Federal Reserve losing control

[11:11]

These showed the benchmark FTSE 100 closing up on Wednesday, even though it was sharply down for most of the day.


WOW

[11:11]

Just saw this site recommended. Looks good.

http://www.leap2020.eu/GEAB-N-18-is-ava ... _a999.html

[DoYouEverWonder]

Antiaristo...sup with silver? Do you watch metals?

I have been watching silver sleep like a bear through this gold bug bull market, suddenly...."POP"...silver woke up big time...whats up with it? You know? I just checked the silver charts, and the options chain, and "somebody" has suddenly piled themselves into some damn silver.

Maybe the Hunt Brothers are back in Business?

http://query.nytimes.com/gst/fullpage.h ... A96E948260

[vigilant]

antiaristo, got any idea how much this sort of activity might cushion the fiasco?


Subprime bailouts: Chump check
Monday November 5, 1:22 pm ET

By Les Christie, CNNMoney.com staff writer

Not everyone is happy about mortgage lenders' latest efforts to help troubled borrowers.

Take Teresa Nelson. Instead of going for an adjustable rate mortgage with its lure of low initial rates, she opted for the security of a 30-year fixed at 7.10 percent for a house she bought in Pinellas Park, Fla. in December, 2005.

"I was well aware of what an ARM meant, and was staying far away from those snake-oil pipe-dream promises," Nelson said. "I also wasn't shopping for a short-term, big payoff investment - I was looking for my home, until I retire."

But many delinquent subprime borrowers who went for low teaser rates that shot up to unaffordable levels are now paying lower rates than Nelson as part of a new round of foreclosure prevention packages. And she doesn't like it.

For example, one subprime borrower had a riskier hybrid adjustable rate mortgage (ARM) with a rate of just under 7 percent that was going to reset in December to 10.5 percent. But last month, as part of a new bailout plan from Countrywide Financial, the lender gave him a rate reduction to 5 percent on his loan, saving him hundreds of dollars a month.
Continued...
http://biz.yahoo.com/cnnm/071105/110107 ... ;.pf=loans

[DoYouEverWonder]

Anyone with a fixed rate should also be offered the same deal. I would love for them to turn my 6.25 fixed, into a 5.0

[smiths]

For years Americans have been told that they all benefit from trade with poorer countries - yet many now find they are worse off.

Last February, before the flurry of news stories about unsafe imports, a New York Times/CBS poll [PDF] found that 51% of respondents agreed the US had "lost more than it gained from globalisation." Further, while trade is not supposed to create political problems for Republicans, a recent Wall Street Journal poll of Republican supporters found that that 59% agreed that "foreign trade has been bad for the US".

Chapter one of the trade textbook was essentially written by David Ricardo, and it does indeed teach that trade, on the basis of comparative advantage, typically boosts a nation's average income.
Sadly, both for American workers and the quality of the trade debate, the textbook has other chapters. One of them explains the Stolper-Samuelson Theorem (SST), which points out that when the US exports insurance services and aircraft while importing apparel and electronics, we are implicitly selling capital - physical and human - for labour. This exchange bids up capital's price (profits and high-end salaries) and bids down wages for the broad working and middle-class, leading to rising inequality and downward wage pressure for many Americans.

...In the early 1990s a flurry of studies, driven by the Nafta debate over US trade with Mexico, examined the links between trade, wages, and inequality. Updating a standard method from that earlier debate with 2006 data shows that trade has increased wages for those with a 4-year university degree by around three per cent and lowered wages for all other workers by about four per cent.

...The best antidotes to trade's pulling apart of incomes are grounded in solidarity: social insurance and enhanced bargaining power. Universal healthcare and pensions, for example, would provide the economic security today's jobs increasingly lack. Globalisation has also sapped workers' ability to bargaining for their fair share of growth, underscoring the need to reform labour laws and meet the growing desire of Americans to join unions.

http://commentisfree.guardian.co.uk/jar ... ation.html

[yablonsky]

hey Pazdispenser:

you are of course correct that my noting that Dr. Bookstaber is jewish is entirely irrelevant. perhaps i could have noted that Mr. Taleb is Lebanese - also completely non-germane to the post or thread.

anyhoo, Dr. Bookstaber also has a blog:

http://rick.bookstaber.com/

as you can see in the photo there he is also bald.

a .pdf of ch. 1

yes, taleb and bookstaber were/are both quants; i highly admire the intelligence of both men. the culture they come from (wall street) of course leave much to be desired.

