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flacorps

Gaze With Me Into The Credit Crystal Ball

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The implication: over a decade of worldwide production is pledged

against some huge pile of bad paper. Could be true, but sane traders

won't go there. No power on earth could collect it.

 

Think carefully about what you've said: "sane traders won't go there."

 

But what we've had are bond salesman making the rounds of pension funds and other entities, saying "this stuff is as good as gold ... safe as T-bills" or what have you, and the rubes in the sticks have been buying it. Because it was the highest return you could get. So while the stuff was still salable, it had a lot of value, which made the next batch of it out of the chute equally as valuable even though the quality was a little less. And so on, and so on.

 

Meanwhile, the monoline insurers upped their reserves a little as they made piles of money, but there was no way it could be enough, particularly in the face of systemic catastrophe.

You know, I really did not believe this. So I looked it up.

 

My bad. (OMG, it could be TRUE!)

 

The Bank for International Settlements (bis dot org) reported

for December 2007, "596,004" "Notional amounts outstanding"

total contracts in billions of US dollars ... that's 596 trillion $US

(or 0.6 quadrillion $US) so already over 10x the gross world

product.

 

The reported figure doubled in two years. Other "off-the-books"

private contracts may exist. So, one quadrilliion is not far off of

the mark.

 

ER

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Maybe someone can help me out here. When they say $400 bil in ARMs are about to reset, are they assuming EVERY one will default? Are there no debtors paying back ARMs? Are NONE of them refinancing to a low fixed rate? Personally, my lender has been trying to get me to re-fi like crazy, I'm already at 5.5% fixed so I don't care.

 

Do the houses have zero value? I understand that their worth was inflated in many parts of the country, but come on.

 

EVERY person that got an ARM is just going to walk away and be a renter for eternity?

 

If not all of them, how many? 20%? 50%?

 

The lender has gotten the downpayment, the intersest payments for the past few years and then they get the house. What's the problem?

Four problems. One, houses "sitting on the market" can get

wrecked (meth labs, stripped of copper wiring, whatever) and

may lose almost all value. Two, the neighborhood valuations

will also drop, impairing collateral on unrelated loans. Three, the

defaulting buyers will not be able to buy again for several years:

the pool of willling and able buyers is not so deep. Four, houses

vacant past a certain threshold become "nonconforming" and may

require high-dollar modifications to meet current code.

 

I wouldn't be surprised if the bigger cities start forcing the prompt

demolition of "public nuisances." In most cases, the law already

exists.

 

ER

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The implication: over a decade of worldwide production is pledged

against some huge pile of bad paper. Could be true, but sane traders

won't go there. No power on earth could collect it.

 

Think carefully about what you've said: "sane traders won't go there."

 

But what we've had are bond salesman making the rounds of pension funds and other entities, saying "this stuff is as good as gold ... safe as T-bills" or what have you, and the rubes in the sticks have been buying it. Because it was the highest return you could get. So while the stuff was still salable, it had a lot of value, which made the next batch of it out of the chute equally as valuable even though the quality was a little less. And so on, and so on.

 

Meanwhile, the monoline insurers upped their reserves a little as they made piles of money, but there was no way it could be enough, particularly in the face of systemic catastrophe.

You know, I really did not believe this. So I looked it up.

 

My bad. (OMG, it could be TRUE!)

 

The Bank for International Settlements (bis dot org) reported

for December 2007, "596,004" "Notional amounts outstanding"

total contracts in billions of US dollars ... that's 596 trillion $US

(or 0.6 quadrillion $US) so already over 10x the gross world

product.

 

The reported figure doubled in two years. Other "off-the-books"

private contracts may exist. So, one quadrilliion is not far off of

the mark.

 

ER

In most countries of the world, and this has the word international in it, a comma is used in placed of a period, making it a "decimal comma".

Edited by athensgaguy

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In most countries of the world, and this has the word international in it, a comma is used in placed of a period, making it a "decimal comma".

Other traditions noted. But view a PDF of their page (links

to the Bank of International Settlements):

 

http://www.bis.org/statistics/otcder/dt1920a.pdf

 

Note that numbers like "22" would have to be presented

as "0,022" ... they are not.

 

ER

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New problem. Banks need to pay back short term loans they aren't in a position to roll over:

 

At issue are so-called floating-rate notes - securities used heavily by banks in 2006 to borrow money. A big chunk of those notes, which typically mature in two years, will come due over the next year or so, at a time when banks are struggling to raise fresh funds. That's forcing banks to sell assets, compete heavily for deposits and issue expensive new debt.

 

...

