- Subprime Loans, Corporate-Style, Will Fuel Defaults
- Jon Stewart saves investors: Cramer’s book in free fall
- End of Day 4/23 – Because you’ve got to pick a pocket or two!
- Stress Test Scores ‘C’ If Name Ends in ‘itigroup’: Mark Gilbert
- The (False) Glimmer of Hope
- BOA Video
- IMF: Negative Global Growth for First Time Since WWII (Chart)
- European Manufacturing (Chart)
- Swine flu could infect U.S. trade and travel
- Mike Larson – The Fed: Our Next Troubled Bank?
- Video-o-rama: Economy – recovery or relapse?
- New Home Sales (Chart)
- Week #18, Friday Night Special #26
- Week #18, Friday Night Specail #27
- Week #18, Friday Night Specail #28
- Bank of Canada blames Geithner for financial mess
So it went with the subprime mortgage crisis. And so it is now going with corporate loans and bonds. It appears that defaults on leveraged loans and corporate bonds will soon rise to levels not seen since the Great Depression.
Yesterday, I had a lunch meeting about Bailout Nation with the folks at Borders HQ in Detroit was quite interesting.
I was over-caffeinated, and essentially babbled away for 2 hours. I did manage to remember to ask a few questions, and learned quite a bit. It was an education for me in a real “Art meets Commerce” kind of way.
There is the creation of content, and then there is the selling of that content. They are two utterly different worlds, bound by a small overlap. (Picture a 2 circle Venn Diagram, with a rather smallish “c”). Quite fascinating to me, as I know little of the publishing/book selling universe, especially in the midst of a severe recession.
We discussed the book, purchase promotions, driving traffic to stores and websites, the Bailout Nation blog (coming soon!), and a bunch of other related things.
They asked me what shows I wanted to do to promote the book, and I gave them the full run down. What really surprised me was their reactions to two of the quasi-news opinion programs — The Daily Show with Jon Stewart, and The Glen Beck Program.
After Oprah, these two are (apparently) amongst the biggest book sellers on TV. Like Oprah, Glenn Beck has a loyal audience, is perceived as very sincere — and moves books.
But the most intriguing “inside baseball” stuff we discussed was the impact of The Daily Show on book sales — in particular, two recent books that were the subject of big TDS segments. These were mentioned as prime examples of the power of Jon Stewart.
One bombshell after another… We learn that of the program trading which accounts for more than 30% of all trading on the NYSE, Goldman performed more than twice the next lower program trading firm and that they solely were responsible for nearly 25% of all program trading. If that doesn’t tell you who controls the markets, I don’t know what does. If there is a PPT surrogate, there it is, right there. Goldman, and all the large Primary Dealers need to be broken up if we ever want any hope of having free markets again.
April 23 (Bloomberg) — Tomorrow, the U.S. authorities are scheduled to disclose the methodology for the stress tests that will gauge the creditworthiness of the 19 largest U.S. banks. Below are a few examples of the kinds of searching, penetrating questions the Treasury Department should ask. Some sections have point scores. Others will be judged more subjectively.
(1) Award your institution five points for every ex-Goldman Sachs Group Inc. manager on your board. Double that tally if former Federal Reserve Chairman Alan Greenspan ever took part in a private conference call for your favorite clients. Lose all points if the head of your executive compensation committee has a worse golf handicap than your chief executive officer.
(2) This week, an anonymously sourced blog entry said the government’s stress test would show that 16 of the 19 banks in the study are technically insolvent, with none of the 16 able to survive a disruption of their cash flow or additional defaults on their loans. On hearing this, your first reaction
“But, welcome as it is, optimism contains two traps, one obvious, the other more subtle. The obvious trap is that confidence proves misplaced—that the glimmers of hope are misinterpreted as the beginnings of a strong recovery when all they really show is that the rate of decline is slowing. The subtler trap, particularly for politicians, is that confidence and better news create ruinous complacency. Optimism is one thing, but hubris that the world economy is returning to normal could hinder recovery and block policies to protect against a further plunge into the depths.”
CHICAGO, April 24 (Reuters) – Mexico’s deadly swine flu could disrupt trade and travel between the United States and Mexico if it prompts restrictions on the movement of goods across the border or sparks fear in consumers, analysts say.
The potential impact is far from clear as experts race to learn more about the disease, which has claimed the lives of as many as 61 people. But shipping and travel industries are especially vigilant.
"If you end up with a significant demand shift, you could end up with a very substantial effect on our products, whether it be government-imposed restrictions or alternatively if the consumers just decide to say ‘no’," said Bob Young, chief economist with the American Farm Bureau Federation.
Since Mexico and Canada are the two largest buyers of U.S. agricultural goods, such restrictions could be a drag on U.S. agriculture, Young said.
The World Health Organization has said it is concerned about 800 "influenza-like" cases in Mexico. The group confirmed the outbreak of a new strain of swine flu in the United States and said about 60 people had died in Mexico
The Federal Reserve is watching the backs of U.S. banks. But sometimes I wonder, "Who’s watching the Fed’s back? Is the Fed our next troubled bank?"
You see, all of this garbage paper that’s going bad — the troubled residential mortgage backed securities (RMBS), the commercial mortgage backed securities (CMBS), the asset backed securities (ABS), the Fannie Mae bonds, the corporate loans, and so on — hasn’t just gone "Poof."
