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Brazil Cuts Soybean, Corn Forecast on Fertilizer Cost (Update1)
By Carlos Caminada
Nov. 6 (Bloomberg) -- Soybean output in Brazil, the world's second-biggest producer, will unexpectedly fall next year as farmers lack credit to buy more expensive fertilizer, the government said.
Soybean output will decline to between 58.4 million and 59.3 million metric tons, compared with 60 million tons this year, the Agriculture Ministry's crop-forecasting agency said today in an e-mailed report. The agency, known as Conab, last month forecast production to rise to between 60.1 million and 61.3 million tons.
The global credit crunch came as farmers in Brazil sought financing to finish buying fertilizers for planting this month. The lack of credit means some regions will cut planting, and the reduced use of fertilizers may trim yields, Conab said.
``Production costs are significantly higher during the planting season and there are difficulties to access credit,'' Conab said in the report.
Average soybean yields will drop 1.6 percent to 2.77 tons per hectare in next year's harvest, Conab said. A hectare is equal to 2.47 acres.
In the Center West, which accounts for half of Brazil's soybean output, farmers will reduce planting as much as 2.9 percent to 9.35 million hectares.
Corn production will fall to 54.3 million to 55.2 million tons, from 58.6 million tons, Conab said. That compares with the October estimate for a drop to 55 million to 56 million tons.
Farm Finance Problems
http://www.bloomberg.com/apps/news?pid=20601087&sid=aox4ZwDlWkvQ&refer=home
I hear there are fewer problems in the US. The Ag Credit System is in good shape.
Kipp
Fertilizer Conference Slide Presentations
I attended an intense 3 day fertilizer conference in Charleston last week. This link will take you to all of the presentations given at the meeting. It will give you an up to the minute look at where the industry is headed.
http://www.tfi.org/events/Outlook/Presentations08/
I see a more pain in the next 60-90 days, followed by a sharp recovery into late spring. I also see volatility coming to the grain markets that will be talked about for years.
Kipp
Fertilizer Conference Slide Presentations
I attended an intense 3 day fertilizer conference in Charleston last week. This link will take you to all of the presentations given at the meeting. It will give you an up to the minute look at where the industry is headed.
http://www.tfi.org/events/Outlook/Presentations08/
I see a more pain in the next 60-90 days, followed by a sharp recovery into late spring. I also see volatility coming to the grain markets that will be talked about for years.
Kipp
Fertilizer Conference Slide Presentations
I attended an intense 3 day fertilizer conference in Charleston last week. This link will take you to all of the presentations given at the meeting. It will give you an up to the minute look at where the industry is headed.
http://www.tfi.org/events/Outlook/Presentations08/
I see a more pain in the next 60-90 days, followed by a sharp recovery into late spring. I also see volatility coming to the grain markets that will be talked about for years.
Kipp
QEC.TO spike up today....no news I can find.
Anyone hear anything on QEC?
http://stockcharts.com/charts/gallery.html?QEC.TO
Kipp
Another view on the USD
http://www.marketoracle.co.uk/Article6985.html
May sit on my hands a while longer.
Kipp
yield - I have been buying all of my physical from a local dealer. The supply has completely dried up lately, this week I am going to call this outfit http://www.cmi-gold-silver.com/buy-silver-bullion-coins.html and see what they have. I like the 800oz bar idea because I only have coins and no volume.
I wish I would have figured out the de-leveraging/forced selling deflationary liquidation earlier than I did. I would be able to buy a lot more "stuff" than I am able to at this time. I shutter to think of what I wouldn't have if I didn't raise cash when I did.
I think this will be a wild week!!!!!!
Kipp
crk - It is starting to feel like "stink bid" time. I am looking for more panic selling this week. I am starting to put bids in on Canadian Jr oil/ngas, gold/silver. I guess gold could go all the way back to some rediculous price like $350 and silver to $4.50 but I just can't stand watching what seem like bargains without doing some buying.
FMA was $5ish, now $.75..........if it goes to ZERO, I am only out $.75/shr. The odds of it being 100% worthless are very long. I am going to laddar bids at every $.05 interval and see what gets filled. Risk reward at $.75 vs $5.00 is compelling.
If silver and gold become totally worthless, what will everything else in the economy look like?
As far as the CDS meltdown, I have a feeling at DOW 5-7,000 the government may declare that CDS'S were illegally written "insurance" policies, and declare them null and void. Wouldn't that spark a reversal in stocks!
Kipp
FMA.TO First Majestic/others
Does anyone have an estimate of the cash cost per ounce of silver now that the peso is trading at 13.4:1USD, and oil/energy are way down. The Canadian dollar weakness also makes shares at $.75USD seem really, really, really cheap.
http://finance.yahoo.com/q?s=FRMSF.PK
Is anyone else buying at these levels?
What about Minefinders or other silver miners.....what stocks do you guys like in the silver arena?
I think this week will be the time to buy.
Kipp
BPZ Energy Successfully Tests Oil at 10,268 bopd from CX11-20XD
Business Wire
7:00 AM Eastern Daylight Time Oct 13, 2008
BPZ Resources, Inc. (NYSE Alternext US:BPZ) announces the oil test results from the CX11-20XD well in the Corvina
field of the offshore Block Z-1 in Northwest Peru. The Company completed two drill stem tests (DST) on four sets of oil
sands in the well testing a cumulative flow rate of 10,268 barrels of oil per day (bopd).
Tests on the oil zones produced 100% oil with no water. The first DST achieved stabilized rates of 4,965 bopd with
choke of 60/64, while the second DST achieved stabilized rates of 5,303 bopd with a similar choke size. The well will
now be completed as an oil producer under the long-term testing program currently ongoing at the Corvina field. Recompletion
of the well with dual production strings will take place at a later date at a time when the gas is needed for
the Company’s gas-to-power project.
Manolo Zúñiga, President and Chief Executive Officer stated, “At 10,268 bopd, the 20XD has exceeded our
expectations for initial test rates and will likely meet our three objectives of drilling our best oil producer to date,
enhancing Corvina’s oil-in-place estimates and, consequently, increasing oil reserves. This was by far the most difficult
well we have drilled, but the results are indeed rewarding. Each DST was carried out over the course of several days,
giving us important information needed to update reserves. The tested oil was sent directly to our floating, production,
storage and offloading barge. We will now complete the 20XD well as an oil producer so it may be placed in the
ongoing long-term testing program aimed at establishing the reservoir drive mechanism, so as to be able to more
accurately forecast field production. The next well, the CX11-15D, will be spud as soon as the rig is moved to the
corresponding slot. It is important that we move forward with the 15D, the final well in this initial Corvina drilling
program from the CX11 platform, so that we can move
Does anyone know who is holding the bag on these CDS's? And when they have to cough it up?
"Sellers of credit-default protection on bankrupt Lehman Brothers Holdings Inc. will have to pay 91.375 cents on the dollar to settle the contracts, setting up the biggest-ever payout in the $55 trillion market. The auction may lead to payments of more than $270 billion, BNP Paribas SA strategist Andrea Cicione in London said.
More than 350 banks and investors signed up to settle credit-default swaps tied to Lehman. No one knows exactly who has what at stake because there's no central exchange or system for reporting trades."
Kipp
I just turned my furnace on, official start to ngas draw down in Colorado. Spitting snow and 30's tonight. I also fired up the pellet stove in the basement.
I am sitting on my hands a while longer, watching the Canadian Dollar and the USD index. I see a chance for the USD to get rammed up to $.88 before it runs out of steam. The peak of the USD should be the time to buy many Canadian resource stocks at pre "bubble" prices.
I don't think we are at a low in the general markets yet and any rally will result in a re-test of last week's low. A failure there is one sick puppy, down to 7500 DOW.
I like POE more and more every day and will start buying this week. I still see TXCO as a buy back at some point. So many others to pick from but still lots of de-leveraging and forced selling risk. I am sure more situations like the CEO of CHK and his 35 million share wipe out are brewing over this weekend. The yen carry unwind is going to blow up a bunch more hedgefunds. 40:1 leverage and a 25% move up in the YEN will have them jumping out of windows!
If there is a downturn in the dollar, resulting in a stronger Canadian dollar, any whif of inflation and a cold winter should send oil and ngas a lot higher. We could be looking at huge gains by mid-winter.................................if the world doesn't end before then.
