This weeks This American Life (Chicago Public Radio / Public Radio International) spends this week talking about the subprime -> mortgage -> CDO -> credit crisis in an hour-long segment, and it's the best coverage I've heard of it in any formal news media. They let the ratings agencies off way too easy - that bullshit was fraud outright - but even given that, it's not bad. If it hasn't aired in your area yet, or if it's going to repeat, it's worth catching, or recommending to people who still don't understand how we got here.

A brief note on oil, then to politics; oil is currently acting like a mo-mo stock, hitting $126.25/barrel this morning. In the short term - heading into a recession - I think the momentum of the last month or so is unsustainable, even in a flat production environment. You're also seeing a lot of press idiocy about oil being up each day "on a weak dollar;" the dollar is actually stronger, very slightly, than it was when oil was hanging around $105/barrel, and has been gaining strength the last couple of weeks while oil shoots up to the moon. (The US dollar is up 2% against the basket as oil goes from $115/barrel to $127/barrel. There is cause-and-effect here, btw.) But hey, what's reality got to do with news?

Talking of news, Glenn Greenwald today reports on the broadcast media's continued refusal to cover the illegal domestic propaganda campaign waged by the Pentagon, no doubt because they helped so much. There's been a document dump, and amoungst the things you can trace in those documents are the locking-out of analysts who went off-message, and the co-ordinated attempt to discredit Amnesty International's report on conditions at Gitmo. I wonder how long the network news organisations can continue their silence on this matter?

Meanwhile, Senator John McCain continues to run for Chief Executive Bush's third term, claiming the problem with abuse of power in the Bush administration has been not any claimed powers of the executive (including but not limited to being above both Congressional Law and Constitutional restraint, being able to spend against Congressional law and to block spending by Congress, and, oh yes, editing laws at his whim), but "activist judges" who get in the Chief Executive's way.

This leads, in turn, to that latest attempt by various Democrats to revive retroactive immunity for telecom lawbreaking in illegal domestic spying by the administration. The ACLU has an action item up against it, along with more details than previously reported. The reported plan is to work it in to a "compromise" bill that grants Chief Executive Bush basically everything he wants, as always. As always, it's about closing down the last functioning route to investigate these crimes, and making clear and obvious lawbreaking retroactively legal. I strongly recommend you take action. (Pointer courtesy slashdot and hubbit.)

In other politics, the American Psychological Association has, inexplicably, named two determined opponents of the transgendered to a work group assigned to revise the Manual for Diagnosis of Mental Disorders in preparation for the DSM-V. On the Task Force assigning the workgroup members is Dr. Ray Blanchard, a proponent of the idea that people with gender identity disorder are actually paraphiliacs, or men who have a fetish for forced feminisation. (The proponents of this theory ignore ftm men - half the transgendered population - pretending and sometimes even stating outright that they don't actually exist.) He's assigned Dr. Kenneth Zucker to the workgroup as chair; Dr. Zucker is a proponent of "reparative therapy," a hobbyhorse of the anti-gay "ex-gay" movement, only this time applied now to gender identity disorder. There is, of course, no doubt that this would, if institutionalised against GID, also be used against lesbians and gay men.

[ETA:This story must be going around, as elfs also posts about it, and adds Obsidian Wings' coverage of an NPR story that follows two GID children, one getting okay-let's-deal-with-it treatment and one getting reparative therapy. Guess which kid is all screwed up? ;_; ]

And in other outrages, this story of gang-rape going unprosecuted will be disturbing to anyone sane. And apparently some are shocked! Shocked! that proponents of Michigan's anti-gay anti-marriage amendment would lie about its impacts on domestic-partner benefits. Blocking recognition and benefits for even the children of queers was the entire fucking point, and if you listen to them talking to their core, in their own media, they'd say things like that out loud. But, as always, the mainstream media takes liars at face value without the first hint of fact or consistency checking.

So there you are. Good morning!

Something the friendly folks at Minyanville have been talking about for a while is how social change and economic change work together, and how this will trigger a social change away from spending. Essentially, the things you can't have become uncool, in the classic "fox and grapes" scenario. You can see USA Today's take on that here, wherein they note how, for example, Ellegirl.com, the teen offshoot of Elle magazine, launched a new video fixture called Self-Made Girl, which shows teens how to make clothes and accessories. Mish talks more about it here.

