Hedge Fund Collapse [Major]

I read an article today on Marketwatch.

This was a follow up article from 24 October also on Marketwatch.

Why do I present this information? Simple. I have read so many of these types of articles from companies that within 6 months are dead, gone, penny stocks or bailed out, it is not funny. Citidel is massive in the hedge fund world.

I predict and have been saying for some months now that we will experience a major hedge fund collapse soon. This will be larger than the collapse last year of the of $9 billion hedge fund Amaranth Advisors.

Back in 1998 Mr. Greenspan orchestrated a the bail out of Long Term Capital Management. He did this without government money. Instead he had a dozen or so banks pony up to $250 million each to re-capitalize the fund and allow its holdings to be sold off in an "orderly" fashion.

The interesting connection between LTCM failure and the statements by Citidel in the article from 24 October is this quote:

He (Ken Griffin) blamed most of the fund's losses on huge dislocations between cash securities like corporate bonds and related derivatives that Citadel and other firms use to hedge those positions.

This was exactly the cause of the collapse of LTCM. LTCM lost huge money primarily due to bets related to the Rubble. The Rubble collapsed in 1998 and Russia defaulted on debts. The key is these funds use sophisticated methods to "hedge" their investments (bets) for or against a security, currency, commodity or your grandmother's likelihood to die tomorrow or whatever else BS they can thrash around billions of dollars at to try and make a buck irrespective of the laws, lives or losses by any party willing to do business with these vultures.

Anyway, this "dislocation" Mr. Griffin talks about is exactly what number crunching mathematicians are completely unable to deal with. These guys leverage themselves to the hilt to rake out a few percentage points gain in their bets. They risk so much capital and borrowed money by use of hedging strategies that allow them to minimize risk while making high returns. However when their risk protection strategies break down they are screwed, literally. They can suddenly loose billions and often have no way to protect themselves other than to liquidate.

Well, as I have said before many times, when one is dealing with an "esoteric" market of highly complicated, unregulated "derivative products" and all hell breaks loose, whom in the hell are you going to "liquidate" to? Everyone else is playing the same game. There are no regulators, there are no authorities since these guys play in unregulated markets, there are no laws, rules, allegiances to nations, people, humanity... anything. There is no oversight or "police" looking into what these guys do. They are secretive and play with "products" most people do not understand and have terms that only work in normal functioning markets. The products are created and traded on proprietary systems by over paid number crunchers who have the street smarts of a doorknob.

OK, off the stump. Well, I will add that one of the early "brilliant" ideas of Mr. Bernanke was to open the treasury up the regulated banks followed by the unregulated Wall Street "investment" banks with the explicit idea that they would provide liquidity to their "clients" duh, hedge funds, they acted as prime brokers to, lent to and often took positions in their "investments" (raids on other companies).

It is really fascinating to see the treasury open up to the completely unregulated market through regulated entities. Oh, and when the unregulated entities begin to go broke because leverage at 30 to 1 has failed as a "business model", the fed says "OK now you just become regulated and we will open up the spigots for you." I mean this is just F***ing crazy. Period.

Also it is fascinating to see how desperately this entire process is failing. There are so many "dislocations" in the market right now nobody knows which way is up. All I know is the stock market is now a playground for hedge funds to trade and manipulate and play "who is left standing at the end of today" games to try and make a buck. They account for 40+% of the volume and for anyone in 2008 to even THINK that the stock market is a place to "invest" they are kidding themselves.

The valuation of the stock market has become such that the model of how it used to work is no longer valid when you have hundreds of billions of dollars (trillions really when you count leverage)playing it like a schoolyard game. All of the "value" funds, mutual funds, retirement accounts, endowments, pension funds and the like that still have "ownership" of stocks are simply going to hand all of their money over to whoever manages to rake the most out of it before it collapses entirely. This will be soon.

We are looking into the abyss right now and as long as the government continues to pump billions of soon to be worthless dollars into the institutions that function in this market, this money is going to simply be sucked back out by those who understand what is going on. If you want to see an example look back to that 1998 collapse of the Rubble. I will not forget the billions pumped into Russia at the time by I believe it was the World Bank. The money went into Russia as hard currency, got converted by anybody and everybody with access to the right people and promptly went right back out of the country into Swiss bank accounts and the like.

This is what is happening with the money the Fed is pumping into a dying system right now. That is why there is no market. The cash pumped in goes right back out and is being held by anyone and everyone with access to it. The "market" continues to get sucked like a vacuum.

Meanwhile, I am convinced the dollar is going to loose it's international value as the world's reserve currency and as I have said many times before, if the nations with this currency don't start spending it on I don't care what, (buy anything and everything TANGABLE you can now with the dollars you have) they will be burning them for fuel in the winter, maybe not this winter but definitely by next winter.