Good luck to all of you. I have been focusing on my work and plan to go to China within 30 days to visit a zinc, lead, indium recovery plant. www.sino-indium.com (click the "English" tab)
Kipp
60 Minutes Video Paulson Interview
http://www.cbsnews.com/stories/2008/09/28/60minutes/main4483612.shtml
A successful bailout? Watch lending between banks
Sunday September 28, 4:14 pm ET
By Jeannine Aversa, AP Economics Writer
Bailout's success will be evident once banks begin lending freely to each other -- and then us
WASHINGTON (AP) -- The New Deal it is not.
The government's biggest economic bailout since the Great Depression is aimed not at relieving unemployment or reforming questionable business practices, but at resuscitating financial markets debilitated by lousy bets on the housing market.
Put simply, the hastily crafted plan lawmakers agreed to in principle on Sunday is intended to revive jittery and fragile banks on Wall Street and Main Street with enough money -- by using taxpayer funds to purchase billions upon billions of their worst mortgage-related assets -- so that lending, the lifeblood of the American economy, flows freely again.
If it is working, signs will emerge almost immediately in the interest rates on short-term Treasury securities and in an array of obscure -- but crucial -- financial benchmarks.
Loans -- particularly those made from one bank to another -- would be more available and less expensive in a matter of weeks, if not days.
And as the government gobbles the banks' toxic assets, the industry would gain the confidence and strength needed to make it easier and cheaper for families to borrow for homes, cars and college -- and for businesses to secure ample debt to pay for plants, equipment and workers.
Still, rising unemployment, high energy prices and falling real estate values will not disappear overnight -- and there's no guarantee a recession will be avoided.
"At first, there will be some sort of sigh of relief, which I'm afraid would be misplaced, because when you get through the shorter-term terror, you're left with an economic landscape that will be very fragile," said Michael Farr, president of Farr, Miller & Washington, which manages investment portfolios for people and businesses.
Were the clogged credit markets of the past year -- and more crucially, the past few weeks -- left to fester without a massive government intervention, the United States faced a financial calamity that could have plunged the economy into a deep recession, putting the livelihoods and investments of millions of ordinary Americans at risk, President Bush and Federal Reserve Chairman Ben Bernanke warned.
"Bernanke told us that our American economy's arteries, our financial system, is clogged, and if we don't act, the patient will surely suffer a heart attack maybe next week, maybe in six months, but it will happen," said Sen. Chuck Schumer, D-N.Y., chairman of Congress' Joint Economic Committee.
Once the liquidity floodgates have been opened -- the government will have as much as $700 billion at its disposal to buy banks' bad mortgages and other rotten assets -- the benefits of the bailout proposed by Treasury Secretary Henry Paulson and modified by Congress are expected to trickle down through the rest of the economy. But Americans should be braced to feel economic pain well into next year.
More people will lose their jobs, foreclosures will go up, paychecks will be strained and home values -- people's single biggest asset -- will keep falling, experts predict.
Even if the plan is successful, many predict the economy will probably shrink in the final quarter of this year and in the first quarter of next year, meeting the classic definition of a recession. The unemployment rate -- now at a five-year high of 6.1 percent -- is expected to hit 7 or 7.5 percent by late 2009. That would be the highest jobless rate since after the 1990-91 recession.
So, how exactly will we know if the credit clog is breaking up?
Some of the banking industry's first responses won't be immediately visible to most Americans, but they are critical to the proper functioning of the U.S. financial system.
For instance, a drop in a crucial short-term lending rate called the London Interbank Offered Rate, or Libor, would be a telltale sign that banks are less anxious about extending credit to each other -- and the rest of us.
Libor is the rate many banks pay for the short-term loans essential to their daily operations. It's also the base rate for an enormous amount of commercial lending and for many adjustable-rate mortgages. On Friday, the six-month Libor rate was 2.3 percentage points above comparable Treasury bills. Last year, the difference was 1.2 percentage points.
Another sign of growing confidence in financial markets would be lower rates on "commercial paper," a crucial short-term borrowing mechanism that many companies rely on for financing day-to-day operations, including payrolls and other expenses.
Economists said a properly designed bailout should also cause interest rates on short-term Treasury securities to rise relatively quickly.
As the financial crisis worsened, investors fled risky types of debt and flocked to these ultra-safe securities backed by the full faith and credit of the U.S. government, driving down their yields. In a sign of just how spooked investors have become, the 3-month Treasury bill's yield has fallen below 1 percent, compared with a yield of nearly 4 percent a year ago.
"The recovery process is going to come in stages, not in one fell swoop," said Terry Connelly, dean of Golden Gate University's Ageno School of Business. "The credit markets had a stroke. We are in intensive care now. We will have to learn how to walk and talk again."
As credit markets thaw, rates should also begin to fall on a type of corporate-debt insurance known as credit default swaps.
While not a household word, these derivatives figured prominently in the country's financial crisis. Prices for credit default swaps soared in the aftermath of the Lehman Brothers' bankruptcy and pushed American International Group Inc., a major insurer of this kind of corporate debt, into the hands of the government following an $85 billion emergency loan funded by taxpayers.
Assuming these more obscure corners of the financial markets are on solid footing again, consumers should eventually begin to have an easier time taking out loans for homes, cars, furniture and college.
Over time, a healthier financial system should help the value of the dollar rise versus other currencies, reflecting renewed confidence in the U.S. economy and blunting inflationary pressures that have made Americans feel less wealthy.
But it is only after a wide range of industries feel confident that the economic and financial conditions have fully recovered that they will start to ramp up hiring, perhaps by 2010. House prices should stop falling in the summer of 2009 and may start rising in 2010, economists said.
In the short term, there are several economic reports to watch for clues about whether credit conditions are improving:
-- The Federal Reserve's weekly report on emergency loans provided to banks and investment firms is a barometer for how strapped they are for cash;
-- Freddie Mac's weekly report on mortgage rates shows what home buyers are being charged to borrow;
-- The Mortgage Bankers Association's quarterly survey of home foreclosures and delinquencies will indicate whether the struggling housing market is on the mend.
-- The Fed's quarterly senior loan officers' survey tracks banks' appetite to lend.
The heart of the bailout plan gives the government authority to relieve financial institutions of the distressed mortgages and other bad assets on their books. Getting dodgy assets off the books of hobbled banks will make it easier for them to attract fresh capital and boost lending.
As Lehman, AIG and other major financial companies racked up huge losses and saw more coming, credit problems spread globally, firms hoarded cash and they all clamped down on lending. That crimped consumer and business spending, and dragged down the economy -- a vicious cycle Washington lawmakers hope to break with this historic bailout.
"It's just a huge negative psychology that will be hard to turn around," said William Dunkelberg, chief economist for the National Federation of Independent Business and an economics professor at Temple University.
Adds Sean Snaith, economics professor at the University of Central Florida: "If someone slights you today, it is going to be hard to immediately trust them the next day. It will take time for that confidence to be restored."
BAIL OUT PORK AND ADD ONS
From the Wall Street Journal......Unbelievable!
http://online.wsj.com/article/SB122247015469280723.html?mod=googlenews_wsj
Re-Seeding the Housing Mess Article
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Taxpayers are naturally suspicious that political insiders and contributors on Wall Street are going to make out like bandits once Washington starts spending the $700 billion in the financial market rescue. But Democrats have already decided to spin off potentially billions of taxpayer dollars from the bailout fund to their own political buddies -- not on Wall Street but on nearby K Street.
The House and Senate Democratic drafts contain an indefensible and well-hidden provision. It would mandate that at least 20% of any profit realized from the sale of each troubled asset purchased under the Paulson plan be deposited in either the Housing Trust Fund or the Capital Magnet Fund. Only after these funds get their cut of the profits are "all amounts remaining . . . paid into the Treasury for reduction of the public debt."
Here's the exact, amazing language from the Democratic proposal, breaking out how the money would be divided and dispensed:
"Deposits. Not less than 20% of any profit realized on the sale of each troubled asset purchased under this Act shall be deposited as provided in paragraph (2).
"Use of Deposits. 65% shall be deposited into the Housing Trust Fund established under section 1338 of the Federal Housing Enterprises Regulatory Reform Act . . . ; and 35% shall be deposited into the Capital Magnet Fund . . .
"Remainder Deposited in the Treasury. All amounts remaining after payments under paragraph (1) shall be paid into the General Fund of the Treasury for reduction of the public debt."
What we have here essentially are a pair of government slush funds created in July as part of the Economic Recovery Act that pump tax dollars into the coffers of low-income housing advocacy groups, such as Acorn.
