Standing on the precipice of a world-wide credit crisis—triggered by the housing boom that propelled him to the White House and to a second term on a tsunami of easy credit—the president who declared “Mission Accomplished” in Iraq in 2003 addressed reporters questions yesterday about the housing market collapse and claimed, “The US economy is sound.”
Today the stock market is down, at 4:07PM, 386 points.
The Bush team established causal links where it serves their interests: weapons of mass destruction in Iraq where none were found to exist, Al Qu’aeda in Iraq where there were none before the war.
Now, we continue to be in Iraq in order to “contain” terrorists there, just like the mess is subprime mortgages is “contained”.
It is breathtaking, really. Even today, the wire services are still flogging the message point that seeks to attribute the meltdown in credit markets to the subprime segment.
It is not just subprime and hasn't been for a couple of weeks.
Take the case of Luminent Mortgage, with $9 billion in debt. Today the San Franscisco Chronicle reports: “On July 30, Luminent issued a news release saying that its dividend "is secure and will not be canceled" and that it had "ample liquidity to manage its business." On Monday, exactly one week later, Luminent said it was canceling its dividend because "the secondary market for mortgage loans and mortgage-backed securities has seized up."
On Wednesday, it said it had received default notices from two lenders. Luminent's share price has fallen to 95 cents from more than $10 in the past month.”
Luminent did not invest in any subprime loans.
This morning’s big story concerns France’s biggest bank BNP Paribas SA, that “halted withdrawals from three investment funds because it couldn't ``fairly'' value their holdings after concern over U.S. subprime mortgage losses roiled credit markets.Redemptions are similar to margin calls, except in the former case it is shareholders who are asking for their money back.
Halting redemptions is an extreme measure to prevent “runs” on financial institutions, whether banks or hedge funds.
According to Bloomberg, (excerpts) “The funds had about 2 billion euros ($2.76 billion) of assets on July 27, including 700 million euros in subprime loans rated AA or higher. The Paris-based bank said today that it will stop calculating the net asset value for the funds, Parvest Dynamic ABS, BNP Paribas ABS Euribor and BNP Paribas ABS Eonia.
The French bank joins Bear Stearns Cos. and Union Investment Management GmbH in stopping fund redemptions. Dutch investment bank NIBC Holding NV said today that it lost at least 137 million euros on U.S. subprime investments this year.
Union Investment, Germany's third-biggest mutual fund manager, stopped withdrawals from one of its funds on Aug. 3 after investors pulled about 10 percent of the assets. Frankfurt Trust, the mutual fund manager of Germany's BHF-Bank, halted redemptions from a fund after clients removed 20 percent of their money since the end of July.
Two hedge funds run by New York-based Bear Stearns filed for bankruptcy protection in the Cayman Islands on July 31 following subprime losses. The New York-based securities firm then blocked investors from withdrawing money from a third fund.”
In the last week of July, Sowood Capital run by a former Harvard endowment manager lost $1.5 billion and sold its remaining assets to a private equity firm.
According to a MSNBC report, “Other recent losers include Braddock Financial, which is closing its $300m Galena fund due to losses on subprime The Horizon Fund was down 32.9 per cent in June and sources close to the fund suggested it may have endured more problems in July, while the Eidos Structured credit fund was down 8 per cent in June."
Also in late July, Absolute Capital Group, an Australian hedge fund that invests in collateralized debt obligations, suspended withdrawals from two of its funds, its Yield Strategies Fund and Yield Strategies Fund NZD, which together have about 200 million Australian dollars, or $177 million, under management.
A second Australian hedge fund, Basis Capital, is in trouble. Reuters reports, “Investors in BT Financial Group, the wealth management unit of Westpac, had A$180 million ($159 million) in Basis Capital's two funds, a spokeswoman said.
She said BT was seeking more information from Basis Capital, which has said little since it suspended withdrawals from its two funds last week.
"We have withdrawn the products from the (investment) platform until we have confirmation on how redemption requests will be treated," the BT spokeswoman said.
