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Second Bailout Proposal More Criminal Than First

If you thought the first bailout plan was a piece of garbage, the second one is one hell of a stinker.

Besides using American taxpayer money to pay for the handiwork of those greedy bastards that live among us, this new bill also takes care of executives’ golden parachutes, increases the deficit, and aids and abets Wall Street in cooking the books. Way to go Congress. The Founding Fathers are rolling in their graves. Even faster now.

From MarketWatch’s Greg Robb and Robert Schroeder last night:

The Senate approved a revised $700 billion U.S. plan to stabilize the financial industry and kick-start credit on Wednesday night, just two days after the House defied President Bush and leaders of both political parties to reject the original package.

By a vote of 74-25, senators authorized the Treasury secretary to buy bad assets from companies’ books, allowed the Federal Deposit Insurance Corp. to raise its deposit-insurance cap to $250,000 from $100,000, extended several tax breaks and required government agencies to modify troubled mortgages…

House Majority Leader Steny Hoyer said the House leadership will likely bring the bill to the floor on Friday.

I wouldn’t expect anything less. As most of us know, money talks on Capitol Hill. And Wall Street banks are anxious to receive their share of the plunder.

A lot of anger has been directed at executive compensation packages. Predictably, that issue won’t be addressed in the new bill. Robb and Schroeder noted:

Executive pay would also be limited in some cases under the bill, as would “golden parachutes” for some corporate chiefs.

Note the multiple use of “some.” The looting goes on.

Greg Hitt Sarah Lueck of the Wall Street Journal pointed out other problems with the “new and improved” bailout plan, such as deficit growth and accounting rule modifications. They wrote last night:

The 10-year, $150.5 billion package of tax proposals includes a measure to ease the bite of the alternative minimum tax, as well as research-and-development tax credits coveted by high-tech companies and drug makers. Its addition is designed to secure the support of Republicans, who were overwhelmingly opposed in the House. But it could irk conservative House Democrats because the measure will add to the deficit.

Add to the deficit? Bring it on, I’m sure the discredited followers of John Maynard Keynes are saying at this very moment.

The Journal reporters added:

The compromise bill represented a marriage of the rescue proposal with a host of measures designed to win the support of reluctant lawmakers. Additions include an increase in bank deposit insurance limits, a suggested change to accounting rules, and a $150.5 billion package of unrelated personal and corporate tax cuts.

And just what is this “suggested change” to accounting rules? Hitt and Lueck explained:

The bill also reaffirms the Securities and Exchange Commission’s authority to suspend so-called mark-to-market accounting, an issue that gained surprising traction among lawmakers looking for less costly alternatives to the Bush plan. The practice, adopted in the aftermath of the savings-and-loan collapse in the 1980s, pegs the value of assets to their current market price, rather than the price paid for them.

Banks have complained the strict application of mark-to-market rules have forced them to write down billions worth of mortgage-related securities for which there are no buyers, intensifying the squeeze in the credit markets.

Um, yeah, there’s a good reason why mark-to-market accounting was implemented after that other famous episode of financial greed in America. Joanna Ossinger of FOX Business wrote yesterday:

Mark-to-market, which is part of fair-value accounting, simply means that companies assigning values to assets they hold must value them at current market levels. If something is trading right around $10, it’s given a value of $10, regardless of whether it was bought for $2 or $20.

That sounds logical, right? The problem, though, and the reason M2M is getting so many opponents, is that the credit markets are in such a bind now that a lot of securities aren’t selling at all. So, technically, you might have a “market” of $0 for a security.

In effect, change the rules, assign fictitious values to securities, announce less write-downs… and pencil in some dates to look at property in The Hamptons and the latest Maserati to roll of the line in Italy.

I don’t know about you, but the suspension of mark-to-market accounting sure sounds like cooking the books to me. With the help of the U.S. government, no less.

We hang the petty thieves and appoint the great ones to public office.

-Aesop

Sources:

“Senate approves $700 billion financial rescue plan”
Greg Robb, Robert Schroeder
MarketWatch, October 2, 2008

“Senate Vote Gives Bailout Plan New Life”
Greg Hitt, Sarah Lueck
Wall Street Journal, October 2, 2008

“In Defense of Mark-to-Market Accounting”
Joanna Ossinger
FOX Business, October 1, 2008

U.S. Economy Headed Towards Doom And Gloom?

