US - Subprime

[millionairemind]

U.S. Foreclosures Hit Record in August as Housing Prices Fell
By Dan Levy

Sept. 12 (Bloomberg) -- U.S. foreclosure filings rose to a record in August as falling home prices made it harder to sell or refinance homes to pay off the mortgage, RealtyTrac Inc. said.

Owners of 303,879 properties, or one in 416 U.S. households, got a default notice, were warned of a pending auction or foreclosed on last month. That was the most since reporting began in January 2005. Filings increased 27 percent from a year earlier, about half the annual pace of previous months, because of high default totals in August 2007, the Irvine, California- based seller of foreclosure data said in a statement today.

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

[LenaHuat]

China's property market is heading for a meltdown and now Swedish banks are also suffering likewise from overinvestments in the property markets of the Baltic states.
http://www.spiegel.de/international/business/0,1518,577603,00.html

Subprime is PRIME stress for global banks

[millionairemind]

Putting lipstick on a pig
Wall Street suffered from the illusion that it could make beautiful bonds out of piles of dubious mortgages.
By Elizabeth Spiers, contributor
Last Updated: September 13, 2008: 1:01 PM EDT

(Fortune Magazine) -- If nothing else, we've learned recently that if you put lipstick on a pig, it's still a pig. Presumably that has always been true - unless of course the pig in question was a subprime mortgage derivative, circa 2006. Then it was quite possibly a "runaway bargain," a "great time to buy," or an "opportunity in a market that's only going to go up."

Still a pig, you say? Well, how is it that no one noticed the legions of bankers, ratings agencies, and real estate professionals bearing lipstick?

Treasury Secretary Hank Paulson has engineered a rescue of Fannie (FNM, Fortune 500) and Freddie (FRE, Fortune 500), but the markets are haunted by the specter of two more big institutions - Lehman Brothers (LEH, Fortune 500) and Washington Mutual (WM, Fortune 500) - on the brink.

The fate of Lehman may soon be decided though, with recent reports suggesting some sort of deal to rescue Lehman could be announced this weekend, perhaps on Saturday night.

How did this all happen? One answer is that Wall Street, the ratings agencies, and regulators were blinded by the science of securitization - bundling ordinary debt like credit card balances, car loans, and mortgages into vast pools, then issuing bonds backed by those pools. It was a gigantic money machine for Wall Street, but it created a system that was unprecedented in its complexity and opacity.

You might have expected ratings agencies to see the problem, but instead they became part of it. Complex securities are often priced from models that assume, in what may be the apogee of wishful economic thinking, that the underlying assets will behave exactly as they have historically. That has always been a weakness of model-based valuation, but it's particularly problematic when the securities are new and untested.

As for the Wall Street bankers who should have known better, they were mesmerized by the beauty of their creations. They forgot that those sophisticated securities were built from millions of mortgages that required someone to make payments every month. And in the real world, not the mathematical one, a lot of those loans were made to people who never had any plausible chance of repaying them. When the complexity of a security (lipstick, anyone?) has the effect of decoupling its value from that of the underlying asset, it can be very difficult to know what that security is truly worth. When no one knows what anything is worth anymore, it's easy to inflate an asset bubble.

And when it's easy to inflate an asset bubble, someone inevitably will, because all the players have incentives to do so. The way people are paid on Wall Street encourages them to pursue immediate returns at the expense of longer-term stability. Prudent managers might store capital in boom times to deal with the inevitable downturn. But given the ethos of returns-no-matter-what, available capital is capital that will be put to work. In the words of former Citigroup CEO Chuck Prince, "When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing." Well, nobody's dancing anymore

[millionairemind]

September 17, 2008, 9.22 pm (Singapore time)

Latest update
Poliycmakers struggle to restore market composure
* Japan, Australia, India inject US$33b into money markets
* Libor overnight rates ease but three-month up
* IMF chief says more trouble may yet emerge
* Trading on Russia's Micex and RTS stock exchanges halted

LONDON/SINGAPORE - Central banks struggled to restore confidence on financial markets for a third day running on Wednesday after the United States agreed to rescue insurance giant AIG, the latest casualty in a crisis sweeping Wall Street.