[vigilant]

November 8, 2007

Fed Chairman Says Economy Likely to Slow

By EDMUND L. ANDREWS

WASHINGTON, Nov. 8 — Ben S. Bernanke, chairman of the Federal Reserve, told Congress today that the economy is going to get worse before it gets better, a message that got a chilly reception from both Wall Street and politicians.

On a day when stock prices swung wildly, the dollar hit another new low against the euro and further signs emerged that consumers are growing more cautious about spending, Mr. Bernanke warned that the economy is about to “slow noticeably” as the housing market continues to spiral downward and financial institutions tighten up on lending.

But in a disappointment to investors, Mr. Bernanke offered no signal that the central bank might soften the blow by lowering interest rates for a third time this year at its next policy meeting on Dec. 11.

Stock prices, which had plunged Wednesday, went on a roller-coaster ride after Mr. Bernanke testified. The Dow Jones industrial average first fell 205 points by mid-afternoon, but then clawed back most of the way and ended the day at 13,266.29, down just 33 points.

Testifying before the Joint Economic Committee, the Fed chairman said that the two rate cuts in September and October “should” be enough to keep the economy from slipping into a recession. Without being specific, he reinforced statements by other Fed policymakers that the economy would have to show signs of stalling out entirely before they would reduce rates again.

Asked if he saw any risks of a recession, Mr. Bernanke demurred. “We have not calculated the probability of a recession,” he responded. “Our assessment is for slower growth, but positive.”

The Fed chairman’s stance was similar to that of Treasury Secretary Henry M. Paulson Jr. At a meeting today with editors and reporters of The New York Times, Mr. Paulson predicted that the crisis in the mortgage and credit markets would hurt growth but not lead to a recession.

"I believe we will continue to grow,” Mr. Paulson said. "We have a diversified economy."

Mr. Bernanke’s message did not sit well. Wall Street analysts quickly criticized him for ignoring the real risk of a serious downturn. And at least one Republican, Senator Sam Brownback of Kansas, begged him at length to cut interest rates as soon as possible.

But Fed officials are far from persuaded of the need for another rate cut, even though some now expect economic growth to slow to an annual pace of 1.5 percent or less in the final months of this year — a dramatic downshift from the rapid pace of almost 4 percent this summer.

Mr. Bernanke offered a rocky outlook for the months ahead. He said that the battered housing market had yet to hit bottom, that delinquencies and foreclosures were likely to rise and that the downturn in home building was “likely to intensify.” He predicted that personal spending would advance more slowly, because consumers are less confident and because of tighter credit conditions.

On top of all that, he said, “further sharp increases in crude oil prices have put renewed upward pressure on inflation and may impose further restraint on economic activity.” Oil traded above $95 a barrel today, but the price was down slightly from the day before but still near its recent record highs.
Despite all these worrying signs, Mr. Bernanke noted that the economic data since the Fed reduced short-term interest rates last week “continued to suggest that the overall economy remained resilient in recent months.”

“The cumulative easing of policy over the past two months should help forestall some of the adverse effects on the broader economy,” he said.

Wall Street analysts and anxious investors took little comfort in the chairman’s remarks.

“Mr. Bernanke gave no ground to the market’s desire for further easing,” wrote Ian Shepherdson, chief United States economist at High Frequency Economics in Valhalla, N.Y.

But Mr. Shepherdson and a number of other analysts predicted that the economy would slow much more than Mr. Bernanke expects and force the Fed’s hand.

Paul Ashworth, an economist at Capital Economics in London, predicted that the economy will be “stagnant at best” in the final quarter of this year.

“The only question is whether there is enough evidence of this slowdown available by mid-December — or whether we will have to wait until January for the next cut,” Mr. Ashworth wrote in a research note.

David Rosenberg, chief United States economist at Merrill Lynch, predicted that the housing market would not hit bottom by the end of next year. Noting that the Fed chairman said he would “act as needed,” Mr. Rosenberg said Mr. Bernanke had left the door open to more rate cuts.

