If you are like me, the frustration is reaching critical mass. On one front, politicos and pundits grouse about what to do to save troubled homeowners and speed the economic turnaround. What they do not realize, or won't admit, is that to not permit home prices to find the bottom and let the free market reward the wise and punish the foolish, the recession could be long and deep. The same could be said about banks and investment banks. Many will be spared because the lesson which should be taught is a costly one.
Short speculators and and muckrakers are also getting my dander up. These "investors" will do anything to see their prophecy fulfilled. Take Lehman Brothers for example. The firm has ample liquidity, can tap the Fed for liquidity and can use non-treasuries as collateral. That still was not good enough for some on Wall Street. Lehman then announces plans to raise $3 billion via a convertible preferred deal. The short speculators denounced it as proof that Lehman is in trouble. This may or may not be true, but these same "experts" would be just as negative if Lehman did not come with a deal, expressing their opinions that Lehman cannot raise capital. This is a Catch-22.
As with politicians, market pundits should be taken with a grain of salt. We (I am also a pundit) have agendas. Mine to to shoot holes in the theories and bloviations of various talking heads and legalized market manipulators.
I will leave all with two words of advice. First, beware of strategies which blindly use cyclical historic precedents. Secondly, beware of regulators bearing new rules.
Monday, March 31, 2008
Wednesday, March 26, 2008
The Dead Parrot Sketch
Housing activists staged a demonstration in the lobby of the Bear Stearns building to protest the "bailout" of Bear Stearns, but are irate that there was no bailout of troubled homeowners. OK, let's set the record straight. Bear Stearns was not bailed out. It is gone, finis, kaput! It has failed and has ceased to be. It is an ex investment bank. Bear Stearns shareholders were wiped out. Two dollars or ten dollars it makes no difference. Shareholders were wiped out.
As I have said previously, I am no fan of bailouts and abhor moral hazards, but to let Bear go bankrupt would not have taught anyone a lesson and the Fed, Treasury or Congress would still be using taxpayer money, in this case to support a failing financial system. It was the bank failures of 1930 / 31 which which caused the Great Depression to be so deep and so long. The crash of 1929 merely started the ball rolling.
More writedowns are coming. More CDOs will be written down (especially if the monoline insurers cannot fulfill their obligations). Leveraged loans will haunt investment banks. If enough investors, lenders and counterparties become concerned enough to back away from another Wall Street Firm, we could see a replay of Bear. Who vould it be? Every investment bank is at least somewhat vulnerable. All it takes is some party panicking.
When will it all stop? When housing prices bottom, but that will not happen until home prices are permitted to seek their own levels. Bear Stearns shareholders lost almost their entire investment. Home owners are not nearly in as bad shape. After all, many troubled home owners never invested any money (no money down).
I write an Internal Use Only piece at my real job. However, a friend of mine, independently, has written about a subject on which I touched today. Please visit the following blog:
http://bondguy1824.blogspot.com/
As I have said previously, I am no fan of bailouts and abhor moral hazards, but to let Bear go bankrupt would not have taught anyone a lesson and the Fed, Treasury or Congress would still be using taxpayer money, in this case to support a failing financial system. It was the bank failures of 1930 / 31 which which caused the Great Depression to be so deep and so long. The crash of 1929 merely started the ball rolling.
More writedowns are coming. More CDOs will be written down (especially if the monoline insurers cannot fulfill their obligations). Leveraged loans will haunt investment banks. If enough investors, lenders and counterparties become concerned enough to back away from another Wall Street Firm, we could see a replay of Bear. Who vould it be? Every investment bank is at least somewhat vulnerable. All it takes is some party panicking.
When will it all stop? When housing prices bottom, but that will not happen until home prices are permitted to seek their own levels. Bear Stearns shareholders lost almost their entire investment. Home owners are not nearly in as bad shape. After all, many troubled home owners never invested any money (no money down).
I write an Internal Use Only piece at my real job. However, a friend of mine, independently, has written about a subject on which I touched today. Please visit the following blog:
http://bondguy1824.blogspot.com/
Tuesday, March 25, 2008
In The Long Run
The decision of JPM to pay up to $10 per share for Bear Stearns is being met with derision from all sides. Populists are claiming that taxpayer dollars are being used to "bailout" Bear Stearns. This is ridiculous. Tell BSC share holders who will receive $10 for stock which was trading at $80+ just weeks ago.
Others believe that it was unfair for the Fed to interfere and push JPM to pay up for BSC. Still others are miffed that BSC was not allowed to fail. Truthfully, I am usually in the third camp, but to do so would have caused massive panic over the health of the financial system It could have been the 1930s all over again. In the 1930s, financial institutions were permitted to fail and fail they did.
