Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.

Credit Crunch - Act II

by Jerome a Paris Fri Nov 2nd, 2007 at 09:18:55 AM EST

The WSJ reveals this morning that Merrill Lynch has been using hedge funds to temporarily hide its exposure to the subprime mess:

Merrill Lynch & Co., in a bid to slash its exposure to risky mortgage-backed securities, has engaged in deals with hedge funds that may have been designed to delay the day of reckoning on losses, people close to the situation said.

(...)

In one deal, a hedge fund bought $1 billion in commercial paper issued by a Merrill-related entity containing mortgages, a person close to the situation said. In exchange, the hedge fund had the right to sell back the commercial paper to Merrill itself after one year for a guaranteed minimum return, this person said.

So Merrill Lynch is buying time, putting its own money on the line via the guarantee to repurchase after a year in exchange for a deal that allows it to lower its apparent exposure to subprime mortgages - or to create for them an artifical transactional value which it can use to value favorably the rest of the paper it still holds. This suggests that neither Merrill (which needs to resort to tricks to find a market value for its assets) nor the hedge funds (which require a guarantee) are confident that the underlying value is anywhere near what they claim it is. And it explains why banks are increasingly wary of one another.

The Financial Times has a scary article this morning, describing some of what's going on behind the scenes in the credit markets right now, and it's worth looking at in more detail:


Prepare for the credit drama sequel

This week, a banking friend made a startling confession. In recent weeks he has been furtively unwinding some large investment portfolios linked to subprime securities.

But as he has embarked on this sordid task, he has discovered that the only effective way to get rid of these distressed assets is to avoid putting any tangible price on the trade.

Again, the same underlying points: worries about the value of subprime securities have not abated, and everybody is trying to get rid of them in any way they can. But, and this is very important, nobody wants an actual formal price to be put on any transaction, because that would force such prices in the open, causing the need to use such 'official' market prices to value other similar assets held by banks and investors on their balance sheets or portfolios, under current "mark to market" rules (ie you're supposed to provide on a regular basis a value of your portfolio at its market value, and not at what it cost to purchase. It's only when there is no market that you can use acquisition price or, on occasion 'mark to model' - fancy estimates of what you think it's worth).

Instead, he has resorted to using a tactic more normally associated with third world markets than the supposedly sophisticated arena of high finance: barter.

“Barter is the only thing that works right,” he chuckles grimly. “It is like the Dark Ages.”

I daresay this is an extreme example. But it nevertheless reveals a crucial point: namely that while this summer’s credit turmoil is already several months past, parts of the credit world remain plagued by strikingly high levels of fear and mistrust.

Barter is highly inconvenient compared to using money: you need to have assets of similar value to trade, and both sides must want what the other is 'selling'. Resorting to barter is an extraordinary sign that either (i) money is no longer trusted or (ii) bringing out the subprime mess in the open would be a catastrophe. As we're not yet under option (i), it just goes to show (like in the Merrill example I used in the introduction) the extremes that banks will use not to have to give an accounting of what they hold.

Indeed, in some arenas, such as mortgage-linked securities, sentiment now seems to be getting worse, not better. And that raises the prospect that we are now moving into an entire new phase of this year’s credit squeeze.

Take the ABX index, the basket of derivatives linked to subprime securities. As financial tools go, this index is far from perfect, since it is barely two years old, and tends to be thinly traded.

But right now it has the unfortunate distinction of being the only tool easily available to measure sentiment in the opaque subprime securities world. And in the past couple of weeks, the message emerging from this measure has started to look utterly dire.

All the indices and ancillary info can be found at this link: ABX Indices

Never mind the fact that the risky tranches of subprime-linked debt (the so-called BBB ABX series) have fallen 80 per cent since the start of the year; in a sense, such declines are only natural for risky assets in a credit storm.

Just as a note here: a BBB rating is an investment grade rating, ie a rating that pension funds are, by public regulation, allowed to trust in invest in freely (the distinction between "investment grade" and "junk bonds" (or "high yield debt") is precisely that those above the cut are allowable for investment by regulated investors, while those below are not). So we're talking about instruments that, in absolute terms, should carry only a little bit of risk.

An article in Bloomberg that i already quoted several times (and which provided some excellent background on the coming crisis back in July)noted:

Corporate bonds rated Baa, the lowest Moody's investment rating, had an average 2.2 percent default rate over five-year periods from 1983 to 2005, according to Moody's. From 1993 to 2005, CDOs with the same Baa grade suffered five-year default rates of 24 percent, Moody's found.

