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post #11 of 69 (permalink) Old 03-03-2008, 07:31 PM
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For those with Rose Tinted ADD I can simplify the article below. DUCK

Telegraph.co.uk

The Federal Reserve's rescue has failed

By Ambrose Evans-Pritchard, International Business Editor
Last Updated: 12:39am GMT 04/03/2008

The verdict is in. The Fed's emergency rate cuts in January have failed to halt the downward spiral towards a full-blown debt deflation. Much more drastic action will be needed.

Yields on two-year US Treasuries plummeted to 1.63pc on Friday in a flight to safety, foretelling financial winter.

The debt markets are freezing ever deeper, a full eight months into the crunch. Contagion is spreading into the safest pockets of the US credit universe.

It is hard to imagine a more plain-vanilla outfit than the Port Authority of New York and New Jersey, which manages bridges, bus terminals, and airports.

The authority is a public body, backed by the two states. Yet it had to pay 20pc rates in February after the near closure of the $330bn (£166m) "term-auction" market. It had originally expected to pay 4.3pc, but that was aeons ago in financial time.

I never thought I would see anything like this in my life," said James Steele, an HSBC economist in New York.

No sane mortal needs to know what term-auction means, except that it too became a tool of the US credit alchemists. Banks briefly used the market as laboratory for conjuring long-term loans at Alan Greenspan's giveaway short-term rates. It has come unstuck. Next in line is the $45trillion derivatives market for credit default swaps (CDS).

Last week, the spreads on high-yield US bonds vaulted to 718 basis points. The iTraxx Crossover index measuring corporate default risk in Europe smashed the 600 barrier. We are now far beyond the August spike.

Sub-prime debt is plumbing new depths. A-rated securities issued in early 2007 fell to a record 12.72pc of face value on Friday. The BBB tier fetched 10.42pc. The "toxic" tranches are worthless.

Why won't it end? Because US house prices are in free fall. The Case-Shiller index for the 20 biggest cities dropped 9.1pc year-on-year in December. The annualised rate of fall was 18pc in the fourth quarter, and gathering speed.

As the graph shows below, US households are only halfway through the tsunami of rate resets - 300 basis points upwards - on teaser loans.

The UK hedge fund Peloton Partners misjudged this fresh leg of the crunch. After an 87pc profit last year betting against sub-prime, it switched sides to play the rebound. Last week it had to liquidate a $2bn fund.

Like many, Peloton thought Fed rate cuts from 5.25pc to 3pc (with more to come) would end the panic. But this is not a normal downturn, subject to normal recovery. Leverage is too extreme. Bank capital is too eroded. Monetary traction eludes the Fed. An "Austrian" purge is under way.

UBS says the cost of the credit debacle will reach $600bn. "Leveraged risk is a cancer in this market."

Try $1trillion, says New York professor Nouriel Roubin. Contagion is moving up the ladder to prime mortgages, commercial property, home equity loans, car loans, credit cards and student loans. We have not even begun Wave Two: the British, Club Med, East European, and Antipodean house busts.

As the once unthinkable unfolds, the leaders of global finance dither. The Europeans are frozen in the headlights: trembling before a false inflation; cowed by an atavistic Bundesbank; waiting passively for the Atlantic storm to hit.

Half the eurozone is grinding to a halt. Italy is slipping into recession. Property prices are flat or falling in Ireland, Spain, France, southern Italy and now Germany. French consumer moral is the lowest in 20 years.

The euro fetches $1.52 (from $0.82 in 2000), beyond the pain threshold for aircraft, cars, luxury goods and textiles. The manufacturing base of southern Europe is largely below water. As Le Figaro wrote last week, the survival of monetary union is in doubt. Yet still, the ECB waits; still the German-bloc governors breathe fire about inflation.

The Fed is now singing from a different hymn book, warning of the "possibility of some very unfavourable outcomes". Inflation is not one of them.

"There probably will be some bank failures," said Ben Bernanke. He knows perfectly well that the US price spike is a bogus scare, the tail-end of a food and fuel shock.

"I expect inflation to come down. I don't think we're anywhere near the situation in the 1970s," he told Congress.

Indeed not. Real wages are being squeezed. Oil and "Ags" are acting as a tax. December unemployment jumped at the fastest rate in a quarter century.

The greater risk is slump, says Princetown Professor Paul Krugman. "The Fed is studying the Japanese experience with zero rates very closely. The problem is that if they want to cut rates as aggressively as they did in the early 1990s and 2001, they have to go below zero."

This means "quantitative easing" as it was called in Japan. As Ben Bernanke spelled out in November 2002, the Fed can inject money by purchasing great chunks of the bond market.

Section 13 of the Federal Reserve Act allows the bank - in "exigent circumstances" - to lend money to anybody, and take upon itself the credit risk. It has not done so since the 1930s.