Instead, more and more of it has been landing on the Fed’s doorstep — either through direct ownership or as collateral against Fed loans that keep getting rolled over.
The result? The Fed’s once pristine balance sheet is starting to look more and more like the balance sheet of a troubled financial institution.
From AAA to
Something Else Entirely
What do I mean? Well, take a look at this April 26, 2007, Federal Reserve Statistical Release. Table 2, the Consolidated Statement of Condition of All Federal Reserve Banks, shows the breakdown of the Fed’s assets back then.
You’ll see that the Fed banks listed total assets of $883.5 billion at the time. The lion’s share of those assets — $787.1 billion, or 89 percent — were "AAA" quality U.S. Treasury bills, notes, and bonds. There were a few other assorted line items (gold, bank premises, etc.) … but that’s about it.
Now compare that two-year old balance sheet, to this multi-headed hydra of a balance sheet that came out a few days ago. The equivalent table (number 9) shows that total Fed assets have exploded to $2.19 TRILLION. And those plain-vanilla, risk-free Treasuries? They make up just $526.1 billion, or 24 percent, of Fed assets!
The Fed now also owns more than $355 billion of mortgage backed securities and $61 billion in debt issued by Fannie Mae, Freddie Mac, and Ginnie Mae. Term auction credit comes to $455.8 billion. Those are short-term loans against just about anything and everything — from auto loans and credit card receivables to Brady Bonds and CMBS.
The Fed is also holding $238 billion in commercial paper as part of an October 2008 program to help corporations fund short-term debt obligations. And it has $111 billion in so-called "other loans." This all-purpose category includes loans made to primary dealers ($12.9 billion), bailout baby AIG ($45.1 billion), and loans made as part of the Fed’s Term Asset-Backed Securities Loan Facility ($5.1 billion).
Finally, the Fed has lent money to so-called "Maiden Lane" LLCs that acquired dodgy asset portfolios as part of the Bear Stearns and AIG bailouts. The grand total there comes to $72 billion.
– The quality of the balance sheet of the U.S. central bank is deteriorating.
The Fed is now heavily burdened by the same kind of crappy paper that has been hammering private U.S. banks for several quarters.
– The Fed is now heavily burdened by the same kind of crappy paper that has been hammering private U.S. banks for several quarters.
– And the Fed banks are holding total capital of just $45.7 billion against the sum total of $2.19 trillion in assets, meaning the Fed is leveraging its capital 48-to-1. That compares to only 27-to-1 two years ago.
What’s the Risk?
With the Fed doing its best to tarnish its balance sheet and the Treasury borrowing like crazy (not to mention the Fed monetizing some of that debt), the natural question becomes: "What’s the risk?"
The answer is that it all comes down to the reaction of the capital markets…
– Do investors continue to aggressively bid on U.S. Treasuries at our debt auctions?
– Do foreign creditors, who hold more than 53 percent of the privately held Treasury debt outstanding, start balking at supporting our profligacy?
– Does the U.S.’s AAA credit rating come under closer scrutiny?
– And does the dollar start to reflect the fact that the Fed is throwing money around like a drunken sailor — and taking on any and all kinds of crummy assets?
These questions likely won’t be answered today, tomorrow, or next week. We may not learn for months or even quarters. But that doesn’t mean we shouldn’t discuss these risks now … that those risks aren’t very real … and that you don’t want to start taking some protective steps now.
I warned about an impending blow up in residential real estate in 2005. If you sold housing, construction, and mortgage stocks back then, you dodged the worst meltdown in modern history. I warned that commercial real estate was in big trouble in early 2007. If you sold your REITs then, you dodged the biggest crack up in office, industrial, and retail real estate shares in ages.
Now, I recommend you consider buying some gold and dump the heck out of any long-term U.S. bonds. Because some day, the trashing of the Fed’s balance sheet is going to matter, and in a potentially huge way.
On the video front, the IMF upped its forecast of total global credit crisis-related losses to $4.1 trillion by the end of 2010 and the Congressional Oversight Panel on Tarp conducted a hearing on Capitol Hill, whereas a host of commentators – including Martin Feldstein, Joseph Stiglitz, Nouriel Roubini, Frederic Mishkin, Paul McCulley and John Mauldin – weighed in with a combination of gloomy and “bottom-in-sight” economic forecasts, as well as comments on the imminent results of the bank stress tests.
Other clips worth viewing include the Charlie Rose interview with Mikhail Gorbachev and Martin Wolf’s take on the UK economy.
Enjoy the footage while I enjoy the views across the North Pacific.
Bloomberg: IMF’s Vinals says losses from crisis may hit $4 trillion
“Jose Vinals, director of monetary affairs and capital markets at the International Monetary Fund, speaks about the outlook for global losses on distressed loans and securitized assets due to financial market turmoil and the recession. Banks will shoulder about 61% of the writedowns, with insurers, pension funds and other nonbanks assuming the rest, IMF said in a report today on the state of the global financial system. The fund forecast $4.1 trillion in losses by the end of 2010 with $2.7 trillion in losses from US-originated loans and assets, compared to its estimates of $2.2 trillion in January and $1.4 trillion in October.”
Looks like bloggers aren’t the only one concerned about Geithner’s plan. But that doesn’t matter because Americans think the U.S. is on the right track. Obama’s policies are putting Americans in the best frame of mind since Saddam Hussein was captured in 2004. See the video below for details.