Moody's Baa rating is equivalent to S&P's BBB-, ie it's one level lower, or riskier. Thus BBB rated paper should, in theory, have a probability of default under 2%. And now the ABX index is telling us that these papers are valued at 20% of their face value, i.e. buyers expect that they will get only one fifth of the theoretical financial streams they are purchasing. One fifth.

But that's understandable, we are told, because these were the risky bits... But, remember, they have the "investment grade" stamp nad have thus certianly been purchased by the managers of pension funds and other supposedly safe funds all over the world.

But back to the FT article:

Instead, what is really alarming is that the assets which were supposed to be ultra-safe – namely AAA and AA rated tranches of debt – have collapsed in value by 20 per cent and 50 per cent odd respectively.

This is dangerous, given that financial institutions of all stripes have been merrily leveraging up AAA and AA paper in recent years, precisely because it was supposed to be ultra-safe and thus, er, never lose value.

Here's the graph showing the evolution of the price of these two indexes (from the ABX page linked to above):

The prices reached in August were already seen as extraordinarily worrying: 10% discounts on AAA paper was, quite frankly, completely unheard of, and smacked of panic and/or desperation. AAA is the rating that the best sovereign governments (but not all - Japan is not rated AAA, for instance) and a very small number of corporations manage to get. It's the safest kind of paper you get - and you get paid very low remunerations because of the low risk. And now we're talking about 20% discounts! And AA is still an excellent rating - typically that of the best rated banks on the market, something that gets you a remuneration a few tenth of a percentage higher than the no-risk AAA. And they've lost half their value?!

And remember - this is the only visible price we have for these financial assets, given how most banks and investors are desperately scrambling NOT to get them valued, so that they don't have to go through their balance sheet to "mark them to market" and revels bigger losses than they already have.

But the trend also has crucial significance for investment banks. Until quite recently, many Wall Street banks tended to value their subprime linked holdings using models, because they (and their auditors) knew it was hard to get prices for these opaque instruments through real market trades. But I am told that this autumn some banks’ auditors have started to crack down on this approach, particularly in the US, owing to the so-called “Enron factor”.

More specifically, the experience of living through the Enron scandals earlier this decade means that the audit industry is now terrified that it could face lawsuits if it is perceived to be too lax towards its clients. So some now appear to be demanding that their banking clients reprice their mortgage assets according to the only visible market tool – namely the ABX. It is thus little wonder that some banks have suddenly been forced to increase their writedowns in recent weeks. Indeed, I would wager that the pernicious combination of ABX and the “Enron factor” is a key reason for the recent shocks emanating from Merrill Lynch.

This is ironic, but it touches upon one of the hard truth of the subprime mess: it's Enron, write large. First, it does show that regulation-by-precedent at least ensures that the errors of the past are no longer made: at least this time the big accountancy firms are not going to be complicit of attempts to hide the mess. But, secondly, it does flag that, at heart, the mess is not that different from what Enron did. Enron's modus operandi was to create semi-artificial future financial streams, book their equivalent value as profit today, and dump the liability on outside vehicles so they would not be visible on their accounts. The line between outright crime (completely fictional streams) and creative finance (real streams, whose full value was non-fictional only under highly favorable hypotheses) is hard to place...

However, the rub is that while auditors at some Wall Street banks are becoming quasi-evangelical about the need to reprice subprime assets, there are still other, vast swathes of the financial system which have not been touched by the full blast of transparency yet. Moreover, many financiers outside the world of Wall Street banks remain very wary of rewriting their mortgage assets to current ABX price levels, due to a lingering hope that the recent ABX slump will remain temporary.

Titanic ... iceberg ... chairs on the deck ...

No wonder that my banking friend is now furtively resorting to barter, to unwind his clients’ investment portfolio. And no wonder that investors are currently so suspicious about the health of financial entities – and so nervous about the potential for secondary shocks. This new wave of fear is unlikely to vanish quickly. Call it, if you like, The 2007 Credit Crunch Story, Part II.

And remember, this is all happening in an economy which is supposedly growing nicely... What will happen when the inevitable recession hits?

Display:
http://www.dailykos.com/story/2007/11/2/91346/5458

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Fri Nov 2nd, 2007 at 09:21:02 AM EST
'cause the diary has dropped off already, even though 37 recs. It had a lot of good comments, so it really needs to be rescued. Any idea as to how to do that on their site?

I'm surprised at the candid quality of the article that you cite. Now and then a doom-and-gloom financial article hits the intertubes over here, probably just to show fairness-and-balancedness. Is that what is going on with your source article? Or is there some advantage to be gained by a more value-based segment of the financial "industry" that is being test-marketed here? Or is it just accidentally good journalism?

