Federal Reserve losing control

[antiaristo]

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.

Yeah, s_d. Wall Street middle men have been playing both ends against each other.

A ton of this stuff is parked with "blue chip" players like pension funds and insurance companies. They are the equivalent of HIV positive. The small guys will end up paying on both ends.

People have called this "fraud". It's actually much worse than that. It's actually forgery.

Did you know that more people have been executed for forgery than for murder in England?

And there is more bad news for those holding CDO assets.

It turns out that all that financial engineering has completely fucked up the most basic principles of capitalism: ownership of private property.

Deutsche Bank Foreclosures Tossed Out of Ohio Federal Court - "They Own Nothing!"

2007-11-12

by Moe Bedard and Aaron Krowne

Judge Christopher A. Boyko of the Eastern Ohio United States District Court, on October 31, 2007 dismissed 14 Deutsche Bank-filed foreclosures in a ruling based on lack of standing for not owning/holding the mortgage loan at the time the lawsuits were filed.

Judge Boyko issued an order requiring the Plaintiffs in a number of pending foreclosure cases to file a copy of the executed Assignment demonstrating Plaintiff (Deutsche Bank) was the holder and owner of the Note and Mortgage as of the date the Complaint was filed, or the court would enter a dismissal.

The Court's amended General Order No. 2006-16 requires Plaintiff (Deutsche Bank) to submit an affidavit along with the complaint, which identifies Plaintiff as the original mortgage holder, or as an assignee, trustee or successor-interest.

Apparently Deutsche bank submitted several affidavits that claim that Deutsche was in fact the owner of the mortgage note, but none of these affidavits mention assignment or trust or successor interest.

Thus, the Judge ruled that in every instance, these submissions create a "conflict" and they "do not satisfy" the burden of demonstrating at the time of filing the complaint, that Deutsche Bank was in fact the "legal" note holder.

While the decision is great for homeowners in distress (due to providing a new escape hatch out of foreclosure), it is a big blow to the cause of sorting out the high-finance side of the mortgage mess.

Jacksonville Area Legal Aid Attorney, April Charney, broke this news to us via email and made these comments in regards to the Ohio Federal Court ruling (emphasis ours):

This court order is what I have been saying in my cases. This is rampant fraud on every court in America or nonjudicial foreclosure fraud where the securitized trusts are filing foreclosures when they never own/hold the mortgage loan at the commencement of the foreclosure.

That means that the loans are clearly in default at the time of any eventual transfer of the ownership of the mortgage loans to the trusts. This means that the loans are being held by the originating lenders after the alleged "sale" to the trust despite what it says per the pooling and servicing agreements and despite what the securities laws require.

This also means that many securitized trusts don't really, legally own these bad loans.

In my cases, many of the trusts try to argue equitable assignment that predates the filing of the foreclosure, but a securitized trust cannot take an equitable assignment of a mortgage loan. It also means that the securitized trusts own nothing.

So with this decision, it appears confirmed that investors in the mortgage debacle may in fact own nothing---not even the bad loans they funded! It seems their right to the cash flow from the underlying properties does not extend to ownership of the properties themselves; thus clouding the recovery picture considerably.

Charney further remarked to us:

This opinion, once circulated and adopted by state and Federal courts across the country, will stop the progress of foreclosures, at first in judicial foreclosure states, across America, dead in their tracks.

We agree with additional remarks Charney made pointing out that this decision has major adverse implications for the prospects of an amicable financial workout for the various investor contingents in mortgage-backed securities (MBSes). Doubt is cast on where the full write-downs will eventually land, and this uncertainty can only be expected to further harm the market value of MBS and MBS-based synthetic securities, already in shambles purely due to rising underlying delinquencies. Investors in these securities might have assumed---wrongly, it turns out---that they actually owned some "real estate" in these deals.

To paraphrase Jim Cramer, "They own nothing!"

http://iamfacingforeclosure.com/article ... ko/01.html


4 Trillion of "nothing"!

You can thank Sir Bill Clinton for that.

It was him that removed FDR's protection for the little guy against the Wall Street predators.


And I, personally, warned his administration of what was coming seven and a half years ago.


http://rigorousintuition.ca/board/viewt ... 1668#81668

http://rigorousintuition.ca/board/viewt ... 1669#81669


Hillary 2008! Yay!

[antiaristo]

.

[ninakat]

A Nation on borrowed time

By Mike Whitney

11/12/07 "ICH" -- -- On Monday, Asian stock markets took another drubbing on fears that the credit squeeze which began in the United States would continue to worsen in the months ahead. Every index from Tokyo to Sidney fell sharply continuing the “self-reinforcing” vicious cycle of losses started last week on Wall Street. The Nikkei 225 average fell 3.3%, India’s Sensex dropped 2.9%, Taiwan tumbled 3.5%, and Hong Kong’s Hang Seng slumped a whopping 4.5%. The subprime tsunami is presently headed towards downtown Manhattan, where nervous traders are already hunkered-down in the trenches---ashen and wide-eyed-- awaiting the opening bell. Local supermarkets reported an unexpected early–morning run on Valium and Tylenol. Good thinking.

Amid the deluge of bad news over the weekend; one story towers above all the others. The yen gained 1.5% against the dollar. (9% year-over-year) That means that Wall Street’s biggest swindle, the carry trade, is finally unwinding. The over-levered hedge funds will now be forced to sell their positions quickly before the interest-rate window slams shut and they’re stuck with humongous bets they cannot cover. The faltering yen is the grease that lubricates the guillotine. $1 trillion in low interest loans--which keeps the trading whirring along in US markets--is about to get a haircut. Cheap Japanese credit is the hidden flywheel in Hedgistan’s main-cylinder. Once it is removed, the industry will seize-up and clank to a halt. Fund managers can forget about the vacation rental in the Hamptons. It’ll be sloppy Joes and Schlitz Malt-liquor on Coney Island from here on out.