The Reserve Bank of Australia supplied the banking with extra cash for the third day running, more than doubling the previous day's injection to A$4.285 billion (US$3.4 billion), nearly twice the market's estimated cash need
Asian central banks ploughed extra liquidity into short-term funding markets, although central banks in Europe took their foot off the pedal amid signs of respite to some of the sharpest surges in short-term borrowing costs of the previous two days.

Dominique Strauss-Kahn, head of the International Monetary Fund, said there could well be more trouble yet in what former US Treasury Secretary Robert Rubin called 'the worst crisis since the 1930s'.

'The consequences for some financial institutions are still in front of us,' Strauss-Kahn told reporters in Jeddah after talks with Gulf Arab finance ministers and central bank governors.

Overnight, news broke that the US authorities had come up with the rescue of American International Group (AIG) just two days after choosing to let investment bank Lehman Brothers file for bankruptcy.

The bailout, in which the New York Federal Reserve offers up to US$85 billion in loans in return for a stake of nearly 80 per cent in AIG, sparked a recovery in stock markets from Asia to Europe from the losses of previous day after it was announced.

Counting the cost
But interbank lending and credit markets remained stressed.

The bank-to-bank cost of overnight borrowing in dollars fell more than a percentage point but it rose for longer three-month funding, according to the latest London interbank offered rate (Libor) published by the British Bankers Association.

Overnight dollar Libor was fixed at 5.03125 per cent compared with 6.43750 per cent on Tuesday.

Earlier, such funding was quoted as costing nearer 8 percent in Europe, after levels in excess of 10 per cent on Tuesday.

For three-month funding, however, Libor fixed almost 20 basis points higher at 3.06250 per cent, versus 2.87625 per cent on Tuesday.

The AIG bailout pushes the tab to more than US$900 billion so far in government rescues and mortgage market intervention since the housing and sub-prime mortgage markets collapsed, triggering a global credit crunch that is now in its second year.

German Chancellor Angela Merkel joined a lengthening list of political leaders expressing belief or hope that Europe would be spared some of the economic pain which is likely to follow the troubles of the big financial institutions.

'The effects until now on the real economy in Germany have been moderate,' she told parliament. 'However, an open economy like Germany's will not be able to escape completely unscathed.'


In Britain, HBOS Plc bank confirmed it was in advanced talks that may lead to a takeover by domestic rival Lloyds TSB. News of the talks surfaced after shares in HBOS, Britain's biggest home mortgage lender, were battered for a sixth consecutive day due to fears about its funding position.

Asia pumping, Russia shaking
Japan, Australia and India pumped US$33 billion into money markets on Wednesday. Across Asia, which has been largely shielded so far from the worst of the credit crisis, central banks were bracing for more market turmoil.

The Bank of Korea warned that foreign funds would keep flowing out of the domestic bond market.

India added an extra money market operation to improve banks' access to funds while Taiwan made lending easier by lowering the ratio of time deposits banks must keep in reserve on Tuesday.

Australia's central bank supplied the banking system with extra cash for the third day, more than doubling the previous day's injection to A$4.285 billion (US$3.4 billion).

The Bank of Japan pumped 3 trillion yen (US$28.58 billion) into the market in two moves, matching a record from March 31, after overnight rates jumped above 0.7 per cent, 20 basis points higher than the central bank's target rate.

Bank of Korea Governor Lee Seong-tae said the credit crisis triggered last year by US mortgage defaults would drag on and hurt the global economy. 'We need to prepare for potential foreign fund outflow from the bond markets in the medium term,' he said.


Capital has been fleeing emerging markets as investors stung by the upheaval on Wall Street shun risky assets. Seoul has spent more than US$30 billion this year to support the won, which has tumbled 17 per cent in 2008 against the dollar.


Russia looked particularly fragile. Russian stocks plumbed new lows in the worst decline in at least a decade and the central bank injected a record 340 billion roubles of one-day funds in a Wednesday repo auction.