This morning I came across two pieces which were notable in that they painted a gloomy picture for the U.S. economy going forward. Jonathan Burton of MarketWatch talked about TCW Group’s Jeffrey Gundlach’s economic outlook, and wrote:

An influential investment strategist has a dire forecast for U.S. stocks, credit markets and the continued independence of some of the nation’s top financial institutions.

Jeffrey Gundlach, chief investment officer at Los Angeles-based mutual-fund company TCW Group Inc., told clients on a conference call late Wednesday that the crisis in credit and housing may not abate for several years and is actually getting worse.

In the deteriorating climate he sees unfolding, Gundlach said, the Standard & Poor’s 500 Index could fall another 30%, giant Citigroup could become an “AIG-sized debacle,” Morgan Stanley would merge with a banking company, Wachovia won’t be able to stand alone, default rates on even prime mortgages could soar, and European banks’ woes are just beginning.

“This is no market for old men,” said Gundlach, who also manages TCW’s flagship Total Return Bond Fund . “This is no market for old-school thinking.”

Gundlach based his assessment on a belief that housing prices still face several more years of decline, a protracted slump, he said, not seen since the Great Depression. Moreover, Gundlach said it’s possible that home prices could be sluggish until 2022.

“If it’s like the Depression experience — and it sure is shaping up that way — it could take several years. Maybe we won’t see a bottom in home prices until 2014,” he said.

Burton talked about Gundlach’s credentials for making such statements. He wrote:

As a forecaster, Gundlach didn’t just climb aboard the gloom-and-doom wagon. He was early to spot the cracks that subprime loans were making in the financial system, and among the first to warn that an era of easy money would come to a bad end.

The MarketWatch reporter noted:

Expect loan default rates to rise, Gundlach said, not just in the subprime market, but among the top-drawer prime borrowers as well. The prime default rate could approach 10% from a current 2% before the carnage is over, he said…

Accordingly, financial institutions may suffer write-offs that could surpass $1 trillion before conditions improve, he said…

The breakdown will take a further toll on U.S. stocks, Gundlach added. The S&P 500 will tumble below 800, he said, about 35% below its 1156 close on Wednesday.

Said Gundlach: “None of us have ever seen this, and it’s no market for old men, but risk aversion is the order of the day.”

Someone else who sees massive problems ahead for the American economy is Harvard economic professor and former chief economist of the International Monetary Fund Kenneth Rogoff. He wrote on the Financial Times (UK) website last night:

Were the financial crisis to end today, the costs would be painful but manageable, roughly equivalent to the cost of another year in Iraq. Unfortunately, however, the financial crisis is far from over, and it is hard to imagine how the US government is going to succeed in creating a firewall against further contagion without spending five to 10 times more than it has already, that is, an amount closer to $1,000bn to $2,000bn.

In other words, $1 to $2 trillion. Rogoff continued:

True, the US Treasury and the Federal Reserve have done an admirable job over the past week in forcing the private sector to bear a share of the burden. By forcing the fourth largest investment bank, Lehman Brothers, into bankruptcy and Merrill Lynch into a distressed sale to Bank of America, they helped to facilitate a badly needed consolidation in the financial services sector. However, at this juncture, there is every possibility that the credit crisis will radiate out into corporate, consumer and municipal debt. Regardless of the Fed and Treasury’s most determined efforts, the political pressures for a much larger bail-out, and pressures from the continued volatility in financial markets, are going to be irresistible…

The Ivy League professor talked about the potential fallout from allocating so much money to deal with the escalating financial crisis. He wrote:

It may prove to be possible to fix the system for far less than $1,000bn- $2,000bn. The tough stance taken by regulators this past weekend with the investment banks Lehman and Merrill Lynch certainly helps.

Yet I fear that the American political system will ultimately drive the cost of saving the financial system well up into that higher territory.

A large expansion in debt will impose enormous fiscal costs on the US, ultimately hitting growth through a combination of higher taxes and lower spending. It will certainly make it harder for the US to maintain its military dominance, which has been one of the linchpins of the dollar.

The shrinking financial system will also undermine another central foundation of the strength of the US economy. And it is hard to see how the central bank will be able to resist a period of allowing elevated levels of inflation, as this offers a convenient way for the US to deflate the mounting cost of its private and public debts.

