Crisis in the Financial Markets

[nmap]

New Development: Bailout deal breaks down; Bernanke back to Capitol

Link

Example of potential consequences: Derivatives Pose New Wrinkle in Lehman Case

LINK

It turns out the new bankruptcy bill lets derivative holders go to the front of the line in the case of bankruptcy. Lehman bondholders who expected to get paid half their money back (fifty cents on the dollar) are now likely to get about forty-five cents on the dollar.

The total credit default swap market is $62 trillion (with a T). The total derivative market is supposed to be four times larger, although no one knows for sure.

Should the bailout fail, the possibility of breakdown in the derivatives markets increases. The consequences of unraveling a market valued at $250 Trillion or more are likely to be unpleasant.

[nmap]

To misquote Clausewitz, finance is merely war by other means.

The present situation is about more than bailing out Wall
Street, home foreclosures, or declining markets.
----------------------------------------------------------------------------------
Asia Needs Deal to Prevent Panic Selling of U.S. Debt, Yu Says

By Kevin Hamlin

Sept. 25 (Bloomberg) -- Japan, China and other holders of U.S. government debt must quickly reach an agreement to prevent panic sales leading to a global financial collapse, said Yu Yongding, a former adviser to the Chinese central bank.

``We are in the same boat, we must cooperate,'' Yu said in an interview in Beijing on Sept. 23. ``If there's no selling in a panicked way, then China willingly can continue to provide our financial support by continuing to hold U.S. assets.''

An agreement is needed so that no nation rushes to sell, ``causing a collapse,'' Yu said. Japan is the biggest owner of U.S. Treasury bills, holding $593 billion, and China is second with $519 billion. Asian countries together hold half of the $2.67 trillion total held by foreign nations.

China, Japan, South Korea and others should meet soon to seal a deal, said Yu, a former academic member of the central bank's monetary policy committee. The talks should involve finance ministers, central bank governors and even national leaders, he said.

``Whether some kind of agreement between them to continue to hold Treasury bills is viable, I'm not sure,'' said James McCormack, head of sovereign ratings at Fitch Ratings Ltd in Hong Kong. ``It would be unusual. If it became apparent that sovereigns in Asia were selling Treasuries the market would take that quite badly, it's something to be avoided.''

The global credit crisis, triggered by a housing slump in the U.S., has saddled financial companies with more than $520 billion in writedowns and losses, collapsing Bear Stearns Cos. and Lehman Brothers Holdings Inc. in the process. Insurer American International Group Inc. and mortgage giants Fannie Mae and Freddie Mac also were rescued by the government.

`Grave Threats'

U.S. Treasury Secretary Henry Paulson is urging Congress to pass a $700 billion plan to remove devalued assets from the banking system. Federal Reserve Chairman Ben S. Bernanke said Sept. 24 that the U.S. is facing ``grave threats'' to its financial stability.

China's huge holdings of U.S. debt means it must bear a large proportion of the ``burden of sorting things out'' in the U.S., Yu said. China is not in a hurry to dump its U.S. holdings and communication between the two nations every ``couple of days'' is keeping Chinese leaders informed and helping to avoid a potential panic, he added.

``China is very worried about the safety of its assets,'' he said. ``If you want China to keep calm, you must ensure China that its assets are safe.''

Currency Manipulator

Yu said China is helping the U.S. ``in a very big way'' and added that it should get something in return. The U.S. should avoid labeling it an unfair trader and a currency manipulator and not politicize other issues, he said.

``It is not fair that we are doing this in good faith and are prepared to bear serious consequences and you are still labeling China this and that, accusing China of this and that,'' he said. ``China knows what to do. We don't need your intervention.''

The U.S. financial crisis had taught China a lesson and that was: ``Why are we piling up these IOUs if they may default?'' China's economic expansion strategy, which emphasizes export growth that has led to trade surpluses and the accumulation of $1.81 trillion in foreign-exchange reserves, is the main problem, said Yu.

``Our export-growth strategy has run its natural course,'' he said. ``We should change course.''

China should stop intervening in the foreign currency markets and thus allow rapid appreciation of the yuan, he said. While this would cause pain for exporters, China could ease the transition by using its strong fiscal position to aid those who lose their jobs. It also should stimulate domestic demand to offset lower income from overseas sales.

Without yuan appreciation, China will continue to accumulate foreign reserves, which means further accumulating ``IOUs from the U.S.,'' said Yu. ``This is paper and it may default and it will not increase China's national welfare.''

If China doesn't allow the yuan to appreciate and continues to promote export-led growth it will lead to confrontation with the U.S. and Europe, Yu said.

