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Old 05-31-2008, 06:57 PM   #3 (permalink)
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It seems to me that the fiscal problems in the US, and they will, for a time, affect demand in the rest of world....are insurmountable, now.

There is increasing evidence that our system of rating the quality of credit and debt issuance has broken down, to the point of this example of absurdity:

Quote:
http://www.bloomberg.com/apps/news?p...gu8&refer=home

Moody's Implied Ratings Lab Reveals Ambac, MBIA Turning to Junk
By David Evans

May 30 (Bloomberg) -- Moody's Investors Service has created a new unit that surprises even its own director.

The team from Moody's Analytics, which operates separately from Moody's ratings division, uses credit-default swap prices as an alternative system of grading debt. These so-called implied ratings often differ significantly from Moody's official grades.
The implied ratings frequently show that swap traders think debt is in more danger of defaulting than Moody's credit ratings signify. And here's the kicker: The swaps traders are usually right.

``When I first saw this product, my reaction was, `Goodness gracious, Moody's has got a product that is basically publicizing where the market disagrees with Moody's,''' says David Munves, managing director for credit strategy research at Moody's Analytics. The implied-ratings unit works in a corner of Moody's new world headquarters in lower Manhattan, across the street from Ground Zero.

``But these differences are out there,'' Munves says. ``We might as well capture and learn from it what we can.''....
The translation of the above "news", is that Moody's credit ratings have become unreliably optimistic, so Moody's doesn't change their ratings or the process they use to determine them, they simply offer a new product that copies the opinions of outsiders who are "usually right", so that Moody's can capture profits by selling information that contradicts their own ratings, further calling the justification for their entire core business of issuing ratings that lenders in the past relied on to make lending and investment decsions, into question.

On top of that, MBIA and Ambac are insurers of credit. If Moody's were to downgrade MBIA and Ambac any further, a large number of credit instruments that are rated investment quality by Moody's precisely because they are insured against losses from default, by MBIA or Ambac, would have to be downgraded, and then sold, in the event Moody's lowered the ratings on them to below investment quality. This teetering scheme could collpase before the november presidential election, and it is too precarious a situation to discuss in a campaign platform.

The private banking system is insolvent, the dependency on, and cost of foreign petroleum is solved only with the coming slack demand of a deflationary depression, which will increase the burden, of shouldering a $9-1/2 trillion national debt demoninated in dollars increasing in value. All dollar denominated debt will increase in value, making it more difficult to pay back, the "worst nightmare" scenario for the "inflation fighting", US Federal Reserve.
The memory of the experience of the last deflationary depression of the 1930's influences the Fed to claim that inflation is it's greatest concern, when in fact, it is it's opposite, deflation, that the Fed's inflation worry posturing is all about.

FWIW, here are links to the economic platforms of the 3 major presidential candidates, and, IMHO, it ain't worth much. Gasoline will be cheaper, but consumer mortgage and credit card debt will have to be paid back with harder to come by dollars. Deflation makes cash worth more, as good are worth less.

http://useconomy.about.com/od/fiscal...ry_Economy.htm

http://useconomy.about.com/od/fiscal...ma_economy.htm

http://useconomy.about.com/od/fiscal...ohn_McCain.htm

If any of them attempted to respond to the actual crisis, the eyes of their intended audience would glaze over, much like mine does, and conveniently, there are no solutions, we are so past that opportunity.

These banks have no money to lend, and no business model to make money lending, and there will be much less interest in borrowing, anyway, if the expectation is that everything will cost less, this time next year:

<h3>Whoops !!!:</h3>
Quote:
http://research.stlouisfed.org/fred2/series/BOGNONBR

Series: BOGNONBR, Non-Borrowed Reserves of Depository Institutions

<img src="http://research.stlouisfed.org/fred2/data/BOGNONBR_Max_630_378.png">

Latest Observations:
Date 2007-12-01 - 2008-01-01 - 2008-02-01 - 2008-03-01 - 2008-04-01
Value 27.169 ......... -3.874 .......-17.578 ..... -50.490 ..... -91.935
Quote:
http://www.rgemonitor.com/blog/roubini/252638/
Nouriel Roubini's Global EconoMonitor
How will financial institutions make money now that the securitization food chain is broken?
Nouriel Roubini | May 19, 2008

The most severe financial crisis in decades has not only damaged the balance sheet of financial institutions. It has also severely affected their P&L, i.e. the process of generating revenues and profits.