This takes me to Ceberus Capital Management, the fund stupid enough to buy some 80% of Chrysler and 51% of GMAC Financial Services including their desperately worthless mortgage arm ResCap. GM announced this week they don't have any money and thus have no resources to bail out Chrysler. I believe this spells b-i-g p-r-o-b-l-e-m for Ceberus. They were trying to orchestrate some kind of quick deal to get Chrysler on GM's books so the government could bail the auto company out. Not even the idiots making decisions to bail out industries in Washington right now have the stomach to hand over the money to the likes of Cerebus. They would go to jail for something like that.

What if Chrysler / GMAC / Cerebus all go down the tubes? What a party that would be.

Don't be stupid. Shake all preconceived notions about the US stock market being a place to put your money for your future. The world is being reshaped as we speak and until the idiots running our government have the "balls" (for lack of a better word) to shut down the massive unregulated markets that trash the global financial system for a living and admit all of the norms that have defined the functioning of the capital markets have been completely destroyed by this massive unregulated market and their creation of "products" to place their highly leveraged bets, normal people must stay as far from this circus as possible.

If you are saving for your future, get out of the sucker's stock market before it becomes an empty dustbin.

All the best.

Rants on another topic...

I got a phone call from my mother the other day. She has been staying in her Jacksonville, FL house for the past 3 months. The call was some routine question about her house here in Maryland then ended. Shortly thereafter she called again. This time it was to vent about something or everything. I am not sure which but the conversation started with something like, “I am really upset about these markets.” Then some spouting about “This $700 billion bail out is ridiculous. Using taxpayer money like this really pisses me off. I am really pissed off about these markets. I mean I worked very hard for my money and now it is nearly gone. That xyz mutual fund I have is down to nothing (she was gleaming when it was going up during the unwarranted record reached in the Dow about a year ago). And what about this damn election… I don’t understand why all these black people are voting for Obama. I mean they are all excited to vote just because he is black. That really makes me mad. They are even registering “homeless” people here. Some guy was given an address like “pillar #4 under freeway…”

OK, this is when I have to just cut off the conversation and hang up (with a few short words expressing my extreme displeasure of her “TV induced Talking Head view of the world”, most likely from the antithesis of intelligent reporting, FOX news).

So what is it about Florida that once my mother has been there for more than 60 days she becomes some kind of extreme right wing racist? After she had been there 5 months or so she usually gets fed up with Florida herself and can’t wait to get back to Maryland. That is when I breath a sigh of relief and realize she is only truly 30 percent right of center and not 70 percent as she becomes after a couple of months in that dreadful state.

Occasionally I get questioned about when I am going to come down and visit. Mind you, my mother’s snowbird home is in Jacksonville. She might as well be in Alabama or Georgia cause everything north of Orlando is not worth a wintertime visit. It gets cold there. The beaches are lacking, the economy non-existent, culture does not exist and it is not perpetually warm. What in the hell would I want to go to Jacksonville Florida for? Anything north of Orlando is just not worth the trip.

My impression of the northern ½ of Florida is that it’s heavily settled by blue-collar northerners who just wanted to be in Florida when they retired and found the cheap real estate enticing. The economy there is like that of a Central American nation where all the “currency” that supports the local economy comes from the pension funds and 401k’s built up while people worked in states with productive economies. Go south of Orlando and you get the better off northerners who can afford the more pristine locations and 365-day warm weather offered by the tropical southern part of the state. Here, for example, is where you get the New Jersey and New York Jews who buy up “nice” condos on the beach in Miami and elsewhere they can use to bribe their reluctant children down for a visit. I mean even their kids cannot resist a free condo on the beach in Southern Florida. In fact, I might even visit my mom if she were down there. But no, she had to be where her siblings settled in the northern part of the state.

Initially there was hope. My mom first purchased a condo on a golf course just outside of St. Augustine, still not far enough south but it was a start. I figured maybe she would find it to cold and move closer to her ½ Jewish cousin who lives just west of Miami. I actually went to her condo for about 4 days in November 2007. It was cold. There was some kind of costal storm that had wiped out the beaches. Everything was deserted. I was told the “season” did not start till December. Huge multi story condo buildings rested on the deserted beaches south of St. Augustine. There were no restaurants, no grocery stores, bars, nothing, just rows of condos on the beach nearly deserted. It was surreal to say the least.

One day the little bridge we drove over from my mother’s misplaced “condo on golf course development” was closed and I had to take a detour to get to town where I would go the 5 Star St. Augustine hotel and borrow their network for a few hours for about $10. I was amazed at what I saw. On this detour only minutes from downtown and my mothers condo was a road bordered by double wide trailers on cinderblocks, tiny bungalows and houses that looked like servant quarters from some long lost Georgia plantation that were dragged down to Florida and had survived for 100 years only because of the hardiness of their tin roofs. I mean, the place was downright poor, Alabama, Mississippi and Louisiana poor. Yep, we were in Florida, home of stolen elections, inbred politicians and God fearing racists.