To contact the reporters on this story: Kevin Hamlin in Beijing at khamlin@bloomberg.net

Last Updated: September 25, 2008 01:45 EDT

LINK

[Roguish Lawyer]

Washington Mutual apparently was seized by federal regulators today, then sold to JP Morgan Chase.

http://www.latimes.com/business/la-f...0,614943.story

Fortunately, we represent both companies. LOL

[Roguish Lawyer]

OTS 08-046 - Washington Mutual Acquired by JPMorgan Chase
FOR RELEASE: CONTACT: William Ruberry
Thursday, Sept. 25, 2008 (202) 906-6677
Cell – (202) 368-7727


--------------------------------------------------------------------------------


Washington, DC — Washington Mutual Bank, the $307 billion thrift institution headquartered in Seattle, was acquired today by JPMorgan Chase, the Office of Thrift Supervision (OTS) announced.

The change will have no impact on the bank’s depositors or other customers. Business will proceed uninterrupted and bank branches will open on Friday morning as usual.

Washington Mutual, or WaMu, specialized in providing home mortgages, credit cards and other retail lending products and services. WaMu became an OTS-regulated institution on December 27, 1988 and grew through acquisitions between 1996 and 2002 to become the largest savings association supervised by the agency. As of June 30, 2008, WaMu had more than 43,000 employees, more than 2,200 branch offices in 15 states and $188.3 billion in deposits.

“The housing market downturn had a significant impact on the performance of WaMu’s mortgage portfolio and led to three straight quarters of losses totaling $6.1 billion,” noted OTS Director John Reich.

Pressure on WaMu intensified in the last three months as market conditions worsened. An outflow of deposits began on September 15, 2008, totaling $16.7 billion. With insufficient liquidity to meet its obligations, WaMu was in an unsafe and unsound condition to transact business. The OTS closed the institution and appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. The FDIC held the bidding process that resulted in the acquisition by JPMorgan Chase.

Customer questions regarding the institution, including questions about federal deposit insurance coverage, should be directed to the FDIC at 1-877-ASK-FDIC. WaMu customers with questions can also call the bank's service center at 1-800-788-7000.

[Red Flag 1]

The more I read about this crisis, the more impressed I am as to the global impact. The complexity is baffeling! It seems that I am looking at a house of cards.

Despite the angst of reporters on the news networks, I feel that the debate now taking place in DC is a good thing. I felt real uneasy with what was begining to feel like a knee jerk reaction a few days ago. Given the global breath holding, and US asset holding abroad, I do hope a workable agreement surfaces soon. This really is troubling! It will be interesting to look at Tokyo trading over the next few hours.

What irks me a bit is the " debate over the debate " on Friday. Jeeezzzz guys, take a knee! Are there not enough moving parts here for you ? :-(

Thanks again nmap!


RF 1

[ZonieDiver]

I am in the process of refinancing the house I bought three years ago at a great price, thanks to a government program for teachers, firefighters, EMTs, and police officers. It was a HUD repo in a designated "revitalization" area. I got it at half the HUD price, and at that time similar models were selling on the market for 25% above the HUD price. Can't lose, right?

Now, it is time to refinance after my three year owner-occupancy period. My neighborhood has been hit hard by the housing collapse, combined with the effects of Arizona's "Employer Sanctions Law" - which caused an exodus of illegal immigrant renters and a dumping of their once profitable rental property by absentee landlords. The houses have been vacant for almost a year. Recently, banks and mortgage companies have been "dumping" them at firesale prices. The most recent was for just a bit over the half price I paid, which is making my refi a bit more difficult due to the comps coming in.

I will still "get 'er done" but it gives me a few more gray hairs (only three black ones left). I am in an enviable position compared to most of my neighbors due to my low purchase price. I commiserated with my poor mortgage broker - same guy as three years ago - about how this is turning out. Banks, etc. are trying to minimize their losses, and in doing so are creating a situation where more homeowners will have few options but to "send in the keys" if they face a "must sell" situation. So, it appears that the bleeding WILL continue...

(Since we have many teachers, firefighters, EMT's, and police officers here - if you don't know about this program, PM me. There will probably be a lot of homes in the HUD inventory in the not-to-distant future.)

[afchic]

NMAP could you give a low down on the difference between what the dems are proposing vs the republicans. From what I am understanding the Republicans want the companies that defaulted to take out insurance against their loses, is that correct? Is there a benefit of one plan over the other?

[Razor]

Originally Posted by nmap

CEO pay is an interesting issue. The board of directors, who are elected by the shareholders, sets CEO pay. However, the board has a single set of directors, with no real alternatives for the shareholders.

The only real power a shareholder possesses is his or her investment. While it may be economically painful to do if a company's stock has high returns, an investor can always sell their shares if they disagree with the company's policies, to include CEO compensation. Individually, this has little actual effect, but if enough investors follow suit, the loss of equity capital may be enough to force a BOD to rethink its policies.

[steel71]

Originally Posted by Razor

When he proposed moving back to a gold standard during his "campaign", I stopped listening to anything he had to say about economics.