The Fed had to protect the financial system. It had to protect the financial system from irrational fears of irrational investors and fearful institutions. Irrational investors don't concern me as most individual investors are, shall we say, stupid. They buy tech stocks in spite of no earnings. They buy emerging market debt at lower yields than AA-rated corporate bonds. They buy low-coupon callable bonds and preferreds at discounts thinking they will be called (if I have to explain why this is stupid, you are a lost cause). They buy T-bills with yields around 1.00% and TIPs at negative yields.
When individual investors decline to invest in financial sector bonds I take it with a grain of salt. However, when institutions decline to loan money or trade with a firm, I become alarmed. Not necessarily because I think they have any insight into a potentially troubled firm, but because they may be concerned about the problems of others because they have the very problems they fear others have.
We are not done with the pain. Leveraged loans will be the blowup du jour in the coming weeks. Clear Channel promises to be the first and maybe biggest problem of the latest round. It is getting to the point that I almost want one of these big arrogant firms to blow up, but that would be cutting of my nose to spite my face. The saga continues.
Others believe that it was unfair for the Fed to interfere and push JPM to pay up for BSC. Still others are miffed that BSC was not allowed to fail. Truthfully, I am usually in the third camp, but to do so would have caused massive panic over the health of the financial system It could have been the 1930s all over again. In the 1930s, financial institutions were permitted to fail and fail they did.
The Fed had to protect the financial system. It had to protect the financial system from irrational fears of irrational investors and fearful institutions. Irrational investors don't concern me as most individual investors are, shall we say, stupid. They buy tech stocks in spite of no earnings. They buy emerging market debt at lower yields than AA-rated corporate bonds. They buy low-coupon callable bonds and preferreds at discounts thinking they will be called (if I have to explain why this is stupid, you are a lost cause). They buy T-bills with yields around 1.00% and TIPs at negative yields.
When individual investors decline to invest in financial sector bonds I take it with a grain of salt. However, when institutions decline to loan money or trade with a firm, I become alarmed. Not necessarily because I think they have any insight into a potentially troubled firm, but because they may be concerned about the problems of others because they have the very problems they fear others have.
We are not done with the pain. Leveraged loans will be the blowup du jour in the coming weeks. Clear Channel promises to be the first and maybe biggest problem of the latest round. It is getting to the point that I almost want one of these big arrogant firms to blow up, but that would be cutting of my nose to spite my face. The saga continues.
Thursday, March 20, 2008
Run, Run, Run, Run, Run, Run, Run, Run.
CIT Group is the latest financial firm to be victimized by the liquidity crunch. At work, one broker asked me why I didn't see this coming three or four weeks prior. I explained that, in today's market, it is difficult to see this coming, sort of.
What happened to CIT was akin to a 1930s run on a bank. In the 1930s, depositors, fearing a bank failure would rush to withdraw their money, thereby causing a bank failure. This is similar to what happened to CIT today (and to Bear, Thornburg, Carlyle and a host of other troubled firms). CIT was unable to access the capital markets to obtain liquidity. Why? Because investors would not purchase CIT commercial paper and bonds because they were afraid to own CIT debt out of fear of possible liquidity problems. In doing so, they caused the liquidity crisis they feared.
Fears of counterparty risk and diminishing liquidity are causing much investors and counterparty panic. This panic threatens to cause major disruptions on Wall Street. Possibly the worst disruptions since the Great Depression.
Who is immune? The real question may be; Who isn't immune. Fear, real or imagined, can cause liquidity to evaporate. Counterparties will refuse to do business with brokerage firms who may have liquidity issues. The Fed's liquidity programs may not help as planned.
There is a stigma about borrowing form the Fed. Lehman, Goldman and Morgan Stanley borrowed from the Fed's new primary dealer facility to reduce the stigma of borrowing from the Fed. Time will tell if there gestures will have the desired effect.
Some financial firms do not have access to the Fed. Problems could lie with consumer and commercial finance companies and regional banks. Some finance firms, such as CIT, have bank credit facilities. CIT tapped theirs, but what happens if banks, themselves strapped for cash, cut finance companies off from capital? The possibilities are frightening.
Fear has similar effects as greed, only in the opposite direction. The main difference is that bubbles caused by greed are corrected by price declines, investors are unhappy, but life goes on. Turmoil caused by fears, real or imagined, can have devastating results.
What happened to CIT was akin to a 1930s run on a bank. In the 1930s, depositors, fearing a bank failure would rush to withdraw their money, thereby causing a bank failure. This is similar to what happened to CIT today (and to Bear, Thornburg, Carlyle and a host of other troubled firms). CIT was unable to access the capital markets to obtain liquidity. Why? Because investors would not purchase CIT commercial paper and bonds because they were afraid to own CIT debt out of fear of possible liquidity problems. In doing so, they caused the liquidity crisis they feared.