In the old “originate & hold” model (before securitization) financial institutions made money from the investment income of holding the credit risk of loans and mortgages. But in the brave new world of securitization where you “originate & distribute” the credit risk rather than hold it on balance sheet an increasing fraction of the income of financial institutions was coming from the fees and commissions involved in this securitization process. This food chain of fees on top of fees is now broken: securitization of mortgages, that was running at the annual rate of $1,000 billion in January of 2007, was down 95% to an annual rate of $50 billion by January of 2008. So the process of generating fees and commissions is broken.....

...In the case of leveraged buyouts (LBOs) the process started with LBOs that should have never occurred in the first place as the last vintage of LBOs had reckless debt to earnings ratios of 8-10 as opposed to the historical average of 3-4. Thus highly leveraged buyouts with tons of debt and little equity took private borderline profitable corporations that should have never been loaded with such massive amounts of debt. And since credit was cheap – junk bond yield spreads bottomed at 250bps relative to Treasuries in June of 2007 - and investors were searching for yield hundreds of billions of dollars of LBO deals were generated with terms that did not make any sense (including covenant lite terms and PIK toggles). Then these LBOs were financed with leveraged loans and bridge loans; and then further sliced and diced into CLOs that were then stuffed into SIVs and conduits when they could not be sold to investors. Too bad that eventually - by early 2008 when this LBO and private equity bubble went bust - hundreds of billions of dollars of frozen leveraged loans and bridge loans were still sitting on the balance sheets of financial institutions being valued at 70 or 80 cents on the dollar.

So how will all these financial institutions generate revenues and profits now that this effective scam has mostly collapsed? Origination of new subprime and near prime (Alt A) mortgages is effectively dead; origination of new commercial real estate mortgages is nearly frozen; securitization of mortgages has collapsed by 95%; the entire CDO, CMO and CLO market is frozen with almost no new issuance; while the SIVs and conduits have collapsed with the rolloff of the ABCP paper that was financing these scams.

So how will mortgage brokers, banks, broker dealers, monoline insurers, rating agencies generate revenues and profits now that this slice & dice scheme has unraveled? The current market delusion that the worst is behind us for financial institutions is based on the view that most of the writedowns of the toxic assets have already been done. But this is not just a balance sheet problem. Now financial institutions have a more severe P&L problem, i.e. how to generate income and earnings from now on when they cannot originate junk any more. The entire income generating model of financial institutions – make income out of securitization fees rather than by holding the credit risk - is broken now that the generalized credit bubble (not just subprime mortgages) has burst; thus, how will these financial institutions generate earnings over time? Capital losses are one-time problems; but destruction of the income generation process is a more severe and persistent problem that will require banks and other financial institutions to rethink their overall business model of credit risk transfer. But there is no clear and sound new business model for them: going back to the old days of “originate and hold” is not fully possible while the new “originate and distribute” model has shown all of its wrong and distorted incentives, risks and systemic failures. So banks and other financial institutions will have to seriously rethink their business model and how they are going to make money: the model of slice and dice and pile fees upon fees and transfer the credit risk is broken. It is not clear if banks and other financial institutions have a better model. May they will have to go back to old fashioned banking: carefully assess the creditworthiness of their borrowers, lend on sensible terms and hold a good part of the credit risk now that the easy fee/profit generating machine of securitization is terminally broken.

Last edited by host; 05-31-2008 at 07:45 PM..
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