Trading on Russia's Micex and RTS exchanges was suspended after their indexes tumbled 10 and 6 per cent respectively on the day, reversing earlier gains and marking the biggest percentage fall for the Micex index since the Russian financial system collapsed in 1998. -- REUTERS

[ishak]

financial bailout Fed stands by to contain crisis
TodayOnline, September 19, 2008

Federal Reserve officials are signalling that they are prepared to take an even larger role in trying to contain the deepening financial crisis.

A day after Fed officials seized control of the huge insurance company American International Group (AIG), the United States Treasury acted at the Fed’s request to fortify the central bank’s balance sheet with US$100 billion ($143 billion) in new cash. Fed officials can use the proceeds to pump money into financial institutions fearful of lending to each other, or to catch the next insolvent bank that is unable to raise capital.

“It is just not credible for the Fed or the Treasury to say they won’t put up” any more money, said Mr Stephen Stanley, chief economist at RBS Greenwich Capital Markets, and a former Fed economist. “They are the big lender for anyone who runs into trouble.”

Since the financial crisis began more than a year ago, the US central bank has marshalled its holding of more than US$900 billion into unprecedented action, lending Treasury bonds against Wall Street’s hard-to-finance bonds and providing loans to protect creditors of failing banks and insurers that threatened the financial system. The Fed’s latest additions to its balance sheet come as the crisis has grown to wildfire proportions.

The Fed’s actions do not appear to have calmed the panic. Wednesday’s 4.7 per cent drop in the Standard & Poor’s 500 Index means half its gain from the five-year bull market that began in 2002 has now been wiped out. Yields on three-month Treasury bills sank to the lowest since World War II as investors sought the relative safety of government debt.

One cause of the flight to the safest investments is that neither the US Congress, the Treasury nor the Fed is prepared to establish the rules of intervention.

While creditors of Lehman Brothers Holdings were left to bankruptcy, those of AIG were rescued.

Shareholders lost in every bailout, from Bear Stearns in March to Fannie Mae, Freddie Mac and AIG this month. That created an incentive for investors to dump financial shares and test the government’s willingness to insure creditors.

[ishak]

Paulson May Propose Plan To Take Over Bad Debts
CNBC, 18 Sep 2008

Treasury Secretary Henry Paulson is considering setting up a government facility to take on bad debts from financial institutions and prevent the global credit crisis from worsening, CNBC has learned.

The facility would be similar to the Resolution Trust Corporation, which was set up in 1989 to take on all the failed thrift assets during the savings and loan crisis, sources said.

Paulson began briefing House Speaker Nancy Pelosi and other congressional leaders on the proposal at 7 p.m. New York time.

A plan could be announced as early as Friday, sources said.

The meeting, being held at Pelosi's office, includes Senate and House leaders from both political parties, Federal Reserve Chairman Ben Bernanke, and SEC Chairman Christopher Cox, in addition to Paulson.

The Bush administration wants to make sure Congress is behind the idea before it moves ahead on the plan, a source told CNBC.

Such a move, according to its advocates, would allow banks to shovel bad debt off their balance sheets and allow the firms to go back to business as usual. It would also eliminate the need for individual company bailouts.

In turn, that could allow the housing market to recover because it would restore banks willingness to lend.

"This will bring real trust back into the market." Donald Marron, chairman of Lightyear Capital, said on CNBC. "It would free up real, spendable capital in these organizations. They can use that to make loans, to make transactions and to build confidence in the system. This is a confidence crisis."

Charlie Gasparino breaks the story on Paulson's plan. Watch video at left.

The news sparked a big rally in stocks after a day in which investors remained nervous about the spreading effects the global credit crisis.

The Treasury Department and Federal Reserve, which engineered an $85 billion rescue plan for insurer American International Group earlier this week, declined to comment.

The aide also pointed to an opinion piece in Wednesday's Wall Street Journal by former Federal Reserve Chairman Paul Volcker, former Comptroller of the Currency Eugene Ludwig and former Treasury Secretary Nicholas Brady in which they said such a body could buy up troubled real estate debt to get credit markets working again.