In any case an article like that - especially spiced with your comments - could cause a panic, if widely disseminated and believed. It's a titillating prospect - publicize and perhaps tip the tottering mess into the crash that will come anyway. Are we ready for creative destruction?


paul spencer

by paul spencer (paulgspencer@gmail.com) on Fri Nov 2nd, 2007 at 12:09:04 PM EST
[ Parent ]
has been providing some pretty good coverage of this crisis at the FT all through the year.

The information has been there all along - it's just not been processed into common wisdom yet, because it doesn't fit the narrative (and is thus discounted) and because it is hard to understand and happens mostly behind the scenes anyway. Who cares about CDS spreads when the Dow Jones is at 14,000?

As to dKos, it was a close thing - a bit of unlucky timing.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Fri Nov 2nd, 2007 at 12:17:23 PM EST
[ Parent ]


paul spencer
by paul spencer (paulgspencer@gmail.com) on Fri Nov 2nd, 2007 at 12:37:43 PM EST
[ Parent ]
One-diary-per-day rule on DKos.

We have met the enemy, and he is us — Pogo
by Carrie (migeru at eurotrib dot com) on Fri Nov 2nd, 2007 at 12:42:45 PM EST
[ Parent ]
It's grounds for banning to post the same diary twice. But it's been read. And here too. And it may be posted on the Oil Drum as well. And I'll keep writing about this...

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Fri Nov 2nd, 2007 at 12:55:05 PM EST
[ Parent ]
i am still wwondering why not use a external value for the assets.. you actually enver know how many credits will eb returned.. utnil the end...so you can decide not to price until the end.. if you account for those who already decided not to pay....

What's the problem with this scenario?.. is it taht the credit was sliced and reslcied and repackaged adn resold.. and noone knows who has credits with who?... It is certainly possible since financial economy, after all, it is not thermodynamics.

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Fri Nov 2nd, 2007 at 09:47:12 AM EST
As I understand it, auditors are demanding "mark to market" valuations for these assets in the annual accounts, not fiction or "wait and see".
by afew (afew(a in a circle)eurotrib_dot_com) on Fri Nov 2nd, 2007 at 10:12:35 AM EST
[ Parent ]
there are still other, vast swathes of the financial system which have not been touched by the full blast of transparency yet.

Next stop where?

by afew (afew(a in a circle)eurotrib_dot_com) on Fri Nov 2nd, 2007 at 10:09:12 AM EST
Next stop where?

Yes, and where does the whole thing stop?

How much of the global economy can this subprime mortgage thread unravel?  Are there any solid walls that are impermeable to this erosive chaos?  I may sound a little hysterical here, but could this lead to a complete breakdown, like the one that ensued after 1929?

Truth unfolds in time through a communal process.

by marco on Fri Nov 2nd, 2007 at 12:04:09 PM EST
[ Parent ]
is quite possibly the optimistic scenario...

The bubble was a lot bigger this time. And the peak oil thingy is not going to go away. But don't worry, it'll take at least one more year to unravel, and will be properly blamed on the next Democratic president...

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Fri Nov 2nd, 2007 at 12:19:23 PM EST
[ Parent ]
it'll take at least one more year to unravel, and will be properly blamed on the next Democratic president...

if 1929 is the optimistic scenario, a year from now i won't care who the president is.

on the bright side, a year may be just long enough to get basic proficiency in survivalism and move my family to somewhere less... dependent on the global economy.

Truth unfolds in time through a communal process.

by marco on Fri Nov 2nd, 2007 at 12:56:01 PM EST
[ Parent ]
that it took a few years for the whole enchilada to unravel. 1933 was much worse than 1929, IIRC. 1929 was bad for the stock market, mostly. The real economy suffered later.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Fri Nov 2nd, 2007 at 01:38:34 PM EST
[ Parent ]
I guess you are shorting US banks like hell?

There should be an ETF for this...

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Fri Nov 2nd, 2007 at 02:17:36 PM EST
[ Parent ]
I have an idea...

We engineer a swap for those ETers with dollar assets (or revenue streams) who'd like to have Euros instead. We pool the dollar assets, and buy euro assets on margin.

