market fund losses.

``Your typical day doesn't include outflows,'' said Peter Crane, president of Crane Data LLC, which tracks money-market funds.

This week, shareholders pulled more than 60 percent of the assets from Reserve Primary Fund, which on Wednesday became the first money-market fund in 14 years to expose investors to losses.

Financial advisers around the country said they are fielding more calls from clients buffeted by events including the failure of Lehman Brothers Holdings Inc. and the sale of Merrill Lynch & Co. to Bank of America Corp. Now, brokers, say, clients are worried about their funds in money-market accounts, traditional safe havens.

Rattled Nerves

``People are asking if their cash is safe,'' said Cary Carbonaro, president and founder of Family Financial Research, an advisory service based in Huntington, New York and Clermont, Florida. ``I've been telling them yes, but they're still scared. It's bad out there. Really bad.''

Investors have already started withdrawing funds from money markets in the Phoenix area, said Rich Kerr, branch manager of the Charles Schwab Corp. office in Chandler, Arizona. The experience of Reserve Primary, he said, ``has stimulated a greater degree of conversation.''

Though stocks rallied the most in six years Thursday as the Dow Jones Industrial Average jumped 617 points from its low of the day, investors remained jittery over the recent volatility.

Marci Fenske, an air resources technician for the state of California, said she overheard a woman in a restaurant tell her friends that she redeemed all her assets and buried the money in her backyard.

`Walk the Cat'

Carl Mueller, 48, an actor in Los Angeles, said he has begun shopping at a 99-cent store to save money. Chris Calle, 27, a project manager for a concrete company in Dallas, said he has started buying off-label goods at the grocery store.

Ruth May, 75, a retired travel agent in Laguna Woods, said whenever she feels panicky, she calls her financial adviser.

``He tells me to calm down and take a walk with the cat,'' she said.

Mark Berg, president of Timothy Financial Counsel, Inc. in Wheaton, Illinois, said one of his customers, a single mother, decided to trade houses for vacations rather than spend on a traditional getaway.

``People are beginning to be a little more creative in how to moderate the way they live,'' Berg said. ``So, her vacation is essentially free.''

Carbonaro said, ``The biggest question I hear from my clients is, `Should we liquidate everything?''' She said she has been so shaken by recent events on Wall Street that she wakes up in the middle of the night to check foreign markets.

``This is way more than anyone expected,'' she said. ``It's incredibly taxing, psychologically and emotionally.''

Changing Their Lifestyles

Bialka said she has already altered her routines to accommodate the worsening economy. She said she cooks at home more, rather than go to restaurants, and worries that any future bad news might require bigger changes.

``Next thing, I'll have to stop going to the theater and wearing the latest styles,'' she said. ``I might have to start shopping at thrift shops.''

Fenske, 64, said she was sitting alone at Carol's Restaurant in West Sacramento, California, when a group of elderly women at a nearby table were discussing how much money they had been losing in the financial markets.

She said she heard one woman, whom she didn't know, complain that she ``can't take any more hits'' and told her friends, ``I turned everything I had into cash, put it in a lock box and buried it under the shed near the sewer line.''

``I was horrified that somebody else might have heard her,'' Fenske said. ``The placed was crammed. I told her to go home and move it.''

To contact the reporter on this story: Michael Janofsky in Los Angeles at mjanofsky@bloomberg.net

Last Updated: September 19, 2008 12:20 EDT

Tuesday, September 16, 2008

The Markit CDX North America Investment Grade Index climbs 25 basis points

The Markit CDX North America Investment Grade Index, which rises as confidence in companies deteriorates, climbed 25 basis points to a record 220 at 7:50 a.m. in New York, according to broker Phoenix Partners Group. http://www.bloomberg.com/apps/news?pid=20601109&sid=ad5I2uMlzN7o&refer=home

"It's banana republic financing," Lockyer said. The spending plan relies on "phony money and phony estimates." http://blogs.usatoday.com/ondeadline/2008/09/schwarzenegger.html

Fed to give AIG $85 billion loan and take 80% stake

Fed to give AIG $85 billion loan and take 80% stake

By Michael J. De La Merced and Eric Dash

Wednesday, September 17, 2008

In an extraordinary turn, the Federal Reserve agreed Tuesday night to take a nearly 80 percent stake in the troubled giant insurance company, the American International Group, in exchange for an $85 billion loan.    http://www.iht.com/bin/printfriendly.php?id=16217125