It’s easy to feel self-righteous when things turn out the way we anticipate. The markets deliver a type of impartial justice that we no longer expect from the courts or the government. When fundamentals are breached for too long, the market’s “terrible swift sword” quickly descends leaving the offending party in a pool of his own blood. Then, progressively, market-balance is restored.

Over the weekend Deutsche Bank announced that losses from “securitized” subprime mortgages were likely to reach $400 billion. The news sparked a sell-off in the Asian markets where investors have become increasingly eager to pare down their holdings of US equities and dollar-backed assets. Overnight, the greenback has become the leper at the birthday party; everyone is steering clear for fear of contagion. Foreign central banks are looking for any opportunity to dump their stockpiles of dollars in a manner that doesn’t disrupt their economies or the global financial system. Their intentions may be prudent—even honorable—but it won’t forestall the inevitable blow-off of USDs that is likely to commence as soon as the financial giants reveal the real size of their losses. New regulations have been put in place that will require the banks to provide “market prices” for their assets. This will expose the degree to which they are under-capitalized. When word gets out that the banking system is underwater; there’ll be a run on the dollar.

On Sunday, the AFP reported that the Group of Seven richest nations (G7) is considering direct “intervention” in the dollar’s decline to prevent a “disorderly correction”.

“It is not too early contemplating the risk of coordinated interventions by the G7," said Stephen Jen and Charles St-Arnaud of investment bank Morgan Stanley. "History shows that multilateral, coordinated interventions have been key in establishing turning points in multi-year trends in major currencies in the past three decades.”

So now, the ailing greenback is being offered crutches just to keep it from tipping over? How pathetic is that?

On Thursday, Treasury Secretary Hank Paulson reiterated the same tired mantra, “A strong dollar is in our nation’s interest and should be based on economic fundamentals.”

Paulson needs to retire. He’s simply not up to the task. The problems facing the markets, the dollar and global economy will take more than his bland fabrications to resolve.

According to Bloomberg News: “More than $350 billion of collateralized debt obligations comprising asset-backed securities may become ‘distressed’ because of credit rating downgrades.”

What’s clear is that the situation is getting worse, not better. Honesty must at least be considered as one of many options, although the Treasury Dept avoids that choice like the plague. Eventually, the public will have to be told about what is going on or there could be social turmoil. Is that what Bush and Paulson want; more mayhem?

Last week, the Financial Times reported: “In recent days, investors have been presented with a stream of high-profile signs that sentiment in the financial world is deteriorating. However, deep in one esoteric corner of finance, another, little-known set of numbers is provoking growing concern. So-called correlation - a concept that shows how slices of complex pools of credit derivatives trade relative to each other - has been moving in unusual ways… ‘What we are seeing in the synthetic [derivative] markets is that there is a serious fear of systemic risk,’ says Michael Hampden-Turner, credit strategist at Citigroup. ‘This is not just about price correlation within the collateralized debt obligation market, but about a potential rise in default correlation and asset correlation.’ …Until recently, traders often tended to assume that there was relatively little correlation between different chunks of debt, because they thought that the biggest risk to the world was idiosyncratic in nature - meaning that while one company, say, might suddenly default, it was unlikely that numerous companies would default at the same time. However, some regulators have been warning for some time that in times of stress correlation does not always behave as traders might expect.”

The multi-trillion dollar derivatives industry—which has never been tested in down-market conditions---is now moving sideways. No one really knows what this means except that the most-opaque and volatile debt-instruments are now threatening to unravel triggering a cascade of unanticipated defaults and a colossal loss of market capitalization. Credit default swaps (CDS) are rarely thrashed out in market commentary. They are counterparty options which provide hedging against the prospect of default. They are, in fact, a financial Sirocco which is steadily gathering strength as foreclosures mount and mortgage-backed bonds continue to implode. As the Financial Times suggests, the gale-force gusts from this monster should be sweeping through the Wall Street trading pits in the very near future knocking down everything in its path.

There’re also new developments on the sale of “marked to model” CDOs—the red-haired stepchild of the new structured finance paradigm. “The trustee of a $1.5 billion collateralized debt obligation managed by State Street Global Advisors has started selling assets, apparently starting a process of liquidation,” Standard and Poor’s said. The sale is a red flag for the other holders of $1.5 trillion of CDOs who’ve been waiting for market conditions to change before they try to sell their mortgage-backed bonds. The liquidation will assign a “market price” to these complex structured investment vehicles. If the price at auction is mere pennies on the dollar, then the banks, pension funds, and insurance companies will have to write down their losses or add to their reserves to cover their weakening assets. Simply put, the State Street sale could turn out to be doomsday for a number of under-capitalized investment banks. Their revenues are already down; this would be the last wooden stake to the heart.

Finally, Greg Noland, at Prudent Bear.com reports on the “looming disaster” at Fannie Mae where, the best-known Government Sponsored Entity (GSE) has entered into the current housing slump with a “Book of Business of mortgages, MBS and other credit guarantees of $2.7 trillion” which is backed by a measly “$39.9 billion of Shareholder’s Equity”.

That’s all?!?