In that context, I present these items:

Gin, Television, and the Social Surplus, an article from the Here Comes Everybody blog about new participatory media and collaborative activities taking away from passive activities such as television, for the better. You should read it, and then you should read:

The Gospel of Consumption, and the Better Future We Left Behind, talking about the end of the 6-hour workday and the quite-intentional development of the consumerist society in the 1920s and 1930s, when industrial leaders feared that too much productivity would destroy the business world, and their solution to that dilemma.

Then, finally, we have something of a synthesis of the first article's idea of "cognitive surplus" and the second article's advocacy of "free time," over here, in roozle's livejournal, wherein Rachel disagrees with National Association of Manufacturers president John E. Edgerson's 1927 comment, "Nothing breeds radicalism more than unhappiness unless it is leisure," and has other comments on collaborative tools and networked communications vs. the "real world" with which I take issue, but that's a secondary point.

Essentially, all of these are talking about paths away from having things and watching things (in both cases, consumerism, and largely passive) into more participatory activities that, arguably, innately are about the creation of value, if in no other way value of community, all in ways that involve taking power (in this case, creative and/or economic) away from higher-degree concentrations of power, either by doing things yourself, or not caring particularly what other people decide to offer to you.

And all of that goes back to the argument I've been making (on and off, here, but sadly not lately) about the reversion to a more dispersed formation of power, and the ability (or, more commonly now, lack thereof) to force the degrees of concentration of power seen over the previous couple of centuries.

I don't have a conclusion to hand you from this set, I'm afraid. But it is interesting seeing these kinds of things keep popping up.

Okay, so what else do I have open still, in my econ browser? Let's see!

The Federal Reserve is moving to accept a wider range of funds, including those backed by credit cards and automobile loans as collateral. Jesus, why not just take IOUs? If you add this move - and yet more expansions of the latest rounds of new "liquidity" vehicles - that's $462 billion in cash and Treasuries plus the discount window plus the PCDF and that all adds up to somewhere around US$600Billion with a B in liquidity injection. That's a fuckload of dollars.

Oh, and late Friday night, student loan funds got added to the list, just a few days after Bernanke said that wouldn't happen. So it was going to happen, just after a denial and late in the news cycle.

A mostly non-reported story (except over at Market Ticker) is that a bunch of the "improvements" in bank financial situations over the last month or so has been a mass migration of funds from "Level 2" asset categorisation (distressed market, but sellable) to "Level 3" (no functional market or no sale desired, describe according to model). This lets banks take funds with a paper (or face) value of $N but which are selling for the much smaller $Y and pretend on paper that they're actually still work $N, thus letting them pretend none of those market losses have actually happened. How is this possible? Magic! Plus US$600B in "liquidity injection," as above. How long does this work? I don't know.

But the Fed wants vast new powers to do even more, powers that Mish calls fascist, stating that the "proposal essentially would grant vast authority to the Federal Reserve and the government to virtually control markets. It will give them the ability to gather private market information and unilaterally decide if positions taken with that private money for private investment is somehow negative for the financial system. It could then force the unwinding of those positions. Initially the powers will be used to supposedly prevent over leverage in the system (that the Fed created itself). But it doesn't exclude the situation where a hedge fund that is long puts can be forced to unwind those puts at the government's discretion."

Meanwhile, the Centre for Economic and Policy Research notes a new vacancy record, and states outright that "The rate of price decline will destroy almost $6 trillion in housing wealth this year." There's some discussion of the LA market here, and a Case-Shiller graph of interest here. Good times.

No link for it, but the majority of credit-card users carry a balance month-to-month. That average balance is US$17,000. That makes my eyes bleed. Here's a story about the great business pawn shops are doing, talking about how people are pawning anything and everything to pay for gas. (Or selling things outright on eBay and Craigslist. Or both.) Brad Setser notes that sovereign investors continue to treasury market afloat.