 

They're also likely to become less willing to make new loans to consumers and companies, aggravating economic downturns in both the U.S. and Europe.

http://www.azcentral.com/business/news/art...urdle27-ON.html

Edited by flacorps

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... A crisis in liquidity will force those lenders to pull back credit lines and increase interest rates and fees well beyond what is already becoming uncomforable for say, Amex and Juniper cardholders. Lenders can only lend a set ratio of the value of their assets ... when the asset base shrinks, they must call loans due and payable or face takeover by regulators and liquidation. The FDIC is already rehiring retirees in anticipation of 100+ bank failures.

...

Healthier banks will assume the performing portfolios of the failed banks, and will treat all their cardholders like second class citizens (higher rates and fees and lower limits will be the order of the day). The failed portfolios ... will go to the FDIC's "JDC"program--an outgrowth of the RTC program that was moved over to FDIC when it proved successful at the RTC back in the late '80s and early '90s.

 

A major Wall Street player is calling on the government to buy assets (read: bail out the financial houses) to avert a financial "tsunami" because banks can't lend (buying the assets would at worst help banks maintain solvency and at best would give banks liquidity, which is necessary for them to maintain the financial ratios required for them to continue lending).

 

He also mentioned that a new RTC (Resolution Trust Company) may be needed.

 

http://www.bloomberg.com/apps/news?pid=206...id=aaVfH47UrqgA

Edited by flacorps

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Apropos yesterday's post, we have the new announcement that the Tresury, supported by the Fed will now be stepping directly into the Fannie/Freddie situation (they obtained the authority earlier, in July).

 

An announcement could come as early as this weekend. Some details are still being worked out, and terms of the arrangement could change.

 

The plan is expected to involve putting the two companies into the conservatorship of their regulator, the Federal Housing Finance Agency, said several people familiar with the matter. That would mean the government would take the reins of the companies, at least temporarily.

 

It is also expected to involve the government injecting capital into Fannie and Freddie. That could happen gradually on a quarter-by-quarter basis, rather than in a single move, one person familiar with the matter said.

 

In addition, Treasury's plan includes a top-level management shakeup at both companies, according to people familiar with the plans. Daniel H. Mudd, chief executive of Fannie Mae, and Richard Syron, his counterpart at Freddie Mac, are expected to step down from their posts eventually.

...

 

Freddie and Fannie own or guarantee more than $5 trillion of mortgages. They have suffered combined losses of about $14 billion over the past four quarters as they make provisions for a wave of defaults. Investors worried that a government bailout would wipe out the value of existing stock, and those fears have sent the shares down about 90% from a year ago. Many U.S. banks as well as foreign governments own stock or debt in the two giants, meaning their financial woes could cause broad problems beyond the housing market.

 

http://online.wsj.com/article/SB1220646501...p_us_whats_news

 

In short, they're doing what Pimco's head said to do, buying assets (either shares of Fannie and Freddie, debt issued by Fannie and Freddy, or the mortgages held by Fannie and Freddy) to prevent them from being worthless.

 

Note that the assets are rights to specific future income streams. They aren't really worthless necessarily. What has happened is that the market for them has dried up. Anything that has no buyers is worthless if you have to mark it to market, which is what newer accounting rules require in their draconian way. Of course, the old way of valuing things however you darn well pleased didn't work all that well either.

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snipped - a lot blah, blah, blah nonsense....

 

If you want to support the fortunes of your ailing party then by all means add a political banner at the end of your postings.

 

But PLEASE spare us the thinly disguised political tirade.

 

TIA

Edited by confused_bookworm

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snipped - a lot blah, blah, blah nonsense....

 

If you want to support the fortunes of your ailing party then by all means add a political banner at the end of your postings.

 

But PLEASE spare us the thinly disguised political tirade.

 

TIA

 

Huh? We're talking about facts on the ground, not which individuals or parties should be blamed, rewareded, elected or deposed because of them.

 

This thread is simply about what is happening or coming down the pike.

 

Both presidential candidates have praised what Treasury and the Fed are doing, although each has in the past expressed criticism for what Fannie and Freddy had become, and each has had a different suggested approach to reform the situation, neither of which I will get into here except to note that what is happening now does not fit the mold that either of them envisioned.

 

While both have their own strategic view for Fannie and Freddy, what is happening now is tactical ... putting a finger in a dike now rather than drawing up plans to shore up the dike, rebuild the dike or move people and property out of the way if the dike cannot be expected to survive in the long term.

 

Fannie and Freddy are but a small part of the "financial tsunami" which I believe is occurring in slow motion and will continue to occur for some time to come. However, "tsunami" may not be the correct term. The correct analogy may be to a hurricane, because right now I believe we're all in they eye of the storm (some economic indicators have stabilized or improved, oil is going down in price, etc.--these apparently "good" effects are the result of weakening demand, however--that is a part of the "deleveraging" and bespeaks lower levels of economic activity in the future, which cannot be healthy) ... the back half of the storm will be another huge impetus to deleverage, and could lead to a greater depression. Or Great Depression II.