As Noland opines, “A devastating housing bust will bankrupt the mortgage insurers, while the solvency of their derivatives counterparties going forward will be in doubt in any number of scenarios. The GSEs are now integrally linked to what I expect to be Credit insurance’s and "structured finance's" astonishing downfall.”

Amen.

For now, the stock market may slip the noose, but tomorrow could be different. The subprime orgy of endless credit expansion, speculative frenzy and murky accounting wizardry has generated a system-wide crisis. The financial apparatus has thrown a rod and is in dire need of repair. At the same time, the big-hand continues to edge ever-closer to midnight. We’re on borrowed time. The dollar is flagging, the banks are floundering, the consumer is upside-down, and Greenspan’s trillion-dollar “easy-credit” dirigible is crashing to earth.

The only thing looking up is oil futures. And they’ll be denominated in euros soon enough.

[slimmouse]

All the above said, today the Dow makes a 300 point surge

Plunge Protection anyone ?

[ninakat]

All the above said, today the Dow makes a 300 point surge

Plunge Protection anyone ?

Probably, amongst other behind-the-scene maneuvers. But, like the title of this thread indicates, the Fed can only control so much, given how many chickens are coming home to roost now.

And, notice that for every "surge" upwards on Wall Street, there have been more drops. Things are incredibly volatile but, in general, it's going down.... only a matter of time. Just hang in there. It's only a ride, afterall (with a nod to Bill Hicks).

[Pazdispenser]

In 1922, the Frankfurter Zeitung index of dividend paying stocks went up more than ten times (in marks). In dollar terms, the Zeitung went down 60%.

[antiaristo]

.

Hey, the mainstream is catching up.

Foreclosures Hit a Snag for Lenders

By GRETCHEN MORGENSON
Published: November 15, 2007

A federal judge in Ohio has ruled against a longstanding foreclosure practice, potentially creating an obstacle for lenders trying to reclaim properties from troubled borrowers and raising questions about the legal standing of investors in mortgage securities pools.

Judge Christopher A. Boyko of Federal District Court in Cleveland dismissed 14 foreclosure cases brought on behalf of mortgage investors, ruling that they had failed to prove that they owned the properties they were trying to seize.

The pooling of home loans into securities has been practiced for decades and helped propel real estate prices in recent years as investors sought the higher yields that such mortgage trusts could provide. Some $6.5 trillion of securitized mortgage debt was outstanding at the end of 2006.

But as foreclosures have surged, the complex structure and disparate ownership of mortgage securities have made it harder for borrowers to work out troubled loans, in part because they cannot identify who holds the mortgage notes, consumer advocates say.

Now, the Ohio ruling indicates that the intricacies of the mortgage pools are starting to create problems for lenders as well. Lawyers for troubled homeowners are expected to seize upon the district judge’s opinion as a way to impede foreclosures across the country or force investors to settle with homeowners. And it may encourage judges in other courts to demand more documentation of ownership from lenders trying to foreclose.

The ruling was issued Oct. 31 by Judge Boyko, and relates to 14 foreclosure cases brought by Deutsche Bank National Trust Company. The bank is trustee for securitization pools, issued as recently as June 2006, claiming to hold mortgages underlying the foreclosed properties.

On Oct. 10, Judge Boyko, 53, ordered the lenders’ representative to file copies of loan assignments showing that the lender was indeed the owner of the note and mortgage on each property when the foreclosure was filed. But lawyers for Deutsche Bank supplied documents showing only an intent to convey the rights in the mortgages rather than proof of ownership as of the foreclosure date.

Saying that Deutsche Bank’s arguments of legal standing fell woefully short, the judge wrote: “The institutions seem to adopt the attitude that since they have been doing this for so long, unchallenged, this practice equates with legal compliance. Finally put to the test, their weak legal arguments compel the court to stop them at the gate.”

A spokesman for Deutsche Bank declined to comment on the ruling. But the inability of Deutsche Bank, as trustee for the pools, to produce proof of ownership at the time of the foreclosures will fuel borrowers’ concerns that they are being forced out of their homes by entities that may not even hold the underlying loans.

“This is the miracle of not having securities mapped to the underlying loans,” said Josh Rosner, a specialist in mortgage securities at Graham-Fisher, an independent research firm in New York. “There is no industry repository for mortgage loans. I have heard of instances where the same loan is in two or three pools.”

The process of putting together a mortgage pool begins when a home loan is originated by a bank or mortgage lender. That loan is typically sold to a Wall Street firm that pools it with thousands of others. Once a pool is packaged, it is sold to investors in different slices, based on risk. A trustee bank oversees the pool’s operations, ensuring that payments made by borrowers go to the appropriate investors.

Lawyers who represent troubled borrowers complain that trustees overseeing home loan pools often do not produce proof, usually in the form of a mortgage note, that their investors own a foreclosed property. And a recent study of 1,733 foreclosures by Katherine M. Porter, an associate professor of law at the University of Iowa, found that 40 percent of the creditors foreclosing on borrowers did not show proof of ownership. Such proof gives a creditor standing to foreclose against a borrower and is required by law.

“The big issue in all these cases, whether we are dealing with a bankruptcy court, a state court or a federal court, is who really owns the mortgage note, and that is allegedly what they securitized,” said O. Max Gardner III, a lawyer who represents borrowers in foreclosure in Shelby, N.C. “A collateral question is, has that mortgage note really been transferred and assigned to the securitization trust? If not, then they really don’t have standing. It’s Law School 101.”

When a loan goes into a securitization, the mortgage note is not sent to the trust. Instead it shows up as a data transfer with the physical note being kept at a separate document repository company. Such practices keep the process fast and cheap.

