US - Subprime

Re: Subprime

Postby financecaptain » Fri Sep 26, 2008 8:30 am

Sorry. I meant US$60 trillion. To be precise US$54.6 trillion at the end of June 2008, down 12% from the US$62.3 trillion at the end of 2007. Source is from ISDA and report in FT on Thursday 25 September 2008. Thanks for pointing out the mistake.
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Re: Subprime

Postby financecaptain » Mon Sep 29, 2008 10:16 am

financecaptain wrote:Sub-primes and CDOs are not the only problems.
You have a CDS market that has a nominal value of US$60 trillion. They are traded OTC and not regulated. So difficult to estimate the damage.
Finally, economic slowdown will affect other parts of the credit markets like credit cards, consumer loans etc.
You have not seen technical recession in the US yet. Nor have you seen major earning downgrades in a big way.
Winter has not come, we are only experiencing autum.


Deleveraging
A fate worse than debt Sep 25th 2008
From The Economist print edition
Consumers and companies may be forced to cut back


IT IS ugly, but deleveraging is the word of the moment. Financial institutions, desperate to repair the damage inflicted on their balance-sheets by mortgage-related securities, sell assets. In doing so, they exacerbate the problem. Forced sales push down the prices of assets, worsening the balance-sheets of other investors, forcing more asset sales, and so on. In the end, the government is the only entity left in the game with a balance-sheet strong enough to keep buying.

The Bush administration’s bail-out plan, even if it gets through Congress, may not be the end of the finance industry’s problems. The travails of investment banks will inevitably cause problems for hedge funds, which depend for their finances on institutions such as Goldman Sachs and Morgan Stanley.

Many hedge funds have already cut positions since the credit crunch started in the summer of 2007, and banks have tightened the terms on which they will do business with them. This has been particularly true for those that sought funding through the prime-brokerage arms of Bear Stearns and Lehman Brothers before they were wiped out.

The volatility of financial markets may intensify the pain, since both brokers and hedge funds use models which lead them to sell assets when prices move down sharply. Some hedge funds may have to give up altogether. Around 15% more were liquidated in the first half of 2008 than in the first half of 2007, according to Hedge Fund Research, a consultancy.

What hurts finance affects the rest of the economy in spades. Tim Bond, of Barclays Capital, reckons that, thanks to the gearing effect, a shortfall of bank capital of around $170 billion may reduce the potential supply of credit by $1.7 trillion.

A cut in overall lending would be a complete reversal of trend. Morgan Stanley reckons that total American debt (ie, the gross debt of households, companies and the government) has risen inexorably since 1980 to more than 300% of GDP (see chart), higher than it was in the Depression. Consumers, in particular, were encouraged to borrow by low unemployment and interest rates and (until last year) rising asset prices. Their debt jumped from 71% of GDP in 2000 to 100% in 2007, a bigger increase in seven years than had occurred in the previous 20.

If consumers start to save more or borrow less, spending suffers. In the last three months, America has seen the weakest car sales since 1993, according to Bloomberg. A general decline in demand will cause businesses to shed jobs, creating further falls in demand and more bad debts.

Once started, the process is hard to stop. “What the financial and household sectors are doing is unwinding more than ten years of a credit boom,” says George Magnus, an economist at UBS. “The idea that they can rid themselves of this problem in a matter of months is pie in the sky.”

Then there are businesses. Thanks to strong recent profits, many firms are less geared than they were earlier this decade during the telecoms bust. Nevertheless, there are plenty of big borrowers around, including carmakers and businesses bought by private-equity groups. They may struggle to refinance their debts as they fall due. Martin Fridson, of Fridson Investment Advisors, says that the default rate on high-yield bonds may climb to 10%.

Even firms that are not heavily in debt may think twice about expanding. According to Morgan Stanley, changes in bankers’ attitudes to lending tend to lead business investment by three quarters. If the past pattern holds good, by the summer of next year investment may be falling at an annual rate of more than 10%. That will further depress economic growth.

The danger is of a “second-round effect”, as the crisis in finance affects the economy, leading to further problems in finance. Mortgages may be the problem asset of the moment but next year the worry may be about credit cards, car loans and corporate debt.