My trip to downtown St. Augustine with friends from the Netherlands and Germany who happened to be in Florida at the same time, hence my reason for trekking down there, were to find places to hang out and enjoy some bourgeois time in town. Unfortunately since we were there in November (once again before the prime season) the place was perpetually deserted except for an occasional day tripper bus tour, a few off season tourists and some students from the tiny collage in town. What was worse than the desertedness of the place was the lack of places where I would want to spend more than 10 minutes hanging out in. I mean poor towns are quite depressing to hang out in. We found one lively bar at the end of a pretty extensive strip of mostly deserted and closed bars (due to the off season time I presume) where they had live music and some people actually in the place. I met a few locals and one nice girl explained how the majority of the strip of bars I asked her about had migrated into the hands of one or two owners over the years. Yep, this is a reality in many towns in America that have seen they’re past glory come and go. The stately houses become 8 one or two bedroom tenement style housing units owned by one or two old school families and the commercial district follows suit, often by the same clan. That is when the rest of society drags down along with the town. If you have an outspoken attitude you are run out of town and if you are black or lacking in education you get exploited to the n’th degree and if you speak out, your destined for the food stamp line for life.

This is an area where the right wing politicians push for school vouchers (an idea pushed by the right wing that a family can obtain a “voucher” they can take to a school that is “achieving” positive test scores and get out of the cycle of sending their children to failed schools in their home district). The reason they push for the vouchers is these pieces of paper allow the families with the means (i.e.; transportation, income/job, freedom of movement and connections) to get a government issued pay out where they can “self bus” their kids to the one school in the entire county that may be able to have test scores that pass the national standardized tests. What the right wing does not bother to say is that in most school districts in poor states (and even in entire districts in most American cities) there is not one public school that is capable of passing national standardized tests. Thus the damn voucher is a worthless piece of paper unless you have the means to trek your kid to some other far school or district or ability to get them into a “limited access” charter school. The people with these means are going to benefit and they of course are the last people who need it. Hence, the voucher program is nothing but another subsidy for the wealthy conservatives who rake the most “rents” from poorer parts of the nation and want some kind of government handout to get their kids to better schools on the broader taxpayer’s dime. Yea, you got it, Banana Republic, I mean America, well the US anyway.

Let’s not mistake my attitude here. I had only been to Florida once, when I was 15 years old and my mother took us down to visit my right wing religious aunt and her family and to see Disney world (or land or whatever they call it there). I think that trip was also to Jacksonville where my aunt and uncle and cousins had recently moved from Tampa. My uncle was from a big farm family in Georgia and all I remember from the trip were new churches with lots of people, a different way of talking and trying to water ski (Disney whatever is a kind of blur). That trip left no lasting impression. I always made an effort to see my aunt and uncle when they came up north to visit the family though. My cousins were great when we were kids and as an adult I always enjoyed the cultural experience of talking at length with my aunt and uncle about everything. I may trash macro cultural realities but I love communicating with individual people of all stripes.
I don’t however like Florida.

I suppose if I were a CEO of a Fortune 500 company and could use the corporate jet to fly down to my waterside house in Palm Beach or Boca Raton for the weekends like about 60% of them do there might be some reason to visit the place. But even then I wince at the idea of finding any kind of cultural entertainment or other stimulating leisure experience to recharge before heading back to the office in some productive economy state. (Well other than having a rolodex of other Fortune 500 company CEO’s and good social calendar where I could always find the hottest place to hang out and flirt with hordes of beautiful borderline professional women who haunt the place looking to land their sugar daddy CEO. Needless to say, this is not happening any time soon.)

So to my loving mother I politely asked again in a follow up email full of apologies and other niceties both ways about the short heated conversation on everything that is wrong with our lovely country simply to avoid political issues in our conversations. We are days from an election and even though many of her siblings up north that moved right of center during the waning years of the Clinton administration have, after being completely disenfranchised by the doorknob running our country for the last few years, decided also to vote for Obama (even though they are not black) my loving mom who has spent the last 90 days surrounded by the many God fearing racist in the poor state of Florida, has not had the opportunity to change her mind.

Letters to Tom 6

-----Original Message-----
From: Thomas
To: Patrick
Sent: Tue, 28 Oct 2008 3:19 pm
Subject: impatient White House

Pat, here a headline from recent article that is kind of shocking:

"AP - An impatient White House served notice Tuesday on banks and other
financial companies receiving billions of dollars in federal help to quit hoarding the money and start making more loans."

What the hell is that all about? Telling banks to make loans? Americans are bankrupt, are they not? They, republican/neo-cons, already ran the middle and lower class to the hilt with sub-prime, so who can actually afford credit right now? Wouldn't the banks loan it if they saw any chance of getting some interest on it, plus their money back? I also read that there's trouble on the horizon because of credit card debt. How is that gonna play out in the coming months?

t


Hi Tom,

Yes this is the cry from the White House and their cronies. As it happens, the big bad bail out of $700 billion was originally to buy worthless derivative paper based on just about everything. Then the UK had this bright idea of just parking the money in the bank's coffers to shore up their balance sheets (of course by buying some kind of newly created "preferred shares" in the US). The idea was if banks have healthy balance sheets they would be willing to lend again right?