Because most foreclosures proceed without challenges from borrowers, few judges have forced trustees like Deutsche Bank and Bank of New York to prove ownership by producing a mortgage note in each case.

Borrower advocates cheered Judge Boyko’s ruling.

The plaintiff’s argument that “‘Judge, you just don’t understand how things work,’” the judge wrote, “reveals a condescending mindset and quasi-monopolistic system where financial institutions have traditionally controlled, and still control, the foreclosure process.” The cases could be filed again in state court, however.

April Charney, a consumer lawyer at Jacksonville Area Legal Aid in Florida, who has been practicing foreclosure law since the late 1980s, said she rarely sees proof of ownership in cases involving securitization trusts. Her group has 30 to 50 such cases and not one of the lenders’ representatives has produced proof of ownership predating the foreclosure action.

“We see a trend toward judges having enough of this trampling of the rules and procedure and care and reverence with which lawyers and litigants and participants in the judicial process should comply,” Ms. Charney said. “Hopefully this will convince everybody that the time to work out these home loans is now.”

(New York Times)
http://tinyurl.com/23guv7

Some people are saying this is simply a paperwork issue. That MAY be true, but I'm not so sure.

There may be a more metaphysical issue at base.

The relationship between the mortgages and the security tranches is a statistical relationship: it is stochastic, not deterministic.

That's why we have been hearing things like "a six sigma event". "Sigma" is the symbol for standard deviation.

Now that probably makes some sort of sense for cash payments. A Dollar is a Dollar, wherever it comes from. It is a commodity that can be quantified, divided and shared amongst the security holders on a statistical basis.

But does it make sense for the physical properties that are the underlying "collateral" for the collateralised debt obligation? Each is unique, and must be treated deterministically.

But CDOs disperse the right to foreclose amongst the security holders such that, perhaps, none has standing to foreclose. You cannot subdivide that right!

Now if that sounds incredible, hold on, because it fits the data.

The ratings agency models have all been based on one assumption: that house prices CANNOT FALL. For example Fitch admitted that their model "starts to break down" if prices stagnate. If prices actually fall for a period of some years the model "breaks down completely".

So THERE you have their definition of a AAA investment grade security: one that is safe SO LONG AS THINGS GO WELL!

It's fucking ridiculous. But I digress.

The point I am making is that these things have been set up without a thought for what happens if prices fall and foreclosures become necessary. The ONLY thought has been about divvying up the cash that flows in from performing mortgages.

So this may be ANOTHER fatal flaw inherent in this whole concept of securitised mortgages.

If that is the case this will trigger an unwinding of the securities. The senior trancheholders will want to get their money back before the whole thing collapses in a heap.

Like I say, that money never existed, and something like $4T of securities are going to take a haircut amounting to forty to fifty percent.

It's ELEVEN TIMES the size of the S&L scandal.

[Sweejak]

I haven't read the thread, hope this is relevant:

via email:

Dear Liberty Dollar Supporters:

I sincerely regret to inform you that about 8:00 this morning a dozen FBI and Secret Service agents raided the Liberty Dollar office in Evansville.

For approximately six hours they took all the gold, all the silver, all the platinum and almost two tons of Ron Paul Dollars that where just delivered last Friday. They also took all the files, all the computers and froze our bank accounts.

We have no money. We have no products. We have no records to even know what was ordered or what you are owed. We have nothing but the will to push forward and overcome this massive assault on our liberty and our right to have real money as defined by the US Constitution. We should not to be defrauded by the fake government money.

But to make matters worse, all the gold and silver that backs up the paper certificates and digital currency held in the vault at Sunshine Mint has also been confiscated. Even the dies for mint the Gold and Silver Libertys have been taken.

This in spite of the fact that Edmond C. Moy, the Director of the Mint, acknowledged in a letter to a US Senator that the paper certificates did not violate Section 486 and were not illegal. But the FBI and Services took all the paper currency too.

The possibility of such action was the reason the Liberty Dollar was designed so that the vast majority of the money was in specie form and in the people’s hands. Of the $20 million Liberty Dollars, only about a million is in paper or digital form.

I regret that if you are due an order. It may be some time until it will be filled... if ever... it now all depends on our actions.

Everyone who has an unfulfilled order or has digital or paper currency should band together for a class action suit and demand redemption. We cannot allow the government to steal our money! Please don’t let this happen!!! Many of you read the articles quoting the government and Federal Reserve officials that the Liberty Dollar was legal. You did nothing wrong. You are legally entitled to your property. Let us use this terrible act to band together and further our goal – to return America to a value based currency.

Please forward this important Alert... so everyone who possess or use the Liberty Dollar is aware of the situation.

Please click HERE to sign up for the class action lawsuit and get your property back!

If the above link does not work you can access the page by copying the following into your web browser. http://www.libertydollar.org/classaction/index.php

Thanks again for your support at this darkest time as the damn government and their dollar sinks to a new low.

Bernard von NotHaus

Monetary Architect

[antiaristo]

.

Oh it certainly is, Sweejak.
It demonstrates nicely that force majeur is all that matters.

Here's another group that have learned the lesson.

First, from the Financial Times:

Investors in London have successfully wrested control of one of the collapsed Bear Stearns hedge funds from its previous management and directors as a first step towards seeking recovery of some of their losses...

“Today’s shareholder victory is an important first step in bringing objective review and transparency to these crashed CDO funds,” said Constantine Karides, a lawyer with Reed Smith, which represents investors in the funds.

The fund’s previous management and board will be replaced by FTI Capital Advisors, forensic accountants who seek evidence of mismanagement that could be used for lawsuits.