We have met the enemy, and he is us — Pogo

by Carrie (migeru at eurotrib dot com) on Fri Nov 2nd, 2007 at 04:02:53 PM EST
[ Parent ]
and, where, pray, is that?

the insidious effects of globalisation hang like damocles' sword over those few regions not already robbed blind and reduced to economic serfdom, injustice waits round every corner, and to try to outrun the beast is futile...we have to work within its belly and take our chances.

we can bust our butts putting together fancy solar arrays that are part of the solution, i believe, (obviously), but some thug sees copper tubes and thinks about what he can get for them down at the scrapyard, and then how would i replace them?

it's all futile at the end of the day, but it's fun trying to use every neuron available to try to see a way through this tangle we've allowed our species to become embroiled in.

we are pretty adaptable, but i think what's coming will test the hardiest and most flexible beyond our wildest imaginations...

or not!

maybe we'll transition effortlessly and have a smooth landing....

right...

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Sat Nov 3rd, 2007 at 03:59:51 AM EST
[ Parent ]
and, where, pray, is that?

go kiwi, baby!

or Yakushima Island has plenty of rain water and food, and warm, temperate climate.  Incovenient for copper thieves to get to.  And lots of natural hot springs!

and I heard Iceland has hot springs, too.

we are pretty adaptable, but i think what's coming will test the hardiest and most flexible beyond our wildest imaginations...

well, humans may be due for a little darwinistic paring down anyway.  the surviving population will be called Homo sapiens neoliber.

Truth unfolds in time through a communal process.

by marco on Sat Nov 3rd, 2007 at 04:39:59 AM EST
[ Parent ]
and, where, pray, is that?

ETopia!

We have met the enemy, and he is us — Pogo

by Carrie (migeru at eurotrib dot com) on Sat Nov 3rd, 2007 at 05:47:29 AM EST
[ Parent ]
Well it just goes to show that there's AAA paper and there's AAA paper.

While within each category the rating agencies methodology is probably valid, where it all went wrong was in their basic assumption that plain vanilla debt (Chalk) is in fact equivalent in risk terms to structured note (Cheese) - and some of it is pretty cheesy...

But it all made work for the ("For Profit") ratings agencies to do....

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Fri Nov 2nd, 2007 at 10:11:59 AM EST
But I wonder who was aware befroe this summer of the different scales. I certainly wasn't.

If anything, in my sector (wind power), agency ratings were always more severe than we thought the underlying risk was...

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Fri Nov 2nd, 2007 at 11:02:01 AM EST
[ Parent ]
That's the punishment you get for dealing in stuff you can see and touch, rather than leveraged lies story-telling.
by ThatBritGuy (thatbritguy (at) googlemail.com) on Fri Nov 2nd, 2007 at 11:51:03 AM EST
[ Parent ]
Speaking of the Enron business model, yesterday I noted this US story, U.S. Climate Bill Would Pay Farmers to Store Carbon in Soil , with interest. Lieberman outlined creation of the future US exchange platform in S.280 (12 Jan). Now comes S.2191 (18 Oct), apparently a modest revision of S.280. The obvious difference is the PR to accompany the first in a series, I'm sure, of new "asset-backed" financial instruments -- carbon sequestration real estate.  

The reporter helpfully notes that in 2005, farmers in Iowa, Nebraska and Kansas generated $380,000 selling carbon credits to companies and universities. Bankers, the 21st Century Agricultural Policy Project [!], are projecting an exponential rate of growth and implying minimal investment risk over the next 40 years. The forecast value of trading CCS properties ranges $2.6B - $24B per year. Modest return by subprime CDO standards. Still ...

"If structured properly, it ["credit" price structure] could create a huge market and bring in a large source of emissions reductions," said Gia Schneider, vice president of energy trading and environmental markets for Credit Suisse.
[...]
Offsets can lower the cost to utilities of meeting new pollution requirements, said Elizabeth Thompson, legislative director for Environmental Defense, an advocacy group. It will be years before power plants can use technology to capture and store carbon from power plants that burn coal.

Allowing polluters to use some domestic and international offsets would lead to carbon credit prices of about $14 per ton in 2015 and about $77 per ton in 2050, according to a U.S. Environmental Protection Agency analysis. If offsets are not allowed, prices jump to $40 in 2015 and $219 in 2050.

"We view offsets as a very useful bridge," Thompson said.

"A useful bridge:" Will (carbon) credit exchanges induce a calming effect on global commodity and capital price volatility in the near term? Perhaps so long as "value" creation for investors is evidently positive. But I'm not optimistic, given AgriBiz monopolies, ongoing E8-stock production by the self-same credit trading "farmers," and Peak Soil science.

Diversity is the key to economic and political evolution.

by Cat on Fri Nov 2nd, 2007 at 11:14:33 AM EST
Will (carbon) credit exchanges induce a calming effect on global commodity and capital price volatility in the near term?

Carbon credits come from the very same stable of intermediaries who bring us Debt as Money, and is equally unsustainable.