Thing is, the banks don't have healthy balance sheets. They are looking at a really tough economy and as you reference in the second part of your email, increasing delinquencies in their consumer credit divisions. These delinquencies are already approaching 7% or more at some institutions. This is astronomical when you consider the costs and need for extra reserves to cover these losses on top of recently delinquent home equity loans (the borrowed cash that gave Bush his debt financed "growth" for the past 5 years).

Yes the banks and credit card companies like Amex and Cap One are looking at shrinking margins on their cards, increasing delinquencies and an almost evaporated credit market where they normally sell the credit card "receivables" as debt to the credit markets (mainly purchased by money market funds, an area I think should disappear as I believe money market funds have fueled the extraordinary expansion of short term debt from the consumer side of the equation over the past 20, yes 20 years, as I bitched about this with my professors back in 1990 at UM when consumer debt was approaching $800 billion, a small number in hindsight).

Anyway, with the banks bleeding money from write downs on their bad "investments" over the past few years and vastly expanded "assets" of garbage loans to consumers who are all tapped out and loosing their jobs, once they got their hands on the Fed money they just want to sit on it or start scheming up ways to gobble up their competition and gain deposits on the cheap. Well, wouldn't you? With bank shares down 70% or more why not take advantage of that and just buy your way out of your troubles using "cheap" government handouts?

But the government in all its brilliant ideas just doesn’t understand all this. They look at some economic model and say "Hey, if the banks have capital they will want to lend it and expand their assets and make more money right?" Well Tom, you are right this time. Hell no! They have no interest in lending to a tapped out consumer who may loose their job and there are few businesses with enough cash to lend to (remember, in tough times banks only lend to those who don't need it).

Patrick

Letters to Tom (5)

From: Thomas
To: Patrick
Sent: Sun, 19 Oct 2008 4:02 pm
Subject: Re: Cheer up???
Pat,

As usual I can't hold on to the economic ship you describe since I'm not an economist (as you obviously are). But... I refuse to let go and drawn. With that in mind, let me give this economy stuff a go.

Inflation? Are you saying as in "inflation" of national economies? I think what you might be referring to is deflation. I don't know, Pat. I don't think inflation is what it used to be.

Aren't you forgetting about the drastic decrease in the price of oil recently? Russia and China - both economies almost wholly dependent on (fictional?) petro-dollars - are right now tittering on the edge. And why is that? You're right that the dollar is weak but what is also clear is that no matter what happens too many countries are dependent on that dollar - no matter what form that dollar has. A bit ironic, perhaps, that all the G8 leaders are going to meet to discuss how to deal with this problem (notice they don't use the term G8 anymore - since Russia isn’t invited.) What do you think they're going to talk
about? How Russia and China are going to burn (real) cash to fuel their winters?

What "real" cash, Pat? There is no such thing as cash in this crisis. It is truly about trust - as in: whom do you trust? (The west or...?)

What is so interesting about this crisis (to me) is the fact that it has never been more obvious that the money being put into the system right now ($700b in the US) is truly monopoly money - as in Monopoly the game! It is not even referred to as "cash". Well, I guess some refer to it as that but... The dippy Bush referred to it the other day as "capital" - it is clearly not that. Isn't it really liquidity? No? Wait. Isn't it really anything more than a Bookie guaranteeing his store?

To me the real question is how much more production can America afford to lose through this crisis? Will GM buy Chrysler? Can America really sustain itself by having a majority service economy? And on top of that afford all this wacky Wall Street krapp?

I recently thought about an old econ101 term that I haven't heard in years. What ever happened to M3? The crisis is really stirring up 200 or so years of capitalism - that part the hedge fund guy got right. But couldn't this crisis also be changing economics as well?

Ah, what do I know?

t


Funny you mention M3. All the monetary numbers M1-M3 used to be published regularly. They were removed from being published a few short years ago. They are simply mind-boggling and I guess the Fed did not see the point. Lets just say over 85% of the "currency" in dollars is outside of the US.

Anyway, remember the later 90's? We had something they were talking about there called the "Goldie lox economy" where unemployment dropped into the 4% range (where previously the Fed used to think under 6% would start to cause inflation to rise) but inflation was stagnant or non existent. I mean there was just no noticeable inflation until after 2001. And yes, typical inflation assumes rising prices, commodities usually start the rise then prices go up and people demand higher wages etc.