The Bush administration’s rescue plan aims to arrest this deleveraging cycle. But it will not be easy. “Eventually they will put the fire out,” says Nick Carn, a partner at Odey Asset Management, a hedge fund. “The question is how much gets burned between now and then.”
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Re: Subprime

Postby LenaHuat » Mon Sep 29, 2008 10:19 pm

The US Congress should include the suspension of the accounting rule "mark to market" in the $700 billion bailout plan. This accounting rule is the Damocles' sword hanging over the banks by a hair :twisted: There are extraordinary times not for generally acceptable accounting principles :mrgreen:
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Re: Subprime

Postby mojo_ » Tue Sep 30, 2008 11:20 am

Forbes.com Commentary

Suspend Mark-To-Market Now!
Newt Gingrich 09.29.08, 6:05 PM ET

Today, Congress voted against passing the bailout package for Wall Street. The stock market reacted immediately, falling almost 800 points. It is clear that something needs to be done, and in the coming days, a new package must be constructed that has the support of the American people that both deals with the liquidity crisis and sets the stage for long-term economic growth.

However, there is an immediate step that could be taken right now that would calm the markets and dramatically reduce taxpayer risk in any future government intervention.

Today the Treasury secretary released the following statement: "I and my colleagues at the Fed and the SEC continue to address the market challenges we are facing on a daily basis. I am committed to continuing to work with my fellow regulators to use all the tools available to protect our financial system and our economy."

While Congress and the White House consider next steps, the Treasury and its fellow regulators should follow their own counsel and take without delay the one regulatory action within their discretion that can help immediately to calm markets and dramatically reduce the taxpayer risk in any necessary government intervention: suspend mark-to-market.

Chief economist Brian S. Wesbury and his colleague Bob Stein at First Trust Portfolios of Chicago estimate the impact of the "mark-to-market" accounting rule on the current crisis as follows:

"It is true that the root of this crisis is bad mortgage loans, but probably 70% of the real crisis that we face today is caused by mark-to-market accounting in an illiquid market. What's most fascinating is that the Treasury is selling its plan as a way to put a bottom in mortgage pool prices, tipping its hat to the problem of mark-to-market accounting without acknowledging it. It is a real shame that there is so little discussion of this reality." (Emphasis added.)

If regulators on their own--or Congress, if regulators fail to use their discretion--can fix 70% of the financial crisis by changing the mark-to-market accounting rule, we should change the rule first before attempting to pass another reevaluated bailout package.

"Mark-to-Market" Accounting and the Origins of the Financial Crisis: Mark-to-market accounting (also known as "fair value" accounting) means that companies must value the assets on their balance sheets based on the latest market indicators of the price that those assets could be sold for immediately. Under such a rule, declining housing prices don't just reduce the value of defaulting mortgages. They reduce the value of all mortgages and all mortgage-related securities because the housing collateral protecting them is worth less.

Moreover, when a company in financial distress begins fire sales of its assets to raise capital to meet regulatory requirements, the market-bottom prices it sells out for become the new standard for the valuation of all similar securities held by other companies under mark-to-market. This has begun a downward death spiral for financial companies large and small.

More foreclosures and home auctions continue to depress housing prices, further reducing the value of all mortgage-related securities. As capital values decline, firms must scramble to maintain the capital required by regulation. When they try to sell assets to raise that capital, the market values of those assets are driven down further. Under mark-to-market, the company must then mark down the value of all of its assets even more.

The credit agencies see declining capital margins, so they downgrade the company's credit ratings. That makes borrowing to meet capital requirements more difficult. Declining capital and credit ratings cause the company's stock prices to decline.

Panic sets in, and no one wants to buy mortgage-related securities, which drives their value under mark-to-market regulations down toward zero. Balance sheets under mark-to-market suddenly start to show insolvency. This downward spiral shuts down lending to these companies, so they lose all liquidity (cash on hand) needed to keep company operations going. Stockholders--realizing that they will be wiped out if the companies go into bankruptcy or get taken over by the government--start panic selling, even when they know the underlying business of the company is fine.

The end result for the company is stock prices driven toward zero and bankruptcy or government takeover. The criminal liabilities imposed under Sarbanes-Oxley have driven accountants to stricter and stricter accounting evaluations and interpretations and have prevented leading executives from resisting them.