Oh, and Mish finally took apart that jobs report that showed "only" 20,000 jobs lost in the latest reported month. (A gain of 150,000 is needed to keep up with population, btw.) That number is a farce; with almost all sectors actually surveyed showing major job losses, the Fed jiggered the "birth/death model" to create 267,000 jobs statistically, including 45,000 new jobs in construction and 72,000 in professional services, all of which are sectors in continued rapid contraction. You can read the details here. Noriel Roubini provides a similar (tho' smaller) breakdown of the first-quarter GDP results here.

Quick check-in post again, really; here are things I've been thinking about.

Half, yes, half, of Alt-A and subprime loans made after 2005 are going underwater, which means the loan value will be higher than the property value. Of the oldest of these, which are the least affected, 33% of alt-A and 60% of subprime are 60 days late or greater. We're talking about US$800B exposure, with about half of that probable losses at these rates. S&P, about which I have other bad things to say, is lowering their estimation of recovery rates on the CDOs built from these things, putting AAA-rated at 60% recovery (40% loss of principal), AA-rated at 5% recovery (95% loss of principal), and everything below that (A, BBB, BBB-) at zero.

That's more or less what the CDO market, such as it it, has been saying - modulo people willing to buy trash hoping for a surprise home run.

Oh, and one of the bad things I have to say about the ratings agencies - that they're basically engaged in mass denial - is directly fueled by a massive and intrinsic conflict of interest documented here. In short form, the ratings agencies are paid by the issuers, and if the issuers don't get the ratings they hope for, they don't pay the agency. And go trying again at one of the other two charted agencies. But they insist that everything is just fine, of course, despite train-wrecks like the above.

In other news Russian oil production may have reached its second (and this time non-Soviet-ineptness-produced) peak. Russia has been one of the few oil success stories in recent years, having recovered from a previous, Soviet-era peak-and-fall that was driven in large part by the usual incompetence. This appears to be more akin to what we're seeing in other areas; existing superfields drying up, new fields expensive, difficult to find, and smaller.

Finally, the rumours flying around continue to be super-crazy, but one of them has me wondering: What's interesting about 2010? Other than the Vancouver Olympics. I also know that some less-than-crazy observers are charting possible total liquids peak (as opposed to conventional crude peak, which, so far, remains a couple of years behind us) for around then. But what else happening then might, say, push a large trading house to bet everything it has towards accumulating as much capital as possible before 2010, and not care what happens after?

It's just a rumour, but it's a curious one, so there it is.

Over the last two weeks, the banks needed to borrow an additional US$40B to meet reserve requirements (for some value of "reserves" which can be described as "money borrowed from the Fed"), bringing the total bank non-borrowed reserve figure to a dizzying, terrifying, and utterly unprecedented US$-101,385,000,000. (That's negative, again.)

Date	Total	Nonborrowed	Required	Monetary base
Apr. 9p	42565	-101385	40329	831666

Here, have a credit-market potpourri, before I get back to music stuff:

No more 100% LTV mortgages in Great Britain, which is not immune from the credit crunch and housing downturn. Meanwhile, Washington Mutual is getting out of the wholesale mortgage business entirely. They were a major wholesaler, so that's going to put another crimp on lending.

One of the current responses (this one by Rep. Mark Kirk (R-IL)) is HR 5649, which nationalises $300B in mortgage debt. Read that again. US$300 billion:

6.A.1) AUTHORITY- The Corporation may issue bonds in an aggregate amount not to exceed $300,000,000,000, which may be sold by the Corporation to obtain funds for carrying out the purposes of this Act, or exchanged as hereinafter provided.

It also forgives underwater portions of loans acquired, lets people pick random-ass payment schedules, and all sorts of junk. It also authorises equity loans. Damn, that's a lot of new debt, and damn, that's one big hunk of nationalisation. But it is the sort of large-scale intervention the IMF wants, only it wants it globally. Hm, difficult.

Incidentally, pending home sales fell more than expected again in February. Boston Fed president Eric Rosengren is shocked! Shocked! that housing hasn't recovered yet.

Auction-rate securities auctions continue to collapse as well. Rates for municipalities are going through the roof, which is bad; Jefferson County, Alabama is desperately trying to avoid the largest government bankruptcy in history. Dole Foods and the Tribune Company are having to draw down on bank lines to avoid default. That's also bad. Student loans are facing more troubles as Education Resources Institute Inc. files Chapter 11. They're a student loan guarantor, reportedly a large one; bad again. But you are starting to see some more credit movement, even if it's discounted nontrivally. (Later reports put that at 85¢/$1, rather than 90¢.) And the commercial real estate bond spreads are, while still very high, out of crazytown. At least, the higher-rated tranches. That's good, too; we'll see whether it lasts.