Acorn, one of America's most militant left-wing "community activist groups," is spending $16 million this year to register Democrats to vote in November. In the past several years, Acorn's voter registration programs have come under investigation in Ohio, Colorado, Michigan, Missouri and Washington, while several of their employees have been convicted of voter fraud.
Along with other potential recipients of these funds, including the National Council of La Raza and the Urban League, Acorn has promoted laws like the Community Reinvestment Act, which laid the foundation for the house of cards built out of subprime loans. Thus, we'd be funneling more cash to the groups that helped create the lending mess in the first place.
This isn't the first time this year that Democrats have tried to route money for fixing the housing crisis into the bank accounts of these community activist groups. The housing bill passed by Congress in July also included a tax on Fannie Mae and Freddie Mac to raise an estimated $600 million annually in grants for these lobbying groups. When Fannie and Freddie went under, the Democrats had to find a new way to fill the pipeline flowing tax dollars into the groups' coffers.
This is a crude power grab in a time of economic crisis. Congress should insist that every penny recaptured from the sale of distressed assets be dedicated to retiring the hundreds of billions of dollars in public debt that will be incurred, or passed back to taxpayers who will ultimately underwrite the cost of the bailout.
The idea that special-interest groups on the left or right should get a royalty payment for monies that are repaid to the Treasury is a violation of the public trust. We're told the White House and House Republicans are insisting that the Acorn fund be purged from the bailout bill. The Paulson plan is supposed to get us out of this problem, not start it over again.
Illegal Aliens were given "no-doc" loans!
http://blog.vdare.com/archives/2008/09/27/tancredo-urges-no-bailout-goodies-for-illegal-borrowers/
Tom Tancredo is from my congressional district. He just turned the light on loans that were made to illegals that had no SS#, no documentation of citizenship, income, employment, NOTHING. Loans were even given to illegals with fake driver's licenses! Yes, there is fraud but come on, don't the banks have any sense of risk left at all?????
Tancredo said there are 10's or possibly over 100,000 loans to illegal aliens in the U.S. and they are simply walking away from the loans.
Kipp
Illegal Aliens were given "no-doc" loans!
http://blog.vdare.com/archives/2008/09/27/tancredo-urges-no-bailout-goodies-for-illegal-borrowers/
Tom Tancredo is from my congressional district. He just turned the light on loans that were made to illegals that had no SS#, no documentation of citizenship, income, employment, NOTHING. Loans were even given to illegals with fake driver's licenses! Yes, there is fraud but come on, don't the banks have any sense of risk left at all?????
Tancredo said there are 10's or possibly over 100,000 loans to illegal aliens in the U.S. and they are simply walking away from the loans.
Kipp
The market is going to crash as soon as we burn through the $700 billion "rescue/bailout" because they refuse to deal with the CDS market. The $700 billion will only plug the hole in the dike for a few days or weeks. The CDS market is still $55 TRILLION. Burnanke and Paulson will be back again asking for trillions to "fix" the problem after the crash.
I can't wait to see how many pages the bail out bill is, and what pork got added on and who added it on.
I am getting steamed here. ALL bets are off until the CDS market and it's players are liquidated. Until that swamp is drained the foundation of a new system can't be built.
Kipp
No wonder they banned short selling of financial institutions. It is a slam dunk that most of them are broke and will be BK in a matter of days, weeks, and months.
I am staying out of harms way until the CDS market has completely unwound. The carnage will take all stocks down as the participants "burn the furniture"!
Cash is king and I can actually see the dollar holding in for a while longer as there will be huge demands for cash. Eventually we will see the destruction of the dollar as we have these Sunday trillion dollar bandaid parties.
Kipp
Key Point on CDS's
This sums it up:
Today, the economy is teetering and Wall Street is in ruins, thanks in no small part to the beast they unleashed 14 years ago. The country's biggest insurance company, AIG, had to be bailed out by American taxpayers after it defaulted on $14 billion worth of credit default swaps it had made to investment banks, insurance companies and scores of other entities. So much of what's gone wrong with the financial system in the past year can be traced back to credit default swaps, which ballooned into a $62 trillion market before ratcheting down to $55 trillion last week—nearly four times the value of all stocks traded on the New York Stock Exchange. There's a reason Warren Buffett called these instruments "financial weapons of mass destruction." Since credit default swaps are privately negotiated contracts between two parties and aren't regulated by the government, there's no central reporting mechanism to determine their value. That has clouded up the markets with billions of dollars' worth of opaque "dark matter," as some economists like to say. Like rogue nukes, they've proliferated around the world and now lie hiding, waiting to blow up the balance sheets of countless other financial institutions.
THE MONSTER THAT ATE WALL STREET
This story is coming out next week in Newsweek Magazine (dated October 6) and is the first major media outlet to even mention Credit Default Swaps (CDS). I haven’t seen ANY mention of CDS’s all weekend on the major networks?????
Kipp
http://www.newsweek.com/id/161199/output/print
The Monster That Ate Wall Street
How 'credit default swaps'—an insurance against bad loans—turned from a smart bet into a killer.
Matthew Philips
NEWSWEEK
From the magazine issue dated Oct 6, 2008
They're called "Off-Site Weekends"—rituals of the high-finance world in which teams of bankers gather someplace sunny to blow off steam and celebrate their successes as Masters of the Universe. Think yacht parties, bikini models, $1,000 bottles of Cristal. One 1994 trip by a group of JPMorgan bankers to the tony Boca Raton Resort & Club in Florida has become the stuff of Wall Street legend—though not for the raucous partying (although there was plenty of that, too). Holed up for most of the weekend in a conference room at the pink, Spanish-style resort, the JPMorgan bankers were trying to get their heads around a question as old as banking itself: how do you mitigate your risk when you loan money to someone? By the mid-'90s, JPMorgan's books were loaded with tens of billions of dollars in loans to corporations and foreign governments, and by federal law it had to keep huge amounts of capital in reserve in case any of them went bad. But what if JPMorgan could create a device that would protect it if those loans defaulted, and free up that capital?
What the bankers hit on was a sort of insurance policy: a third party would assume the risk of the debt going sour, and in exchange would receive regular payments from the bank, similar to insurance premiums. JPMorgan would then get to remove the risk from its books and free up the reserves. The scheme was called a "credit default swap," and it was a twist on something bankers had been doing for a while to hedge against fluctuations in interest rates and commodity prices. While the concept had been floating around the markets for a couple of years, JPMorgan was the first bank to make a big bet on credit default swaps. It built up a "swaps" desk in the mid-'90s and hired young math and science grads from schools like MIT and Cambridge to create a market for the complex instruments. Within a few years, the credit default swap (CDS) became the hot financial instrument, the safest way to parse out risk while maintaining a steady return. "I've known people who worked on the Manhattan Project," says Mark Brickell, who at the time was a 40-year-old managing director at JPMorgan. "And for those of us on that trip, there was the same kind of feeling of being present at the creation of something incredibly important."
Like Robert Oppenheimer and his team of nuclear physicists in the 1940s, Brickell and his JPMorgan colleagues didn't realize they were creating a monster. Today, the economy is teetering and Wall Street is in ruins, thanks in no small part to the beast they unleashed 14 years ago. The country's biggest insurance company, AIG, had to be bailed out by American taxpayers after it defaulted on $14 billion worth of credit default swaps it had made to investment banks, insurance companies and scores of other entities. So much of what's gone wrong with the financial system in the past year can be traced back to credit default swaps, which ballooned into a $62 trillion market before ratcheting down to $55 trillion last week—nearly four times the value of all stocks traded on the New York Stock Exchange. There's a reason Warren Buffett called these instruments "financial weapons of mass destruction." Since credit default swaps are privately negotiated contracts between two parties and aren't regulated by the government, there's no central reporting mechanism to determine their value. That has clouded up the markets with billions of dollars' worth of opaque "dark matter," as some economists like to say. Like rogue nukes, they've proliferated around the world and now lie hiding, waiting to blow up the balance sheets of countless other financial institutions.
It didn't start out that way. One of the earliest CDS deals came out of JPMorgan in December 1997, when the firm put into place the idea hatched in Boca Raton. It essentially took 300 different loans, totaling $9.7 billion, that had been made to a variety of big companies like Ford, Wal-Mart and IBM, and cut them up into pieces known as "tranches" (that's French for "slices"). The bank then identified the riskiest 10 percent tranche and sold it to investors in what was called the Broad Index Securitized Trust Offering, or Bistro for short. The Bistro was put together by Terri Duhon, at the time a 25-year-old MIT graduate working on JPMorgan's credit swaps desk in New York—a division that would eventually earn the name the Morgan Mafia for the number of former members who went on to senior positions at global banks and hedge funds. "We made it possible for banks to get their credit risk off their books and into nonfinancial institutions like insurance companies and pension funds," says Duhon, who now heads her own derivatives consulting business in London.