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However, getting Congress to approve such a plan quickly would likely be difficult because lawmakers plan to leave by the end of the month to campaign for the Nov. 4 election.

White House spokeswoman Dana Perino declined to comment on what steps, if any, the Bush administration was considering.

She also questioned whether doing something in the middle of a market correction was wise and acknowledged it could be difficult to approve something quickly.

"I think Democrats themselves, and maybe some Republicans, have questioned whether or not they will be able to get anything done in the next two weeks," Perino said.

"And it probably isn't that smart to try to finalize legislation in the middle of a market correction as we're trying to figure out what other possible necessary steps may or may not need to be taken as we move forward," she said.

Earlier Thursday, Sen. Charles Schumer, D-NY, told reporters he has spoken with officials at the Treasury Department and Federal Reserve about trying to do something more permanent.

"I think both the Federal Reserve and the Treasury are realizing that we need a more comprehensive solution," he said. "You can't just keep...having the government take over one company after another without really solving the problem," Schumer said.

[ishak]

Looking on the bright side of the financial collapse
Their savings may have been wiped out but there's still much that investors can take away from the Wall St debacle
Bloomberg, 19 Sep 2008

One of life's rules is that there's bad in good and good in bad. The total collapse of the US financial system is no exception. Even in the midst of the current financial despair we can look around and identify many collateral benefits.

A lot of attractive office space seems to be opening up in midtown Manhattan, for instance, and the US government is now getting paid to borrow money. (And with T-bills yielding 0 per cent, they really ought to borrow a lot more of it, and quickly.) And so as Morgan Stanley chief executive officer John Mack blasts short-sellers for his problems, and Goldman Sachs CEO Lloyd Blankfein swans around pretending to be above this little panic, we ought to step back and enjoy the positives. To wit:

We finally get to see what's inside these big Wall Street firms.

We've just witnessed the largest bankruptcy in US history and we know neither the inciting incident (though there is speculation that sovereign wealth funds decided to stop lending to Lehman Brothers Holdings Inc), nor the deep cause. But there's now a pile of assets and liabilities smouldering in New York awaiting inspection.

The assets include sub-prime mortgage-backed bonds and no doubt many other things that aren't worth as much as Lehman hoped they might be worth. But it's the liabilities that are most intriguing, as they include more than US$700 billion in notional derivatives contracts. Some of that is insurance sold by Lehman, against the risk of other companies defaulting.

The entire pile might be benign, but somehow I doubt it. We may well find out that Lehman Brothers, in liquidation, has a negative value of hundreds of billions of dollars. In that case the natural question will be: How much better could things be inside Morgan Stanley and Goldman Sachs, both of which were engaged in the same lines of business?

We are creating the financial leaders of tomorrow.

Remember when everyone believed in Alan Greenspan? When John McCain, running for US president in 2000, said that if Mr Greenspan died he'd have him stuffed and propped up against the wall at the Federal Reserve, where he'd remain chairman?

No sooner did Mr Greenspan shuffle off the stage and sell his memoir than the financial system he helped shape fell apart. He's left not only a mess but a void.

No matter how well-educated we become in our financial affairs, we still need public officials to look up to, unthinkingly. And there's nothing like a government bailout to create new public-sector heroes. US Treasury Secretary Hank Paulson, 62, is probably too old; in any case, he's tarred by his association with both George Bush and Goldman Sachs. But 47-year-old Tim Geithner at the New York Fed is perfectly positioned to make Americans feel as if their financial system is in good hands for many years to come.

Getting the credit

I have no real idea if Mr Geithner knows what he's doing and he may not either. ('Bail out that one. No! Not that one - the other one!') It doesn't matter. He's in the middle of great events and should, by the end of them, know more about what happened than anyone.

Whatever happens to the US financial system someone is bound to get the credit for something even worse not happening and, as no one really understands what Mr Geithner does, he's the obvious choice.

Ordinary Americans get a lesson in low finance. It's been expensive but, then, so is kindergarten.