At the hearing, Senator Charles E. Schumer of New York, chairman of the Joint Economic Committee, urged Mr. Bernanke to act more aggressively to stimulate the economy. “I’m very concerned that there may be a bigger storm on the horizon,” he said.

But Mr. Bernanke refused to budge. Indeed, he referred first to the Fed’s attention to “price stability” and second to its interest in “sustainable growth.”

That did little to cheer lawmakers. In an early sign of the political pressure that the Fed is likely to face if the economy falters next year, Senator Brownback, who recently abandoned his Republican campaign for president, pleaded with Mr. Bernanke to cut interest rates in time for the Christmas shopping season.

“It seems to me that now is the time,” Mr. Brownback said. “When those gas prices get up to $3 a gallon, it seems to hit some sort of psychological point in consumer’s mind that ‘I have less to spend,’ and that’s a reality for them.”

[antiaristo]

CONSCIENCE OF A LIBERAL

Paul Krugman
NOVEMBER 8, 2007,  3:31 PM

Cartoon physics and the markets

I thought tomorrow’s column should be about the market turmoil — but I kept coming up blank on what to say, except “Eeeeekkkk!” So the column is about something else.

My general comment on the markets, however, is that financial markets obey the First Law of Cartoon Physics:

Any body suspended in space will remain in space until made aware of its situation.

Hence my discussion of a Wile E. Coyote moment for the dollar. But it’s not just the dollar: subprime-based securities seem to be having their own Wile E. Coyote moment. Everyone seems to have looked down, noticed that there’s nothing holding them up, and whoosh!

http://krugman.blogs.nytimes.com/2007/1 ... e-markets/

[antiaristo]

.

Barclays has been lying.
They are the bank that was shunned by others and had to go to the BoE.

Their losses are going to be HUGE.

Barclays denies $10bn rumour as shares slide

By Katherine Griffiths, City Correspondent
Last Updated: 3:57pm GMT 09/11/2007

Barclays has been forced to deny rumours sweeping the City that it faced a possible $10bn (£4.7bn) writedown after trading in its shares was earlier suspended.

The halt followed a 9pc slump in late morning trading and leaves the bank's shares down 20pc so far this week.

Barclays also rejected rumours that chief executive John Varley or Bob Diamond, who heads up Barclays Capital, were about to resign, or that it needed to raise money in an emergency rights issue.

Speculation Barclays has been hit by the treacherous markets of the past few months intensified this morning after it emerged that the bank had made a change to the upper ranks of Barclays Capital, its investment banking and trading arm.

Barclays has moved responsibility for credit trading from Grant Kvalheim to Jerry del Missier, a spokesman for the bank told Bloomberg.

Both are co-presidents of Barclays Capital and have been seen as the most likely replacements to Bob Diamond, who oversees Barclays investment banking and fund management operation and is also president of Barclays at a group level.

Despite several upbeat statements from Mr Diamond that Barclays Capital has been robust and profitable, there is suspicion in the market that the investment bank, which ranks as one of the biggest in the world, has been hit by the meltdown of America's subprime mortgages and problems in the global financial markets.

Mr del Missier is the head of trading for Barclays Capital. Due to the change in responsibilities, he adds credit trading to overseeing commodities and equities. Mr del Missier also has regional responsibility for Europe, the Middle East and Africa.

Mr Kvalheim will continue to be in charge of other investment banking roles and oversees America and Asia.

The change in responsibilities of the two - who are both from north America and based in London - happened in September.

Barclays did not comment.

Mr del Missier joined Barclays in June 1997 from Bankers Trust in London where he had been a senior managing director of derivatives. Mr Kvalheim joined Barclays Capital from Deutsche bank.

http://tinyurl.com/3xa7w5


See the problem?

"credit trading"

Translation: Credit Default Swaps (CDS)

highlighted earlier on this thread.

Here are the open market values




http://www.markit.com/cache/curves/278b ... 319e09.png

So called AAA derivatives are "worth" 71.33 cents on the dollar.

Because af the risk of CREDIT DEFAULT: that which is SWAPPED.