The Fed, apparently unable to convince private-sector companies to provide the cash, did the deal itself. That raises the question of whether the financial-services industry really felt that AIG's demise would have been catastrophic. The only alternative explanation would be that Wall Street won a game of chicken with the Fed... http://www.forbes.com/markets/2008/09/16/aig-fed-bailout-markets-equity-cx_mm_0916markets50.html

With time potentially running out due to credit rating downgrades that have threatened AIG's ability to operate, it reportedly reached a deal with the Federal Reserve, gaining an $85 billion bridge loan in return for going into conservatorship, with the Fed taking an 80% stake in the insurer. http://www.forbes.com/2008/09/16/briefing-outlook-aig-markets-equity-cx_ss_0916markets48_print.html

Sunday, September 14, 2008

ISDA reverses 14 trillion in derivatives

http://www.nytimes.com/2008/09/15/business/15lehman.html?_r=1&hp=&pagewanted=print&oref=slogin In one the most extraordinary days in Wall Street's history, Merrill Lynch is near an 11th-hour deal with Bank of America to avert a deepening financial crisis while another storied securities firm, Lehman Brothers, hurtled toward liquidation, according to people briefed on the deal.

SUNDAY[!]: One of the most dramatic days in Wall Street history...

LIQUIDATE: Banks, Brokerages Prepare for Possible LEHMAN Bankruptcy...
BARCLAYS Abandons Talks...

Feds Balk at putting up taxpayer money...
CEO hubris contributed to meltdown...


ISDA confirms a netting trading session is taking place between 2 pm and 4 pm New York time today for OTC derivatives. Product classes involved are credit, equity, rates, FX and commodity derivatives. The purpose of this session is to reduce risk associated with a potential Lehman Brothers Holding Inc. bankruptcy filing. Trades are contingent on a bankruptcy filing at or before 11:59 pm New York time, Sunday, September 14, 2008. If there is no filing, the trades cease to exist. These trades are subject to a protocol which is being distributed by ISDA (International Swaps and Derivatives Association). Traders should execute the protocol and email a copy of the signature page to Mark New at ISDA (mnew@isda.org) with LEHMAN PROTOCOL in the subject line. Click here for Protocol Text.


Barclays May Bid for Lehman as Fed Seeks Solution (Update1)

Barclays May Bid for Lehman as Fed Seeks Solution (Update1)

By Ben Livesey and Yalman Onaran

Sept. 14 (Bloomberg) -- Barclays Plc, the U.K.'s third- biggest bank, moved closer to making a bid for Lehman Brothers Holdings Inc. as the U.S. government raced to find a solution for the faltering investment bank, two people familiar with the situation said.

Senior executives of major financial-services companies arrived at the New York Federal Reserve building in lower Manhattan this morning to discuss a rescue plan, including Citigroup Inc. Chief Executive Officer Vikram Pandit and Robert Wolf, chairman for the Americas at UBS AG. JPMorgan Chase & Co. sent CEO Jamie Dimon, Investment Bank Co-CEO Steven Black and General Counsel Stephen Cutler.

Barclays's takeover approach depends on whether losses from Lehman's mortgage-related holdings can be sealed off, said the people, who declined to be identified because no formal offer has been made. Bank of America Corp., the biggest U.S. consumer bank, also is among the potential bidders for New York-based Lehman, which has lost 94 percent of its market value this year after record losses from investments tied to mortgages.

``The solution is to force the merger of Lehman now, this weekend, with a big commercial bank,'' said Richard Bove, a Lutz, Florida-based analyst at Ladenburg Thalmann & Co.

Lehman, led by Chief Executive Officer Richard Fuld, may be forced to liquidate unless buyers step up for all or part of the 158-year-old company, U.S. Treasury Secretary Henry Paulson and New York Fed President Timothy Geithner told the heads of Wall Street's biggest firms at a meeting Sept. 12. Paulson has said he's reluctant to use government money to rescue Lehman. Talks with the banks continued yesterday without producing an agreement.