But overall, the CEO of Morgan Stanley says things are the worst he's seen in 40 years. Alan Greenspan sees that and raises him a decade to 50 years. Oh, and oil bounced off a new intraday record of $112.21/barrel before closing at an astronomical $110.87. I'm already seeing $4/g for diesel; it looks like regular unleaded won't be that far behind.

This is again mostly a post of things I read and thought worth keeping up on a tab. No theme, sorry.

Miami's real estate market is remarkable at times, with a $1.1m waterfront property receiving no bids. They stopped asking at 91% off.

American media is mostly a travesty; the economic media is proving out to be pretty damn bad too, tho' not as bad as the Court at Versailles so-called political press. But it's close. Naked Capitalism asks why the American media continues to accept Bush administration pronouncements at face value when there have been so very many obvious lies that have been proven lies - yet press behaviour remains unchanged. In this case they're talking economics, but note the parallels to the political world.

They're talking about a lot of things in that post, amoungst them the so-called reform plan which will give the Fed sweeping new powers. Note the commonality here: when there's a fuckup, particularly if it's related to a series of government failures, the Bush administration response is to grab more power, even if (in a semi-opposing view) the powers sought don't address the problem. Mish, more bluntly, calls various reforms being floated around open invitations for corporations to lie. No one seems to be suggesting that this increases transparency, which is really what's needed.

But I degress. Back on the press: one example of the problems with the American press is that it is still talking about whether there's going to be a recession, despite the fact that it's pretty damn clear we've already entered one. (407,000 jobless claims are a pretty good clue tho' only the latest.) The Australian press, on the other hand, says the Bear Stearns buy-out/bailout was necessary to avoid a Great Depression. (The Treasury came out a couple of days later and said much the same thing, but again, dancing around about the language.) The UK Telegraph talks outright about the Nordic-style nationalisation that's started in the US.

In response, Genesis over at Market Ticker is extremely angry about some of the details of the Bear Stearns deal, noticing that essentially the $30B in loans is a de facto giveaway of money which he considers illegal and grounds for impeachment of Chief Executive Mr. Bush. Mish agrees that the de facto payoff of $30B to J.P. Morgan (basically a bribe to buy Bear Stearns) was blatantly illegal, shredding it in a line-by-line deconstruction. (With further commentary here; he claims even the vote to take action was illegal, taken without a quorum.)

Meanwhile, consumer debt is in its worst condition since 1992. 70% of tax refunds are going to pay of credit-card debt, giving rise to a general impression that the tax "rebate" coming out later this year will do the same.

The smallest bit of good news can be seen in the AAA ABX, where for the first time in months, there's a tiny bit of a rally in AAA ("up" here is good), and the CMBX indicies off their highs (remember, "up" == bad here) and forming a bit of a channel at merely "horrific," and off of "end of the economy." And private commercial spreads are still high, but well off their upward spikes. But Fed commercial paper spreads are shooting back up (again, up == bad), and somebody asked for an assload of money yesterday at the discount window and didn't get it. But they could've just gone to any of the other bazillion little windows the Fed has been opening. I just don't know.

Finally, I got private mail about the Senate not extending the power of bankruptcy judges to rewrite contracts to lower mortgage payments. I'm a bit torn, in that I can see how this could provide some relief - sort of establishing a demi-bankrupcy where the house debt is concerned - but I think it could also have horrific consequences for contract law, and "law" has already taken enough hits these last few years. So I'm ambivalent at best.

I'm still fighting this Martian Death Flu so I'm not doing a lot in the way of econ reading and stuff - mostly I'm napping and otherwise lazing about, frankly - but I did want to get a heads up on this:

Mish at Global Economic Trend Analysis has pretty good evidence that Citigroup is committing credit fraud on a possibly massive scale by lying to customers about rate changes in a marketing effort to get people not yet in trouble to refinance mortgages at higher rates. They're listing "projected" upcoming rate adjustments which are fictional, and significantly higher than apparent reality. So consider yourself warned if you are dealing with Citigroup.