Jacob Zamansky, a lawyer who negotiated an early settlement from Merrill Lynch in a scandal over skewed investment bank research, said the move could also assist some investors’ pursuit of arbitration.

Mr Zamansky has filed for arbitration in the US on behalf of a group of domestic investors and expects to file similar claims in London.

An element of the claim is alleged improper trading and conflicts of interest by the bank, buttressed on Wednesday by a lawsuit from the lead securities regulator for the state of Massachusetts making the same allegations.

http://www.nakedcapitalism.com/2007/11/ ... -bear.html


It's a very good read.

They're registered in the Cayman Islands, and their legal defence is that they are a "foreign company" due protection under s 15.

The judge said "eff off".

Now they've got the books.

[yablonsky]

http://bigpicture.typepad.com/

Here's something you may not have heard:

The surprise selection of NYSE CEO John Thain as Merrill's new CEO over the more widely expected BlackRock CEO Larry Fink was based on reasons you may not be aware of.

What are those reasons? Well, according to CNBC.com, Fink would only agree to take the position if Merrill was willing to give a full and complete accounting of it's subprime exposure:

"Merrill's selection of Thain was a surprise because the firm had recently indicated to BlackRock CEO Larry Fink that the job was his if he wanted it. CNBC has learned that Fink said he would take the job but only if Merrill did a full accounting of its subprime exposure. At that point, Merrill, which owns 49% of BlackRock , moved in a different direction and decided to go with Thain instead."

I obviously have no way to verify that, but I give the benefit of the doubt to CNBC reporters like Charlie Gasparino and Herb Greenberg. (UPDATE: I have just confirmed with Charlie Gasparino that he was the one who's fine investigative work uncovered this; You can see some of the discussion via CNBC video here, right margin, labeled "The New Bull at Merrill").

Note: I don't know who uncovered this.

If the story is true, and Fink passed on the position (or was passed over) because of his insistence on a complete sub-prime accounting, apparently not accommodated by Merrill, it makes one wonder what the old lady is hiding.

[antiaristo]

.

y,
what kind of right-minded person would invest their savings with Merril?

This is pretty long and probably for us geeks.
So here's the money quote:

"I now see the risk of a severe and worsening liquidity and credit crunch leading to a generalized meltdown of the financial system of a severity and magnitude like we have never observed before."

This guy is Professor of Economics at NYSU.
Unlike most of the pundits he's a dry academic.

Time to take this seriously in our own lives.

Nouriel Roubini's Global EconoMonitor

With the Recession Becoming Inevitable the Consensus Shifts Towards the Hard Landing View. And the Rising Risk of a Systemic Financial Meltdown

Nouriel Roubini | Nov 16, 2007

It is increasingly clear that by now that a severe U.S. recession is inevitable in next few months. Those of us who warned for the last 12 months about a combination of a worsening housing recession, a severe credit crunch and financial meltdown, high oil prices and a saving-less and debt-burdened consumers being on the ropes causing an economy-wide recession were repeatedly rebuffed the consensus view about a soft landing given the presumed resilience of the US consumer.

But the evidence is now building that an ugly recession is inevitable. Thus, the repeated statements by Fed officials that they may be done with cutting the Fed Funds rate are both hollow and utterly disingenuous. The Fed Funds rate will be down to 4% by January and below 3% by the end of 2008.

More revealing of the change in mood the financial press and some of the most prominent market analysts are coming to the realization that a recession is highly likely. The Economist has a cover story and long piece arguing that a US recession highly likely (and citing this author's work with Menegatti and our views on the inevitability of such a recession).

More importantly, on Wall Street some of the leading analysts that had been in the soft landing camp for the last year have now moved their forecast in the direction of hard landing. It is not just David Rosenberg of Merrill Lynch who has been informally in the hard landing camp and is now explicitly talking about a consumer recession. It is not just Jan Hatzius of Goldman Sachs who was always more bearish relative to the soft landing consensus and is today explicitly talking about a US recession and a credit crunch reducing lending by $2 trillion.

Even in soft landing houses such as Morgan Stanley and JP Morgan the tone is completely different now. At Morgan Stanley Steve Roach was the in-house bear while Richard Berner (a most sophisticated economist and analyst) was the in-house soft landing optimist. With Roach now gone to run Morgan Stanley Asia, the commentary by Richard Berner has become increasingly darker. And the latest Monday piece by Berner is titled “The Perfect Storm for the US Consumer” where his points on the headwind forces hitting the US consumer are completely overlapping with my analysis of such risks in my recent “The Coming US Consumption Slowdown that Will Trigger an Economy-Wide Hard Landing. Berner starts with

“Serious pressures are mounting on the US consumer on five fronts: Job growth is slowing, surging energy and food quotes are draining purchasing power, adjustable rate mortgages are resetting, lending standards are tightening, and housing wealth will likely decline. Do these dark clouds finally and ominously herald the perfect consumer storm?”
And he concludes with:



“Risks to the consumer are rising, and the risk of outright US recession is higher now than at any time in the past six years: Housing is in sharp decline, consumers are vulnerable, and companies may cut capital spending and liquidate inventories. A strong contribution from global growth is still a huge positive, but spillovers from US weakness to trading partners may hobble that lone source of strength. These pressures could last longer or be more intense than I expect. And even if the economy skirts overall recession, corporate earnings will likely decline.”