Strange thing is during the housing boom / bubble, housing prices skyrocketed and I kept saying, where is the rise in income to sustain the rise in prices? Well it was not there and never appeared, hence the housing bubble burst. We had a very strange time. There was my attitude during the bubble where I asked my friends who talked about their rising house prices and posed this question: Did you house price go up or does it simply take more dollars to buy your house?

Understand the difference? I believed it was the latter and house prices were foretelling a collapse of the dollar. If you remember, during the 70's inflation time, house prices went up with inflation. Those were old and traditional and reliable economic models we all learned from. Today we are in different times. The "Goldie lox economy" followed by the "housing bubble" without underlying income to support it and the current melt down in the credit markets as a separate event from the industrial production etc parts of the economy are all putting traditional models out to rest.

My fear of inflation is a simple one. It assumes the lack in faith of the value of the dollar. I feel by pumping more and more dollars into the banking and credit system we are taking the assumption that there is some kind of intrinsic value of the dollar, which allows us to recklessly print more. I mean, what other country can get away with the kind of national debt and trade deficits we have? None! There is the rub. The globe accepts our trade deficits, budget deficits, consumer debt and other reckless numbers. But with every possible number going bad, what is not to say pumping dollars into the financial system at this point does not have the ability to create the "prefect storm" where no matter how many dollars are put out there, credit remains tight, people horde dollars and nothing moves. Then just like any "asset class" that is horded, at some point people will want to unload. That is the problem, are they going to unload dollars into a dead economy? If we lower interest rates to 1% or .75% or whatever, and the US economy sinks further, who will want to hold dollars?

Anyway, I am just thinking out loud here. I don't have all the technical knowledge to determine the viability of what I am saying. I just feel it in my gut. I feel it in the panic in Washington, the panic in the Fed the panic in the Treasury, the panic on Wall Street, the Panic in London the Panic everywhere you look... I just feel it.

Patrick

Letters to Tom (4)

Tom,

I am increasingly convincing myself our economy (including Europe's but to a lesser extent) is about to hit an unprecedented bout of inflation. My prior comments over the past few years about allowing China to take some of their hundreds of billions of dollars and buy US assets before they end up burning them for heating fuel in the winter is starting to take real shape (like the hedge fund guy Andrew Lahde's comment about the legislation that never passed because industry bought off the government, those industries also bought off the government by convincing them to not allow China to purchase several American companies which is the best thing that could happen to all those dollars they have collected).

This will not be the kind of inflation economist’s talk about, rising asset prices, wages etc. but a simple collapse in the faith of the US currency combined with the government's current bias towards literally flooding the banks and financial markets with "unlimited" dollars to improve liquidity. I am not kidding. We went from 10's of billions in dollars of support to hundreds of billions to now quoted everywhere, "unlimited" of financial support from the fed.

I seriously think China may in fact be using those dollars as fuel this winter, they will become that worthless as the US current reckless attempts to bail out a financial system that is larger then their capacity to deal with it results in a complete loss in confidence in the value of the dollar. I cannot say it will all happen by this winter, in fact it may take closer to 8-10 months to happen but I feel strongly it IS going to happen. It is in my gut for all I know as a measly undergrad economics degree holder.

The question is how to "profit" from this reality. The only asset class traditionally to migrate to is Gold. I hate Gold. I hate the thought that the idiots running our country and economy for the past 8 years or so still think like it is the 19th century, before central banks, when currencies went bust regularly, precious metals where the only stable value and vast amounts of resources were spent scouring the globe for mineral riches. I would much rather invest in the foundation of our technological advances over the past 30 years or so where some of the smartest people spend their lives creating more amazing products and devices that have ways of "improving" human life. Things like semi-conductors, real medical advances, energy saving technologies, better and more efficient products and art. Instead, my option to hedge what I fear is an impending loss of confidence in the dollar is to buy the very thing I despise the most, a damn base metal extracted from the earth.

I am really pissed off. I feel like the French during the French Revolution. I strongly believe our government (an expression that I have had for about 25 years now) had become so impotent and bought that they have put our entire system in jeopardy. It is unfortunate. I can remember back when I was in my early 20's and talked about entering politics sometime after I was 35 saying I felt by the early 21st Century the US would be in such a mess that it would be easy to run for president. I mean, who would want the job? To see what is going on now makes me feel for the next person to enter that house on Pennsylvania Avenue. I am willing to bet that within 2 years the house will become nothing but a ceremonious museum. The citizens of the United States will become so disenfranchised by what has happened to our economy that they will create a situation that causes smart people to conclude there is no way the leader of the US can govern from such an accessible location. It will simply be too dangerous. The entire seat of government around the capital will become sealed for blocks around and the 1/2 a billion dollars that has been spent making the Capital visitable again will be wasted cash.

Mark these words.

Now, how to profit from a complete loss of value in the dollar...