Before long, credit default swaps were being used to encourage investors to buy into risky emerging markets such as Latin America and Russia by insuring the debt of developing countries. Later, after corporate blowouts like Enron and WorldCom, it became clear there was a big need for protection against company implosions, and credit default swaps proved just the tool. By then, the CDS market was more than doubling every year, surpassing $100 billion in 2000 and totaling $6.4 trillion by 2004.
And then came the housing boom. As the Federal Reserve cut interest rates and Americans started buying homes in record numbers, mortgage-backed securities became the hot new investment. Mortgages were pooled together, and sliced and diced into bonds that were bought by just about every financial institution imaginable: investment banks, commercial banks, hedge funds, pension funds. For many of those mortgage-backed securities, credit default swaps were taken out to protect against default. "These structures were such a great deal, everyone and their dog decided to jump in, which led to massive growth in the CDS market," says Rohan Douglas, who ran Salomon Brothers and Citigroup's global credit swaps division through the 1990s.
Soon, companies like AIG weren't just insuring houses. They were also insuring the mortgages on those houses by issuing credit default swaps. By the time AIG was bailed out, it held $440 billion of credit default swaps. AIG's fatal flaw appears to have been applying traditional insurance methods to the CDS market. There is no correlation between traditional insurance events; if your neighbor gets into a car wreck, it doesn't necessarily increase your risk of getting into one. But with bonds, it's a different story: when one defaults, it starts a chain reaction that increases the risk of others going bust. Investors get skittish, worrying that the issues plaguing one big player will affect another. So they start to bail, the markets freak out and lenders pull back credit.
The problem was exacerbated by the fact that so many institutions were tethered to one another through these deals. For example, Lehman Brothers had itself made more than $700 billion worth of swaps, and many of them were backed by AIG. And when mortgage-backed securities started going bad, AIG had to make good on billions of dollars of credit default swaps. Soon it became clear it wasn't going to be able to cover its losses. And since AIG's stock was one of the components of the Dow Jones industrial average, the plunge in its share price pulled down the entire average, contributing to the panic.
The reason the federal government stepped in and bailed out AIG was that the insurer was something of a last backstop in the CDS market. While banks and hedge funds were playing both sides of the CDS business—buying and trading them and thus offsetting whatever losses they took—AIG was simply providing the swaps and holding onto them. Had it been allowed to default, everyone who'd bought a CDS contract from the company would have suffered huge losses in the value of the insurance contracts they hadpurchased, causing them their own credit problems.
Given the CDSs' role in this mess, it's likely that the federal government will start regulating them; New York state has already said it will begin doing so in January. "Sadly, they've been vilified," says Duhon, who helped get the whole thing started with that Bistro deal a decade ago. "It's like saying it's the gun's fault when someone gets shot." But just as one might want to regulate street sales of AK-47s, there's an argument to be made that credit default swaps can be dangerous in the wrong hands. "It made it a lot easier for some people to get into trouble," says Darrell Duffie, an economist at Stanford. Although he believes credit default swaps have been "dramatically misused," Duffie says he still believes they're a very effective tool and shouldn't be done away with entirely. Besides, he says, "if you outlaw them, then the financial engineers will just come up with something else that gets around the regulation." As Wall Street and Washington wring their hands over how to prevent future financial crises, we can only hope they re-read Mary Shelley's "Frankenstein."
Credit Default Swaps
I have spent a lot of time reading and trying to understand the financial mess this country is in. Please read the attached article on the Credit Default Swaps. I bet 99% of the citizenry INCLUDING congress do not have the mental capacity to understand what is going on. I feel that we have let a few thousand elitists highjack our system and our future. Some of them are politicians, some of them are CEO/board members of financial institutions, some are regulators……..all are enriching themselves at our expense.
One thing that amazes me is the speed at which companies and “wealth” are being wiped out. It only takes a few days to vaporize companies that have been around for over a hundred years. The de-leveraging we are seeing is causing downward pressure on all stocks, regardless of traditional valuations. My big problem is that I can’t see the light at the end of the tunnel……. all I see are more train wrecks and carnage ahead.
“Credit Crisis Truth: The Real Story Behind the Collapse of AIG”
http://www.marketoracle.co.uk/index.php?name=News&file=article&sid=6496
There is also a good presentation given in the second hour of the Financial Sense broadcast found at this link:
http://www.financialsense.com/fsn/main.html
Family and my job are what I am focused on most these days.
Good Luck!
Kipp
READ THIS wikipedia on Paulson. Can you guys connect the dots......
http://en.wikipedia.org/wiki/Henry_Paulson
Outrage is right!
Kipp
My "Illustration" of Paulson IS A LOT DIFFERENT than that post.
He was the mastermind of getting deregulation and exploding leverage. He made his cash on the internet bubble and the early days of the housing bubble. He figured out he could leave GS at the peak and take the job at the Treasury and use it to cash out at the top. He was required to convert all public stock he owned to t-bills and put them in escrow to avoid "conflict of interest" issues. His buddies, Barney Frank and Sen. Dodd were the Fannie Freddy kings....."everyone should own a home!"
Now they want us to trust them and give them $700 billion to save us!
I could go on and on but I won't.
PUKE
Kipp
CDS = Assured Financial Mass Destruction
(Please read this and tell me why anyone is still long the markets. Kipp)
http://www.marketoracle.co.uk/index.php?name=News&file=article&sid=6496
By the best estimates of the International Swaps and Derivatives Association and the Bank for International Settlements (BIS), often referred to as the central banks' central bank, the notional value of credit default swaps out in the market place is some $62 trillion , or 35 trillion British Pounds at an exchange rate of $1.78.
A credit default swap (CDS) is akin to an insurance policy. It's a financial derivative that a debt holder can use to hedge against the default by a debtor corporation of sovereign. But a CDS can also be used to speculate.
A subsidiary of AIG wrote insurance in the form of credit default swaps, meaning it offered buyers insurance protection against losses on debts and loans of borrowers, to the tune of $447 billion . But the mix was toxic. They also sold insurance on esoteric asset-backed security pools – securities like collateralized debt obligations (CDOs), pools of subprime mortgages , pools of Alt-A mortgages , prime mortgage pools and collateralized loan obligations. The subsidiary collected a lot of premium income and its earnings were robust.
When the housing market collapsed, imploding home prices resulted in precipitously rising foreclosures. The mortgage pools AIG insured began to fall in value. Additionally, the credit crisis began to take its toll on leveraged loans and it saw mounting losses on the loan pools it had insured. In 2007, the company was starting to feel serious heat.
From its humble beginnings in China in 1919 – through the 40-year tenure of CEO Maurice R. “Hank” Greenberg , which ended ignominiously for Greenberg in 2006 – AIG grew aggressively. Greenberg grew and diversified the insurance giant, ultimately amassing a trillion-dollar balance sheet.
But not everything was Kosher .
In an effort to assuage analysts and maintain leverage, the firm entered into sham transactions to affect the appearance on its balance sheet of $500 million of loan-loss reserves, which analysts had been questioning as formerly declining. The result was a 2006 Securities and Exchange Commission enforcement action , a $1.6 billion settlement and the removal of Greenberg. Greenberg is still fighting civil charges related to his actions at the firm.
As 2007 progressed, so did the losses on AIG's books and credit default swaps. Once again, it appears that AIG tried to “manage” the problem through accounting maneuvers. Last February, for instance, AIG said that “its auditor had found a material weakness in its accounting.” It had not been properly valuing its CDO liabilities and swap-related write-downs. The losses were revealed to be in excess of $20 billion through this year's first quarter. The SEC is once again investigating, as are criminal prosecutors at the U.S. Justice Department and the U.S. Attorney's Office in Brooklyn.
After writing down assets against gains elsewhere, AIG posted cumulative losses of $18 billion over the last three quarters. In February, AIG posted $5.3 billion in collateral against credit default swap contracts it had written. In April, AIG had to post an additional $4.4 billion in collateral. When rating agencies Standard & Poor's , Moody's Investors Service ( MCO ) and Fitch Ratings Inc. , lowered the firm's ratings last Monday evening, it triggered an additional $14 billion collateral call as margin against AIG's credit default swaps.