Moreover, these intermediaries who are selling us this total bollocks make their money from the volatility which is the consequence of the market manipulation and speculation inherent in what they do.

Far from calming it, they cause it.

What's needed IMHO is an "asset-based"  market in energy units based on the carbon in fuel, rather than a "deficit-based" market based on the carbon in emissions created when carbon- based energy is used.

It's not Rocket Science to do, either.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sat Nov 3rd, 2007 at 08:22:11 AM EST
[ Parent ]
the derivated fantasies of copycats seem to have no end, when the original-fantasy bubble just popped.

Credit Suisse said:  ´we have our fees and commissions sheet ready.´

USEPA said:  ´our regulated businesses have told us to say this is good and we agreed.´

Our knowledge has surpassed our wisdom. -Charu Saxena.

by metavision on Sat Nov 3rd, 2007 at 02:06:04 PM EST
[ Parent ]
with an excellent title, as usual...


Loss Leaders

"THIS time it's different" are the four most expensive words in the English language, runs a saying among bankers. So it has proved at Merrill Lynch, an American investment bank which is ruing a stampede into collateralised-debt obligations (CDOs) and other subprime mortgage-linked nasties. Never mind that most of its CDOs were "super senior" and supposed to be relatively safe. On October 24th the Thundering Herd's senior bulls sheepishly announced write-downs of $7.9 billion on Merrill's mortgage holdings, $3.4 billion more than the bank had estimated only 19 days before. This tipped Merrill into loss. After a few days' testy deliberation, the board tipped its chairman and chief executive, Stan O'Neal, through the nearest window.

The $161.5m that Mr O'Neal grabbed on his way out will no doubt encourage would-be successors to step forward. But the new boss will be taking over at an unenviable time. The mortgage crisis has done more than $27 billion-worth of damage to capital-markets businesses so far. With the value of subprime securities still falling, that number could rise dramatically when fourth-quarter results are unveiled. Hopes that banks would be able to put the worst behind them in a single bad quarter have been dashed.

(...)

UBS, the biggest Swiss bank and long regarded as a leader in risk management, gave no better answers than any other institution for calculating the future impact of the subprime crisis when it reported its third-quarter results on October 30th. UBS's investment-banking division lost SFr4.2 billion ($3.6 billion) in the third quarter. The bank's value-at-risk, the amount it stands to lose on a really bad day, has shot up (see chart). On 16 days during the quarter its trading losses exceeded the worst forecast by its value-at-risk model on the preceding day. It had not experienced a single such day since the market turbulence of 1998.

In a conference call to discuss the results, Marcel Rohner, UBS's chief executive, and Marco Suter, chief financial officer, struggled to explain the methodology behind their valuation of what seems to be a deteriorating portfolio of subprime securities. Reluctant to give a worst-case assessment of UBS's exposures in future, the best they could do was predict that the investment-banking division would not make a profit in the fourth quarter.



In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Fri Nov 2nd, 2007 at 11:16:30 AM EST
the UK is not mentioned.  Cute.

Our knowledge has surpassed our wisdom. -Charu Saxena.
by metavision on Sat Nov 3rd, 2007 at 01:26:26 PM EST
[ Parent ]
It's growing much nicer than I would've anticipated.  (I was betting on growth of no better than about 2% for the quarter.  It came in at nearly double that.)  166,000 jobs is too high in such a nervous environment and with so much about to slam into the economy over the next couple of years.  And 3.9% growth is unbelievable.  The improvement in exports is understandable, given the state of the dollar.  That was pretty easy to see coming eventually.  And companies replenishing their inventories for the holiday season makes perfect sense.

But I still say these numbers have got to be revised down.  They don't smell right.  This is not an economy that should be growing at 4%, and the renewed slowdown in wages suggests softness that isn't accounted for in the numbers.

Or, if this is an economy hitting nearly 4% (strong even by the standards of the 1990s boom), then Bernanke needs to quit slashing and start raising, or inflation is going to take off into the stratosphere.  The underlying trends don't support this acceleration.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Fri Nov 2nd, 2007 at 11:41:42 AM EST
I'll simply note that 166,000 new jobs is below the average for the 8 Clinton years, and would have been a pretty weak month last decade. It's barely enough to keep up with natural population growth.

and yet it's labelled a "surge" by the breathless business media...

How standards have changed.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Fri Nov 2nd, 2007 at 12:00:49 PM EST
[ Parent ]
A funny data point in that article:


The average U.S. work week was unchanged at 33.8 hours.

Maybe the USA needs a 35-hour week so that Americans are incited to work a bit more than their current lazy habits?