Discussions Continue

``Senior representatives of major financial institutions reconvened on Saturday with U.S. officials at the New York Fed. Discussions are expected to continue tomorrow,'' a New York Fed spokesman said.

With backing from the company's board, Barclays President Robert Diamond, 57, is leading a team to review Lehman's books and gauge the level of guarantees the bank would need to cover potential losses, the people said. Peter Truell, a Barclays spokesman, declined to comment.

``Acquisitions are difficult for Barclays because of capital constraints,'' said Simon Willis, an analyst at NCB Stockbrokers Ltd. in London, who has a ``reduce'' rating on the London-based bank. Barclays raised 4.5 billion pounds ($8 billion) in a share sale in June to shore up capital depleted by credit losses and increase its securities trading and fund management units in the U.S.

Bad Bank

Geithner, 47, and Paulson, 62, are pushing Wall Street to contribute money to a so-called bad bank that would assume Lehman's $50 billion of devalued real estate assets. That would make it easier for a buyer to take over the rest of the company while the assets are sold off.

The approach is similar to one Lehman presented to investors last week, which the company said would cost $5 billion to $7 billion.

Such an arrangement would be reminiscent of the rescue of hedge fund Long-Term Capital Management LP, which failed in 1998 as Russia defaulted on its debt, roiling global markets. Spurred by the New York Fed, Wall Street firms including Lehman contributed cash to prop up LTCM.

Korea Development

Lehman CEO Fuld, who participated in the LTCM talks and built Lehman into the biggest U.S. underwriter of mortgage securities during his four decades at the investment bank, was pushed toward a forced sale this past week after talks about a cash infusion from Korea Development Bank ended, eroding investor confidence and the company's market value.

In addition to Pandit and Dimon, the government met Sept. 12 with CEOs including Morgan Stanley's John Mack, Goldman Sachs Group Inc.'s Lloyd Blankfein, Merrill Lynch & Co.'s John Thain and Credit Suisse Group AG's Brady Dougan, according to the people, who asked not to be identified because the gathering was private.

Robert Kelly, CEO of Bank of New York Mellon Corp., UBS's Wolf, and Christopher Cox, chairman of the U.S. Securities and Exchange Commission, also participated, the people said. Bank of America CEO Kenneth Lewis didn't attend because his company is a potential bidder for Lehman, one person said.

Helping lead the discussion was Kendrick Wilson, a former Goldman executive whom Paulson tapped last month as an adviser.

HSBC Holdings Plc, Europe's largest bank by market value, is also considering a bid for Lehman, the Wall Street Journal reported yesterday, without saying where it got the information. Goldman, the largest securities firm, is interested in Lehman's real-estate portfolio, the Journal said.

Goldman's Position

HSBC spokesman Richard Lindsay said the company doesn't comment on market speculation. Goldman spokesman Lucas van Praag also declined to comment.

Paulson, the former chairman of Goldman, doesn't want to put up money to help fund any Lehman acquisition, a person familiar with his thinking said Sept. 12.

Unlike when the Fed committed $29 billion to help JPMorgan take over Bear Stearns Cos. in March, Lehman has access to a lending facility for brokers that would permit an orderly process for unwinding the firm, the person said.

Paulson stepped in last week to guarantee the debt and mortgage-backed securities of home-loan financing companies Fannie Mae and Freddie Mac.

Fuld May Balk

If the government's resistance to fund the purchase lowers the price offered for Lehman, Fuld could balk as well, said Brad Hintz, an analyst at Sanford C. Bernstein & Co.

``We might have a Mexican standoff, with two guys holding guns to each others' heads but nobody firing,'' Hintz said.

Lehman hired the New York law firm Weil, Gotshal & Manges LLP to advise the company on a potential bankruptcy filing, the Journal reported yesterday, without saying where it got the information.

The government is pushing for a quick resolution because Paulson is concerned panic may spread to other financial institutions, Ladenburg Thalmann's Bove said. American International Group Inc., the largest U.S. insurer, and Seattle- based lender Washington Mutual Inc. each plummeted in New York trading last week on speculation about their financial health.

AIG may move up plans to raise capital or sell assets after the shares plunged 46 percent, according to a person familiar with the company. WaMu, which fell 36 percent, may sell parts of its nationwide bank-branch network to raise cash, according to L. William Seidman, a former chairman of the Federal Deposit Insurance Corp.