The company didn't have the cash.
Indeed, the dire need for cash collateral on top of mounting losses on warehoused CDO “assets” on the company's balance sheet necessitated a massive infusion of capital. That's what happened to AIG.
But once again, there's the story – and there's the story behind the story.
There's a problem – an inherently systemic problem – and it has to do with how structured investments like tranched collateralized debt obligations (CDOs), residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS), and credit default swaps on them and on corporate debts and loans are actually valued.
Individually, CDOs are hard to value. Suffice it to say, legend has it that constructing the cash flow payments on the first theoretical 3-tranche CDO (the simplest type of CDO) took a Cray Inc. ( CRAY ) supercomputer 48 hours. Now try and value credit default swaps on them!
Because there are so many different individual CDO securities, and because there are so many credit default swaps on so many of these CDOs, and so many swaps on individually referenced entity debts and loans, the only way to value them in a portfolio is by indexing.
That's right, there are indexes, and guess what? You can trade the indexes! Markit Group Ltd. , of London, constructs and manages the CDX, ABX, CMBX and LCDX family of credit-default-swap indexes. Investopedia has a decent little tutorial .
Here's the problem: If you own a portfolio of CDOs, and the only way to value them (or, at least, to develop a valuation that others are reasonably certain to respect), is by looking at them through the prism of an index of credit default swaps on them, you're at the mercy of the index. Your portfolio, your securities may not be so bad, but you may not really know based on mortgage-duration analysis and foreclosure events that you can't calculate. So you value, or mark-to-market , against the closest index.
Here's the rub. What if other speculators are selling short – that is, betting in anticipation of that index going down? What if large portfolio-hedgers are selling short the index to hedge the portfolio they can't sell because no one will buy it – because no one knows what it's worth?
It's crazy. And it gets worse.
What if you're running a profitable company that needs to borrow money, but credit default swaps (bets against your ability to pay back your debt) are expensive by virtue of speculators fear and greed, such that if any bank looks at where the CDS pricing on your paper is trading, they tell you: “Sorry, but we can't lend you money because the market for credit default swaps thinks you're a bad bet.”
You don't get the loan. You can't build your factory; you can't produce and have nothing to sell. The upshot: Now you actually are going out of business. Is this self-fulfilling?
Ponder this: Last Monday, as AIG was initially seeking $20 billion in capital and actually had it in hand (by virtue of a deal with New York insurance regulators), traders were bidding up credit default swaps on AIG's debt and loans so furiously that based on the insurance premiums traders were actually paying for default insurance on AIG… the company was already dead . Self-fulfilling?
Credit default swaps are creating a downward spiral in the capital markets, driving up the cost of capital, and squeezing out all manner of borrowers. And these speculative bets run amok are undermining all U.S. Federal Reserve and U.S. Treasury Department efforts to “liquefy” the system. If this keeps up, the credit default market could sink the U.S. economy into a recession/depression that will make the Great Depression look like a day at the beach.
What would happen if the SEC came out and said all shares held short needed to be accounted for? I know this will not happen, but the hedge funds and brokerages thought naked shorting was awsome until everyone did it to them.
????
Kipp
BLOOMBERG LIVE - Covering Crisis - This is all looking really bad no matter what anyone does. Now I flipped to CNBC and they are live too.
This is not good folks.
Kipp
The next 24 hours will be one of the most decisive and significant in our lifetimes.
Bankers in black town cars began arriving at Liberty Street early in the day yesterday and at 7.30am three bags of Dunkin Donuts were delivered. On Saturday there had been 15 hours of donuts and coffee; yesterday was the same.
On Saturday afternoon, Barclays Bank of the UK pulled out of a plan to buy the Lehman “good bank” because it couldn’t get indemnities.
But in any case, the matching plan for US banks to continue trading with the “bad bank”, which contain all of Lehman’s toxic mortgage exposures, was already in trouble.
The question remains: who will step up? Who will throw capital away buying an insolvent institution for zero dollars without taxpayers' money making up the gap? Nobody will – or can.
The three men trying to orchestrate the rescue of Lehman are Treasury secretary Hank Paulson, Fed chairman Ben Bernanke (who has stayed in Washington) and New York Fed boss Tim Geithner.
But for them the moral hazard problems are now enormous. Having put taxpayers money into guaranteeing Bear Stearns’ worst assets and then bailing out Fannie Mae and Freddie Mac, they have to draw the line.
If Lehman goes, then so do Washington Mutual, and then American International Group, each of which is already teetering. Today’s emergency, though, is Lehman.
And no one wants to buy Lehman for a positive price, or even zero, unless there is a public subsidy – that is, taking the most toxic assets out of the picture. In fact Barclays didn’t even want to deal on the good assets without a guarantee.
Pictured arriving yesterday in Liberty Street were Robert Wolf of UBS Americas, Stephen Black of JP Morgan Chase, Vikram Pandit of Citigroup, so we know they are involved in the talks. Others made it through without being photographed.
Early on Saturday there seemed a chance that Bank of America would step up to the plate, but it, too, was insisting on government support.
Paulson, Geithner and Bernanke, meanwhile, are holding out. They were trying to play Bank of America and Barclays off against each other but that strategy has now failed, and now they are just jawboning the others – telling them that if they do not put their capital on the line and continue to trade with Lehman this week, they would also suffer devastating counterparty runs this week and would lose more capital if they did not do it. In other words they all are playing chicken.
If someone does not blink tonight New York time, which is our daytime, then it looks like Lehman will crash before dinner tonight.
The Wall Street Journal has reported this morning that Lehman has hired law firm Weil, Gotshal and Manges LLP, a bankruptcy specialist, to prepare a Chapter 11 filing.
Meanwhile Bloomberg has reported that banks and brokers held a session a few hours ago for netting derivatives transactions with Lehman, or cancelling trades that offset each other, in case the New York-based firm files for bankruptcy before midnight New York time.
There was a statement from the International Swaps and Derivatives Association: “The purpose of this session is to reduce risk associated with a potential Lehman Brothers Inc. bankruptcy filing. The ISDA includes 218 banks, brokerages, insurance companies and other financial institutions from the US and abroad.
"ISDA confirms a netting trading session will take place between 2pm and 4pm New York time for over-the-counter derivatives. Trades are contingent on a bankruptcy filing at or before 11:59pm New York time, Sunday, September 14, 2008. If there is no filing, the trades cease to exist.''
If there is a bankruptcy today, then Lehman’s brokerage units would have to file Chapter 7 liquidation, in which a court-appointed trustee would take over and liquidate its assets, so the broking customers could get back their money.
Lehman’s lenders would immediately withdraw all lines of credit, since Chapter 11 would be a default event.
There would then be a scramble to see how many of Lehman’s credit default swaps trades could be offset, with new counterparties found.
Nobody knows how much Lehman has in CDS contracts because this trade is not disclosed, but in a survey last year, Fitch Ratings listed Lehman among the top 10 largest CDS counterparties. If it fails, then, as the ISDA statement above implies, a huge number of CDS contracts will be worthless unless new counterparties can be found.
Australian municipal councils and others who bought CDOs from Lehman will also be watching events unfold with close interest.
Lehman was one of the counterparties to about 70 per cent of what was sold to the councils. It was a counterparty or guarantor in one capacity or another. It is also understood to be a reference company in more than 50 per cent of the CDOs.
So in the first instance, the failure of its debt would be a credit event for those CDOs (most of which also reference Fannie Mae and Freddie Mac – and for that matter AIG, Merrill Lynch and Washington Mutual) and this would push those CDOs towards loss.
The other problem with a Lehman bankruptcy is that its assets – stock, property and mortgage securities – are likely to hit the market in a firesale, forcing prices even lower and then, next quarter, forcing further mark-to-market write-downs by other banks and investment banks.
In fact it’s unlikely to be a slow-motion train wreck this time. With Lehman in liquidation, and Washington Mutual and AIG on the brink, the credit market would likely shut down entirely and interbank lending would cease.
In his newsletter yesterday, Nouriel Roubini wrote: “What we are facing now is the beginning of the unravelling and collapse of the entire shadow financial system, a system of institutions (broker dealers, hedge funds, private equity funds, SIVs, conduits, etc.) that look like banks (as they borrow short, are highly leveraged and lend and invest long and in illiquid ways) and thus are highly vulnerable to bank-like runs; but unlike banks they are not properly regulated and supervised, they don’t have access to deposit insurance and don’t have access to the lender of last resort support of the central bank (with now only a small group of them having access to the limited and conditional and thus fragile support of the Fed).