An even more persistently bullish bank was JP Morgan that kept on warning for the last year that the biggest risks to the US economy was not a growth slowdown but rather a growth pickup and the risk that inflation would surprise on the upside and force a behind-the-curve Fed to raise the Fed Funds rate above 6%. This analysis obviously proved wrong and now the very smart – but mistaken - Bruce Kasman has had to throw in the towel and accept that the downside risks to grow are sharp and that the Fed will cut the Fed Funds rate to 4%. As he put it in his latest note:

US outlook change: More drag, more ease -- Drags from energy, and credit tightening push GDP forecast to 1% on average for current and upcoming quarter -- Fed is likely to recognize growing downside risk and ease 50bp, to 4% by end of 1Q08 -- December meeting outcome remains close, but we now expect 25bp move from a proactive Fed As the US moves through the fourth quarter, incoming economic news remains consistent with our forecast of a growth “pot hole”. Powerful drags now in place — from tighter credit conditions and an intensified contraction in residential investment — are evident in the decline in output and employment in the goods producing industries and in a slowing in consumption spending…. …three developments over the past month look set to increase downward pressure on growth.

• Oil on the boil. Global crude oil prices rose more than $10 dollars during October, and has held at an elevated level this month. If current levels are maintained, it would represent a drag on annualized household income of approximately one percentage point between now and the end of the first quarter. This drag, which has yet to have been felt, adds to the forces weighing on consumer spending.

• Temporary lifts to fade. Although an upward revision to 3Q07 growth to close to 5% now looks likely, this outcome is partly borrowing from growth in the quarters ahead. Defense spending, which has grown at a 9% annualized pace in the past two quarters, is almost certainly due for a pause. And a significant upward revisions to inventory building in 3Q07, points to an adjustment ahead. Indeed, the latest rise in ISM customer inventory index, combined with auto production schedules pointing to cutbacks through year end, suggests that stockbuilding is likely to subtract from growth this quarter and next.

• Credit tightening broadens. Results of the Fed’s latest Senior Loan Officers Survey indicates that credit conditions are tightening broadly and that demand for credit is slowing. Most recently, credit conditions have tightened significantly for commercial construction projects with CMBS securitizations plunging over the past couple of months. While the quantitative effects of this tightening is hard to measure, credit conditions look set to remain tight for a longer period than anticipated in our current forecast.

Taken together, these developments warrant a downward revision to an already sluggish growth forecast for the coming quarters. The trajectory of GDP growth is being lowered by one half percentage point per quarter through the middle of 2008, with the path of consumption, stockbuilding, and nonresidential construction activity shouldering much of the burden. During this quarter and next, GDP growth is expected to be particularly soft, averaging a meager 1% percent. The underlying resiliency of the US corporate sector will be severely tested through a period in which profits are expected to contract. While we continue to believe that firms are unlikely to retrench in a manner that produces a recession, the risks of a recession remain uncomfortably high. We currently place the risk of a recession taking hold in the coming two quarters at 35%. The Federal Reserve has made it clear that it is willing to act preemptively in the face of elevated recession risks. Having moved 75bp in two meetings, its October statement signalled that it viewed the risks to growth and inflation as balanced — a message that the bar for further easing was high. Against this backdrop, the Fed will need to shift materially its perceptions of risks about the outlook in the direction of our forecast change to produce ease. We now believe such a shift will take place and produce 50bp of additional ease by the end of the 1Q08. "



When the most prominent and respected and sophisticated “soft-landing” analysts on Wall Street turn this bearish and start talking about high probability of a recession and downside risks to growth and of a consumer recession you know that these are code words for admitting implicitly – short of an official and explicit endorsement of such view that very few analysts of Wall Street can afford to have because of sell-side research constraints - that they believe that a recession is highly likely.

So at this point the debate is less and less on whether we are going to have a recession that looks inevitable; but it is rather moving towards a debate on how deep, protracted and severe such a recession will be. But the financial and real risks are much more severe than those of a mild recession.

I now see the risk of a severe and worsening liquidity and credit crunch leading to a generalized meltdown of the financial system of a severity and magnitude like we have never observed before. In this extreme scenario whose likelihood is increasing we could see a generalized run on some banks; and runs on a couple of weaker (non-bank) broker dealers that may go bankrupt with severe and systemic ripple effects on a mass of highly leveraged derivative instruments that will lead to a seizure of the derivatives markets (think of LTCM to the power of three); a collapse of the ABCP market and a disorderly collapse of the SIVs and conduits; massive losses on money market funds with a run on both those sponsored by banks and those not sponsored by banks (with the latter at even more severe risk as the recent effective bailout of the formers’ losses by theirs sponsoring banks is not available to those not being backed by banks); ever growing defaults and losses ($500 billion plus) in subprime, near prime and prime mortgages with severe known-on effect on the RMBS and CDOs market; massive losses in consumer credit (auto loans, credit cards); severe problems and losses in commercial real estate and related CMBS; the drying up of liquidity and credit in a variety of asset backed securities putting the entire model of securitization at risk; runs on hedge funds and other financial institutions that do not have access to the Fed’s lender of last resort support; a sharp increase in corporate defaults and credit spreads; and a massive process of re-intermediation into the banking system of activities that were until now altogether securitized.

When a year ago this author warned of the risk of a systemic banking and financial crisis – a combination of global liquidity and solvency/credit problems - like we had not seen in decades, these views were considered as far fetched. They are not that extreme any more today as Goldman Sachs is writing today on the risk o a contraction of credit of the staggering order of $2 trillion dollars in the next few years causing a severe credit crunch and a serious recession. As I will flesh out in a forthcoming note the risks of such a generalized systemic financial meltdown are now rising. Hopefully by now some folks at the New York Fed and at the Fed Board are starting to think about this most dangerous systemic financial crisis that could emerge in the next year and what to do to prepare for it.

http://www.rgemonitor.com/blog/roubini/227330


"Hopefully by now some folks at the New York Fed and at the Fed Board are starting to think about this most dangerous systemic financial crisis that could emerge in the next year and what to do to prepare for it."