Asset Write-Offs

A Lehman sale may be possible without government backing, an analysis of Lehman's distressed mortgage assets shows. In a worst-case scenario -- with the assets discounted more deeply than in recent distressed sales -- a buyer could write off almost half of Lehman's mortgage holdings and still have $7 billion of equity left in company, based on figures the investment bank disclosed when it reported third-quarter financial results last week.

``The firm should be worth something even after the troubled assets are taken out at a massive discount because Lehman has a good franchise,'' said Corne Biemans, a Boston- based senior portfolio manager at Fortis Investments, which oversees about $200 billion. ``There are distressed asset buyers who should be interested in this stuff at such serious haircuts.''

Lehman's mortgage-related assets have been marked down to between 29 cents and 85 cents on the dollar. Reducing valuations further to between 5 cents on the dollar for collateralized debt obligations and 35 cents for European mortgages would result in $21 billion of further writedowns. Shareholders' equity was $28 billion at the end of firm's fiscal quarter in August.

To contact the reporters on this story: Ben Livesey in London at blivesey@bloomberg.net; Yalman Onaran in New York at yonaran@bloomberg.net.

Last Updated: September 14, 2008 10:15 EDT

Friday, September 12, 2008

Ike looms on Galveston

http://www.cnn.com/2008/US/weather/09/12/galveston.1900/?iref=hpmostpop (CNN) -- The worst weather disaster in American history took place in Galveston, Texas, in 1900 when a hurricane estimated as a Category 4 intensity blew ashore, killing thousands of residents and obliterating the town.


http://www.accuweather.com/news-top-headline.asp?partner=accuweather&traveler=0&date=2008-09-12_19:45 A significant part of Galveston Island is inundated, 6 hours before Hurricane Ike is forecast to make landfall near the threatened barrier island. Waters will continue to rise this evening on the barrier island and other coastal areas along the central and upper coast of Texas.

Updated 9/12 2045 EDT. Hurricane Ike's current track currently is headed directly for Houston/Galveston and is expected by the National Hurricane Center to be Category 2 (or perhaps a 3) at a late Friday/early Saturday am landfall, which remains in striking distance of over 5 million bpd of US petroleum refining capacity. (A little perspective: 5 MMBBL is about 30% of US capacity (about 15 MMBBL), and a bit less than 6% of global capacity (~85 MMBBL)). THEOILDRUM.COM

Ike Strikes

The wall of water being pushed through the Gulf Mexico by Hurricane Ike is already flooding Galveston, Texas.

Live News Feeds:

ABC http://abclocal.go.com/ktrk/feature?section=news/local&id=6102015

FOX http://www.myfoxhouston.com/myfox/pages/Home/Detail?contentId=7406837&version=1&locale=EN-US&layoutCode=TSTY&pageId=1.1.1

KHOU http://www.khou.com/video/?nvid=178826&live=yes&noad=yes

Thursday, September 11, 2008


http://www.citizen-times.com/apps/pbcs.dll/article?AID=200880911105 Emergency chiefs urge halt to local gas run

COLUMBIA, SC (WIS) - The impending landfall of Hurricane Ike has caused issues with the price of gas and limits on the amount you can buy, according to officials.    http://www.wistv.com/Global/story.asp?S=8993849

Ike shuts down oil and gas production in the gulf

Energy production in the Gulf of Mexico remained largely shuttered Thursday as energy companies scrambled to complete evacuations and shut down refineries in advance of Hurricane Ike.

Roughly 97 percent of all oil production in the Gulf and 93 percent of all gas production is shut down, according to the Minerals Management Service, the federal agency that oversees drilling. Gulf energy production has not fully resumed since Hurricane Gustav struck Louisiana over a week ago.    http://www.nola.com/hurricane-ike/index.ssf/2008/09/energy_industry_scrambles_to_s.html

Wednesday, September 10, 2008

Massive Dollar Short Opportunity

One way or another, the dollar is going down. Hold on to your shorts because this will be the short of the decade.