Patrick

Letters to Tom (3)

-----Original Message-----
From: Thomas
To: Patrick
Sent: Wed, 15 Oct 2008 4:02 pm
Subject: This is the end?
Oh my god, Pat. Are you worth, like, negative money now?
(Sorry. Hope you don't mind the weak attempt at a bad joke.)
Just heard the market is way down again.
How are you doing?
T

Hi Tom,
Let's just say about a year and 1/2 ago I could have bought a decent boat and had another 5 years where I would not have to work. Now, I could buy a dingy and take a few months off. Ha Ha.

http://www.ft.com/cms/s/0/19153990-9615-11dd-9dce-000077b07658.html

This is a great site to review recent financial history offered by the FT.

I have become the dreaded "day trader" that I never really liked. It is difficult for me to see value in a stock and buy it just to unload it when it moved up a dollar (or in the case when I short it buy it back when it falls a dollar) but this is what I am doing. On some days I can make a few grand. On others I lick my wounds. The market swings are heaven for day traders and I am trying to make it work. I actually look forward to 400 point swings and last week was full of them. I mean from Tuesday am open 9800 at to Thursday about 11 am at 8200 the market moved an entire years worth: nearly 20%

So if anyone sold into the early Tuesday rally they could have cashed out by Thursday morning and I can tell you I was one lucky person with one position I took on Monday which when the market was up I had shorted. I thought I would loose my shirt that day but by Thursday AM was making silly money as the market plunged (well on that position anyway). My only mistakes are not seeing how far the market can move. My strategy is move in 250-500 shares at a time then exit 250-500 shares at a time. Unfortunately this drastically lowers profit in really big swings but the key word here is to make a profit even though there are "make a killing" opportunities I give up with this more conservative strategy.

The news is finally starting to speak about hedge funds. There are by some estimates 8000 hedge funds and anywhere from $1.9 to $2.4 trillion they hold. From ALL the government speak and bailout speak and every thing damn else, you would think hedge funds did not exist. You know my take on the bastard industry. Well now they are making their way into the financial news at least and it is only the big names and their losses and redemptions over the last 60 days. Like we are supposed to cry for these pigs. Yea, even some of those assholes did not predict a crash and they did not get to cash early enough. Anyway, I have been predicting some of them will crash and it will be uglier than today. They are unregulated and some of them hold or held as much debt as Lehman. 1998 saw the bail out of LTCM, which was a hedge fund, but NOT with government money. Greenspan brokered a deal for a dozen or so banks to pony up enough cash to keep the fund from collapsing on Monday morning that year but no Fed money went in the pot. To this day, I have been pissed to no end at the Fed's opening up cash to non regulated Wall Street funds with tacit understanding they were going to support the unregulated hedge fund market with their access to cash. Lehman was $400 Billion in leverage (and this was DOWN to 23% or so when they went under). At their peak they had about $600 Billion in debt outstanding, a ration of over $30 invested for each $1 in capital. They were essentially one big hedge fund who operated right on Wall Street and took real money from real people. That is no joke. Well hedge funds run $7-10 for each $1 in capital if they are conservative. Others go $20-30 to $1 and they are out there now.

When we hear of debt markets freezing up, it is like "hello". Any idiot, including me, saw this thing happening years ago. With that many firms leveraged at such ratios it is like going to implode. I am surprised inflation did not really bite, I mean they chased oil and commodities to unheard of prices and somehow real businesses swallowed the costs and kept making money, albeit less.

It is the financial businesses that have imploded. I wondered at amazement for years what in the hell banks like Bank of America who was taking in after tax profit margins of 30% ($3 Billion on profit on $9 Billion in quarterly revenue back in 2006!) and other Wall Street firms where doing with all this money. Also, corporate America, with National Retailers and food producers who had bought up all the competition and commanded 40% of their respective markets, what were they doing with all the profits? Well as the quarterly reports come out and the exposure to Lehman Brothers and other financial firms are reported, it is becoming obvious that Wall Street was not only taking money from dumb suckers. They were taking money from corporate America, pension funds, university endowments, utility companies, all the way down to local governments and community banks.

In the US, unlike the 1980’s S&L scandals with Milkman (I mean Milken who was a genius at milking cash from anyone and everyone to play his buyout game), where junk bonds at the end of the debt boom where being sold to pensioners and old ladies through their local S&L, this current mess was not sold directly to individual private investors (with the exception of the "auction rate bond products" where banks are having to return capital to individual investors who bought these products and were stuck not able to sell them when the auctions "seized up", polite for Wall Street firms did not have any money left to support the artificial and non transparent market they “created” and for any person for 1/2 a brain, this was a canary of things getting worse as this market collapsed early in the crises).