That's a DISASTER for these people.

They've been lying and hiding, and the disaster has got worse.

There is a new rule coming on 15 November that will FORCE these banks to mark to "observable inputs" like this index.

And there is real bad news to come out of Barclays.

[vigilant]

Ex-Wall Street Journal Editor: Dollar Collapse Will Cripple European Economy

Former Assistant Secretary of the Treasury says world economy could return to barter system

Friday, November 9, 2007



The father of Reagonomics and former Wall Street Journal editor Paul Craig Roberts has warned that the collapsing dollar will eventually cripple the European economy and may even return the world economy to a barter system as financial chaos ensues.

Roberts served as an Assistant Secretary of the Treasury in the Reagan Administration and is a former editor and columnist for the Wall Street Journal, Business Week, and Scripps Howard News Service.

Speaking on the Alex Jones Show yesterday, Roberts cautioned that "The loss in value of the dollar is becoming so rapid it's alarming....we've got unmanageable trade deficits, budget deficits, the economy is set for recession, the wars show no end."

Asked how bad the dollar crisis can get, Roberts responded, "It can get awfully bad - the trouble is where can they go?"
"If China removes the peg and all the surplus dollars drive up the value of the Chinese currency then given our dependence on China....it's going to drive the prices up here a tremendous amount and Americans don't have any discretionary income left," said Roberts.

"At some point the foreigners will stop financing our budget and trade deficits - then we're going to have a massive crisis the likes of which we've not experienced....if you're totally dependent on imports of manufactured goods and you can't pay for them, what do you do?" asked Roberts, explaining that the only recourse would be to print more money, pushing the dollar down even further.

Citing the fact that the dollar had lost more than 60 per cent of its value against the Euro since 2001, Roberts said that the flight from the dollar could eventually wreck the European economy because it would cripple their exports.

Asked how low the dollar could go, Roberts said that there was a limit because "There's simply so many dollars, there's not enough room in other currencies to absorb them - at some point the flight of investors from the dollar to the Euro will cause amazing troubles in Europe - they won't be able to export anything because the prices are driven up so high."

Roberts said investors will eventually desert the Euro as a safe haven from the dollar and the same process will cause a crisis in Britain as the pound is devalued due to exports being hit.

"Wages are being frozen, profit margins are shrinking, exports are down - so it's starting to impact on Europe," said Roberts.

Roberts warned that the potential destruction of the dollar as the world's reserve currency could eventually return us to a system of barter, completely altering the landscape of the economic structure as we know it.

[vigilant]

Soros Says U.S. Slowdown Bigger Than What Bernanke Sees

Investing and Trading Journal
Friday November 9, 2007

Billionaire investor George Soros, speaking at New York University on Tuesday, said that the coming U.S. slowdown will be far worse than the Federal Reserve Chairman Ben Bernanke expects.

“We have borrowed an awful lot of money and now the bill is coming to us”, Soros said, according to Reuters.

“I think we are definitely in for a slowdown that I think will be a bigger slowdown than Bernanke is seeing”, he added.

The Fed just cut rates by 25 basis points, hard on the heels of a surprisingly large mid-September cut of 50 basis points.

The moves are seen as an effort to stave off the effects of hundreds of billions in bank write-downs tied to subprime mortgages. The current estimate of the cost of those write-downs, including international banks, is $1 trillion, according to Pimco’s Bill Gross.

Soros joins a chorus of influential voices who predict that the economic contraction ahead will be worse than widely believed, among them investor Jim Rogers - with whom he ran the Quantum Fund in the 1970s, Warren Buffett and former Fed chief Alan Greenspan.

The U.S. economy is “on the verge of a very serious economic correction”, Soros said.

Soros also intimated that China is clearly the “winner” in terms of its financial relationship to the world’s largest economy, a point recently echoed by Rogers. But, Soros said, a correction in China would be due within a decade.

Separately, Greenspan said on Tuesday that home inventories have to come down drastically to assure stability in the United States.

“The critical issue on the whole subprime and by extension, the international financial system rests very narrowly on getting rid of probably 200,000 to 300,000 excess units in inventory”, Greenspan said in a videoconference to a Tokyo audience, from Washington, D.C

[antiaristo]

.