Back at Bloomberg, “For some of the securities there are just no prices,'' Alain Papiasse, head of BNP Paribas's asset management and services division, said in an interview. ``As there are no prices, we can't calculate the value of the funds.”
Notwithstanding, all of the above, President Bush continues his themes that US economy is fundamentally sound, that problems in the housing sector are transient, that borrowers should have read “the fine print”, and that there is nothing to worry about from China which has, in recent days, reminded the United States that pressure to revalue the yuan could result in a re-assessment of the massive, regular infusions of capital into US debt.
Meanwhile, in Congress the Democrats are urging government intervention in the housing markets through Fannie Mae and Freddie Mac—where the cause of past accounting scandals have not yet been cleared up.
“Blocking investors from withdrawals ``was a very good decision because it avoids huge redemptions,'' said Jean-Edouard Reymond, who helps manage $63 billion at Union Bancaire Gestion Institutionelle SA in Paris. ``If they had had redemptions they would have been obliged to sell the securities they might have in their portfolio at very cheap market prices.''
President Bush, again, was at the White House seeking to reassure the world that the US economy is "fundamentally sound". One of the optimistic points, seized by the administration, is employment. The president says, employment is strong.
But as economist Joseph Stiglitz recently noted, "By some reckonings, more than two-thirds of the increase in output and employment over the past six years has been real estate-related, reflecting both new housing and households borrowing against their homes to support a consumption binge."
You connect the dots.
8 comments:
To readers of this blog, this morning's news is not news.
Reuters
Mortgage delinquencies spreading: AIG
Thursday August 9, 8:46 am ET
NEW YORK (Reuters) - Residential mortgage delinquencies and defaults are becoming more common among borrowers in the category just above subprime, American International Group (NYSE:AIG - News) said on Thursday.
In a presentation on its subprime exposure, AIG, the world's largest insurer and one of the biggest mortgage lenders, said total delinquencies in its $25.9 billion real estate portfolio were 2.5 percent.
It said 10.8 percent of its subprime mortgages were 60 days overdue, compared with 4.6 percent in the category with credit scores just above subprime, indicating that the threat to the mortgage market may be spreading.
Let me play devil's advocate here. Wouldn't the collapse of the subprime market actually be a good thing? Perhaps the easy money that has been flowing like a spigot will dry up and force financial institutions to live within its means. Perhaps that will also slow the incredible influence of greedy developers. Maybe it will lessen the tsunami of illegal aliens washing ashore looking for construction work and taking jobs from American citizens. Don't get me wrong, it will be painful and it will hurt, but can't we look at it as an opportunity to flush away some of the toxins in our economy and in our population? Of course, it may be too late to save Miami, but that's another story.
I predict 1,000 people will walk away from deposits on pre-construction condos in Miami. Each investor will lose an average of $120,000 each. That is a loss of $1 Bil.
President Bush is an idiot. Whatever he says, bet on the opposite.
From The Independent (UK):
ECB injects €98bn but markets are gripped by panic
By Danny Fortson
Published: 10 August 2007
The European Central Bank released nearly €100bn (£68bn) in emergency funds into the banking system yesterday in an effort to kick-start the crippled credit markets, but its move only sparked panic selling on stock markets across the world.
The sudden cash injection was the largest since 12 September 2001, when the central bank released billions to stabilise the market after the terrorist attacks in New York.
The trigger for the €98bn package was a major overnight spike in inter-bank lending rates that if unremedied threatened to disrupt the normal functioning and stability of Europe's financial system.
As with the other market upheavals in the last month, the root cause was traced to America where the fallout from the meltdown of the market for risky, or sub-prime, loans continues to widen. "This is a reflection of the fact that the sub-prime issues will not be constrained to the US financial sector. As the financial sector across Europe shows its hand over the next weeks and months we will see where the exposure exists," said Ian Richards, European equity strategist at ABN Amro. "The ECB is acting as the lender of last resort. The scale of intervention we have seen today is quite large."