In Hong Kong there have been near riots by individual investors because they were actually sold Lehman structured debt products directly. Can you imagine the hell they are going through? This paper is worthless. I am only glad the impotent and incompetent and largely on the sidelines SEC had rules on the books that unregulated paper could not be sold to Joe the Investor. All this crap created was basically unregulated insurance on debt. Strange stuff. There was a chart in the WSJ of the CDS market that went from an insignificant amount in 2000 to over $60 Trillion of the paper by 2007. The crazy thing is there came a point where debt could not be issued without the blessing of a CDS price (the cost to insure the debt). The ratings agencies still rated the stuff but the sellers of insurance on the debt were really making a killing (obviously or the product would not have grown so fast). Then of course this insurance product became a weapon and indirect way of destroying the ability of a company or municipality to issue debt. The issuers of unregulated insurance products suddenly had the power to decide who would get access to capital. The exceptional thing about this is that 99% of the people selling and writing this stuff (after the mathematicians and lawyers had written the novel long contracts) did not know a damn thing about insurance and had no capital to back losses if the underlying debt their "products" were created for actually went sour.

Along with the creation of this market which shows a curve going straight up from 2000 - 2007 before coming down for the first time in 2008 is the graph showing consumer price inflation doing the exact same thing along with Oil and commodity prices and I have seen graphs showing the private equity buyout craze (which started a bit later, say 2003) which had escalated to a point where a continued growth rate would have had private equity swallowing all of Wall Street.

Actually come to mention it, this week’s buzz about GM buying Chrysler is really a desperate attempt by Cerberus Capital Management and the syndicate of banks who backed this ludicrous buyout to avoid complete collapse when the private Chrysler declares bankruptcy. Yes, they will be bankrupt or bailed out by GM within 10 days of this posting. You know why? The Government bailed out Chrysler the first time but no person, even amongst Paulson’s cronies, has the stomach to bail out Chrysler while they are in the hands of “private equity”. I mean those guys are the cream of pigs. They buy companies with little to no money down, steal all the cash, strip the assets, pay themselves billions, then re-float highly indebted companies back on the street and cash in again. Who wants to lend these guys a hand? At the same time the complete collaps of this important Private Equity firm and or Chrysler will have real repercussions in the US economy. That is my take. Look at their company description:

Company Overview
Cerberus Capital Management, L.P. is a principal investment firm specializing in investments in undervalued companies. The firm seeks to invest in aerospace and defense, apparel, automotive and industrial, building products, commercial services, consumer and retail, financial services, healthcare, manufacturing and distribution, paper, packaging, and printing, real estate, food service, logistics, media, hospitality, technology and telecommunications, transportation, and travel and leisure sectors. It holds controlling or significant minority interests in its investee companies. Cerberus Capital Management, L.P. is headquartered in New York, New York…

Anyway, the paper economy of the first decade of 21st Century has collapsed. The problem I see is the Reagan boom was built on debt and ended with the collapse of the savings and loan and real estate markets and nearly took the banks with it, while the Bush II economy was built on debt and has ended with the collapse of the banking industry, investment banking industry, real estate market and is so severe it will cut into the "productive" side of our economy as well potentially destroying what actual productive industries we have left in the US. The Clinton boom also ended with a big bust of the artificial internet bubble economy and to some extent the financial world with the collapse of the tech oriented NASDAQ, but no matter how you slice this boom / bust, technology never accounted for more than 6% of so of the economy so the collapse did not have such a great an overall impact. Industries remained intact, banking remained intact and successful technology companies remained intact.


Anyway, without more on this, things are moving along.

Patrick

Letters to Tom (2)

Today another reply to in inquiry from Tom about hedge funds I thought worth posting...

Tom,

Hedge funds traditionally got cash from wealthy individuals and institutions (corporations and the like). The basic rules were something like one had to have a net cash worth of about $1.5 million or total assets of like $5 million or some other arbitrary number. In addition, since they are unregulated, brokerages could not sell or recommend directly to their clients so they would have to arrange social events or other such things to introduce their hedge fund friends to wealthy clients.

In the past few years, some hedge funds tried to become more transparent by listing on stock exchanges. Fortune Group in the US along with Blackstone and Man Group in the UK were the first. This has stopped.

The SEC put out a report about 2002 or so suggesting they tighten rules and researched whether it would be wise to regulate them. They did require "registration" of hedge funds with a certain size and some other criteria around 2004 but the hedge funds sued the SEC and won so all that got turned back. (my dates are from memory here as are the stats but the info is correct)

They have plenty of cash, there are hundreds of hedge funds, they hold over $2 trillion and leverage themselves anywhere from 7 to 20 to one. They engage in every scheme imaginable to make money and were involved in much of the success of esoteric products based on debt. I suspect they are responsible for the margin calls against brokerages, insurance companies and the like who sold the CDS insurance products without enough cash to back losses when things turned sour. Thus they have enough knowledge of the extent of the crises to know the sellers would not be able to cover their obligations and went heavy into shorting their stock, putting them out of business while making money on the fall. They got their cash anyway I guess one could suspect.

Wall Street has not changed.