“The step by step, ad hoc and non-holistic approach of Fed and Treasury to crisis management has been a failure so far as plugging and filling one hole at the time is useless when the entire system of levies is collapsing in the perfect financial storm of the century. A much more radical, holistic and systemic approach to crisis management is now necessary.”
The next 24 hours will be one of the most decisive and significant in our lifetimes.
Bankers in black town cars began arriving at Liberty Street early in the day yesterday and at 7.30am three bags of Dunkin Donuts were delivered. On Saturday there had been 15 hours of donuts and coffee; yesterday was the same.
On Saturday afternoon, Barclays Bank of the UK pulled out of a plan to buy the Lehman “good bank” because it couldn’t get indemnities.
But in any case, the matching plan for US banks to continue trading with the “bad bank”, which contain all of Lehman’s toxic mortgage exposures, was already in trouble.
The question remains: who will step up? Who will throw capital away buying an insolvent institution for zero dollars without taxpayers' money making up the gap? Nobody will – or can.
The three men trying to orchestrate the rescue of Lehman are Treasury secretary Hank Paulson, Fed chairman Ben Bernanke (who has stayed in Washington) and New York Fed boss Tim Geithner.
But for them the moral hazard problems are now enormous. Having put taxpayers money into guaranteeing Bear Stearns’ worst assets and then bailing out Fannie Mae and Freddie Mac, they have to draw the line.
If Lehman goes, then so do Washington Mutual, and then American International Group, each of which is already teetering. Today’s emergency, though, is Lehman.
And no one wants to buy Lehman for a positive price, or even zero, unless there is a public subsidy – that is, taking the most toxic assets out of the picture. In fact Barclays didn’t even want to deal on the good assets without a guarantee.
Pictured arriving yesterday in Liberty Street were Robert Wolf of UBS Americas, Stephen Black of JP Morgan Chase, Vikram Pandit of Citigroup, so we know they are involved in the talks. Others made it through without being photographed.
Early on Saturday there seemed a chance that Bank of America would step up to the plate, but it, too, was insisting on government support.
Paulson, Geithner and Bernanke, meanwhile, are holding out. They were trying to play Bank of America and Barclays off against each other but that strategy has now failed, and now they are just jawboning the others – telling them that if they do not put their capital on the line and continue to trade with Lehman this week, they would also suffer devastating counterparty runs this week and would lose more capital if they did not do it. In other words they all are playing chicken.
If someone does not blink tonight New York time, which is our daytime, then it looks like Lehman will crash before dinner tonight.
The Wall Street Journal has reported this morning that Lehman has hired law firm Weil, Gotshal and Manges LLP, a bankruptcy specialist, to prepare a Chapter 11 filing.
Meanwhile Bloomberg has reported that banks and brokers held a session a few hours ago for netting derivatives transactions with Lehman, or cancelling trades that offset each other, in case the New York-based firm files for bankruptcy before midnight New York time.
There was a statement from the International Swaps and Derivatives Association: “The purpose of this session is to reduce risk associated with a potential Lehman Brothers Inc. bankruptcy filing. The ISDA includes 218 banks, brokerages, insurance companies and other financial institutions from the US and abroad.
"ISDA confirms a netting trading session will take place between 2pm and 4pm New York time for over-the-counter derivatives. Trades are contingent on a bankruptcy filing at or before 11:59pm New York time, Sunday, September 14, 2008. If there is no filing, the trades cease to exist.''
If there is a bankruptcy today, then Lehman’s brokerage units would have to file Chapter 7 liquidation, in which a court-appointed trustee would take over and liquidate its assets, so the broking customers could get back their money.
Lehman’s lenders would immediately withdraw all lines of credit, since Chapter 11 would be a default event.
There would then be a scramble to see how many of Lehman’s credit default swaps trades could be offset, with new counterparties found.
Nobody knows how much Lehman has in CDS contracts because this trade is not disclosed, but in a survey last year, Fitch Ratings listed Lehman among the top 10 largest CDS counterparties. If it fails, then, as the ISDA statement above implies, a huge number of CDS contracts will be worthless unless new counterparties can be found.
Australian municipal councils and others who bought CDOs from Lehman will also be watching events unfold with close interest.
Lehman was one of the counterparties to about 70 per cent of what was sold to the councils. It was a counterparty or guarantor in one capacity or another. It is also understood to be a reference company in more than 50 per cent of the CDOs.
So in the first instance, the failure of its debt would be a credit event for those CDOs (most of which also reference Fannie Mae and Freddie Mac – and for that matter AIG, Merrill Lynch and Washington Mutual) and this would push those CDOs towards loss.
The other problem with a Lehman bankruptcy is that its assets – stock, property and mortgage securities – are likely to hit the market in a firesale, forcing prices even lower and then, next quarter, forcing further mark-to-market write-downs by other banks and investment banks.
In fact it’s unlikely to be a slow-motion train wreck this time. With Lehman in liquidation, and Washington Mutual and AIG on the brink, the credit market would likely shut down entirely and interbank lending would cease.
In his newsletter yesterday, Nouriel Roubini wrote: “What we are facing now is the beginning of the unravelling and collapse of the entire shadow financial system, a system of institutions (broker dealers, hedge funds, private equity funds, SIVs, conduits, etc.) that look like banks (as they borrow short, are highly leveraged and lend and invest long and in illiquid ways) and thus are highly vulnerable to bank-like runs; but unlike banks they are not properly regulated and supervised, they don’t have access to deposit insurance and don’t have access to the lender of last resort support of the central bank (with now only a small group of them having access to the limited and conditional and thus fragile support of the Fed).
“The step by step, ad hoc and non-holistic approach of Fed and Treasury to crisis management has been a failure so far as plugging and filling one hole at the time is useless when the entire system of levies is collapsing in the perfect financial storm of the century. A much more radical, holistic and systemic approach to crisis management is now necessary.”
U.S. dollar tumbles after Lehman talks falter
Sun Sep 14, 2008 10:25pm BST
WELLINGTON, Sept 15 (Reuters) - The U.S. dollar tumbled in early trade on Monday on increasing worries over the U.S. financial sector after talks to sell Lehman Brothers Holdings (LEH.N: Quote, Profile, Research) faltered over the weekend.
Barclays Plc (BARC.L: Quote, Profile, Research), which had appeared to be frontrunner to take over Lehman -- excluding its toxic mortgage-related assets -- said it pulled out of the bidding, as top bankers and regulators met for a third day to try to resolve the crisis.
The British bank withdrew because the U.S. government wouldn't provide financial guarantees, according to a person familiar with the matter. "Growing worries about the health of the U.S. financial sector will likely spur speculation about near-term Fed rate cuts, which will likely weigh on USD and provide some support for NZD/USD," said Bank of New Zealand currency strategist Danica Hampton.
The euro jumped to $1.4325/28 <EUR=> at 2115 GMT, compared with $1.4225 in late U.S. trade on Friday.
The U.S dollar dropped to 105.93/95 yen <JPY=> versus 107.86 yen. (Reporting by Kazunori Takada)
Lehman Inches Toward Bankruptcy After Potential Buyers Drop Out
By Yalman Onaran and Craig Torres
Sept. 14 (Bloomberg) -- Lehman Brothers Holdings Inc. moved closer to filing for bankruptcy after Barclays Plc and Bank of America Corp. abandoned talks to buy the U.S. securities firm and Wall Street prepared for its possible liquidation.
Barclays, which had emerged as a leading candidate to acquire Lehman, pulled out first, contending it couldn't obtain guarantees from the government or other Wall Street firms to protect against potential losses on Lehman's assets. Bank of America withdrew about three hours later, according to a person with knowledge of the talks. Banks and brokers began consolidating trades in which Lehman is involved to minimize the impact of a possible bankruptcy filing tonight.
The U.S. Treasury and the Federal Reserve have struggled for three days to prevent the investment bank from failing before markets open tomorrow, people familiar with the situation said. With the two most serious bidders out of the picture, Lehman's options are few.
``The best case is that the Fed offers a 48-hour standstill by backing Lehman's liquidity directly to win time for other bidders to come forth or the previously interested parties to reconsider,'' said Sean Egan, president of Egan-Jones Ratings Co. in Haverford, Pennsylvania. ``The worst case is bankruptcy, and Lehman goes down the tube.''