It is a very good thing that the rest of the world retains such confidence in America’s ability to manage its problems, otherwise the financial crisis would be far worse.

Let us hope the US political and regulatory response continues to inspire this optimism. Otherwise, sharply rising interest rates and a rapidly declining dollar could put the US in a bind that many emerging markets are all too familiar with.

A new banana republic?

Sources:

“The worst is yet to come”
Jonathan Burton
MarketWatch, September 18, 2008

“America will need a $1,000bn bail-out”
Kenneth Rogoff
Financial Times (UK), September 17, 2008

Vanguard Founder Warns Of Difficult Economic Times, Drawn-Out Credit Crisis

John Bogle, the founder and retired CEO of the Vanguard Group, appeared on Bloomberg Television earlier today from Valley Forge, Pennsylvania. Bogle warned of “difficult economic times that very clearly lie ahead.” He added:

We’re going into something, or are in the midst of something, you might call the great unraveling, of all that excess credit, all that low-quality credit, that built up to such enormous levels in, say, the previous decade. So, that’s going to take a long time to unravel.

Bloomberg’s Betty Liu asked Bogle how far along he thought we were in the credit crisis. Bogle, who is still active with the second largest fund family in the country, replied:

None of us really know. I’m certainly among those that don’t know. But I’d say a third of the way through would be more like it. I’d say we have several more years to go. And they’re not going to be fun years for any of us.

He also added that he expects more bank failures and more bailouts during this time. According to Bloomberg, there have been $509.6 billion in credit losses and asset write-downs since the beginning of 2007.

You can view the 7 minute 12 second interview here.

Source:

John Bogle Interview
Bloomberg, September 3, 2008

Credit Crisis Far From Over For Financial Sector

Bank and securities firm write-downs since the beginning of 2007 now total $503 billion. And yet, a number of analysts are saying that the carnage is far from being done. Bloomberg’s Jeff Kearns wrote earlier today:

The credit crisis is “broad, deep, and global” and “far from over” for financial companies even after they reported $500 billion in writedowns and credit losses, Merrill Lynch & Co.’s chief investment strategist said.

“Investors are significantly underestimating both the scope and the extent of the credit bubble and the consequences of its subsequent deflation,” Richard Bernstein wrote in a note to clients. “The problems are not confined to large institutions that are overexposed to U.S. subprime loans.”

The lingering effects of the crisis mean banks and brokerages need “massive” consolidation because of the glut of lending worldwide, Bernstein said.

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Sources:

“Bank Debt Risk Rises as Writedowns, Losses Exceed $500 Billion”
Shannon D. Harrington and Abigail Moses
Bloomberg, August 13, 2008

“Credit Crisis Still ‘Far From Over,’ Merrill’s Bernstein Says”
Jeff Kearns
Bloomberg, August 13, 2008

Write-Downs Approach $500 Billion, With More To Come

According to Bloomberg today, the world’s biggest banks and brokerages have reported $497 billion of write-downs since the start of 2007.

And the end is nowhere in sight, according to CNN Money’s Paul R. La Monica. The editor-at-large wrote this morning:

Make no mistake: The worst probably is not over for financial firms. Not by a long shot.

Many bank stocks have bounced sharply from their panic-induced lows of mid-July on hopes that the bleak second-quarter results represented the bottom.

But the bigger-than-expected losses reported by Freddie Mac and Fannie Mae this week, accompanied by dismal forecasts for the housing market, are strong indicators that there are likely more credit-related woes to come.

“The banks are still at the mercy of writedowns. I don’t think the worst is over for financials yet,” said Liz Ann Sonders, chief investment strategist with Charles Schwab & Co.

The International Monetary Fund forecasts that global losses tied to the credit crisis will be $945 billion. It’s a widely used number, but Sonders thinks it’s “potentially very conservative.”

So how high could losses go? Sonders points to the $1.6 trillion forecast from hedge fund firm Bridgewater Associates or even the $2 trillion number from Nouriel Roubini, the highly-respected professor of economics at NYU’s Stern School of Business.

And based on the losses already reported, we’re not even halfway through the crisis.