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Fri Nov 2nd, 2007 at 12:02:48 PM EST
[ Parent ]
The 33.8 hour work week must be the average of PT (wage) and FTE (salaried) employees, sample surveyed. The reality of uncompensated labor is hardly documented; that would upset hyperactive productivity calculations.

What I wanted to note though was this other discrepancy in NFP monthly statistic: Current Population Survey (CPS), published by BLS also, showed a loss of 250,000 jobs and a decrease in the Civilian labor force of 211k.

That is interesting beside the increasing statistical significance of counting "marginally attached" employment in the labor force who are "not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey."

Diversity is the key to economic and political evolution.

by Cat on Fri Nov 2nd, 2007 at 07:52:25 PM EST
[ Parent ]
Significantly below the Clinton average.  I believe the Clinton average was 280k per month, which implies about thirteen million jobs even after deducting labor market growth.  Bush's growth has been, if I remember correctly, about 180k per month, besting natural growth by only about 40k.

I think you could certainly argue that 166k is not bad given the state of things, but when you have a number like that spread over the business cycle, it's pretty weak.  Now, in fairness, Bush didn't need as much growth in the recovery to get back to something near the NRU, since the peak unemployment rate after the '01 crash was roughly two full percentage points lower than the peak in the recession of the early-1990s (6% vs 8%).  And the extremely low unemployment rate under Clinton probably implies that we dealt with an unnatural expansion in labor supply back then -- e.g., the elderly reentering the market seeking the higher wages a tight supply would afford them, dropping back out once the contraction arrived and more normal levels returned.

But it's been very weak, nonetheless, and I suspect that's why wage growth has been so pathetic throughout this expansion.  I'd guess we've basically made up in the expansion what we lost on employment during the contraction over the last several years.  Even taking out the Clinton years and comparing Junior with Reagan, Carter, Daddy, etc, this has been pretty sad.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Fri Nov 2nd, 2007 at 12:46:13 PM EST
[ Parent ]
an unnatural expansion in labor supply back then

Putting my economist's hat back on for a moment, I should state that as, not "unnatural," but rather irregular.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Fri Nov 2nd, 2007 at 03:29:12 PM EST
[ Parent ]
That expansion in labor supply would also be consistent with the high number of people who dropped out of the labor market during the slowdown.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Fri Nov 2nd, 2007 at 03:32:09 PM EST
[ Parent ]
Generally speaking, when something is unbelievable - or incredible for that matter - don't believe it. There is no segment of the U.S. economy that is showing growth at the moment and several are showing contraction. Inventories may be turning into sales, but that is the only thing that could account for any such mythical increase.

As far as inflation fears that Bernanke might consider - high inflation is already here. Bernanke and the Fed and the federal Housing Authority are trying desperately to inject "cash" (overtime for the currency presses) into the financial markets to dilute the losses. As someone else wrote - the good news is that we'll be paying our mortgages with cheap dollars - which is essentially what they're doing by increasing the money supply.

The bad news is that everything else that the overwhelming majority of us (in the U.S.) buy is going up at over 10% per annum at the moment - with no wage increases to compensate - unless you recently ran Merrill Lynch - come to think of it, I guess that Sean is taking a cut, too. Point being that to speak of a 3.9% growth rate is based on their fiction of < 3% inflation. Actual inflation adjustment means that the real "growth" rate is negative.

paul spencer

by paul spencer (paulgspencer@gmail.com) on Fri Nov 2nd, 2007 at 12:31:32 PM EST
[ Parent ]
what surprises me is that no-one accents how much of that growth is in the necrotic businesses, those who profit off fear and insecurity, and are hand-in-glove with those propaganda outlet-spouts which are hellbent on reducing the public to a state of quivering, gibbering protoplasmic terror.

take away all the profits made on weapons, tazers, riot shields, uniforms, junk food manufacturers, dodgy pharma, stupid energy creation, noxious chemicals, and factor in the future costs (those precious externalities), all the Love Canals waiting to be cleaned up, and how fast is the -tumour- growth occurring?

if someone's underweight and fading away, do we celebrate weight gain in the form of cancerous tissue?

man needs work for dignity and self-expression, to repay the inevitable fact that his life was and is dependent on the work and kindness of others, but there's a heck of a difference between work tilling the fields and putting on your hazmat suit and cleaning up the spilt detritus of some previous generation's hubristically myopic lust for phantom security and transitory stock market gains.

most people would choose different lives, if they could, i believe.

how can we return that choice to people, in a way that the planet can sustain?

i would be very happy to have the answer to that question...