--------------------------------------------------------------------------------

The Problems with Mark-to-Market Accounting: William Isaac, chairman of the FDIC in the 1980s under President Reagan, recently wrote in The Wall Street Journal, "During the 1980s, our underlying economic problems were far more serious than the economic problems we're facing this time around. ... It could have been much worse. The country's 10 largest banks were loaded up with Third World debt that was valued in the markets at cents on the dollar. If we had marked those loans to market prices, virtually every one of them would have been insolvent."

Isaac continues, "But what do we do when the already thin market for those assets freezes up, and only a handful of transactions occur at extremely depressed prices? ... The accounting profession, scarred by decades of costly litigation, just keeps marking down the assets as fast as it can."

He concludes, "This is contrary to everything we know about bank regulation. When there are temporary impairments of asset values, due to economic and marketplace events, regulators must give institutions an opportunity to survive the temporary impairment. Assets should not be marked to unrealistic fire sale prices. Regulators must evaluate the assets on the basis of their true economic value (a discounted cash flow analysis). If we had followed today's approach during the 1980s, we would have nationalized all of the major banks in the country, and thousands of additional banks and thrifts would have failed. I have little doubt that the country would have gone from a serious recession into a depression."

Similarly, University of Chicago Law Professor Richard Epstein, among the best in the country at law and economics analysis, recently wrote about mark-to-market accounting for today's mortgage-related securities, "Unfortunately, there is no working market to mark this paper down to. To meet their bond covenants and their capital requirements, these firms have to sell their paper at distress prices that don't reflect the upbeat fact that the anticipated income streams from this paper might well keep the firm afloat."

Alex Pollock, former head of the Federal Home Loan Bank of Chicago, explains that when the economy is in the midst of a severe downturn, the use of mark-to-market accounting "reinforces the downward cycle of panic-falling prices-losses-illiquidity-credit contraction-more panic-further falling prices-greater reported losses-no active markets. Fair value accounting adds momentum to a destructive downside overshoot."

Reform or Bust: Because existing rules requiring mark-to-market accounting are causing such turmoil on Wall Street, mark-to-market accounting should be suspended immediately so as to relieve the stress on banks and corporations. In the interim, we can use the economic value approach based on a discounted cash flow analysis of anticipated-income streams, as we did for decades before the new mark-to-market began to take hold. We can take the time to evaluate mark-to-market all over again. Perhaps a three-year rolling average to determine mark-to-market prices would be a workable permanent system.

It is not widely understood that the adoption of mark-to-market accounting rules is a major factor in the liquidity crisis which is leading companies to go bankrupt. But it is destructive to have artificial accounting rules ruin companies that would have otherwise survived under previous rules.

For companies like Bear Stearns, Lehman Brothers and American International Group, suspending mark-to-market rules will come too late. But for the remaining vulnerable banks and corporations, doing away with the current mark-to-market accounting rules will safeguard against destructive pricing volatility, needless bankruptcies, job loss and huge taxpayer bailouts.

Suspending Mark-to-Market Only the First Step to Economic Recovery: In the wake of today's vote, suspending mark-to-market is an extremely important first step to take, but it is only a first step.

Congress should also consider a bold and dramatic program to restart economic growth and rebuild market efforts.

In particular, the Congress should look at the impact of the Irish 12% corporate income tax on attracting investment and jobs to Ireland and consider a dramatic cut in the U.S. corporate income tax (the highest in the world when combined with state taxes) as a step toward attracting high-value productive and desirable jobs back to the United States.

The Congress should look at the Chinese and Singapore growth patterns and match them by zeroing out the capital gains tax to induce massive flows of private capital to rebuild the market and minimize the need for a taxpayer-funded bailout.

The Congress should repeal Sarbanes-Oxley, which failed to warn of every single bankruptcy but provides a $3-million-a-year accounting and regulatory expense for every small company wishing to go public.

This is the kind of pro-growth, pro-entrepreneur program that would accelerate the American recovery and lead to the next economic period of real growth.

Former House Speaker Newt Gingrich is a senior fellow at the American Enterprise Institute (AEI). Emily Renwick is a research assistant at AEI and also contributed to this op-ed.
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Re: Subprime

Postby LenaHuat » Tue Sep 30, 2008 5:01 pm

Hi mojo

Thanks a million for the above excellent reference :D The US economy is oredi in ICU and the ICU ward is full. To **** with this man-made rule. As one senator said on CNBC : "This mess did not fall from the sky. Man created it and we can sort it out."