Recent interventions in commodity markets, which has been a combination of short selling in the Gold market, and large institutions taking profit in a multi-year bull market in hard commodities such as Oil, has caused a short uptick in the dollar. The fed didn't raise interest rates, and US economic data did not get any better. Nor was there any watershed event or even a clear indication that the US economy is improving. There is no other reason the dollar is up, other than the previously mentioned factors. 34% of the world's wealth (calculated in dollars) is still USD based, so any sell off in stocks, commodities, and bonds (meaning a return to cash) means a boon for the USD.

This trade will be a long term play and should not be taken with large leverage unless you are a day-trader who will be in and out of the markets. There is an overwhelming amount of negative data supporting the argument for USD down, so let's examine what could potentially cause the USD to rise, which we shall consider as USD down trade exit strategies.

What can change this trade (stop loss / exit points) can be the following unlikely scenarios:

  • Fed raises interest rates
  • ECB cuts rates (unlikely because unlike the Fed, the ECB only mandate is to contain inflation)
  • US Economy not only bottoms but shows signs of rapid growth (a bottom would not cause the dollar to rise without an increase in rates)


Anyone who previously thought it somehow negative to promote the shorting of the dollar should be silenced with Treasury's recent move, a message to the world saying that the US Government will backup free market capitalism with state sponsored socialism for the rich. None of these actions can possibly be good for the dollar in the long term. In the short term, as we see the Euro-bubble collapse, it is possible for the USD to rise slightly, but this should not be a prolonged trend. Euro weakness does not necessarily make a strong dollar, world markets are desynchronized and interest rate parity theory has stopped working years ago.

How to short the dollar?


  • Long term close your eyes trade; sell now with no stop loss and take profit at USD Index 65.
  • Short term automated trading systems with Sell USD bias. Tweak your systems to find USD short trends and take profits (systematic day trading)
  • Non-USD portfolio (European/Asian bonds / equities)
  • Long Swiss Francs or CHF based bonds


There may be a time when investment in the USD will be the trade, when once again foreign investors will flock to USA as a beacon of capitalism (meaning the ability to make money, which is restricted in many countries by strict government controls and the threat of potential nationalizations). Now is not that time.

http://eliteeservices.net/ Elite E Services FX Systems See more articles at www.eliteforexblog.com

Tuesday, September 9, 2008

Hedge funds - the daredevils of Wall Street - are backing away from risk

September 9, 2008 --

Hedge funds - the daredevils of Wall Street - are backing away from risk, fearful of getting beaten up by the market's persistent turbulence.

JPMorgan Chase's Highbridge Capital and Phil Falcone's Harbinger Capital are among a growing number of big-name hedge funds that are hunkering down, moving into cash and reducing the use of borrowed money, or "leverage," to inflate returns, sources said. http://www.nypost.com/php/pfriendly/print.php?url=http://www.nypost.com/seven/09092008/business/hedge_hogs_hunker_128180.htm

Sunday, September 7, 2008

Paulson Engineers U.S. Takeover of Fannie, Freddie


Paulson Engineers U.S. Takeover of Fannie, Freddie (Update4)

By Rebecca Christie and Dawn Kopecki

Sept. 7 (Bloomberg) -- The U.S. government seized control of Fannie Mae and Freddie Mac after the biggest surge in mortgage defaults in at least three decades threatened to topple the companies making up almost half the U.S. home-loan market.

``Our economy and our markets will not recover until the bulk of this housing correction is behind us,'' Treasury Secretary Henry Paulson, who engineered the takeover along with Federal Housing Finance Agency Director James Lockhart, said in Washington today. ``Fannie Mae and Freddie Mac are critical to turning the corner.''

The FHFA will take over Fannie and Freddie under a so- called conservatorship, replacing their chief executives and eliminating their dividends. The Treasury can purchase up to $100 billion of a special class of stock in each company as needed to maintain a positive net worth. It will also provide secured short-term funding to Fannie, Freddie and 12 federal home-loan banks, and purchase mortgage-backed debt in the open market.

The takeovers bring Fannie, formed after the Great Depression and spun off in 1968, and Freddie, created in 1970, back under the government's fold. It's the biggest step yet in officials' efforts to grapple with a yearlong credit crisis that has caused more than $500 billion of losses and writedowns.

Treasury Gets Stock

Under the plan, the Treasury will receive $1 billion of senior preferred stock in coming days, with warrants representing ownership stakes of 79.9 percent of Fannie and Freddie. The government will receive annual interest of 10 percent on its stake.