Barclays walked away because it couldn't get guarantees from the government or agree on a private-sector deal to mitigate what it called Lehman's ``open-ended'' trading obligations, Leigh Bruce, a spokesman for the London-based bank, said in a phone interview today. Bank of America spokesman Scott Silvestri declined to comment. The Wall Street Journal reported that the bank had entered into merger talks with Merrill Lynch & Co., citing unidentified people.
Swaps and Derivatives
The International Swaps and Derivatives Association, which has 218 banks as members, said in a statement today that it held a so-called netting session on Lehman trades to prepare for the New York-based firm's bankruptcy. The trades during the session will be annulled if there's no bankruptcy filing as of 11:59 p.m. in New York today, ISDA said.
Wall Street executives arrived at the New York Fed building in lower Manhattan this morning for a third day of discussions about a rescue plan. Among those present were Citigroup Inc. Chief Executive Officer Vikram Pandit and Robert Wolf, chairman for the Americas at UBS AG. JPMorgan Chase & Co. sent CEO Jamie Dimon, Investment Bank Co-CEO Steven Black and General Counsel Stephen Cutler.
Lehman's bankruptcy wouldn't have as big an impact as the bankruptcy of Fannie Mae or Freddie Mac, Bear Stearns Cos. or Countrywide Financial Corp., Egan Jones's Egan said.
``What the market has been telling us is that Lehman's equity and assets don't cover its liabilities, so the debt isn't worth 100 cents on the dollar,'' said Egan. ``That means credit default swaps on Lehman's debt will be triggered.''
Sealing Off Losses
Barclays's takeover approach depended on sealing off losses from Lehman's mortgage-related holdings, according to people familiar with the talks. New York-based Lehman has lost 94 percent of its market value this year after record losses from investments tied to mortgages.
``Barclays has its own problems,'' said Bruce Foerster, president of South Beach Capital Markets in Miami. ``So it's possible they realized they can't do this without government aid.''
The U.K. bank, which has taken $7.6 billion of writedowns on its mortgage positions in the past four quarters, raised 4.5 billion pounds ($6.4 billion) in a share sale in July. The bank's 5 billion pounds of buyout loans and 12 billion pounds of commercial mortgages may spur further markdowns, Collins Stewart analyst Alex Potter said last week.
`Wasn't Willing'
Barclays said it was approached by the U.S. Treasury at the end of last week and saw in Lehman ``a potential opportunity to significantly enhance our investment banking and investment management franchise in key areas.''
``The proposed transaction required a guarantee for the trading obligations of Lehman Brothers which was potentially open-ended,'' Barclays said in a statement. ``Barclays wasn't willing to assume such an open-ended obligation.''
New York Fed President Timothy Geithner, 47, and U.S. Treasury Secretary Henry Paulson, 62, were pushing Wall Street to contribute money to a so-called bad bank that would assume at least some of Lehman's $50 billion of devalued real estate assets. That would have made it easier for a buyer to take over the rest of the company while the assets were sold off.
The approach was similar to one Lehman presented to investors last week, which the company said would cost $5 billion to $7 billion. The firm's mortgage-related assets have a face-value of about $74 billion before writedowns, based on figures the firm has reported. About another $10 billion of high-yield leveraged loans have been marked down to $7 billion during the past year, as market prices for the debt sank.
Fuld Forced
Led by Chief Executive Officer Richard Fuld, Lehman may be forced to liquidate unless buyers step up for all or part of the 158-year-old company, Paulson and Geithner told the heads of Wall Street's biggest firms at a meeting Sept. 12. Paulson has said he's reluctant to use government money to rescue Lehman.
Fuld, who built Lehman into the biggest U.S. underwriter of mortgage securities during his four decades at the investment bank, was forced to consider a sale this past week after talks about a cash infusion from Korea Development Bank ended, eroding investor confidence and the company's market value.
Unlike when the Fed committed $29 billion to help JPMorgan take over Bear Stearns Cos. in March, Lehman has access to a lending facility for brokers that would permit an orderly process for unwinding the firm, the person said.
Paulson stepped in last week to guarantee the debt and mortgage-backed securities of home-loan financing companies Fannie Mae and Freddie Mac.
Weil Gotshal
Lehman hired the New York law firm Weil Gotshal & Manges LLP to advise the company on a potential bankruptcy filing, the Journal reported yesterday, without saying where it got the information.
The government is probably concerned that panic may spread to other financial institutions, Ladenburg Thalmann & Co. analyst Richard Bove said. American International Group Inc., the largest U.S. insurer, and Seattle-based lender Washington Mutual Inc. each plummeted in New York trading last week on speculation about their financial health.
AIG may move up plans to raise capital or sell assets after the shares plunged 46 percent, according to a person familiar with the company. WaMu, which fell 36 percent, may sell parts of its nationwide bank-branch network to raise cash, according to L. William Seidman, a former chairman of the Federal Deposit Insurance Corp.
Oil is down $2 http://futuresource.quote.com/markets/market.jsp?id=energy
On the open it was down a little more than $2. I am headed out for a while, too much gloom and doom in what I am reading this morning. Hard for me to see a way out of the mess the brokerage houses have made for all of us. What a f*$king mess!
Good Luck This Week! We'll all need it!
Kipp
Greenspan: Economy in 'once-in-a-century' crisis
http://money.cnn.com/2008/09/14/news/economy/greenspan/
In an interview Sunday, the former Federal Reserve chairman said that more financial firms will fail and that housing won't stabilize until 2009.
September 14, 2008: 1:08 PM EDT
WASHINGTON (CNN) -- The U.S. credit squeeze has brought on a "once-in-a-century" financial crisis that is likely to claim more big firms before it eases, former Federal Reserve chief Alan Greenspan said Sunday.
Greenspan told ABC's "This Week" that the situation "is in the process of outstripping anything I've seen, and it still is not resolved and it still has a way to go."
"Indeed, it will continue to be a corrosive force until the price of homes in the United States stabilizes," Greenspan said. He predicted that would not happen until early 2009, and said the odds of U.S. recession have gone up in recent months.
"I can't believe we could have a once-in-a-century type of financial crisis without a significant impact on the real economy globally, and I think that indeed is what is in the process of occurring," he said.
While recent declines in the prices of oil and food may help avert a recession, he said, "I wouldn't put my money on it."
The financial crunch already has claimed investment bank Bear Stearns, spurred the federal seizure of mortgage giants Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) and left century-old Wall Street institution Lehman Brothers (LEH, Fortune 500) clinging by its fingernails after suffering nearly $7 billion in real estate-related losses.
Federal regulators and Wall Street executives were holding weekend crisis talks aimed at resolving the Lehman situation without further shock to the financial sector.
Greenspan, who left office in 2006, said he expected more failures before the crisis eases. While regulators "shouldn't try to protect every single institution," he said, companies should be kept from failing "in a sharply disruptive manner" to prevent further shocks.
Greenspan's critics say he helped inflate the housing bubble by keeping target short-term rates too low for too long, leading to reckless lending and borrowing in the housing market. But Greenspan has said the problem lay not in the loans themselves, but in their repackaging as securities and sale to investors.
CNG - Natural Gas Powered Cars Explained:
http://www.consumerreports.org/cro/cars/new-cars/news/2006/the-pros-cons-of-buying-a-cng-powered-honda-civic/overview/0609_how-to-jump-start-a-car_ov.htm
I like the idea of natural gas powered cars here in Colorado. We have lots of cheap natural gas in this area. I wonder about the gas tax avoided by the Phill system hooked up to my home, by-passing the filling station tax of $.45/gal.
Interesting stuff.
Kipp
Website says BofA will lead Lehman buyout
Sun Sep 14, 2008 10:12am EDT
NEW YORK (Reuters) - A financial website said a deal has been reached to split beleaguered Lehman Brothers into two entities, with a "bad bank" taking the toxic, real-estate assets amounting to around $85 billion and Bank of America taking the lion's share of the good assets.
A second day of emergency meetings between regulators and Wall Street bankers on the crisis at Lehman ended on Saturday without an announcement, and talks were extended to Sunday.
Dealbreaker.com, whose story could not be independently confirmed, said the deal would be financed without any government backing. Lehman CEO Dick Fuld will resign, it said.
Britain's Barclays Plc and Japanese investment bank Nomura Holdings will also play a role, the website said, while an international consortium of financial firms will inject capital for the deal.
Dick Fuld's resignation was demanded by Bank of America, the website said.