Fears of counterparty risk and diminishing liquidity are causing much investors and counterparty panic. This panic threatens to cause major disruptions on Wall Street. Possibly the worst disruptions since the Great Depression.
Who is immune? The real question may be; Who isn't immune. Fear, real or imagined, can cause liquidity to evaporate. Counterparties will refuse to do business with brokerage firms who may have liquidity issues. The Fed's liquidity programs may not help as planned.
There is a stigma about borrowing form the Fed. Lehman, Goldman and Morgan Stanley borrowed from the Fed's new primary dealer facility to reduce the stigma of borrowing from the Fed. Time will tell if there gestures will have the desired effect.
Some financial firms do not have access to the Fed. Problems could lie with consumer and commercial finance companies and regional banks. Some finance firms, such as CIT, have bank credit facilities. CIT tapped theirs, but what happens if banks, themselves strapped for cash, cut finance companies off from capital? The possibilities are frightening.
Fear has similar effects as greed, only in the opposite direction. The main difference is that bubbles caused by greed are corrected by price declines, investors are unhappy, but life goes on. Turmoil caused by fears, real or imagined, can have devastating results.
Tuesday, March 18, 2008
You Never Give Me Your Money
The Fed eased by 75 basis points today, much to the chagrin of major Wall Street firms. However, the Fed's decision not to give into the Street tells us two things.
1) The Fed is concerned about inflation (as indicated by the Fed's text and two dissenting presidents.
2) It believes that cuts to the Fed Funds and Discount rates will be only marginally effective in easing the credit crunch.
Most outside observers are puzzled about why low short-term borrowing rates have not resulted in an improved housing market and economy. The answer is that banks need all the capital they can get for themselves. They need more capital to offset billions of dollars of writedowns, fund operations and to build reserves should the crunch deepen. The do not have the excess capital to lend to home buyers.
This is evidenced by the fact that 30-year mortgage rates are higher than before the credit crunch began last August. Banks are only using capital to write high-quality loans which can be securitized. Even then, investors what to be compensated with high yields. This is why we see 30-year fixed rate mortgages above 6.00%
What is going to free the financial sectors from its current death spiral? When Wall Street firms and banks announce that the writedowns are over and can ensure investors and counterparties that worst is over and the danger has passed the crunch will end.
Will a bailout of troubled mortgages be required to facilitate this? Maybe, but the morale hazard it creates is almost too much to bear. Why in the world should we bail out home buyers who bought too much home? Are people really dumb enough not to realize that adjustable-rate mortgages have rates that can rise? If so, these people deserve to lose their homes.
Alas, many will not lose their homes. The bail out is underway. The taxpayer will once again ride to the rescue and bailout poorly managed banks and stupid home buyers. Of course, only "rich" people (those making more than $70,000) will really be affected. Gotta love class warfare.
1) The Fed is concerned about inflation (as indicated by the Fed's text and two dissenting presidents.
2) It believes that cuts to the Fed Funds and Discount rates will be only marginally effective in easing the credit crunch.
Most outside observers are puzzled about why low short-term borrowing rates have not resulted in an improved housing market and economy. The answer is that banks need all the capital they can get for themselves. They need more capital to offset billions of dollars of writedowns, fund operations and to build reserves should the crunch deepen. The do not have the excess capital to lend to home buyers.
This is evidenced by the fact that 30-year mortgage rates are higher than before the credit crunch began last August. Banks are only using capital to write high-quality loans which can be securitized. Even then, investors what to be compensated with high yields. This is why we see 30-year fixed rate mortgages above 6.00%
What is going to free the financial sectors from its current death spiral? When Wall Street firms and banks announce that the writedowns are over and can ensure investors and counterparties that worst is over and the danger has passed the crunch will end.
Will a bailout of troubled mortgages be required to facilitate this? Maybe, but the morale hazard it creates is almost too much to bear. Why in the world should we bail out home buyers who bought too much home? Are people really dumb enough not to realize that adjustable-rate mortgages have rates that can rise? If so, these people deserve to lose their homes.
Alas, many will not lose their homes. The bail out is underway. The taxpayer will once again ride to the rescue and bailout poorly managed banks and stupid home buyers. Of course, only "rich" people (those making more than $70,000) will really be affected. Gotta love class warfare.
Monday, March 17, 2008
Blame It On The Banks
Bondholders of Bears Stearns have likely dodge a bullet, thanks to the Fed and JPM. We are hearing that Bear is the latest victim of the credit crisis. My ass it is. Wall Street firms knew many of their MBS securities were crap. They thought their quant models offered away to package garbage debt into stink-proof packages.