Translation: If you leave it to the next administration it will be too late.

[antiaristo]

anti sez:

Some people are saying this is simply a paperwork issue. That MAY be true, but I'm not so sure.

There may be a more metaphysical issue at base.

Hmm. Things are moving that way.
Sorry for the legalese, but I THINK these people are saying the same thing:

True Sale, False Securitizations
November 16th, 2007 · 1 Comment

by Aaron Krowne and Moe Bedard

A story we broke this past Tuesday in regards to the Ohio Federal Court Deutsche Bank ruling has been getting a tremendous amount of attention, and probably rightfully so. It wasn’t long after we posted it here that dozens of bloggers and forums were circulating the news around cyberspace.

Calculated Risk’s Tanta did a total of three blog posts of follow-up (here is one, and another), largely intended to rebut our points, and Gretchen Morgenson did a great New York Times piece yesterday, bringing much more visibility to the issue. Even Nigel and the Haterz gave us credit where credit is due:

“It may be a Casey fantasy, but it is true in real life. I Am Facing Foreclosure broke a story that was respected enough and accurate enough to be stolen by the New York Times.”

Well, maybe not stolen… but apparently we were on the right track.

Tanta had numerous issues with our conclusions and apparently those of April Charney (who is actually an attorney on these sorts of cases, mind you). We wanted to reply to some of the those objections here. We don’t believe the issue is settled, and our lawyers aren’t budging.

But first, we want to establish that even Tanta seems to agree with us on one critical point: foreclosures are going to be more expensive for investors in mortgage-backed securities than they might have hoped. Perhaps much more expensive. While Deutsche Bank may have a chance to “get its ducks in a row” yet, since the foreclosures were not dismissed with prejudice, that ain’t exactly nothing.

Tanta might not see this as a big deal or game-changer, but we suspect investors will.

That point aside, there is something more profound going on here. Tanta’s core criticism (as we understand it) is that finding the assignments was simply a matter of due diligence that Deutsche Bank was attempting to shirk out of sloth. Not being legal gurus ourselves, we went back to April Charney for further comment and clarification. She had this to say:

“First of all, it is not a fair assumption that “nobody could find the original assignments.” The “original” assignments from the originating lender to the trust don’t exist to be found until after the foreclosure actions are filed and the loans are already supposedly in default. It would be very interesting to see where these nonperforming loans have been booked until now. This is an epidemic across the country.

As to the real ramification of the Ohio decision, aside from slowing the foreclosure trains, is that the fact that there were no “original” assignments rendering the sales of the mortgages to the trusts, in violation of the true sale obligations imposed by securities law. ”

That, again, does not seem like nothing to us.

April also passed us this link for a primer on the true sale issue. She further directed us to this article By Tim Reason (love the name) regarding true sale in securitizations, which is from 2003.

What we gleaned is that the “true sale” issue (specifically as it comes to securitization) has never been settled. One would think from the Reason article that securitizations would have fallen out of favor after the tech stock collapse, where they were used for various sorts of accounting legerdemain and producing synthetic AAA-ratings (including, famously, in the Enron case). Instead, the problems were swept under the rug and everyone got back on the merry-go-round a second time for the housing bubble. Reason’s article contains this ominous quote on that subject:

Kenneth Kettering, associate professor at New York Law School, argues that the securitization industry owes its very existence to the willingness of rating agencies to rate ABS securities based on “extravagantly hedged” true-sale opinions. “No competent lawyer ever gave a simple flat opinion that the asset transfers involved in a securitization transaction constitute a ‘true sale.’ Indeed, given the absence of controlling case law, a lawyer could not responsibly do so,” he wrote in a letter to Congress. “These all-but-liability-proof legal opinions underline the fact that the parties to a securitization transaction are knowingly assuming a serious legal risk.”

Somehow we suspect that nobody explained this state of affairs to your local pension fund, the Chinese, the Europeans, the Canadians, and other sundry parties exposed to questionable securitized MBS pools. But hey, what’s a few trillion between friends? (We’re all friends, right?)

So this time around, securitization was scaled-up to a greater extent than ever before, despite the fact that the fundamental issues of ownership were not settled. Echoing (and reinforcing) the pay-to-play ratings complex that emerged at the same time, the securitization complex chugged merrily along, while profits were high and defaults were low.

But now these fundamental issues are getting their day in court again, and if this Deutsche Bank ruling is indicative, it isn’t going well for the investor class. Will there be another muddle-through, like last time?

The conflagration seems unlikely to blow out quite so easily this time around. Previously, true sale challenges could be counted on to be rare and occur only in the occasional large-scale corporate bankruptcy—i.e., when a creditor or the bankrupt company itself wanted to “raid” the assets of a securitization to satisfy obligations. Now, the challenges are threatening to proliferate right along with the exploding number of foreclosure cases across the country.

We followed up with California mortgage attorney Nathan Fransen about this landmark case and its implications:

“California is a non-judicial foreclosure state. This means the banks do not file a complaint in court to foreclose on the property. They simply execute a Trustee Sale. This requires them to provide notices in strict accordance to the applicable laws. The sale is a private action that effectively terminates ownership rights by the borrower.