Source:

“$1 trillion in losses? Bank on More”
Paul R. La Monica
CNN Money, August 8, 2008

Move Over Money Honey, It’s The Diva Of Doom

Maria Bartiromo? As my British footballing friends across the pond would say, “Who are yer?” While CNBC’s “Money Honey” was an icon of the nineties stock market boom, Oppenheimer analyst Meredith Whitney, who I refer to as “The Diva of Doom,” is seeing a meteoric rise in popularity as the global economic crisis unfolds. It’s not her looks that are winning over open-minded investors (okay, maybe a wee bit). But her gloomy forecasts, which are turning out to be uncannily correct. CNN Money’s Jon Birger wrote yesterday:

Whitney’s bearishness has deep roots. In fact, she was the first analyst to sound the alarm loudly about subprime mortgages, predicting back in October 2005 that there would be “unprecedented credit losses” for subprime lenders.

Last October, the analyst correctly predicted Citibank would have to cut its dividend.

And now? Well, Whitney is saying U.S. home prices will fall another 33%. From the CNBC website yesterday:

Housing prices will fall more than 30 percent before the market recovers and banks will continue their reluctance to lend until the credit crisis clears up, Oppenheimer analyst Meredith Whitney said on CNBC.

In a wide-ranging interview, Whitney said the housing deterioration will be worse than even the doom-and-gloom predictions that already have circulated regarding the market…

“There’s one obvious area where the bad news isn’t all out yet, and that’s with home prices… Home prices are going to fall much more than people expect,” she said.

“I think it’s going to be well worse than 33 percent, and here’s why: If you look at the futures market, it’s indicating a range right around between 2002-2003 levels, when home ownership rates were actually higher, but fewer people can qualify for a mortgage because you’ve got to put 20 percent down, and that’s a lot of money for people,” she continued. “Furthermore, then you’ve got to find a bank to lend to you, because, Countrywide’s not lending to you.”

Meredith Whitney aka “The Diva of Doom”

In addition to a continuing housing slump, Whitney doesn’t see an end to the credit crunch anytime soon. CNN Money’s Jon Birger wrote yesterday:

The credit crisis is far from over, star analyst Meredith Whitney tells Fortune magazine in its upcoming issue.

Whitney, who audaciously - and correctly - predicted last October that Citigroup would have to cut its dividend, tells the magazine that banks in general today are still facing much bigger credit losses than what they’ve reported so far.

The Oppenheimer & Co. analyst warned last year - and continues to warn today - that the “incestuous” relationship between the banks and the credit-rating agencies during the real estate bubble will have a long-lasting impact on banks’ ability to recover.

How so? The CNN senior writer noted:

For years the ratings agencies, which are paid by the issuers of bonds, gave high marks to securities backed by subprime mortgages. Many of those bonds, of course, turned out to be anything but safe.

With Moody’s and Standard & Poor’s now trying to make up for past wrongs, the pace of downgrades on mortgage securities is quickening.

This is a problem, because every time their portfolios are hit by significant credit downgrades, banks are forced to improve their capital ratios. Often that means issuing reams of new stock, which leads to serious dilution, as shareholders at Citi, Merrill Lynch and Washington Mutual now know.

“You’re going to have this stealth pressure on bank balance sheets until you start to see the ratio of downgrades to upgrades change,” Whitney tells the magazine.

Sources:

“Housing Prices Could Skid Another 33%, Analyst Says”
CNBC, August 4, 2008

“Whitney: Credit crunch far from over”
Jon Birger
CNN Money, August 4, 2008

Wall Street, Housing Woes Hit The Hamptons

There goes the neighborhood. I first talked about the Hamptons, the playground for America’s rich on the East Coast, back on June 5 due to a little foreclosure problem they were having. Now, I understand that the east end of Long Island, New York, is having a bigger problem related to home sales and prices. Bloomberg’s Sharon L. Lynch and Laura Marcinek wrote yesterday:

The Hamptons housing market is feeling the heat of Wall Street’s meltdown.

Second-quarter sales volume dropped 29 percent and the median price fell 11 percent to $735,000 from a year earlier in the resort communities on the East End of New York’s Long Island, Suffolk Research Service Inc. said in a report today…

Bloomberg attributes the decline in sales and prices to tough times on Wall Street. According to Wednesday’s piece:

Transactions are dropping as financial firms have cut more than 93,000 jobs and taken more than $416 billion in mortgage- related losses and writedowns. The retreat in global stock markets, waning consumer confidence and the deepening housing recession are also keeping prospective buyers at bay.