In a similar move, the US Federal Reserve released $24bn (£12bn) in temporary reserves to the banking system, the most since April and at least $9bn more than had been expected. The Canadian central bank announced that it would also inject funds into its market.
The FTSE 100 shed 1.9 per cent to close down 122.7 at 6,271.2, wiping out the index's entire gain since the beginning of the year. In the last month alone it has lost 6.6 per cent.
And the global sell-off accelerated through the day, leaving panicked traders on Wall Street to dump shares in the final minutes before American markets closed last night. The New York Stock Exchange introduced restrictions on automated trading, but the Dow Jones Industrial Average still registered a 387.18 point fall, ending at 13270.68.
In Europe, where bourses also slid lower, the sell-offs were spurred by comments from BNP Paribas. The French bank announced it had frozen three hedge funds with heavy exposure to the sub-prime sector because it could no longer value the assets they contained. The bank did not say when it would lift the prohibition against investors pulling money out of the funds, which together hold assets worth €1.6bn.
In the wake of the liquidation of a pair of Bear Stearns hedge funds last month, investment professionals said the move was necessary to avoid a complete collapse of the funds and heavier losses. "If you give the money back to some of the investors, you have to sell most liquid assets first, which means what will remain in the fund is less liquid and less valuable," said Sophie Panchal, investment analyst at Nedgroup Investments.
Man Group, the world's largest hedge fund, registered its biggest one-day loss in more than a decade after it revealed another fall in the weekly performance of its main funds.
It was rising defaults on risky mortgages taken out by the poorest Americans which first led lenders of all kinds to tighten the terms of their loans or to pull funding altogether, and the problems in the US mortgage market continue to spread. On a conference call to discuss its latest results, the financial giant AIG said defaults were rising even among homeowners with better credit histories.
Demand for complex debt instruments backed by these US mortgages has all but dried up, one of the reasons why BNP Paribas has lost confidence in the valuations of the debt instruments on its books.
Ms Panchal said she expects further turmoil. "I think we still have some weeks and months to go, perhaps all the way to the end of the year, for the extent of losses to become apparent."
The seizing up of the credit markets has meant that potential borrowers either cannot get loans at all or have to pay unexpectedly high interest rates. That in turn has meant that debt-funded corporate takeovers are less likely. Home Depot, America's largest DIY chain, became the latest victim yesterday, saying the $10.3bn disposal of its supply business had hit the rocks. Banks lending to the three private equity firms which had agreed to buy it - Bain Capital, Carlyle and Clayton, Dubilier & Rice - have forced a renegotiation of the terms and Home Depot said it now expects to raise much less money.
8:14 AM Freak Friday, coming at ya.
Re: Fridays
From the New Yorker
“ Shouts & Murmurs
Aesop In The City
by Yoni Brenner
August 13, 2007
The Wolf, the Sheep, the H.R. Person, Mayor Bloomberg, Al Sharpton, and Jesse the Intern
A wolf applies for a job with the Parks Department. To his chagrin, he doesn’t even get a second interview. He disguises himself in a sheepskin and reapplies, but the H.R. person is still unimpressed. Believing that he is the victim of discrimination, the wolf hires a lawyer, who notifies Al Sharpton, who puts in a call to Mayor Bloomberg. The Mayor holds a press conference at which he reaffirms the city’s commitment to diversity and offers the sheep, who is actually a wolf, a job. The wolf accepts, and the whole thing blows over. After a month of answering phones, the wolf suddenly throws off the sheepskin and announces to the office that he is a wolf. Inspired by the wolf’s example, Jesse the intern suddenly announces that he is gay. The office breaks into applause and everyone goes out for drinks to celebrate.
Moral: It’s best to come out of the closet on a Friday, so people can let it sink in over the weekend. ♦”
S
This article says it all. Too bad it's too succinct for main stream media.
"I predict 1,000 people will walk away from deposits on pre-construction condos in Miami. Each investor will lose an average of $120,000 each. That is a loss of $1 Bil."
but you need to remember that these people have already made many Bil $ on other properties so the $1 Bil is not much.
Post a Comment