Razor, I don't post here often but I drop by a couple times a week because there's good information and commentary here(and humor). Please don't take this as disrespectful but your understanding of the gold standard is unfortunately lacking in Constitutional and monetary history. According to our Constitution, only gold and silver should be used as legal tender. That doesn’t mean we have to use metal for exchange, but the certificates/ notes/ paper money has to be backed by gold and silver, not fiat creations backed by nothing. We did have a “gold” standard until 1971, since then it’s been fiat currency. Take a wild guess when our federal debt started to skyrocket? http://www.cedarcomm.com/~stevelm1/usdebt.htm

Ron Paul has written extensively over the last 25 years about economic and monetary policy. No other politician can match his knowledge and intelligence of the subject. He schools Alan Greenspan and Ben Bernanke, and makes them out to be a bunch bumbling idiots squirming in their seats.
http://www.ronpaullibrary.org/topic.php?id=9
Here's 2 quotes to think about:

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. ... This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.
Alan Greenspan, before he sold out to the FED.

"I believe that banking institutions are more dangerous to our liberties than standing armies. Already they have raised up a monied aristocracy that has set the government at defiance. The issuing power (of money) should be taken away from the banks and restored to the people to whom it properly belongs." Thomas Jefferson

[18C Dad]

http://www.foxnews.com/story/0,2933,428641,00.html

Nice work — if you can get fired from it.

That's just what one Alan H. Fishman might have thought when he woke up Friday morning.

Fishman was the new chief executive officer for Washingon Mutual — WaMu — the nation's largest savings and loan, which was taken over Thursday night by federal bank regulators and quickly dumped in a fire sale to JPMorgan Chase for the Wal-Mart-like price of $1.9 billion.

But don't cry for Fishman, who reportedly was sky-high — literally — last night, on a flight from New York to Seattle, when WaMu collapsed. Even though he's only been on the job for less than three weeks, he's bailing out with parachute worth close to $20 million, according to an executive compensation analysis conducted for the New York Times by James F. Reda Associates.

That's right, $20 million for 17 days on the job ... and his company failed.

Fishman, who formerly was chairman of Meridian Capital Group, apparently was much coveted by WaMu, which was counting on him to lead the failing thrift out of mortgage troubles that pushed the bank to a $3.3 billion second-quarter loss.

According to filings with the Securities and Exchange Commission, WaMu threw a $7.5 million bonus at Fishman when it hired him on Sept. 8, and guaranteed him an immediate cash severence of $11.6 million — both of which he gets to keep.

He also was eligible for annual bonuses of up to 365 percent of his annual base pay — set at $1 million — to go with millions of shares of company stock.

Fishman does lose out on a big bonus that would have kicked in had he remained on the job through 2009.

Documents show WaMu was going to pay their new boss $8 million to simply not screw up and get fired — all negotiated as the Seattle-based banking giant's loses climbed to an estimated $20 billion.

[nmap]

Originally Posted by afchic

NMAP could you give a low down on the difference between what the dems are proposing vs the republicans. From what I am understanding the Republicans want the companies that defaulted to take out insurance against their loses, is that correct? Is there a benefit of one plan over the other?

Everything seems to be in flux – in fact, the U.S. Senate page only provides a notation that indicates the bill is a “draft”, with no link to the primary source document. Secondary sources carry the risk of misinterpretation by the author. The items below are cobbled together from a variety of sources, so my apologies in advance for any errors or omissions.

The Senate version seems to offer a $700 B. bailout with several provisions.

Money would be provided in three steps. $250 B would be used immediately. $100 B would be available for use at the discretion of the Secretary of the Treasury. The final $350 B would be subject to disapproval by the Senate.

There may be a “cram down” provision in the bill, which would permit bankruptcy court judges to adjust the provisions of mortgages on the primary residence. Thus, if a debtor owed $500,000, and the house was worth $400,000, the balance of the mortgage could be adjusted downward to the lower number.

There would be provisions against excessive executive pay, although that is not defined.

In addition, the bill would require equity sharing, with the Federal government acquiring an equity stake in companies it helps.

The House Republican Study Committee is behind the alternative. It has several provisions.

First and foremost is a two-year suspension of the capital gains tax.

It also seeks to suspend the mark-to-market rules on long-term holdings (this is, perhaps, the most important element).

It would seek to guarantee the troubled debt, but not acquire it. A fee might be charged, just as the FDIC charges banks a fee to guarantee deposits.

In addition, it would strive to privatize FNM and FRE.

Comparison:

The Senate version has significant costs that may increase over time.

The cram down provisions create additional risk for mortgage providers, which may mean that mortgages will cost more in the future, However, it might reduce the number of people who lose their homes in the short term.