Source: L Nichols Woodcarving

Looking at the individual towns, Lynch and Marcinek noted:

In Southampton, the median price dropped 8.6 percent to $891,000. Sales volume fell 35 percent to 257 homes. In East Hampton, prices fell 11 percent to a median of $1,000,000, Suffolk Research said. Volume there fell 40 percent to 120 homes…

In Southold, prices fell 8 percent to $507,500 and sales dropped 19 percent. On Shelter Island, the median price rose 34 percent to $1.13 million, while sales fell 26 percent to 17. The cost to buy in Riverhead also rose, up 9.6 percent to a median of $411,100, while transactions gained 3 percent to 103 properties.

Source:

“Hamptons House Prices Fall Amid Wall Street’s Decline (Update4)”
Sharon L. Lynch, Laura Marcinek
Bloomberg, July 16, 2008

Small Banks Getting Battered By Construction Loans

Back on March 25, I mentioned that the Associated Press was reporting the Federal Deposit Insurance Corp., or FDIC, was planning to increase staffing 60% to handle an anticipated surge in troubled financial institutions. From that post:

The Federal Deposit Insurance Corp. wants to add 140 workers to bring staff levels to 360 workers in the division that handles bank failures, John Bovenzi, the agency’s chief operating officer, said Tuesday.

“We want to make sure that we’re prepared,” Bovenzi said…

Now, I can see why. The Wall Street Journal said last week:

According to the Federal Deposit Insurance Corp., $45.4 billion of the $631.8 billion in construction loans outstanding at the end of the first quarter were delinquent. When banks announce second-quarter results in coming weeks, they are expected to report sharp increases in loans that builders can’t repay. Banks are also facing intensifying pressure from federal and state regulators to deal with the problem loans on their books.

That will put additional pressure on an already stressed financial system. Banks have begun to dump bad construction and land loans at discounts, curtail new lending and halt construction projects that are under way to preserve capital. Some analysts even see a wave of bank failures as a possibility.

Delinquency Rates from Construction Loans
Source: Wall Street Journal

According to Journal reporters Michael Corkery, Jennifer S. Forsyth, and Lingling Wei, problems were brewing among small banks earlier this year. They wrote:

Scores of banks were already suffering headaches by the end of the first quarter, according to a review by The Wall Street Journal of FDIC-filed reports by 6,919 banks that make construction loans. The smallest banks, those with total assets of less than $5 billion, faced the biggest problems. The WSJ analysis didn’t include savings-and-loan institutions, or so-called thrift banks.

Nearly one in three of the banks analyzed — or 2,182 — had construction-loan portfolios that exceeded 100% of their total risk-based capital, a red flag to regulators, although it doesn’t mean the bank is in danger of failing. Risk-based capital is a cushion that banks can dig into to cover losses.

Even more alarming, 73 of those banks had construction-loan delinquency rates of more than 25%…

The outlook for small banks looks pretty grim, according to the Journal. Corkery, Forsyth, and Wei wrote:

Over the next few quarters, banks are expected to begin recording much larger losses. In 2007 and the first quarter of this year, U.S. banks wrote down just 0.7% of their residential construction and land assets as bad debt, according to Zelman & Associates, a research firm. Over the next five years that figure could rise to 10% and 26%, which would amount to about $65 billion to $165 billion, Zelman projects.

Source:

“Small Banks’ Reckoning Day Is Coming”
Michael Corkery, Jennifer S. Forsyth, Lingling Wei
Wall Street Journal, July 2, 2008

Financial Chaos Not Much Of A Surprise For Some

I came across a piece the other day where the Chicago Tribune’s personal finance columnist Gail MarksJarvis talked about PIMCO’s Mohamed El-Erian and his visit with professional investors at Morningstar’s annual investment conference in Chicago. MarksJarvis wrote:

El-Erian, co-CEO of Pimco, thinks the world is fundamentally changed, with complexity that neither central banks, government leaders, businesses nor investors know how to handle.

As evidence, he said, the world has gone through what he called “the unthinkable” in the last 12 months. If he had made a prediction a year ago that the world’s first systemic crisis would have been set off by the “most sophisticated financial system in the world”—which, of course, is Wall Street—“investors would have thought that improbable,” he noted.