Americans' willingness to believe that we can hire some expert to tell us how to outperform markets is a big problem, with big consequences. It underpins Wall Street's brokerage operations, for instance, and leads to a lot more people giving out financial advice than should be giving out financial advice.

Thanks to the current panic many Americans have learned that the experts who advise them what to do with their savings are, at best, fools.

Merrill Lynch & Co, Morgan Stanley, Citigroup Inc and all the rest persuaded their most valuable customers to buy auction-rate bonds, telling them the securities were as good as cash. Those customers will now think twice before they listen to their brokers ever again. Many, I'm sure, are just waiting to get their money back from their brokers before they race for the exits and introduce themselves to Charles Schwab.

Bank of America Corp will soon discover that the relationship between Merrill Lynch and its customers isn't what it used to be, but Bank of America's loss is America's gain.

America has lots of new houses. Not all of them have people in them, sadly, but that's a minor detail. Even better, no one has had to pay for them, and probably never will.

I'm betting that the US government will soon have no choice but to take the final step and guarantee every bad mortgage loan ever made by Wall Street.

I can hear you thinking: Doesn't that mean the taxpayer foots the bill? That's so negative! Sure, one day some taxpayer will foot the bill but if the government does what it does best, and continues to borrow huge sums from foreigners, it doesn't have to be you or me.

Huge numbers of Wall Street executives will have the time to raise their children.

For years now Wall Street has been far too lucrative for a certain kind of energetic and ambitious person to justify anything but the most perfunctory personal life. Now that the market for his services has collapsed, he has time to go home and figure out which of the children roaming around the mansion are actually his.

In time, he will learn to love them and they him, and they will gain the benefit of his wisdom and experience. Perhaps one day they will put it to use as traders and investment bankers on the Wall Street of the future, where they will report to those exalted creatures of high finance: loan officers.

There, slowly, they can earn the money they will need to pay off the mortgages defaulted upon by their forebears.

[ishak]

[quote="ishak"]Paulson May Propose Plan To Take Over Bad Debts
CNBC, 18 Sep 2008

Treasury Secretary Henry Paulson is considering setting up a government facility to take on bad debts from financial institutions and prevent the global credit crisis from worsening, CNBC has learned.

...
[quote]

Congress will respond to Paulson plan
Reuters, 19 Sep 2008

Senate Banking Committee chairman Christopher Dodd on Thursday said Congress will respond to a Treasury Department proposal for containing the Wall Street crisis after they receive details, which could occur sometime this weekend.

Speaking to reporters after congressional leaders met with Treasury secretary Henry Paulson and Federal Reserve chairman Ben Bernanke, Mr Dodd said he expected Treasury details 'sometime over the weekend' and that 'based on a bicameral bipartisan basis we will react to it'.

But Mr Dodd added that it also could take the Fed and Treasury slightly longer to provide Congress with details and noted his committee is holding a hearing on Tuesday, with the new proposal likely being the main topic.

Mr Dodd added: 'I have no idea what it will look like at this point. I can't tell you numbers, volume. This is a very serious moment.'

Asked whether he approved of the direction Mr Paulson and Mr Bernanke appeared to be headed with their plan, Mr Dodd offered no specifics. But he said: 'You've got to deal with the housing foreclosure issue. I've said that for two straight years on an hourly basis. I think there's finally some recognition of that.'

Mr Dodd repeatedly stressed that what currently is being developed is a Treasury and Fed proposal, not one from Congress. Lawmakers will look at the plan and then 'add anything, subtract anything,' he said.

Describing Thursday's meeting in the Capitol as 'a very sober gathering', Mr Dodd said: 'I've been in the Senate 28 years and Congress 34. There's never been a moment as serious as this one.'

Barney Frank, the chairman of the US House of Representatives Financial Services Committee, said after the meeting 'It will be the power - it may not be an entity - it will be the power to buy up the illiquid assets'.

The Massachusetts Democrat told reporters there is concern that setting up a formal entity 'could take too long'.