CDOs are black boxes created by the financial alchemists. They take various types of shit, mix them up, put them in a fancy package and sell them as "investment grade securities".

It's all lies, of course. But there is a pact on Wall Street. So long as nobody opens the box, they can all continue to pretend, and carry on trading.

This is what happens when you open the box.

S&P Says State Street CDO Liquidates; Ratings Slashed (Update1)
By Jody Shenn
Nov. 8 (Bloomberg) --

Standard & Poor's said a collateralized debt obligation managed by State Street Corp. began liquidating its assets, prompting the ratings firm to slice the investment vehicle's ratings as much as 18 levels.

The ratings on the most senior class of Carina CDO Ltd. were lowered to BB, two levels below investment grade, from AAA, while another AAA class was slashed 18 steps to CCC-. The chance of material losses to noteholders is high, New York-based S&P said.
Carina is the first CDO to begin unwinding after a slump in the credit worthiness of the underlying assets, S&P said. Thirteen others have informed S&P of an event of default, a precursor to liquidation. A widespread fire sale by CDOs, which package asset-backed securities and resell them in pieces, may further exacerbate declines in subprime-mortgage securities.

http://www.bloomberg.com/apps/news?pid= ... refer=news

State Street's name is mud on Wall Street. Purely because of the price discovery they have triggered. Wall Street's dirty secret is coming out.

All that "wealth" created by financial services never actually existed. They've opened the box - and Schroedinger's cat was never inside at all.

Do a google on State Street and find out how unpopular they are, even though this was not their decision.

[antiaristo]

.

This is the first direct consequence of the Carina liquidation at State Street. And the looming FAS 157.

The black boxes are being forced open.

The rating agencies know they are going to be found out lying. So there will now be a cascade of downgradings of "AAA" investment grade securities.

Monday, November 12, 2007

Fitch Downgrades $37.2 Billion of CDOs
From Dow Jones (no link yet): Fitch Downgrades $37.2B Of CDOs, Slashing AAAs to Junk

Fitch Ratings downgraded Monday the credit ratings of $37.2 billion of global collateralized debt obligations, with more than $14 billion worth of transactions falling from the highest-rated AAA perch to speculative-grade, or junk, status.
...
The rating agency said more than 60 CDO transactions are still on watch for potential downgrade, with a resolution due on or before Nov. 21.

On Monday, nearly $20 billion worth of transactions was cut from investment-grade to junk, said Kevin Kendra, managing director at Derivative Fitch.
From AAA to Junk in one fell swoop!
Posted by CalculatedRisk at 2:20 PM Comments (55) | Trackback Labels: CDO, Rating Agencies

http://calculatedrisk.blogspot.com/


What does this mean?
Here's a back of the envelope view.


TRUE investment grade debt is yielding say 6% pa.

The risk premium on "Junk" is say 1000 basis points.

These CDO things have a long maturity - about forty years. That means you can approximate capital values as the reciprocal of yield.

Thus AAA is "worth" 1.00/0.06 = 16.7

Thus Junk is "worth" 1.00/0.16 = 6.7

A "bond" that was worth $16.67 last week is now worth $6.67.

It has lost sixty percent of its value and now trades at forty cents on the dollar.

Now the truth is that it was ALWAYS Junk.
It's just that ALL the players agreed to go along with the lie. The market WANTED grade AAA paper, and it went along with the fiction that large packages of risky loans could be treated the same as sovereign debt.

And one way or another, the market put into its own pockets that fictional sixty cents on the dollar.

Remember those Wall Street excesses, of every description?

Everybody who was troubled by that behaviour was shouted down. "They earned it in the free market! They CREATE wealth and we should be grateful!"

Now the truth is coming out.

There's about $4T of this CDO stuff out there.

I'm sure you can do the calculations for yourselves.

[slow_dazzle]

There's about $4T of this CDO stuff out there.

I've been watching this for a while now and I knew a little about the impending economic implosion.

The CDO's are the really scary thing because of their volume and because, AFAIK, it's not entirely clear where they are in the market. Given the volume of the bad debt it's likely to be everywhere.

This is really bad news but most people don't realise just how bad it is...yet.