The executive pay provision will increase the tendency to defer requests for help. Assuming normal levels of human greed, the CEO and other senior executives may choose to operate the company until it fails instead of seeking government assistance. This could result in larger, more expensive losses.

Equity sharing does offer taxpayers the possibility of profit, but also insinuates the Federal government into corporate governance. If the Federal government owns 51% or more of a corporation, it can fully control the corporation. The provision could be viewed as “seizing the means of production”, an approach spoken of by socialists. Rhetorical questions: Will employees of such corporations qualify for Federal benefits? Will corporations be run to advance policy objectives instead of to produce profit? How will officers and directors by chosen or elected?

The Republican Study Committee version suggests that suspension of the capital gains provision would permit capital to flow into troubled firms. I question the validity of the assertion.

The suspension of mark-to-market rules lets banks, brokerages, and insurance companies continue to operate even though their capital requirements may be less than the regulatory minimums. Taking the information at face value, it might be possible for companies with negative net worth to continue to function. This represents a gamble.

If:
the economy improves,
and affected business begin turning a profit,
and the troubled debt stabilizes or appreciates,
Then the provision permits the affected companies to return to viability with no cost to the taxpayers.

However, if matters deteriorate, the ultimate failure will be larger and more disruptive to the general economy.

Privatization of FRE and FNM may or may not be good ideas; they had some degree of independence, but policy concerns caused the Federal government to take them over. Should mortgages again prove problematic, it seems reasonable to wonder whether the Federal government could stand aside and permit the firms to fail. I doubt they would be permitted to fail.

Finally, there is the option of guaranteeing the troubled debt. It does increase the amount of debt that the Federal government guarantees. The amount of troubled debt is not yet defined, so the increase could have an impact on other U.S. debt. Those who purchased U.S. debt might demand higher interest rates. The world tends to view debt that is guaranteed by the U.S. government as absolutely secure; there may be some point at which added debt burdens will change the perception. However, the key issue is that the plan avoids making current expenditures, saving the taxpayer money, at the cost of making a gamble on the future. At best, the markets would stabilize and the guarantee would cost the taxpayers nothing. Losses that activated the guarantee might be covered by fees charged by the Federal government.

The gamble is that the situation does not improve. In that case, the cost of the guarantees could be some arbitrarily large number that would exceed our national ability to pay. It could be in the trillions of dollars. Factor in the crossover of Social Security in 2017(when employment tax revenues received do not cover payments out), and one gets the possibility of a difficult problem.

In the end, the House Republican Studies Committee (HRSC) appears to prefer a highly optimistic approach. If they are correct, the costs to the taxpayer would be minimized.

The Senate bill, with optimistic assumptions, would probably cost more and be more intrusive into the day-to-day operation of business. It would represent some costs to the taxpayers.

In each case, the underlying implicit assumption is that the economy will resume growth, the markets will stabilize, and the troubled debt will regain a substantial percentage of its value.

Should that assumption prove wrong, the HRSC approach would be the most expensive, and the Senate version less expensive.

[afchic]

Thanks for the explainatin NMAP. It certainly makes a little more sense when you break it down. My head is still spinning from the numbers being tossed around.

[nmap]

Originally Posted by afchic

Thanks for the explainatin NMAP. It certainly makes a little more sense when you break it down. My head is still spinning from the numbers being tossed around.

My pleasure.

You're right about the numbers - they cease to have meaning and become mere abstractions. It is, perhaps, possible to visualize a million, but beyond that we lose any meaningful reference points. For example, a million grains of rice would weigh about 44 pounds. That's something I can understand. But a trillion grains is a million times that - and the derivatives market is 250 times again as large (250 trillion).

At some point, it becomes difficult to put the numbers into the same terms as most of us encounter. Therein lies the problem, perhaps - if the numbers lack meaning, what's a few trillion between friends?

[PSM]

Originally Posted by nmap

...what's a few trillion between friends?

"One trillion seconds ago – 31,688 years – Neanderthals stalked the plains of Europe."

http://www.tysknews.com/Depts/Taxes/million.htm

Pat

[Defender968]

Originally Posted by Broadsword2004

I don't know which is right, however one thing: what gives gold any actual value either? Gold's value can go up or down I think, can't it?

Regarding Thomas Jefferson, he was an absolutely brilliant man, one of my heroes, but remember, he wanted America to remain an agrarian nation, he hated banks and paper money, etc...it was Alexander Hamilton who saw that a nation had to industrialize for the modern times and had to be in the business of controlling its monetary policy and so forth.

I've heard the quote that we admire the world of Thomas Jefferson, but we live in the world of Alexander Hamilton.

Broadsword You are correct, the value of gold does fluctuate, it is usually a contrary indicator i.e. it moves opposite the market, so as the market goes down gold typically goes up, last week when the market went down 500 pts gold jumped up significantly, it set a record for the highest one day jump in history IIRC.