 

The key will be the how central bankers in the nations of the world handle the situation ... there will be political winds affecting things of course, but the real enemy is uncertainty, which is a synonym for lack of faith.

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This is something that I read about months ago that is still not resolved, but it is right on the knife edge of going one way or another:

 

http://www.reuters.com/article/bondsNews/i...845115720080908

 

Essentially, Montgomery Alabama is about to default on $3.2 billion dollars worth of sewer bonds, and it will be the largest Chapter 9 since Orange County California's in '94 if it there isn't a workout arranged.

 

A few months ago, this seemed a significant number that had national implications.

 

After all that has happened in the interim, it's more than a drop in the bucket, but not by much...

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But PLEASE spare us the thinly disguised political tirade.

 

TIA

 

I hadn't noticed that this poster was talking about something from a month ago. I wasn't making a political tirade then either, although I did identify some players and what they had done.

 

Sometimes politicians do something unprincipled and it works out, sometimes they do something principled and it does unwarranted damage. But on the whole it's preferable if those who govern us act according to principles.

 

That's why the "moral hazard" of bailouts is so difficult to balance against the horrendous systemic effects of allowing events to take their natural course.

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The worst is over. The storm has passed. In 2 years everything will be back to normal. Gas will be at $3 and Americans will be buying big cars and living the good life. We are optimists and are very resourceful. In 2 years all this will seem like a bad dream.

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The worst is over. The storm has passed. In 2 years everything will be back to normal. Gas will be at $3 and Americans will be buying big cars and living the good life. We are optimists and are very resourceful. In 2 years all this will seem like a bad dream.

 

:lol: That was sarcasm, right?

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The worst is over. The storm has passed. In 2 years everything will be back to normal. Gas will be at $3 and Americans will be buying big cars and living the good life. We are optimists and are very resourceful. In 2 years all this will seem like a bad dream.

 

;) That was sarcasm, right?

 

 

 

Nope, it wasn't. Americans were buying cars when the gas was $3 and will do so again. People will start buying houses again in a couple of years , once all the excesses of the bubble have wasted away. I definitely think that the 2 year timeframe for recovery is reasonable.

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Nope, it wasn't. Americans were buying cars when the gas was $3 and will do so again. People will start buying houses again in a couple of years , once all the excesses of the bubble have wasted away. I definitely think that the 2 year timeframe for recovery is reasonable.

 

In a perfect world that would be the case. But in this case global economies have achieved an unprecedented level of interconnection. We have partners, we have rivals. Disarray in our own house shakes the former and emboldens the latter, and some of the former are tempted to join the latter, or they flat get trumped by them. We could hold onto hegemony over the oil wealth or Iraq ... or not. We could maintain control of the BTC pipeline ... or not. China could keep buying our debt so that we could buy her goods ... or not. A pipeline could get run through Afghanistan ... or not. NATO could hold up ... or not. Russia could play ball ... or not.

 

There are a lot of plates spinning on a lot of sticks. We're going to need some character and some creativity to keep them that way.

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Nope, it wasn't. Americans were buying cars when the gas was $3 and will do so again. People will start buying houses again in a couple of years , once all the excesses of the bubble have wasted away. I definitely think that the 2 year timeframe for recovery is reasonable.

 

In a perfect world that would be the case. But in this case global economies have achieved an unprecedented level of interconnection. We have partners, we have rivals. Disarray in our own house shakes the former and emboldens the latter, and some of the former are tempted to join the latter, or they flat get trumped by them. We could hold onto hegemony over the oil wealth or Iraq ... or not. We could maintain control of the BTC pipeline ... or not. China could keep buying our debt so that we could buy her goods ... or not. A pipeline could get run through Afghanistan ... or not. NATO could hold up ... or not. Russia could play ball ... or not.

 

There are a lot of plates spinning on a lot of sticks. We're going to need some character and some creativity to keep them that way.

please leave me out of your politics :lol:

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WaMu down 30% today. Either JPMorgan/Chase buys 'em quick on the cheap, or the FDIC will have to seize 'em Friday afternoon after close of business. I'm betting on the shotgun wedding with the Fed providing the cake 'cause I don't think FDIC can afford the seizure.

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The worst is over. The storm has passed. In 2 years everything will be back to normal. Gas will be at $3 and Americans will be buying big cars and living the good life. We are optimists and are very resourceful. In 2 years all this will seem like a bad dream.

 

Can't be buying those types of Car's & Trucks when the Big 3 and the far East car makers NO LONGER make them, Detroit is spending Billions to " re-tool " those plants that USE to build them big Cars & Truck's.....