Typically the sale is followed up by an unlawful detainer proceeding to evict the former owners. The way in which the logic of this court could be used is by filing a complaint and Preliminary Injunction in a court in the county where the property is located. The injunction would stay any foreclosure proceedings by the trustee. A declaratory judgment could also be obtained that would declare the rights of the trustee invalid and thus prevent them from taking future actions against the homeowner.

There are other claims worth exploring that are derivatives of all this. For example, perhaps a claim for slander of title since the trustee did not have the rights to initiate the foreclosure process. Claims under California Business and Professions Code Section 17200 (UDAP statute) may also be available. The leverage that a consumer attorney could use from this type of an action may very well make the difference between a homeowner staying in their home, or packing their bags.”

So quoth the lawyers. Hence we take it that, far from a trivial matter of paperwork, Boyko’s decision is serious business – a tangible ray of hope for distressed homeowners, and a huge headache for securitized mortgage investors (we’re not even sure it’d be proper to use the term “holders” or “owners” anymore).

(Update, Nov 16: And now, apparently, the decision has been reinforced again, with another ruling.).

http://iamfacingforeclosure.com/blog/20 ... tizations/

(embedded links in original)

[antiaristo]

.

Oh look.
Round and round we go.
It's all coming home.

Lloyd's braced for wave of credit crunch claims

By Yvette Essen, Insurance Correspondent
Last Updated: 12:10am GMT 19/11/2007

Lloyd's of London, the world's largest insurance market, is bracing itself for hundreds of claims from company directors as fears mount that the credit crisis will unleash a wave of lawsuits.

Lloyd's has established a notification system to alert it to every potential claim from executives who may trigger their Directors and Officers (D&O) insurance policies if sued. There are also concerns that the fall-out could lead to claims under Errors and Omissions (E&O) policies, which are taken out by professionals such as lawyers and accountants.

To date, underwriters and brokers have said they are largely unaffected by the fallout, but The Daily Telegraph has learnt that Lloyd's franchise performance director, Rolf Tolle, has asked Xchanging - the business-processing company which runs the settlement of its claims - to track any exposure Lloyd's may have to the credit crunch.

It has since created a code called a "unique claims reference", which acts as an alert every time a potential claim related to the sub-prime lending crisis occurs. A spokesman for the 319-year-old market confirmed that Mr Tolle had requested the creation of the new code.

Sources said that up to 30 notifications had already been received. The chief executive of one syndicate said: "There is always going to be a delay before the insurers feel the pain. "

A fortnight ago, a class action lawsuit was filed in New York by investors who had bought shares in Citigroup, alleging the investment bank misled them by falsely reporting financial statements.

Beazley, a Lloyd's insurer that insures risks in the US, has seen its share price hit, but said speculation that it could face a deluge of claims had been "overplayed".

http://www.telegraph.co.uk/money/main.j ... ins119.xml

Round and round we go.
I wonder who has jurisdiction in these cases?
Her Majesty?

[vigilant]

Jim Sinclair is a goldbug that seems to understand this situaton fairly well. His take on this situation is that worldwide this is a 400 trillion dollar problem that will infect the global financial scene in a big way. What say ye antiaristo? Think he is accurate?






Jim's Mailbox

Author: Jim Sinclair



Dear Jim,

I just read an article in the London Financial Times which estimated the risk of credit, credit default and all other varieties of derivatives at only 2% of the world investment base. Why all the fuss?

CIGA Arlen



Dear Arlen,

According to the BIS report, just the Credit and Credit Default OTC derivatives are above $20 trillion nominal value by themselves. Nominal value becomes real value when the special performance contract is called on to do its special performance. They are now called on, and have to a very large degree failed. Because of this fact there is no value. If there is no value then the value is zero.

The total amount of derivatives outstanding is approximately $450 trillion, of which $400 trillion are over the counter derivatives with the characteristics listed below.
Wherever London Financial Times got their number fits the diversion operation "White Noise."

If as the London Financial Times says, the estimate of world investment in total is around $145 trillion then the comparison is to 450 trillion nominal value derivatives outstanding.

OTC derivatives can and will tear the financial world a new rear end by June of 2011.

Where 2% is concerned, I have only one comment, "Bull Shit."

Regards,
Jim




Keep in mind that over the counter derivatives generally have the following characteristics.

Without regulation.
Without listing on public exchanges.
Without standards.
Therefore not in the least bit transparent.
Therefore without an open market of the bid/ask type.
Dealt in by private treaty negotiations.
Without a clearinghouse.
Unfunded without financial guarantee of any kind.
Functioning as contracts of specific performance.
Financial character or ability to perform is totally dependent on the balance sheet of the loser in the arrangement.
Evaluated by computer assumptions made by geek, non market experienced mathematicians who assume religiously that all markets return to their normal relationships regardless of disruptions.
Now in the credit and default category alone considered by accepted authorities as totaling more than USD$20 trillion in notional value.
Notional value becomes real value when the agreement is forced to find a real market for ending the obligation which is how one says sell it.

[antiaristo]

.

Hi vigilant,
I've already written how he "gets it" earlier on this thread.

Of course he's correct.

Have a look at the hard numbers, from the horse's mouth:- the US Treasury

http://www.occ.treas.gov/ftp/release/2007-120a.pdf

In particular look at the table on page 22.
Between them Citi, BoA and JP Morgan are party to $160 Trillion derivatives contracts.

Just those three.

About twelve times the annual GDP of the United States.

And about three times the total output for the whole world. I don't know where the "2% of world investment base" nonsense comes from.

You might recognise those names.
That's the trio that are trying to get Paulson's "Super SIV" off the ground.

Good luck with that!