Lenders are also guilty. They gave mortgages to whomever could fog a mirror. They believed that they could securitize them and move them off the balance sheets by selling them to some poor sap who readily believed that AAA-rated securities could yield 6.00% in a 4.50% envirnoment.
It is the banks' fault that the Fed must ease in the face of inflation. It is their fault that the economy is tanking into the worst dislocation since the 1930s. This is a damn mess and it will take YEARS to sort out.
I do feel sorry for borrowers who were lied to. For buyers of investment property, those who did not do the math, investment banks and Wall Street firms, I say let them burn.
Lenders are also guilty. They gave mortgages to whomever could fog a mirror. They believed that they could securitize them and move them off the balance sheets by selling them to some poor sap who readily believed that AAA-rated securities could yield 6.00% in a 4.50% envirnoment.
It is the banks' fault that the Fed must ease in the face of inflation. It is their fault that the economy is tanking into the worst dislocation since the 1930s. This is a damn mess and it will take YEARS to sort out.
I do feel sorry for borrowers who were lied to. For buyers of investment property, those who did not do the math, investment banks and Wall Street firms, I say let them burn.
Friday, March 14, 2008
When I woke up this morning, She was gone, solid gone
The title from the Younblood's song "Grizzly Bear" sums up Bear Stearns' liquidity situation this morning. Bear Stearns, a well respected and storied Wall Street firm was brought to the brink of collapse after its liquidity dried up.
Bear Stearns is a major player in the mortgage securities market. The firm is smaller than the other major Wall Street firms and does not have as diverse a business model as its larger and thus was more severely impacted by the down turn in the mortgage market.
Writedowns and reduced profits from its core business have negatively impacted Bear's earnings. Counterparty fears caused other market participants reluctant to trade with Bear. To make matters worse, Bear's creditors cut them off from further capital.
If Bear failed the repercussions around the street could be catastrophic. Bear, as with all other dealers and banks, finances trading positions in the repo market. If Bear failed, it could be some time before such repos were unwound. Money deposited with Bear could be locked up for some time until the situation could be sorted out. Trades would not have settled, leaving counteparties without their promised securities of cashed and other firms could have been pushed to the edge of disaster.
Since no private sources wished to loan Bear money, Bear would need to go to the Fed. The problem is that, except via the repo market, the Fed only lends directly to banks. Bear's clearing agent JP Morgan was called in by Bear for help. Bear CEO Jamie Dimon contacted NY Fed President Geithner and arranged financing. JPM will give Bear 28 day financing which is ultimately backed by the. With liquidity tight and other firms likely to have further writedowns and liquidity problems of their own. The Fed needed to prevent Bear from failing. Bear is now scrambling to find a partner to avoid an implosion.
This underscores the true problems in the financial markets. It is bad. This is why the Fed will risk a prolonged recession. If it let the banking / financial system fail, instead of a recession, we could have a depression.
As recently as last week, there were some strategists who said that the liquidity crisis was overblown and this is just like 1990. This weeks liquidity problems only emphasize just how foolish that analysis was.
Look for more poor earnings , writedowns, Fed easing and inflation for the balance of 2008.
Bear Stearns is a major player in the mortgage securities market. The firm is smaller than the other major Wall Street firms and does not have as diverse a business model as its larger and thus was more severely impacted by the down turn in the mortgage market.
Writedowns and reduced profits from its core business have negatively impacted Bear's earnings. Counterparty fears caused other market participants reluctant to trade with Bear. To make matters worse, Bear's creditors cut them off from further capital.
If Bear failed the repercussions around the street could be catastrophic. Bear, as with all other dealers and banks, finances trading positions in the repo market. If Bear failed, it could be some time before such repos were unwound. Money deposited with Bear could be locked up for some time until the situation could be sorted out. Trades would not have settled, leaving counteparties without their promised securities of cashed and other firms could have been pushed to the edge of disaster.
Since no private sources wished to loan Bear money, Bear would need to go to the Fed. The problem is that, except via the repo market, the Fed only lends directly to banks. Bear's clearing agent JP Morgan was called in by Bear for help. Bear CEO Jamie Dimon contacted NY Fed President Geithner and arranged financing. JPM will give Bear 28 day financing which is ultimately backed by the. With liquidity tight and other firms likely to have further writedowns and liquidity problems of their own. The Fed needed to prevent Bear from failing. Bear is now scrambling to find a partner to avoid an implosion.
This underscores the true problems in the financial markets. It is bad. This is why the Fed will risk a prolonged recession. If it let the banking / financial system fail, instead of a recession, we could have a depression.
As recently as last week, there were some strategists who said that the liquidity crisis was overblown and this is just like 1990. This weeks liquidity problems only emphasize just how foolish that analysis was.
Look for more poor earnings , writedowns, Fed easing and inflation for the balance of 2008.
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