Documents (scans, etc) in Mish's post, and yes, he shows his math.

...the penny is exactly equal to the ¥en.



In the extended print, it's four decimal places of zeroes, not just two. Exact parity. I guess this makes all my American money Japanese, and all my Japanese money American, for the moment.

Dollar index through the floor at 70.872, ¥96.45, the Euro buys $1.59. These are monstrous moves.

J.P. Morgan is "buying" Bear Stearns for $2/share, down from $30 at Friday's close, or from $57(!) on Thursday. They're basically buying it for the cost of the Bear Stearns headquarters building. The Fed also cut the overnight rate by a quarter percent, expanded its lending pool again, and has guaranteed J.P.Morgan against losses via $30 billion in "financing" of Bear Stearns's "less liquid assets." What that means is as good your guess as mine. Marketwatch calls it an attempt to stop a global bank run on Monday. Does this take another $300 billion off the US equity markets, like Friday? I don't even know. But it's at least three billion on its own - Bear Stearns's stock value EOD Friday was $3.54B; this marks it to market at $234M, thats M, or a US$3.31B with a B loss. Before this deal, people were talking about buyouts for as little as $15/share - $2 wasn't really on the radar, somehow.

Not at all idly, Bear Stearns listed "notional/contract amounts of approximately $13.40 trillion and $8.74 trillion, respectively, of derivative financial instruments, of which $1.85 trillion and $1.25 trillion, respectively, were listed futures and option contracts." Nnnnnnnng.

Overnights on gold, oil are through the roof. Equities markets open globally (where it's Monday already) are tanking. Interest rates on the 10-year treasury are through the floor in response to panic buying. (Again, these are over-the-counter/overnights.) And it's going to be a festival of margin calls, and not just in North America, either, as the Times asks who is next?

(Meanwhile, more on the so very, very, very unfortunate timing of the Elliot Spitzer downfall. Karl Denninger reported on KFYI that there was cheering on the trading floor when the news broke.)

ETA: Rumours say that CNBC reported Hong Kong is not going to match the Fed rate cut, which implies delinking their currency from the US dollar. No good source, tho'.

ETA2: Spotted on Market Ticker forums: US losing confidence vote as investors flee:

Asian, Mid East and European investors stood aside at last week's auction of 10-year US Treasury notes. "It was a disaster," said Ray Attrill from 4castweb. "We may be close to the point where the uglier consequences of benign neglect towards the currency are revealed."

ETA3: More Market Ticker, where they're up all night about this; who owned lots of Bear Stearns stock as of the end of the year(ish)? And whose shares have lost 98% of their value since the date of these figures? These guys did, that's who:

Institutional
Barclays Global Investors, N.A. 3,676,161 $324,421,208 2.69% 9.16% Low
Barrow, Hanley, Mewhinney & Strauss... 11,485,058 $1,013,556,369 8.41% 28.61% Low
Cayne (James E) 5,838,906 $466,295,033 4.28% 13.16% Low
Legg Mason Capital Management, Inc. 5,732,794 $505,919,071 4.20% 14.28% Low
Lewis (Joseph) 11,053,463 $975,468,110 8.09% 27.53% Low
Private Capital Management LP 5,541,259 $489,016,107 4.06% 13.80% Low
State Street Global Advisors (US) 3,550,715 $313,350,599 2.60% 8.84% Low
Van Kampen Asset Management Inc. 4,482,424 $395,573,918 3.28% 11.17% Low
Vanguard Group, Inc. 3,149,691 $277,960,231 2.31% 7.85% Low
Wilmington Trust FSB (Boston) 27,336,556 $2,183,097,362 20.02% 61.62% Moderate

