Ice Holes

Below is the five year tracking chart of the DJIA, which gives a substantially different view of the overall market than the single-day tracking chart of this morning. In yet another example of self-fulfilling prophecy realized, the market dove off a cliff this morning, then climbed back up again. Don't know about you, but for me this manipulation for the benefit of a select few at the expense of the rest of the planet is getting very, very, very, old.

At this point I think it best to just shut the son-of-a-bitch down for a week.

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part of the normal cycle of the markets? I have the sense you are trying to assess blame on people who might have seen the warning signs that many others ignored for a very long time. There is a lot more to shake out before this settles down. When the market continues to learn the roots of this credit crisis go deeper than ever believed to be possible, it is going to react. The WaPo highlights some of what is behind the latest:

For months, some economists had argued that Asian countries remained largely insulated from the problems in the United States because of strong growth in China and India. But recently, companies and financial institutions in those countries have announced that they, too, contain significant exposure to the subprime mortgage securities that have collapsed in the United States.

The markets fell as fears spread that massive losses on loans made to U.S. home buyers would cascade through the world financial system. Some of the firms that play important, but usually invisible, roles in the global financial architecture are turning out to be exposed to the downturn in the housing market in such a way that their ability to function is threatened.

The companies that insure bond investors against defaults are having to make massive payouts. One, ACA Financial, owes $60 billion that it cannot afford to pay and has been taken over by the Maryland insurance regulator. Its credit rating has been lowered.

The problems among bond insurers have meant that a wide variety of financial institutions cannot count on receiving payments due them, causing further losses.

Those losses could have importance beyond the hit they cause to the banks' share prices. Banks and other financial institutions play an important role in an economic downturn: lending to businesses and consumers so they can help the economy get back on track. The multibillion-dollar losses could make them unable to play that role.

And who else do they suspect has also been key in setting this up? The rating agencies who are supposed to provide a backstop with independent guidance on investments may have introduced new conflicts of interest into their ratings of bonds backed by subprime mortgages. So the market is learning that Moody's, Standard & Poors and Fitch have been assigning ratings that don't accurately reflect the risk. Now we are finding out the AAA ratings they gave to some of these securities are the equivalent of junk bonds.

Investment banks including Bear Stearns Cos., Deutsche Bank AG and Lehman Brothers Holdings Inc. sold $1.2 trillion of these securities in 2005 and 2006, said Brian Bethune, director of financial economics for Global Insight Inc. in Waltham, Massachusetts.

None of this could have happened without the participation of Wall Street's three biggest arbiters of credit -- Moody's Investors Service, S&P and Fitch Ratings. About 80 percent of the securities carried AAA ratings, the same designation given to U.S. Treasury bonds.

This implied the investments couldn't fail, says Sylvain Raynes, 50, a former Moody's analyst who now is a principal at R&R Consulting, a structured securities valuation firm in New York.

``The rating agencies had an almost God-like status in the eyes of some investors,'' Raynes says. ``Now, that trust is gone. It's been replaced with a feeling of betrayal.''

Rating Subprime Investment Grade Made `Joke' of Credit Experts

And get ready for a rough ride because this is just the beginning:

In coming months, subprime losses will reach into almost every home in the U.S. as pension funds reveal setbacks, the former Moody's analyst Raynes says. Some funds won't show the extent of their subprime losses until they issue reports for the current fiscal year, some as late as September 2008.

``The smallest investor, not Wall Street, is the one who will pay the ultimate price because he trusted the fund managers who blindly followed the rating agencies,'' Raynes says.

The downturn of the Dow is probably the least of our problems when the entire U.S. banking system is at risk.

Corrections are part of the cycle - absolutely - but no, I'm not trying to assess blame on reasoned analysis by experts in the field. What I object to hasn't changed: the extreme hyperbole surrounding those warnings, and most egregiously warnings without suggesting remedies.

On the subprime crisis, leading to the credit/lending crisis, I don't see those self-same "experts" point to previous statements by analysts at FDIC that fully 80% of subprime loans would be viable "but for" the resets. It's not here either:

Of the more than 2 million loans at risk, an estimated 54,000 loans were modified and repayment plans were arranged with another 183,000 borrowers during the third quarter of 2007, according to the Mortgage Bankers Association. During the same period lenders began foreclosure actions on another 384,000 loans.