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Sat Nov 3rd, 2007 at 03:51:18 AM EST
[ Parent ]

Les obligations de Citigroup et Merrill plus risquées /Moody's

NEW YORK, 2 novembre (Reuters) - Le risque de détenir des obligations de Citigroup < CITIGROUP INC > ou Merrill Lynch < MERRILL LYNCH & CO INC > a augmenté pour atteindre son plus haut niveau depuis au moins un an, lit-on dans une note de Moody's publiée vendredi.

Les CDS ("credit defaults swaps") de Merrill Lynch, qui mesurent le coût d'assurer la dette d'un groupe contre un risque de défaut, se négocient désormais comme s'ils évoluaient dans la catégorie spéculative ("junk"), affirme David Munves, stratège crédit au sein de l'agence de notation américaine.


Citigroup, Merrill bonds suggest lower ratings-Moody's

NEW YORK, Nov 2 (Reuters) - The risk of owning credit and bonds of Citigroup Inc (C.N: Quote, Profile, Research) and Merrill Lynch (MER.N: Quote, Profile, Research) rose to the highest in at least a year on Friday and Merrill credit default swaps are trading like junk, Moody's Investors Service said.

The spreads, or the yield premium investors demand to hold Citigroup and Merrill bonds over U.S. Treasuries, widened on Friday after Deutsche Bank said most of the more than $10 billion in write-downs expected in the fourth quarter will come from Citigroup and Merrill.

Merrill credit default swaps have a market implied rating of "Ba1," or six levels below its current Moody's rating at "A1," the fifth-highest rating, said David Munves, a managing director and head of Moody's credit strategy group.

(...)

Spreads on Citigroup's 10-year notes widened by 14 basis points to 148 basis points, according to data from MarketAxess. Spreads had widened sharply on Thursday after Credit Suisse and CIBC World Markets downgraded Citigroup.

Citigroup currently has a "AA" rating at Moody's and Standard & Poor's, the third-highest rating, and a "AA-plus" rating at Fitch Ratings, the second-best grade.

This whole crisis is making a joke of all these ratings, showing them as meaningless and totally failing in their predictive role.

As I've said before, this has been a crisis of risk analysis - bankers failing to do their job and relying instead on outsourced manufactured risk analysis - which they were paying for. Part of it is the fascination for simple numbers (or letters on a scale, in that case) giving an impression of a clean underlying risk situation. Part of it is laziness. part of it is greed, as stating a rating allows you to make more deals than if you have to explain the risks to your management. Everybody knows ratings are a safe way of assessing risk.

Sigh...

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Fri Nov 2nd, 2007 at 12:13:55 PM EST
a crisis of risk analysis  = greed in the real world.  

The risk analysis should come up front, before the funny paper is approved to be designed, tainted, repackaged and sold.  It has something to do with ethics and ´socially-responsible´ business.

 

Our knowledge has surpassed our wisdom. -Charu Saxena.

by metavision on Sat Nov 3rd, 2007 at 01:46:11 PM EST
[ Parent ]
There has been a massive failure of due diligence, that much is clear.

Expect lawsuits.

We have met the enemy, and he is us — Pogo

by Carrie (migeru at eurotrib dot com) on Sat Nov 3rd, 2007 at 02:42:12 PM EST
[ Parent ]
It seems clear that
  1. the banks figured out their own balance sheets were full of worthless assets
  2. they then said "well, if my balance sheet is this ugly, imagine the neighbour's" and the credit crunch started
  3. they then proceeded to delay the recognition of their losses for as long as possible - there was a first round of this when quarterly results were published in September, and there will be more rounds each quarter
  4. quarterly results are not audited, but yearly ones are - things will get interesting when auditors force the recognition of losses, or give negative opinions on the accounts, when the annual reports are published


We have met the enemy, and he is us — Pogo
by Carrie (migeru at eurotrib dot com) on Fri Nov 2nd, 2007 at 12:23:31 PM EST
Oh, and the US housing market hasn't crashed yet, nor have we seen massive defaults in the underlying subprime mortgages. This is a crisis of confidence, not a reaction to fundamentals. The worse is yet to come.

We have met the enemy, and he is us — Pogo
by Carrie (migeru at eurotrib dot com) on Fri Nov 2nd, 2007 at 12:25:24 PM EST
[ Parent ]
Thanks, Miguel. For those of us who are only quasi-literate in econospeak, the above helps.