And if he had suggested there would have been “runs on banks” like the debacle at Bear Stearns, he said, people would have imagined the mess occurring in Latin America, Asia, or Russia, but not the U.S.

And if he had suggested that the banking system would have raised $350 billion in fresh capital and then written off a similar amount, “I would have lost most of you,” he said.

But the ultimate assertion that no one would have imagined, he added, is that the richest country in the world would receive capital from poorer nations, like South Korea and Kuwait, to relieve the financial pressure.

Time to set the record straight. There were quite a few individuals who recognized and warned others of the “unthinkable,” the “improbable,” and the “unimaginable” in the U.S. and global financial systems. Bonner, Bookstaber, Buffett, Das, Faber, Grantham, Gross, Panzner, Paul, Prechter, Puplava, Roach, Rogers, Rosenberg, Roubini, Rubino, Schiff, Shiller, Schultz, Soros, Tice, Turk, Volcker, Wiedemer, Wiggin, are just a few names that come to mind.

Marginalized and ridiculed by the financial mainstream for such cognizance, I have a feeling history will be kind to these individuals…

Source:

“Inaction speaks to uncharted territory”
Gail MarksJarvis
Chicago Tribune, June 26, 2008

Top Credit Analysts Say Housing Decline Could Amount To $4 Trillion In Lost Capital

So far, credit crunch talk has revolved mainly around losses in the billions of dollars. No more. Reuters’ Walden Siew wrote today:

No one knows when the credit crisis will end.

But when it does, U.S home prices may have lost a third of their value, high-yield bond valuations will hit levels close to those seen during the last recession, and what may amount to $1 trillion of Wall Street losses may translate into almost $4 trillion of lost access to capital.

That’s the view of top credit analysts, who say a U.S. housing decline, sparked last year by subprime mortgage debt defaults, will likely last another two years as a wider group of consumers, including prime borrowers, feel the pinch from a tightening of credit.

Siew interviewed Peter Acciavatti, a credit analyst and managing director at JP Morgan Securities Inc. The analyst informed him that:

• Wall Street write-downs and losses totaling at least $325 billion to date may ultimately mean $3.9 trillion in tighter credit conditions
• U.S. home prices may keep on falling until 2010, declining as much as 30% from their 2006 peak
• Further drops in subprime mortgage debt markets are expected
• High-yield corporate bond default rates, now at 0.75% from 0.34% at the beginning of 2008, may climb to 2.25% later this year and jump to 6.5% in 2009

Glenn Costello, a Fitch Ratings managing director, also said that there will be more defaults and delinquencies for U.S. home mortgages, with the highest default rates coming from mortgages originating in the last few years. The senior analyst warned:

There are a lot more mortgage defaults to come. We see an ongoing high level of default.

Source:

“Home price drop means $4 trillion in lost capital”
Walden Siew
Reuters, June 11, 2008

Write Downs, Credit Losses Approach $400 Billion Mark

From Bloomberg yesterday:

The biggest banks and securities firms have booked about $387 billion of writedowns and credit losses since the beginning of last year, as the collapse of the U.S. housing market led to losses on securities tied to the value of home prices.

Source:

“Wachovia’s Thompson Joins Prince, O’Neal Toppled by Subprime”
Peter Robison
Bloomberg, June 3, 2008

World’s Leading Banks React To Write-Down Pain

Rules. We’re all taught to follow them at a young age. You know how to spot someone who has real authority and influence? No, it’s not those chumps who break the rules. Rather, it’s those who change the rules of the game to fit their needs. And that’s what we are witnessing with the world’s leading banks as they confront escalating write-downs stemming from the ongoing housing and credit crisis. Earlier today I came across a post by Elizabeth MacDonald from FOXBusiness. In “Emac’s Stock Watch,” MacDonald wrote:

The world’s leading banks are demanding stock market and accounting regulators relax controversial accounting rules in order to stop the “downward spiral” of huge writedowns during the credit and housing crisis, $335b and counting…

The FT says the Institute of International Finance, an alliance of 300-plus companies chaired by Josef Ackermann, Deutsche Bank’s chairman, is promoting a plan that would let financial companies soften the blow of financial crises by valuing illiquid assets using historical, rather than market, prices.

The IIF says: “The writedowns required under current interpretations [of the accounting rules] may be substantially in excess of any actual or reasonably probable loss on many instruments.”