He also said there was 'virtually unanimous agreement' that there would be legislation to create such a power.

Alabama Senator Richard Shelby, who also attended, said the meeting focused on 'how to deal with a lot of illiquid assets ... We're waiting to see the proposal that Treasury and the Fed will be sending up to us.'

Mr Shelby is the senior Republican on the Senate Banking Committee.

[millionairemind]

Published September 20, 2008
breakingviews.com
The perils of a toxic relief fund
By EDWARD HADAS AND HUGO DIXON

STOCK markets love the idea of a Toxic Relief Fund. Thursday's announcement that US authorities are considering ways to 'address the illiquid assets on bank balance sheets' was greeted with jubilation. Global stock markets rose 4-8 per cent. But even if the US government can figure out how to suck the pond scum of the financial system onto its own balance sheet, it may still get dragged into dealing with the over-leveraged balance sheets that created the problem in the first place.

Details of the plan are scarce, and no wonder. The good news is that politicians, regulators and central bankers are all frightened enough to agree to just about anything. The bad news is that it will be tricky, expensive and rife with moral hazard.

The list of questions is daunting. What assets should be considered toxic or illiquid? How should they be valued - implicit market prices from earlier this week, from just before Lehman Brothers collapsed, or something still higher? The higher the assets are valued, the bigger the cost to the taxpayer; the more they are valued in line with current conditions, the less it will help.

Then there's the matter of who will participate. Can hedge funds, private equity houses and institutional investors? And how will the government detoxify its new portfolio? Who on earth can be trusted to run it?

Perhaps the intelligence and skill which went to create all these infectious instruments can be turned to unwinding them. But it's almost inevitable that the most irresponsible market players will end up getting the greatest relief.

Even if the TRF does somehow do what it's supposed to, the financial system won't be in the clear. For that, the bazooka that the government used to destroy doubts about Fannie Mae, Freddie Mac and American International Group may have to be replaced by a cruise missile.

The US financial system is massively over-levered and undercapitalised. But every effort to take debt out of the system leads to price falls for assets which have been financed by debt - houses, stocks and, in this madly leveraged world, risky loans.

Worse, much of the debt used to finance these assets was short-term, creating a 'maturity mismatch' which invites crisis. When the financing isn't renewed, solid assets have to be sold into cash-short markets at pitifully low prices. The complex illiquid assets were just an especially toxic icing on a poison cake.

If a TRF changes the pace of deleveraging from frantic to measured, then perhaps the financial system can gradually return to balance. But a few hundred billion dollars of extra funding from the Federal Reserve - the sort of sums being talked about - may not be enough to do the trick. The total debt of the US financial system is US$15 trillion.

So, in the event that the TRF does not work, Uncle Sam will face further tough choices. One would be to let the deleveraging work its way through the system, causing more financial and economic chaos. But that seems unlikely given the country's low pain threshold.

The US would then be back in even bigger bailout territory. One route would be to further shore up the banks - either by pumping in equity capital or making long-term loans to cure the maturity mismatch. This would amount to a quasi-nationalisation. The other alternative would be to help borrowers keep up with their payments - either by arranging big write-offs or allowing inflation to really take off so making their debts easier to pay.

Even if the TRF succeeds, the US deficit will mount. But if not, the end result will be dramatically higher deficits and inflation. Given that inflation is already lurking and the US is a huge international debtor, the outcome would be a debauched currency.

[millionairemind]

Very good article below. Click on the link to read the full article.

Who knows where or when the crisis will end?
By Joe Nocera Published: September 20, 2008

It was the end of the worst week for financial markets since 1929, and Treasury Secretary Henry Paulson Jr. looked sleep-deprived.

He had begun the week agreeing to let Lehman Brothers go bankrupt, arguing that the government had to stop putting taxpayers' money at risk. Then, midweek, he brokered a deal to rescue the American International Group with an $85 billion loan from taxpayers - arguing that the risk to the financial system was too high to allow the world's biggest insurer to fail.
http://www.iht.com/articles/2008/09/19/ ... php?page=1