Ultimately the big guns have the means to stop descent into an economic Ice Age. But will they act in time?

"We are becoming increasingly concerned that the authorities in the world do not get it," said Bernard Connolly, global strategist at Banque AIG.

"The extent of de-leveraging involves a wholesale destruction of credit. The risk is that the 'shadow banking system' completely collapses," he said.

For the first time since this Greek tragedy began, I am now really frightened.

The Federal Reserve's rescue has failed - Telegraph

McBear,
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post #12 of 69 (permalink) Old 03-03-2008, 07:36 PM
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To clarify the little chart, the largest number of subprime loans whose ARM is going to kick in starts NOW. Start the clock on serious delinquencies in 90-150 days which puts the largest foreclosures of the entire SubPrime debacle starting somewhere around Election time.

Bush's little incentive won't even show up on this radar.

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post #13 of 69 (permalink) Old 03-03-2008, 08:10 PM
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^^^ Probably why the administration is pressing for some sort of forestalling foreclosures. The guy isn't now nor has he ever been a conservative. He's like his daddy with a drawl.

B

The biggest problems we are facing right now have to do with George Bush trying to bring more and more power into the executive branch and not go through Congress at all and thatís what I intend to reverse.

~ Senator Barack H. Obama
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post #14 of 69 (permalink) Old 03-03-2008, 08:20 PM
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Jay,
Why don't you stop smoking crack for one day.

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post #15 of 69 (permalink) Old 03-03-2008, 08:29 PM
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^ He'd have to go back to smoking cock.

However, should he figure out how to take off the Arabian Goggles, he may find this story interesting.

Warren Buffett declares America in recession - Times Online
From Times Online
March 3, 2008

Warren Buffett declares America in recession

Suzy Jagger and Dearbail Jordan

Warren Buffett, the billionaire investor, today declared that the United States was in a recession as he withdrew an offer to bail out the increasingly troubled bond insurance industry.

Mr Buffett, the world's third-richest man, said that "from a commonsense standpoint right now we're in recession", despite the fact America had yet to report two consecutive quarterly falls in gross domestic product, the technical definition of a downturn.

He conceded that the economic environment was "nothing like '73 or '74", when the US was in recession and inflation reached 12.1 per cent, but he said that investors should not rule out the possibility of a severe downturn.

Evidence that the recession in residential construction has spread across America's entire building industry emerged today after official numbers showed a sharp slowdown in public and corporate projects.

Construction spending overall in January dropped 1.7 per cent, far worse than Wall Street's expectations of a 0.7 per cent decline. However, for the first time in two years, non-residential and public sector building - which includes new hospitals and office blocks - shrank 1.2 per cent.

The grim construction data suggests that the credit crisis which erupted last summer has hit company spending, spilling over from the financial sector across corporate America as a whole.

Manufacturing data published yesterday also showed another sharp slowdown in February with output at its lowest since April 2003.

Wall Street is expecting another half a percentage point interest rate cut this month, which would see the cost of borrowing fall to 2.5 per cent.

Meanwhile, Mr Buffett also confirmed that a deal to reinsure $800 billion (£403 billion) worth of government-issued bonds, known as municipal bonds, was "not on the table" any longer.

The bonds had been underwritten by MBIA, Ambac and Financial Guaranty Insurance and a deal would have provided a significant boost to the industry. It is feared that insurers will not have sufficient funds to pay billions of dollars worth of claims on toxic investments.

It is understood that Mr Buffett had offered to reinsure the bonds but only at a steep premium which was rejected by the three insurers. However, Mr Buffett had kept his offer on the table until today.

Last week his company, Berkshire Hathaway Investments, revealed an 18 per cent fall in fourth-quarter profit as income from insurance underwriting fell. Full-year profit rose by 20 per cent to $13.21 billion.

Berkshire Hathaway invests in 76 businesses including Tesco, the UK's largest supermarket, of which it owns 2.9 per cent.
Of course, it's nothing new - but maybe seeing the name "Warren Buffett" and "world's third richest man" and "billionaire" and what not, twice in the same day from different sources, will help him see the light.

Last edited by Qubes; 03-03-2008 at 08:32 PM.
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post #16 of 69 (permalink) Old 03-03-2008, 08:47 PM
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^^^ Probably why the administration is pressing for some sort of forestalling foreclosures. The guy isn't now nor has he ever been a conservative. He's like his daddy with a drawl.

B
He is either trying to push the foreclosures into the next administration OR someone has actually shown him the domino effect that these foreclosures are going to cause and he [or someone who needs elected at some point] realize that something real has to be done.

It might not be Conservative to bail out these ARMs but if we don't fix the problem before it balloons to its inevitable conclusion we are certainly going to screw a tremendous number of innocent people [and that is just about as Republican as it gets].