From what I understand, the issue here is the benchmark, the ABX market index, which might not accurately depict the values for bonds backed by subprime mortgages, as it’s a “thinly traded” index that is barely two years old, according to MacDonald. She explained:

The ABX is a synthetic credit derivative index, or a basket of credit default swaps that are basically high-priced gambling bets on where investors think the direction of the underlying bonds backed by subprime mortgages are headed.

I know this is complicated, but bear with me, it’s important. The swaps in the ABX are basically bets on the prices of the 20 supposedly most liquid (not saying much) subprime mortgage-backed bond deals. It’s an understatement to say booking prices based on this index is accounting that is more art than science…

Can an index based on values for just 20 bond deals legitimately be used for an asset class approaching $1.3tn in size? An index that historically undervalues the cash bonds it purportedly represents? An index noted for its negative sentiment and one that is routinely used by short sellers to attack these securities?

Okay, fair enough. So a new benchmark is needed (easier said than done, I’m guessing). Still, that’s not a good reason for permitting the valuation of illiquid assets using historical, rather than market, prices. But, as MacDonald said, “The bankers want the moon here.” Case in point:

The IIF plan would also let banks decide whether to hold asset-backed securities for as long as they want, freed from accounting rules that would force the banks to hold them to maturity. Instead, they would be able to book these securities on the balance sheet without taking the hit to profits, and then sell them after two years.

I’m not too surprised the banking industry wants to change the rules of the game. As Mayer Amschel Bauer Rothschild, founder of the Rothschild banking empire, once said:

Give me control of a nation’s money and I care not who makes its laws.

Source:

“Bankers Cry Uncle”
Elizabeth MacDonald
FOXBusiness, May 22, 2008

‘Enormous Losses’ At U.S. And European Banks Still Not Recognized

$329.2 billion. That’s what financial institutions worldwide have recorded in credit losses and write-downs since the beginning of 2007. And Carlyle Group Chairman David Rubenstein is saying that banks and financial institutions in the United States and Europe still have “enormous losses” from bad loans they haven’t yet recognized, according to Bloomberg’s Alison Fitzgerald and Ryan J. Donmoyer earlier today. At a meeting of the Institute for Education Public Policy Roundtable in Washington, Rubenstein said that it will take at least a year before all losses are accounted for, and some financial institutions may fail.

A domestic policy advisor to President Jimmy Carter, Rubenstein said that sovereign wealth funds may not ride to the rescue of problem institutions this time around. He explained that the funds are more cautious these days after losing $25 billion on their investments in struggling banks and securities firms worldwide. Rubenstein noted that of the $60 billion of capital provided by sovereign funds to financial institutions last fall, these investments are now only worth around $35 billion.

Source:

“Rubenstein Says ‘Enormous’ Bank Losses Unrecognized (Update2)”
Alison Fitzgerald, Ryan J. Donmoyer
Bloomberg, May 13, 2008

New Forecast: $1 Trillion In Losses From Credit Turmoil

According to Bloomberg today, former World Bank President James Wolfensohn is predicting that losses from the global credit turmoil may climb to $1 trillion. Wolfesohn, who was the head of the Word Bank from 1995 to 2005, said after addressing the European Pensions and Savings Summit:

“It does seem to be a major adjustment on any level. There may be a $1,000 billion worth of losses in it somewhere.”

He added that he “cannot recall anything similar, certainly in the last 30 to 40 years that I’ve worked.”

Bloomberg’s Brian Swint wrote:

The International Monetary Fund predicts that losses from the crisis, including those tied to commercial real-estate, may total $945 billion and says global economic expansion may be the slowest since 2003 this year. Wolfensohn said the fund’s loss forecast of about $1 trillion is now a “consensus estimate.”

Data compiled by Bloomberg as of this morning shows the world’s biggest banks and securities firms have so far reported credit losses and writedowns of about $310 billion linked to the U.S. subprime meltdown.

Now an advisor to Citigroup, Wolfensohn concluded:

I’d have to say in my working experience, this is a different sort of crisis, largely because of the extent of the overhangs in financial markets. I don’t think in my working lifetime, I’ve seen challenges to the major institutions in terms of writedowns and impact on market capitalization.”

Source:

“Wolfensohn ‘Pessimistic’ as Financial Losses Rise (Update1)”
Brian Swint
Bloomberg, April 28, 2008