Bank of America played a brinkmanship role in negotiations, threatening to let Asian markets open on Monday without a deal, the website said, citing a person familiar with the matter.
"Fuld is said to have taken ... developments very badly," the report said. "He does not believe that the situation is as desperate as others on Wall Street believe it is, and may be trying to negotiate an alternative deal, we're told."
Ticking Time BOMB!
http://www.forbes.com/business/2008/09/14/lehman-rescue-fuld-biz-wall-cx_lm_0914lehman.html
Keep an eye on the dollar and gold as well as Asian markets tonight.
Kipp
Barclays May Bid for Lehman as Fed Seeks Solution (Update1)
By Ben Livesey and Yalman Onaran
Sept. 14 (Bloomberg) -- Barclays Plc, the U.K.'s third- biggest bank, moved closer to making a bid for Lehman Brothers Holdings Inc. as the U.S. government raced to find a solution for the faltering investment bank, two people familiar with the situation said.
Senior executives of major financial-services companies arrived at the New York Federal Reserve building in lower Manhattan this morning to discuss a rescue plan, including Citigroup Inc. Chief Executive Officer Vikram Pandit and Robert Wolf, chairman for the Americas at UBS AG. JPMorgan Chase & Co. sent CEO Jamie Dimon, Investment Bank Co-CEO Steven Black and General Counsel Stephen Cutler.
Barclays's takeover approach depends on whether losses from Lehman's mortgage-related holdings can be sealed off, said the people, who declined to be identified because no formal offer has been made. Bank of America Corp., the biggest U.S. consumer bank, also is among the potential bidders for New York-based Lehman, which has lost 94 percent of its market value this year after record losses from investments tied to mortgages.
``The solution is to force the merger of Lehman now, this weekend, with a big commercial bank,'' said Richard Bove, a Lutz, Florida-based analyst at Ladenburg Thalmann & Co.
Lehman, led by Chief Executive Officer Richard Fuld, may be forced to liquidate unless buyers step up for all or part of the 158-year-old company, U.S. Treasury Secretary Henry Paulson and New York Fed President Timothy Geithner told the heads of Wall Street's biggest firms at a meeting Sept. 12. Paulson has said he's reluctant to use government money to rescue Lehman. Talks with the banks continued yesterday without producing an agreement.
Discussions Continue
``Senior representatives of major financial institutions reconvened on Saturday with U.S. officials at the New York Fed. Discussions are expected to continue tomorrow,'' a New York Fed spokesman said.
With backing from the company's board, Barclays President Robert Diamond, 57, is leading a team to review Lehman's books and gauge the level of guarantees the bank would need to cover potential losses, the people said. Peter Truell, a Barclays spokesman, declined to comment.
``Acquisitions are difficult for Barclays because of capital constraints,'' said Simon Willis, an analyst at NCB Stockbrokers Ltd. in London, who has a ``reduce'' rating on the London-based bank. Barclays raised 4.5 billion pounds ($8 billion) in a share sale in June to shore up capital depleted by credit losses and increase its securities trading and fund management units in the U.S.
Bad Bank
Geithner, 47, and Paulson, 62, are pushing Wall Street to contribute money to a so-called bad bank that would assume Lehman's $50 billion of devalued real estate assets. That would make it easier for a buyer to take over the rest of the company while the assets are sold off.
The approach is similar to one Lehman presented to investors last week, which the company said would cost $5 billion to $7 billion.
Such an arrangement would be reminiscent of the rescue of hedge fund Long-Term Capital Management LP, which failed in 1998 as Russia defaulted on its debt, roiling global markets. Spurred by the New York Fed, Wall Street firms including Lehman contributed cash to prop up LTCM.
Korea Development
Lehman CEO Fuld, who participated in the LTCM talks and built Lehman into the biggest U.S. underwriter of mortgage securities during his four decades at the investment bank, was pushed toward a forced sale this past week after talks about a cash infusion from Korea Development Bank ended, eroding investor confidence and the company's market value.
In addition to Pandit and Dimon, the government met Sept. 12 with CEOs including Morgan Stanley's John Mack, Goldman Sachs Group Inc.'s Lloyd Blankfein, Merrill Lynch & Co.'s John Thain and Credit Suisse Group AG's Brady Dougan, according to the people, who asked not to be identified because the gathering was private.
Robert Kelly, CEO of Bank of New York Mellon Corp., UBS's Wolf, and Christopher Cox, chairman of the U.S. Securities and Exchange Commission, also participated, the people said. Bank of America CEO Kenneth Lewis didn't attend because his company is a potential bidder for Lehman, one person said.
Helping lead the discussion was Kendrick Wilson, a former Goldman executive whom Paulson tapped last month as an adviser.
HSBC Holdings Plc, Europe's largest bank by market value, is also considering a bid for Lehman, the Wall Street Journal reported yesterday, without saying where it got the information. Goldman, the largest securities firm, is interested in Lehman's real-estate portfolio, the Journal said.
Goldman's Position
HSBC spokesman Richard Lindsay said the company doesn't comment on market speculation. Goldman spokesman Lucas van Praag also declined to comment.
Paulson, the former chairman of Goldman, doesn't want to put up money to help fund any Lehman acquisition, a person familiar with his thinking said Sept. 12.
Unlike when the Fed committed $29 billion to help JPMorgan take over Bear Stearns Cos. in March, Lehman has access to a lending facility for brokers that would permit an orderly process for unwinding the firm, the person said.
Paulson stepped in last week to guarantee the debt and mortgage-backed securities of home-loan financing companies Fannie Mae and Freddie Mac.
Fuld May Balk
If the government's resistance to fund the purchase lowers the price offered for Lehman, Fuld could balk as well, said Brad Hintz, an analyst at Sanford C. Bernstein & Co.
``We might have a Mexican standoff, with two guys holding guns to each others' heads but nobody firing,'' Hintz said.
Lehman hired the New York law firm Weil, Gotshal & Manges LLP to advise the company on a potential bankruptcy filing, the Journal reported yesterday, without saying where it got the information.
The government is pushing for a quick resolution because Paulson is concerned panic may spread to other financial institutions, Ladenburg Thalmann's Bove said. American International Group Inc., the largest U.S. insurer, and Seattle- based lender Washington Mutual Inc. each plummeted in New York trading last week on speculation about their financial health.
AIG may move up plans to raise capital or sell assets after the shares plunged 46 percent, according to a person familiar with the company. WaMu, which fell 36 percent, may sell parts of its nationwide bank-branch network to raise cash, according to L. William Seidman, a former chairman of the Federal Deposit Insurance Corp.
Asset Write-Offs
A Lehman sale may be possible without government backing, an analysis of Lehman's distressed mortgage assets shows. In a worst-case scenario -- with the assets discounted more deeply than in recent distressed sales -- a buyer could write off almost half of Lehman's mortgage holdings and still have $7 billion of equity left in company, based on figures the investment bank disclosed when it reported third-quarter financial results last week.
``The firm should be worth something even after the troubled assets are taken out at a massive discount because Lehman has a good franchise,'' said Corne Biemans, a Boston- based senior portfolio manager at Fortis Investments, which oversees about $200 billion. ``There are distressed asset buyers who should be interested in this stuff at such serious haircuts.''
Lehman's mortgage-related assets have been marked down to between 29 cents and 85 cents on the dollar. Reducing valuations further to between 5 cents on the dollar for collateralized debt obligations and 35 cents for European mortgages would result in $21 billion of further writedowns. Shareholders' equity was $28 billion at the end of firm's fiscal quarter in August.
Gasoline SHORTAGE
Oil Drum Story : http://www.theoildrum.com/node/4526
People filling jugs and filling tanks will insure a shortage. All it's going to take are "Gas Shortage!" headlines to get everyone headed to the pumps.
With gas prices going down for the past month people were letting their tanks get to empty before filling them. Now those empty tanks will all get filled. Some people are stashing 5 gallon jugs in the garage. 250 million cars x 10 gallons = 2,500,000,000 gallons.
Think about that!
Kipp
Wade - Grain supplies are at all time lows. The grain yields are going to be much lower than the USDA originally forecast. The USDA started back peddling on Friday. You are going to see volitility in the grains as the harvest season is upon us. The press is too focused on the dollar and has not picked up on the supply/demand picture yet. Fertilizer companies are flush with cash, farmers can pay their bills, and no big potasium or phosphate supplies are coming on line any time soon. Ag looks good to go in this time of consumer recession and banking meltdown.
Kipp