Singapore's got a noteworthy mention : :)
The Congress should look at the Chinese and Singapore growth patterns and match them by zeroing out the capital gains tax to induce massive flows of private capital to rebuild the market and minimize the need for a taxpayer-funded bailout.
and may I respectfully submit, in the manner of Paulson-speak to the US Congress, to let more immigrants in. :lol:
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Re: Subprime

Postby mojo_ » Wed Oct 01, 2008 4:15 pm

... subprime results so far :|

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Re: Subprime

Postby blid2def » Sat Nov 15, 2008 12:53 pm

I like to read the weekly Businessweek exposés. Everybody has more or less the same news reports, you read one, you've read five of them - just different cover sheets. Same for opinion, you read one, you've read five of them - just different coloured sheep, but all still sheep.

But insider stories and exposés, now that's a different thing. That's where the numbers we see actually take on a human face.

Sex, Lies, and Subprime Mortgages
Story: http://www.businessweek.com/magazine/co ... topStories
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Re: Subprime

Postby millionairemind » Mon Nov 17, 2008 10:48 am

I always enjoy the writings of Joe Stiglitz. Deep thinker and famed economist. He has written a couple of books on globalization. One of them - Making Globalization Work, which I really enjoyed.

JOSEPH E. STIGLITZ
Global Crisis -- Made in America

ANZEIGE

Joseph E. Stiglitz, 65: It should come as no surprise in a world of globalization that it's not just the good things that move more easily across borders, but the bad things as well. Now, America has exported its downturn to the world.

A global financial crisis requires a global solution. Uncoordinated macro-economic policies, for instance, have contributed to Europe’s problems. When the European Central Bank refused to lower interest rates earlier this year, focused as it was on the threat of inflation, while America's did, focused on the impending downturn, it led to a stronger euro. This in turn contributed to Europe's downturn, though it made America's GDP numbers look better for a while. Now, Europe's downturn is ricocheting back on America: Europe’s weaknesses are contributing to America's.

The same has happened when it comes to regulation. To too great extent, there has been a race to the bottom in accordance with the myth that deregulation breeds innovation. Instead, the innovation was greatest when it came to getting around the regulations designed to ensure good information and a safe and sound financial system.

Financial markets are supposed to be a means to an end -- a more prosperous and stable economy as a result of good allocation of resources and better management of risk. But instead, financial markets didn't manage risk, they created it. They didn't enable America's families to manage the risk of volatile interest rates, and now millions are losing their homes. Furthermore, they misallocated hundreds of billions of dollar.

The Human Toll

The consequences of these mistakes will run into the trillions -- not just the money that is being spent on the bailouts, but the shortfall between global economic potential growth and actual performance.


Beyond this, of course, is the human toll -- families whose life dreams are destroyed as they lose their homes, their jobs, and their life savings. If we are to maintain global financial liberalization, with financial products moving easily across borders, we must be sure that these products are safe and that the financial institutions who are selling them can stand behind the products they create.

Financial market regulators, at both the national and international level, have failed. To a large extent, Basel II, the new framework of bank regulation, was based on self-regulation, itself an oxymoron.
Banks have shown that they are not up to the task of managing their own risk. But even if they had, there is the more fundamental problem of systemic risk.

The current global financial architecture hasn't been working well. But more than that, it is unfair, especially to the developing countries. They will be among the innocent victims of this global crisis that wears the “made in America” label. Even countries which have done everything right -- those which have managed their economy with far better regulation and better macro-economic prudence than the US -- will suffer as a result of America's mistakes. Worse, the International Monetary Fund has -- at least in the past -- demanded pro-cyclical policies (raising interest rates and taxes, lowering expenditures when an economy goes into a recession), while Europe and America do just the opposite. The result is that capital flees developing countries in times of crisis, reinforcing the vicious cycle.

Flawed Governance Structure

There is mounting evidence that the developing countries may require massive amounts of money, amounts that are beyond the capacity of the IMF. The sources of liquid funds are in Asia and the Middle East. But why should they turn their hard earned money over to an institution with a failed track record; one which pushed the deregulatory policies that have gotten the world into the mess where are in now; one which continues to advocate the asymmetric policies which contribute to global instability; and one whose governance structure is so flawed?