Capitalism searches out the darkest corners of human potential, and mainlines them.
by geezer in Paris (risico at wanadoo(flypoop)fr) on Fri Nov 2nd, 2007 at 01:26:56 PM EST
[ Parent ]
Do the banks mostly run their years to the same dates?
i.e. is the Sword of the Auditor going to fall at the same time on a large number of institutions?
by Metatone (metatone [a|t] gmail (dot) com) on Fri Nov 2nd, 2007 at 05:36:30 PM EST
[ Parent ]
That depends on what the company's fiscal year is, so it is really up to them. But fiscal years tend to match either the calendar year (to December) or the tax year (to April). Now,

Wikipedia: Form 10-K

Historically, Form 10-K had to be filed with the SEC within 90 days after the end of the company's fiscal year. However, in September 2002, the SEC approved a Final Rule that changed the deadlines to 75 days for Form 10-K for "accelerated filers"; meaning issuers that have a public float of at least $75 million, that have been subject to the Exchange Act's reporting requirements for at least 12 calendar months, that previously have filed at least one annual report, and that are not eligible to file their quarterly and annual reports on Forms 10-QSB and 10-KSB. These shortened deadlines were to be phased in over a three-year period, however in 2004 the SEC postponed the three-year phase in by one year. In December 2005, the SEC created a third category of "large accelerated filers," accelerated filers with a public float of over $700 million. As of December 27, 2005, the deadline for filing for large accelerated filers was still 75 days, however beginning with the fiscal year ending on or after December 15, 2006, the deadline will be 60 days. For other accelerated filers the deadline will remain at 75 days and for non-accelerated filers the deadline will remain at 90 days. For further reading, see the Final Rules [1] section of the SEC's website, referencing Rule 33-8644.
means that for those US financial institutions whose fiscal year runs to December we'll know in March, and for those whose fiscal year runs to mid-April we'll know in July.

However, the point is not who originated the mortgages, but who is holding the Commercial Paper. When I was in Spain recently people told me things like "Spanish banks like Santander appear to have been more prudent lenders", and I replied "it matters not whether Santander created a lot of subprime themselves, but how much US-generated subprime-backed 'commercial paper' of dubious value they bought in the global capital markets and is now sitting on their balance sheet".

When defaults start really getting out of control then yes, the banks that did the original lending will lose the revenue that they intend to pass on to whoever bought their Commercial Paper and they will have a cash flow problem. If the credit/liquidity crisis is still going on then, they'll be in a pinch just like Northern Rock.

We have met the enemy, and he is us — Pogo

by Carrie (migeru at eurotrib dot com) on Sat Nov 3rd, 2007 at 05:35:58 AM EST
[ Parent ]

"it matters not whether Santander created a lot of subprime themselves, but how much US-generated subprime-backed 'commercial paper' of dubious value they bought in the global capital markets and is now sitting on their balance sheet".

... or for what amount highly leveraged private equity or hedge funds that bought such papers were financed by them...

... or how many clients have "guaranteed sell back" clauses in their agreements to purchase subprime stuff form Santander...

... or how much financing was provided by Santander to real estate and construction groups whose business model was underpinned by cheap credit to finance their buyers...

That last one is particularly sensitive for Spanish banks, given the extent of the construction boom in Spain. I'm still not convinced that the Spanish housing bubble is worse than in the UK, given that there was a lot of genuine catching up to do in Spain, and the Spanish construction groups have been pretty good lately at recycling their bubble profits into acquisitions in other countries (useful diversification), but the end of this cycle will have to hurt anyway.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Sat Nov 3rd, 2007 at 06:48:48 AM EST
[ Parent ]
The Swedish banks are saying the same... Though I actually believe them, only the investment banks might/should be in trouble.

And there might be some issues with the exposure to Baltic markets.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Sun Nov 4th, 2007 at 02:16:10 PM EST
[ Parent ]
I am not convinced that the big auditors have changed much since Enron.  Someone, somewhere would have written up a ´note´ to financial statements about risk in the past 6 years, no?  

Our knowledge has surpassed our wisdom. -Charu Saxena.
by metavision on Sat Nov 3rd, 2007 at 01:56:14 PM EST
[ Parent ]
Well, after Enron they don't have the overt conflicts of interest, so at least the Auditors have plausible deniability and can now pretend they "could not have known".

We have met the enemy, and he is us — Pogo
by Carrie (migeru at eurotrib dot com) on Sat Nov 3rd, 2007 at 02:43:00 PM EST
[ Parent ]
mrs.dvx remarked this evening that it isn't necessarily just banks.

Insurance companies also tend to be in the market for "investment grade" products to park all those premiums in.

The fact is that what we're experiencing right now is a top-down disaster. -Paul Krugman

by dvx (dvx.clt ät gmail dotcom) on Fri Nov 2nd, 2007 at 05:38:08 PM EST


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