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Can't be buying those types of Car's & Trucks when the Big 3 and the far East car makers NO LONGER make them, Detroit is spending Billions to " re-tool " those plants that USE to build them big Cars & Truck's.....

 

I have a feeling there will always be a market for large pick-up trucks... it'll just be a very small market driven by those who really need them. And I'm glad... America just wouldn't be America without full size pick-ups :blush:

 

No large SUV's and other gas guzzling contraptions... I'm not so sure.

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Can't be buying those types of Car's & Trucks when the Big 3 and the far East car makers NO LONGER make them, Detroit is spending Billions to " re-tool " those plants that USE to build them big Cars & Truck's.....

 

I have a feeling there will always be a market for large pick-up trucks... it'll just be a very small market driven by those who really need them. And I'm glad... America just wouldn't be America without full size pick-ups :lol:

 

No large SUV's and other gas guzzling contraptions... I'm not so sure.

 

The far east (China, India) will be making conventional cars, SUVs and trucks for some time, while we all start driving something a bit more high-tech and modern (or maybe just clean diesels which are themselves pretty high tech).

 

Very high MPGs are attainable ... perhaps 7,000 mpg using the right technology in a small, low powered vehicle.

 

http://askpatty.typepad.com/ask_patty_/200...rathon_she.html

 

We could expect to break triple digits in things you and I might want to drive.

 

Heck, if we seriously wanted to we could power cars like we power deep space probes. A permanent nuclear pellet heating a stirling engine to charge batteries. No gas filler, no plug. Maybe change out the rechargeable batteries once in a while for ones that can hold a charge. Of course, bin Laden would immediately go into the car recycling business...

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Can't be buying those types of Car's & Trucks when the Big 3 and the far East car makers NO LONGER make them, Detroit is spending Billions to " re-tool " those plants that USE to build them big Cars & Truck's.....

 

I have a feeling there will always be a market for large pick-up trucks... it'll just be a very small market driven by those who really need them. And I'm glad... America just wouldn't be America without full size pick-ups ;)

 

No large SUV's and other gas guzzling contraptions... I'm not so sure.

 

The far east (China, India) will be making conventional cars, SUVs and trucks for some time, while we all start driving something a bit more high-tech and modern (or maybe just clean diesels which are themselves pretty high tech).

 

Very high MPGs are attainable ... perhaps 7,000 mpg using the right technology in a small, low powered vehicle.

 

http://askpatty.typepad.com/ask_patty_/200...rathon_she.html

 

We could expect to break triple digits in things you and I might want to drive.

 

Heck, if we seriously wanted to we could power cars like we power deep space probes. A permanent nuclear pellet heating a stirling engine to charge batteries. No gas filler, no plug. Maybe change out the rechargeable batteries once in a while for ones that can hold a charge. Of course, bin Laden would immediately go into the car recycling business...

 

LMAO,, lol high end bucks in that business

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Of course, bin Laden would immediately go into the car recycling business...

LMAO,, lol high end bucks in that business

 

He would be in it for the unspent uranium that could be re-enriched into weapons-grade plutonium, not the $$$.

Edited by flacorps

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The worst is over. The storm has passed. In 2 years everything will be back to normal. Gas will be at $3 and Americans will be buying big cars and living the good life. We are optimists and are very resourceful. In 2 years all this will seem like a bad dream.

 

:angry: That was sarcasm, right?

 

 

 

Nope, it wasn't. Americans were buying cars when the gas was $3 and will do so again. People will start buying houses again in a couple of years , once all the excesses of the bubble have wasted away. I definitely think that the 2 year timeframe for recovery is reasonable.

 

I don't believe we'll be back to where we were before in 2 years, but I do believe we'll have recovered significantly. While all of this "tattered economy" (focusing on housing) has been blown out of proportion, I also remain an optimist...

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Of course, bin Laden would immediately go into the car recycling business...

LMAO,, lol high end bucks in that business

 

He would be in it for the unspent uranium that could be re-enriched into weapons-grade plutonium, not the $$.

 

I know that's why I was laughing it would take a lot to get the needed amount

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I don't believe we'll be back to where we were before in 2 years, but I do believe we'll have recovered significantly. While all of this "tattered economy" (focusing on housing) has been blown out of proportion, I also remain an optimist...

 

The global financial system is essentially Godelian, meaning there's always something you either haven't anticipated or it's such a bad thing there's no point in trying to anticipate it because if it happens nothing can stop it (Godel postulated that no flawless mathematical system could exist, any mathematical system that could be devised would be unable to express at least one mathematical truth). As such, bankers will always be fighting imbalances and perhaps patching holes, even in the absence of wars, natural disasters and other calamities.

 

Recovery on any time scale is uncertain, what is certain is that bankers have learned from the past and have faster feedback from the markets than they ever did. The question is whether they will act selfishly or selflessly.

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