Mutual Funds:
American Beacon Large Cap Value Fun... 862,450 $97,974,320 0.63% 2.77% Income Value
Janus Twenty Fund 1,572,815 $178,671,784 1.15% 5.04% Growth
Legg Mason Value Trust, Inc. 2,300,000 $202,975,000 1.68% 5.73% Core Value
Nordea 1 Sicav - North American Val... 842,012 $117,881,680 0.62% 3.33% Core Value
Putnam Fund for Growth and Income F... 1,035,205 $91,356,841 0.76% 2.58% Yield
Van Kampen Comstock Fund 1,092,500 $97,942,625 0.80% 2.76% Deep Value
Van Kampen Equity & Income Fund 1,811,328 $162,385,555 1.33% 4.58% Deep Value
Van Kampen Growth & Income Fund 1,485,200 $133,148,180 1.09% 3.76% Core Value
Vanguard 500 Index Fund 1,096,625 $96,777,156 0.80% 2.73% Index
Vanguard Windsor II Fund 7,867,700 $694,324,525 5.76% 19.60% Income Value

Hopefully these people have been getting out. Because damn. Anyway, I'm going to bed now. I expect things should be explosive tomorrow, by which I mean AAAAAAAAAAAAAAAAAAAGH!! Good luck.

US dollar index at 71.676; US$1 = ¥99.01, €0.6375, all decade or record lows.

The Wall Street Journal describes it as the US receiving a margin call; essentially the last few days saw a run on Bear Stearns. That, and their position was considerably weaker in reality than Alan Schwartz had allowed on Monday, when he called liquidity concerns "totally ridiculous." I personally cop to "considerably weaker in reality than...allowed" being an unduly polite way of saying they were lying through their teeth. Their awfully, awfully short conference call today blames everything on "untrue rumours," which I have to admit I find kind of funny; The Exile, an extremely cranky newspaper of American emigrants living in Russia, notes the direct comparisons to the Russian collapse in the 90s, which was blamed, over and over again, on "rumours." Dr. Roubini at RGE Monitor notes that this is Stage 9 of his 12-step path to a really bad outcome. Also, the Telegraph has this to say:

The 'monoline' bond insurers - MBIA, Ambac, and others - that guarantee most of the $2,600bn market for US municipal bonds have seen their shares collapse by 90pc since the Autumn.

They are still battling to raise enough to capital to save their 'AAA' ratings. Should they fail, the insured bonds will be downgraded in lockstep. Pension funds would be forced to liquidate huge holdings. As New York Governor Eliot Spitzer said before his own liquidation, such an outcome is too dreadful to contemplate.

You have to go back to the banking crisis of the Great Depression to find a moment when the financial system as a whole seemed so close to the precipice.

The Financial Times reports that the International Monetary Fund is telling states to prepare for the worst:

He urged policymakers to “think the unthinkable” and prepare now for what they would do if the worst case scenarios materialised and “low probability but high impact events” threatened to jeopardise global financial stability.

He warned of the risk that a “global financial decelerator” could take hold, in which rising defaults and margin calls from lenders triggered forced asset sales, driving down the value of collateral and forcing further forced sales.

The IMF deputy managing director’s comments make it clear that the fund is open in principle to the possibility of taxpayer-funded intervention in the market for mortgage securities as well as intervention to save individual banks from bankruptcy.

Meanwhile, the CPI came out flat, clearing the way for a possible new large rate cut on Tuesday. Except nobody believes that energy costs fell 0.5% in February; just for example, Fil Zucchi at Minyanville says the CPI report "defies credibility," and some are going so far as to call the report "cooked." (That link also has some good Bear Stearns ranting.)

Lost in the noise is that mortgages continue to deteriourate, particularly alt-A and prime. Yes, prime. Almost half of defaults are now alt-A and prime loans - at least, officially. Also, more funds are halting redemptions.

Have some bullet points:

• Here's a sourceless rumour: there's serious talk of major central-bank coordinated action again, probably Sunday night, partly to Do Something about the collapsing US dollar.
• I'd love to know why the Fed Funds Rate Data stopped updating a couple of days ago. It's probably nothing, but the timing is poor.
• Washington Mutual got downgraded to one step above junk today by Moody's - the same agency that gives AAA ratings to bankrupt CDO-based funds. If they're calling WaMu Baa3, one starts to assume that WaMu is only not bankrupt because nobody's asked them to check lately.

So that's the wrap-up. Enjoy the weekend.

ETA: Stranger link courtesy cow ^_^

ETA2: I keep forgetting to pull this link sent me by hubbit: Americans are staving off bankruptcy by cashing out 401(k) funds. DO NOT DO THIS. EVER. 401(k) are about the only thing you can't lose in bankruptcy. Sadly, Americans either don't know this or are doing it anyway. DON'T.