If 1.6 million at-risk loans were frozen at current rates the owners would not go into default. One giant piece of a complex puzzle that would at the very least keep other dominoes from falling.

But I don't see those basic steps being recommended much anywhere, and that's what I object to.

difficult to offer remedies when they still don't know how deeply entrenched this is? This has gone so far beyond the subprime mortgage market that stopping the hemorrhaging there will only be a start.

From Steve Pearlstein's column More Room to Fall today:

During the financial market disturbance last summer, economic policymakers were mostly concerned about liquidity -- the availability of short-term money as banks husband their cash rather than lend to one another. But after aggressive efforts by the central banks to make hundreds of billions of dollars available to banks on easy terms, the liquidity crisis has largely abated.

The problem now is a more serious one -- a credit crisis in which commercial banks, investment banks, insurance companies and hedge funds all around the world are being forced to write off billions of dollars from American subprime mortgages and more exotic securities. The stronger ones have enough capital, or can raise it, so that their viability is not jeopardized by these losses. But if even a few of the weaker ones collapse and are unable to repay loans or make good on their commitments, it would have a domino effect that could threaten still more institutions and trigger another wave of panicked selling.

It is those considerations, as much as a sudden realization over the weekend that the U.S. economy was tipping into recession, that drove yesterday's sell-off. Leading the way down were shares of big banks and insurance companies, which fell 6 to 10 percent.

While most of the big U.S. financial institutions have acknowledged major write-offs, most European banks have not, and rumors of what's in store have just begun.

...

Even the Bank of China, one of that country's biggest, announced this week that it was taking a $2 billion write-off for securities backed by U.S. mortgages.

Here in the United States, the spotlight is on a group of firms that traded heavily in what are called credit default swaps -- contracts that, in effect, offer to insure corporate bonds, takeover loans and asset-backed securities against default. The buyers of these insurance contracts included banks, pension funds, hedge funds and investment houses that used the swaps to hedge their bets or construct elaborate, computer-driven trading strategies. Now, the prospect that one or more of the insurers may not be able to make good on the insurance has rattled their customers and their lenders, who in some cases are one and the same.

I think the dominoes have already started falling and the trick now is to figure out what will stop the progression. I don't know what you are reading but there has been no shortage of discussion on what to do between economic stimulus and monetary policy. There are the disagreements on how much the Fed can do with inflation rising while the economy is slowing so that it doesn't set us up for an even worse scenario of stagflation. But the truth, or closest information that can be found in lieu of the truth is that no one knows how wide and deep this credit crisis goes yet. Banks have already written down over $100 billion in assets but estimates have ranged they will range between $300 to $500 billion before it is all over. Only time will tell at this point.

isn't it?

no one knows how wide and deep this credit crisis goes yet

After the Republican Revolution controlled legislative decision-making and, in concert with ("it's the economy stupid") Clinton's repeal of the Glass-Steagall {sp?} Act, it removed a real barrier to systemic shenanigans of the banking industry's consumer and investment sectors.

'Deregulation' freed the creative spirit of financial engineers.

In some ways, it was good, I'm sure.

But the packaging and bulk sale of mortgages for trading was combined into financial instruments that multiplied what a firm could control with a small payment up front (leverage) and derivatized the value of the underlying package in ways that the purchaser might only understand he'd bought some sort of debt-instrument.

I'm sure many short-term traders didn't even recognize that fact.

Having willing partners at the Fed is a beautiful thing, too. They'll invent 'hedonic adjusters' to estimate non-quantifiable contributions by new technology to the economy. Or front-load good news into some of the imaginary economic indicators since they can guarentee its revision a month later.

It's a tough thing for the big guys to be wrong in the nearterm. That's why 'leverage' matters: nearterm is most important to the biggest money at the pyramid's leading edge where there's not su much concern about what happens at its base. That's a structure made up of true-believing consumers just trying to finance their retirement with long-term 'buy and hold' strategy.

And that all was the backdrop when Organized Crime Solutions, Inc., took the White House.

I think it should be clear that much of the advocacy for "deregulation" is by those with well-developed models for the number of suckers born per minute versus cost-effectiveness of lobbyist/campaign-finance dollar.

Maybe I'm too cynical?

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"I hope we shall crush in its birth the aristocracy of our moneyed corporations which dare already to challenge our government in a trial of strength, and bid defiance to the laws of our country." - Thomas Jefferson