As a condition for the assistance, Fannie and Freddie eventually will have to reduce their holdings of mortgages and securities backed by home loans.

The portfolios ``shall not exceed $850 billion as of Dec. 31, 2009, and shall decline by 10 percent per year until it reaches $250 billion,'' the Treasury said. Fannie's portfolio was $758 billion at the end of July, and Freddie's was $798 billion.

Officials are aiming ``to prevent the mortgage market from falling apart,'' said former Federal Reserve Bank of St. Louis President William Poole. The Treasury's funds ``will be flowing in for quite a long time,'' Poole, a Bloomberg contributor, said on Bloomberg Radio.

Herbert Allison, 65, former chief executive officer of TIAA-Cref, will take over as Fannie's new CEO. David Moffett, 56, who was vice chairman of US Bancorp, will head Freddie, Lockhart said. They will work with existing management, he added.

Mudd, Syron Exit

Fannie CEO Daniel Mudd, 50, and Freddie CEO Richard Syron, 64, will serve in a transition period as consultants.

``Americans should be confident that the actions taken today will strengthen our ability to weather the housing correction and are critical to returning the economy to stronger sustained growth,'' President George W. Bush said today in a statement released by the White House.

``The actions taken today are temporary,'' Bush said. As the administration considers the companies' future role, ``it is critical that they not pose similar risks to our economy and to our financial system again.''

While common stockholders of Fannie and Freddie won't be eliminated under the conservatorships, they will be last in line for any claims, Paulson said. Preferred shareholders will be second in absorbing losses, he said.

`Restoration Plans'

Banks and insurance companies have typically purchased the two companies' preferred shares. The Federal Reserve and three other bank regulators said that they will work to ``develop capital restoration plans'' with the ``limited number'' of smaller institutions that hold Fannie and Freddie stock as a significant portion of their capital.

By ensuring that Fannie and Freddie maintain positive net worth, the Treasury will provide ``additional security'' to the owners of Fannie and Freddie bonds and ``additional confidence'' for the holders of their mortgage-backed securities, it said. The Treasury noted that Fannie and Freddie securities are held by central banks and ``investors around the world.''

Lockhart added that interest and principal payments will continue to be made on the companies' subordinated debt.

The government is taking an increasing role in financial markets, after the Fed six months ago provided $29 billion of financing to prevent Bear Stearns & Cos.'s collapse. Chairman Ben S. Bernanke praised today's action in a statement.

`Inherent Conflict'

The plan doesn't answer all of investors' questions about the companies' long-term prospects. It also doesn't address the question of whether the companies will be nationalized, privatized, or kept as government-sponsored enterprises that are shareholder owned. Paulson said that ``only Congress'' can tackle the ``inherent conflict'' of serving shareholders and a public mission.

``Keeping them alive is the wrong approach,'' said Peter Wallison, a fellow at the American Enterprise Institute in Washington and a former Treasury general counsel. ``They need to be sustained, they're essential to financing housing right now. But it doesn't mean that they have to be maintained as GSEs.''

Wallison added that if Fannie and Freddie return to profitability, ``then what the shareholders have is worth something.''

Lobbying Ban

Congress has long avoided making major changes to the two companies, which have had extensive lobbying operations. Lockhart said today that those operations will cease.

``All political activities -- including all lobbying -- will be halted immediately,'' Lockhart said. ``We will review the charitable activity.''

Democratic presidential nominee Barack Obama said today that ``some'' intervention was necessary to prevent a ``larger and deeper crisis,'' while adding that the ultimate resolution of the firms' status will need to be addressed.

Free-marked advocates such as former Fed Chairman Alan Greenspan and Richmond Fed President Jeffrey Lacker have called for the two companies to be split up and sold off.

``Debt holders still face uncertainty, especially regarding what happens in 2010 and what is the business plan going forward,'' said Eric Johnson, president of Carmel, Indiana-based 40/86 Advisors Inc., which manages $25 billion in fixed-income assets.

$5 Billion Purchase

Starting with a $5 billion purchase this month, the Treasury will buy new mortgage-backed securities from the two companies, in an effort ``to broaden access to mortgage funding for current and prospective homeowners,'' according to the Treasury.