Is the market seriously telling me traders had actually believed all the "everything is fine here" bullshit?

Apparently, it is.

Wow.

ETA: Marketwatch links to their First Take with the text, "Bailout shatters trust." If that's true and people have been believing all these pretendings and lies and now the shingles are off, then OMG we're in for a ride down now.

Pulled up the exchange rate toy:

1 Can$ = US$1.0100 = ¥101.1110

Right, um, not much post today. The US$ is tanking, hard. It was actually up for a couple of days in a row, then fell over today. If it falls below ¥100.20 decisively then technical targets, I'm told, are in the ¥80 area. Fun times. This is only part of why oil bounced past US$110/barrel today tho'.

Minyanville asks, Can the Fed go Bankrupt? quoting the Financial Times as describing the new US$200B Fed plan as using “the best quality mortgages” as collateral for Treasuries. Here's the problem: the "best quality mortgages" in question are crap. And Karl at Market Ticker found the article and blogged about it before me, but I did find it on my own: Bloomberg did an investigation into the "AAA" CDOs, which are the kind of residential mortgage securities being used as collateral here. Only six (6) of 80 are actually worth their AAA ratings, and yet they all continue to have AAA ratings from at least one agency. The appalling (yet brilliant) interactive Shockwave chart must be seen. 74 of the 80 "AAA" CDOs they checked were below investment grade. 14 are effectively bankrupt outright already. Despite this all 80 have AAA ratings from Moody's. Of the 14 bankrupt CDOs, 13 also have AAA ratings from S&P. Fitch does less badly. And again: only six actually deserve their AAA ratings.

This is a farce, and it has been a farce, and it continues to be a farce. It's also fraud.

BTW - Fitch, being the least bad of the three, downgraded Countrywide as an issuer today to BBB-. Buh-bye.

As for the rest, no real analysis, just some links. Mish notes that everything has been worse than expected so far, and recommends continuing to bet on that when people say things like "no recession" and "mild recession" and all that. Kevin Depew describes Americans as "shot by both sides." And something is going on that we can't see; in addition to the US$200B new facility, and the TAF being expanded to US$100B, and the regular discount window operating at US$77B, today's 10-year bond action was freaky weird. Carlyle Group expects asset seizures by banks and seems to be going under in the next few days; Morgan Stanley has an emergency conference call scheduled for Friday at 2pm (these are never good); and everybody and their mother is looking at Bear Stearns for an explosion of some sort, with Washington Mutual hanging around the corner. Maybe one or more of those is it.

Okay, so, there are these things called "black swan events." They're unpredictable (or at least, essentially unpredicted) disruptions of major scale. Near-turm peak oil with a substantial decline rate - over 2% - would probably qualify as one, despite some predictions of it, since that continues to be unplanned for and has a 20-year recovery timeframe. It causes massive systemic disruption along the way.

There is a huge - I mean massive - derivatives market out there in financials. I don't understand it. At all. As far as I can tell, nobody really does. I've been trying to get some vague hint of a grip on its scale since I first really started hearing about it in 2006. I've heard numbers like $150 trillion notational dollars (and up!) and haven't known what to do with that kind of number. Because what do you do with that kind of number, when your GDP is $15 trillion? Seriously - what?

It's my favourite, by which I mean most terrifying, candidate for a black swan economic event. And I still don't have a good grip on it. Either all this shit cancels itself out once things start to fall down - in that there's a big set of swaps that add up in the end to zero, or close to it - and it ends up not mattering, or the game is over. Completely, totally, fucking over, and it's time to unplug the machine, swap the power supply, and hope you can salvage the processor. It's one of those two things. I have been, and continue to be, betting on the former, despite what comes next here.

Marketwatch's Paul Ferrell reports that the actual number is more like $516 trillion notational, with an actual fall-out value of somewhere around $11 trillion. That's, again, against a GDP of $15 trillion. And as Financeguy on the Market Ticker Forums points out tonight, that market, like most of the other ones, is in trouble.