We need a new financial facility to help the developing countries, one whose governance reflects the realities of today. Going forward, this new facility might lead to deeper reforms at the IMF. Such a facility needs to be created quickly, but if experts from the finance ministries and central banks are loaned out to this new institution, it could be up and running in short order.

There are further reforms that need to be undertaken. The dollar-based global reserve system is already fraying -- the dollar has proven not to be a good store of value. But moving to a dollar-euro, or a dollar-euro-yen system could be even more unstable. We need a global reserve system, for a global financial system. Keynes wrote about this at the time of the last big downturn, but the need today is even greater. His hope was that the IMF would create a new global reserve currency. He called his Bancor, much akin to the IMF's SDR (special drawing rights). This is an idea whose time may have finally come.

It is inconceivable that America would have prospered had it left the management of its financial system to the 50 separate states. They have a role, but that of the national government is essential. We now have a global financial system, but we are leaving its management to that of the individual countries. This system simply cannot work.

We will never achieve perfect stability of our financial markets, or of our economy. Markets are not self-correcting. But we can do a lot better. Hopefully, at the summit in Washington, the leaders of Europe and Asia will lead the way, beginning the task of creating the global financial architecture that the world needs if we are to have a stable and prosperous 21st century.
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Re: Subprime

Postby millionairemind » Wed Nov 19, 2008 8:42 am

A recovery in sight???

UPDATE 2-So. California home sales jump 67 pct, prices sink
Tue Nov 18, 2008 2:28pm EST

SAN FRANCISCO, Nov 18 (Reuters) - Home sales in Southern California in October leapt 66.7 percent from a year earlier and 5 percent from the prior month as buyers jumped on deep discounts in prices, especially for foreclosed properties, MDA DataQuick said in a report released on Tuesday.

Foreclosures, which abound in some areas of Southern California such as Riverside and San Bernardino counties east of Los Angeles, accounted for half of all home resales in October in the most populous region of the most populous U.S. state, pulling the area's median home price down to $300,000.

The median price tumbled 32.6 percent from a year earlier and 2.8 percent from September, the real estate information service said in its report.

A total of 21,532 new and resale houses and condominiums sold in the six-county region in October, the area's highest monthly total this year, the report said.

"Fueled by lower prices, Southland sales have risen on a year-over-year basis for four consecutive months, breaking a 33-month streak of annual declines," the report said. The median price was the lowest in 5-1/2 years for the region.

October home sales in many relatively affordable neighborhoods more than doubled from a year earlier thanks to a surge in loans insured by the Federal Housing Administration, which allows a down payment of as little as 3 percent.

They accounted for nearly one-third of all purchase loans in the region last month, compared with 2 percent a year earlier.

By contrast, use of larger "jumbo" mortgages common in higher-cost coastal neighborhoods remained well below normal levels.

"Before the credit crunch hit in August 2007, 40 percent of Southland sales were financed with jumbos, then defined as over $417,000. Last month just 13.1 percent of purchase loans were over $417,000," the report said.

It would be premature to expect big gains in sales to continue given the state of the economy and efforts to keep foreclosures in check, MDA DataQuick analysts said.

"It tells us there were a lot of very serious buyers in the market during late summer and early fall -- buyers who consider housing a relatively good buy or investment," said John Walsh, DataQuick's president.

"Whether the worst of the housing correction is behind us will depend largely on the depths of this economic downturn, especially with regard to job losses. Also important will be the outcome of recently announced efforts to reverse the tide of foreclosures," Walsh added.
"If a speculator is correct half of the time, he is hitting a good average. Even being right 3 or 4 times out of 10 should yield a person a fortune if he has the sense to cut his losses quickly on the ventures where he has been wrong" - Bernard Baruch

Disclaimer - The author may at times own some of the stocks mentioned in this forum. All discussions are NOT to be construed as buy/sell recommendations. Readers are advised to do their own research and analysis.
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Re: Subprime

Postby kennynah » Wed Nov 19, 2008 9:31 am

California home sales jump 67 pct, prices sink

the key word is underlined....prices sink....

for so long as this housing asset value does not go up, the recovery for equities mkt will be tough...
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