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post #17 of 69 (permalink) Old 03-03-2008, 09:00 PM
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He is either trying to push the foreclosures into the next administration OR someone has actually shown him the domino effect that these foreclosures are going to cause and he [or someone who needs elected at some point] realize that something real has to be done.

It might not be Conservative to bail out these ARMs but if we don't fix the problem before it balloons to its inevitable conclusion we are certainly going to screw a tremendous number of innocent people [and that is just about as Republican as it gets].

I don't know how many "innocent" people will get "screwed". I have seen way too many people buy homes by all intents and measures, well beyond their reach because they could "afford" the introductory rates of an ARM of no interest loan.

I, on the other hand like many others, bought a home well within my budget(and on the low end of that scale) and bought it with a 30year fixed.

Why is it that when the interest rates rise and they can no longer afford their mortage payments, should the government help them out. This world is not and should not try to be idiot proof. I know damn well that if I can't afford my house payment for one reason or another the government(you and I) won't bail me out.

This will have serious effects on our economy for years to come, but people put money in risky(poor cradit ratings, debt to equity issues etc) investments with the expectation to win and this time they lost.

I will pay enough for their stupidity and poor loan practices but I should not have to bail them out too.

Am I making any sense?

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post #18 of 69 (permalink) Old 03-03-2008, 09:40 PM
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I don't know how many "innocent" people will get "screwed". I have seen way too many people buy homes by all intents and measures, well beyond their reach because they could "afford" the introductory rates of an ARM of no interest loan.

I, on the other hand like many others, bought a home well within my budget(and on the low end of that scale) and bought it with a 30year fixed.

Why is it that when the interest rates rise and they can no longer afford their mortage payments, should the government help them out. This world is not and should not try to be idiot proof. I know damn well that if I can't afford my house payment for one reason or another the government(you and I) won't bail me out.

This will have serious effects on our economy for years to come, but people put money in risky(poor cradit ratings, debt to equity issues etc) investments with the expectation to win and this time they lost.

I will pay enough for their stupidity and poor loan practices but I should not have to bail them out too.

Am I making any sense?
You are making plenty of sense.

Here is the problem. There is plenty of anecdotal evidence that:

1) way too many people buy homes by all intents and measures, well beyond their reach because they could "afford" the introductory rates of an ARM of no interest loan AND
2) way too many people were pulled into loans where all the details of the ARMs, Interest Only, Balloon or other instruments were not explained to them or they were simply rolled from their conventional loan to a new ARM with a teaser as a "consolidation".

And therein lies the problem. Federal investigators have already found dozens of mortgage companies that simply pushed paper to folks without even checking to see if they had jobs or if the house was standing. Folks are already in jail. And this is not just from the "fly by nights". Aggressive, targeted marketing at highly uneducated, gullible homeowners has been proven again and again.

Those are NOT the folks who "just bought above their means" or the flippers or the folks who just used their house equity as an ATM. I have ZERO interest in helping them. Problem is, at this point, how do you sort through the two groups? The lack of regulation within the industry makes it nearly impossible to do so.

As for "Why is it that when the interest rates rise and they can no longer afford their mortage payments, should the government help them out?"

In the one case at a time, we most likely should not.

In the one case at a time if we want to give a hand to those who were honestly screwed by fraud and are going to lose their life savings we should look at that case by case.

In the ONE MILLION CASE at a MONTH, the ripple effect on an economy that has already been hit in the nuts by weak dollar, collapsed manufacturing, rising unemployment, rising inflation, increased trade deficits and increased costs of living ADDING to a collapsed housing market by flooding it with millions of more empty houses AND destroying the credit of potential buyers just isn't smart national economics. The trickledown will get much more than your pants wet.

McBear,
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Last edited by mcbear; 03-03-2008 at 09:42 PM.
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post #19 of 69 (permalink) Old 03-03-2008, 10:21 PM Thread Starter
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You just keep on being positive about your country Jay, recessions come and go and are a bonus time for the right type of investor, just be thankful your not all bitter and twisted about America or living in the 3rd world or both.
It's not just that I'm positive about my country, I actually pay attention to facts and data and do not let myself panic. People lose a lot more than their shirts when they panic. And you are absolutely right that recessions come and go and are a bonus time for the right type of investor! I've lived through many many recessions and know from vast experience that the very best time to buy equities is in the middle of a recession and when everyone else is convinced that the world is coming to an end--financially speaking that is.

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post #20 of 69 (permalink) Old 03-03-2008, 11:03 PM
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Why is the American taxpayer being forced to carry the burden of bailing out short sighted US banks, who created the mortgage mess, while the managers responsible can fall back on their golden parachute deals?

BTW, I heard through the grapevine, that the FDIC has very quietly brought back from retirement, and rehired 25 of their bank closure specialists.
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