The Treasury will hire independent asset managers to purchase and run the portfolio of mortgage-backed securities it will buy. ``There is no reason to expect taxpayer losses from this program, and it could produce gains,'' the department said.

For Bill Gross, manager of the world's biggest bond fund at Newport Beach, California-based Pacific Investment Management Co., today's announcement was good news.

``We own lots of mortgage-backed bonds, and I would expect on Monday and in the ensuing weeks for them to do very well,'' Gross said in a Bloomberg Radio interview. ``So yes, I'm smiling at the moment.''

Inflated Capital

Paulson's decision, taken after consulting with Bernanke, followed a review that found Washington-based Fannie and McLean, Virginia-based Freddie used accounting methods that inflated their capital, according to people with knowledge of the decision.

Paulson, 62, hired Morgan Stanley a month ago to probe the companies' finances. The investment bank concluded that the accounting, while legal, enabled Freddie, and to a lesser extent Fannie, to overstate the value of their reserves, according to the people who declined to be identified because the findings were confidential.

Robert Scully, an adviser to Morgan Stanley CEO and Chairman John Mack, and Ruth Porat, head of global financial institutions, led a 39-person team at the investment bank that explored a range of alternatives for Fannie and Freddie.

Morgan Stanley, officials and regulators determined it was too risky for the companies to try to raise money themselves, because of the losses on many private capital injections in the past year, two people involved in the discussions said. They also deemed a Treasury capital infusion without a government takeover as too risky for taxpayers, the people said.

No End Date

The FHFA will aim to ``preserve and conserve'' the companies' assets and property and put them ``in a sound and solvent condition,'' according to a fact sheet distributed by the Treasury. There is ``no exact time frame'' for when the conservatorship will end, the statement said.

Fannie and Freddie own or guarantee almost half of the $12 trillion in U.S. home loans and the government had been leaning on the companies to help pull the economy out of the housing crisis.

Concern over the companies' capital pushed their borrowing costs to record levels over U.S. Treasuries, sent their common and preferred stocks tumbling and boosted mortgage rates. Fannie is down about 66 percent in New York Stock Exchange trading since the end of June. Freddie has fallen about 69 percent.

Paulson briefed Republican presidential candidate John McCain, Obama, and the Democratic and Republican leaders of the House and Senate. Senate Banking Committee Chairman Christopher Dodd and House Financial Services Committee Chairman Barney Frank and their Republican minority counterparts were also informed.

Congressional Reaction

``Paulson has threaded the needle just right by taking necessary action to stabilize U.S. financial markets while minimizing the liability for taxpayers,'' Democratic Senator Charles Schumer of New York, who heads the congressional Joint Economic Committee, said in a statement. ``This plan will be met with broad acceptance in Congress because it doesn't prejudge the ultimate fate of Fannie Mae and Freddie Mac.''

Other congressional statements indicated hearings are likely as soon as this week.

Fannie was created by the government in 1938 as part of President Franklin D. Roosevelt's New Deal. Freddie was chartered in 1970 to compete with Fannie.

As losses on the mortgages grew late last year, the companies recorded $14.9 billion in combined net losses, eating into their capital. Fannie raised $14.4 billion since November and Freddie sold $6 billion of preferred securities. Plans for a $5.5 billion sale were delayed as the company's fortunes sank.

Required By Regulator

Fannie had $47 billion of capital as of June 30, according to company filings. The company is required by its regulator to hold $37.5 billion. Freddie's capital stood at $37.1 billion, compared with a requirement of $34.5 billion, filings show.

Fannie's market capitalization is now $7.6 billion, down from $38.9 billion at the end of last year. Freddie's has fallen to $3.3 billion, from $22 billion over the same period.

Bernanke participated in the meetings because the central bank was given a consultative role in overseeing Fannie's and Freddie's capital under legislation approved in July.

The FHFA was scheduled to release its assessment of the companies' capital levels as early as last week as part of a quarterly appraisal of their finances.

To contact the reporter on this story: Rebecca Christie in Washington at Rchristie4@bloomberg.net; Dawn Kopecki in Washington at dkopecki@bloomberg.net

Last Updated: September 7, 2008 17:23 EDT