Now, you can't really plan for this. You can't really plan for a hard reboot of the entire financial system. I can't tell you what to do because I don't know. It's the kind of situation where since you cannot, definitionally, plan for the bad case, you plan for the one you can plan for, even if it's less likely, or unlikely. And in that case, it all falls in on itself and reduces to a much smaller number that, while nasty, can be handled as part of the rest of the credit implosion.

That's how you end up hoping the economy only takes a $1 trillion dollar hit over the next couple of years, instead of, well... who knows?

And that's why I haven't been talking about it. Because I'm hoping it just goes away.

Okay, so late Friday, things started to happen. As I'm posting this, it's already Monday in Asia, and the dollar is tanking again - new record lows, falling below 101 yen, .68 euros, all that. Bloomberg reports traders are expecting a Fed funds rate cut to 2%, which is well below a ZIRP at this point. We'll see what happens.

Much more interesting was the late-Friday boost in the TAF - kind of like the Fed discount window, only secret (now with extra opacity!) from US$60B to US$200B. That is a absolute Imperial assload of money, and is yet another attempt to restart credit markets and slow down margin-calling. Not easy. In particular Washington Mutual is thought to be in severe, severe trouble, and is begging for cash anywhere it can get it, leading some to worry about FDIC action. But they are not the only ones - the problem is starting to be recognised as systemic. Various sources describe this as the worst the markets have been in living memory:

''We are in historic scarier-than-all hell territory,'' said T.J. Marta, an analyst who monitors the fixed-income markets for RBC Capital Markets. ''I am hearing many people say that the market is more broken now than it ever has been.''

As crazy as they already are, it's not getting any saner yet - MBIA, one of the monoline insurers everyone is trying to pretend is still credit-worthy, asked the one rating agency which downgraded it at all to stop publishing ratings on them! I mean what the hell, people?! The credibility of these rating agencies is truly destroyed at this point. Mish (previous link) opines:

I like this solution actually, provided it would be carried to the logical conclusion: Moody's, Fitch, and the S&P should all lose government monopoly sponsorship. The big three rating agencies are clearly unqualified to rate anything. The conflicts of interest are stunning. They should all stop simultaneously.

He also notes separately that the credit markets are in a panic for the third time.

The strains are showing up everywhere. Hedge funds are blocking withdrawals. Countrywide has another new problem: a reported Justice Department investigation. That's not going to calm anyone down or make any friends. As a reminder, in case you forgot, it's not just the US credit markets; the European LIBOR spreads are also rocketing up. Brad Setser at RGE Monitor has one word for the current situation: Grim. The New York Times had a widely-read article over the weekend noting that the entire post-2002 expansion proceeded without wage gains, and that most Americans are still making less than before 2000. And Paul Krugman asks what's to be done, quoting some interesting testimony from the president of the New York Fed. (Sadly, Krugman's interpretation is... reasonable.)

And several people have linked to this analysis, which calls the Fed actions "covert nationalization, describing the Fed as "Wall Street's genial pawnbroker." I like this section:

What we are witnessing is an incremental, partial nationalization of the US banking system. Northern Rock in the UK is peanuts compared to what the New York Fed is up to.

You may object, and I'm sure many of you will, that our little thought experiment is bunk, debt is debt and equity is equity, these are 28-day loans, and that's that. But notionally collateralized "term" loans that won't ever be redeemed unless and until it is convenient for borrowers are an odd sort of liability. ...

I do not, by the way, object to nationalizing failing banks. There are (unfortunately) banks that are "too big to fail", whose abrupt disappearance could cause widespread disruption and harm. These should be nationalized when they fall to the brink. But they should be nationalized overtly, their equity written to zero, and their executives shamed. That sounds harsh. It is harsh. One hates to see bad things happen to nice people, and these are mostly nice people. But running institutions with trillion-dollar balance sheets is a serious business. Accountability matters. These people were not stupid. They knew, in Chuck Prince's now infamous words, that "when the music stops... things will be complicated.", and they kept dancing anyway.

Market Ticker has a new open letter in response to all that that he's inviting other people to sign and send in themselves. You might give it a read.

(ETA: My contrarian sense is going off a bit. If this weren't of such scale and so systematic (and we weren't clearly in a recession already) this is right about where I'd be looking for things to get better. But it really is that kind of bad. So, well, yeah. Messy and random!)