I suggested a couple years ago that Wall Street had become dwarfed by the pools of money outside of the regulated system. I was right. The regulated system is for suckers and the Government will not win against the unregulated pools of money. They cannot print enough to keep up. Secondly, the money they are printing to cover the insurance calls against companies like AIG is going directly into the pockets of those who bought the unregulated insurance products and are now being paid big time cash to keep the hedge funds from bringing more companies to their knees.

So, the unregulated money industry, with hedge funds in the center along with private equity, and the esoteric products created and sold which were also unregulated insurance products, are bringing down the regulated markets.

No one in Washington will say this and I just don't get it. However as I said, this is the biggest wholesale transfer of wealth the history of capitalism has ever seen.

Said.

Patrick

Letters to Tom (1)

This letter originally sent to Tom was also sent to Danny Roman in response to a very insensitive email from him through the economic forum on Barack Obama's web site although I do not think he has any official role there.

His email was sent as follows:

It0s Not That Bad

Lately, over 300 emails hit my Inbox daily and a disproportionate amount are from citizens afraid and apprehensive over what is happening to the American financial services industry. So many, who ordinarily would bend over backwards to preserve civility and respect toward other views and opinions, are now bucketing out rancor, condescension and insolence; contemptuously voicing inflammatory speech that frankly…should not be verbalized or heard.

Yesterday, the Dow had its biggest loss in history, and today it rebounded by almost 500 points; proof positive that the American economic engine is unmatched in the world.

So, everybody…take a deep lungful of air…slowly exhale…again…one more time…smile…okay, now isn’t that much better?
=0 A

My reply was a reprint of a just sent email to my friend Tom, creator of worstwriter.wordpress.com with a bit of language editing.

Well Danny,
This was one of the worst and most insensitive comments I have seen from anyone in a long time. Below is a reply to an email from a very long time and good friend of mine that starts off commenting about his blog post and follows with some take on the current state of affairs in America. Perhaps a short read would be in order. You can start with the blog post here:

http://www.peter-hacks.de/phpBB2/viewtopic.php?t=1265&sid=fd00180b815ccc6e4ce6544bea169727

and follow up with my letter back...

Hi Tom,
I got around to reading this. Did your publisher really give up on the site? Were you a last ditch effort to save it or something?

Anyway, fun reading. I don't completely get the chip on your shoulder analogy but liked reading the history of the idea anyway. I think applying that idea to the suckers who sit on their asses and watch TV until the world collapses around them and they sort of wake up and try to find someone to blame, now that is a person / people with a chip on their shoulder. Only they need to look in the mirror to find out why they have such an attitude / chip on their shoulder.

On to better things. Well Tom, we are living the evolution of a depression begun by the promulgation of over $60 trillion in worthless unregulated paper traded in regulated and unregulated markets in a completely un transparent way and proved successful by 1) greed and the realization that since there is / was no transparency (you notice in all the shit the government is doing no body has proposed that these "instruments" be quoted in a public way) you could quote whatever you wanted for the paper, based on mathematical formulas only a bunch of Chinese mathematicians could figure out, and sell it at a profit if you could match it with another piece of worthless paper which guaranteed the first piece of worthless paper in case of default and 2) these were unregulated insurance products sold under the name of something else which allowed money to flow like water because anyone who issued or bought debt could also buy insurance that the debt would not default.

Now I saw this for what it was a long time ago, a house of cards that when it collapsed, there was no institution in the world who could ultimately pay the insurance claims. But that is me. See my rants at http://econ4beginners.blogspot.com/ for those of you who are not familiar with my BS.

So what do suckers like me and you do when there is, to this day, no person in Washington willing to say the words "hedge funds"? What the hell? It is hedge funds that account for 40% + of the daily volume of the NYSE. It is Hedge funds that are making a killing shorting the market and playing any other games that will make them a profit on their unregulated capital. It is hedge funds that have over $2.5 trillion dollars in cash they can bet against or for or sideways or whatever they want to do with the market and have no government or regulator or person or nation or group of people or international institution or anyone else to answer to. You mention conspiracies, do you think there are Russian "hedge funds" fighting US "hedge funds" in the race to crash each other's stock markets? I don't know, but with no one in Washington willing or capable of even mentioning the words "hedge funds" when they are the golden cow in the room, what in the hell is anyone to do? If you have enough money to be invested in hedge funds you will understand they are the avenue for the largest theft and movement of wealth into the hands of a very few people that the history of capitalism has ever seen.

You will also begin to understand why about 2 years ago I started asking people if there should not be a way to "identify" the elite rich in the world. I complained that unlike a couple centuries ago, where the average man owned one or two sets of clothing and a few basic physical artifacts verses the nobles etc who traveled with several people and material possessions and displayed immediately an obvious outward show of wealth, why we have / had not established a comparable way to identify the "nobles" amongst us so we could all bow down and pay homage when the moved down the street and thus understand our proper place in the world we were taught somehow sees us as "equal". Perhaps there are some people who heard my rant who understand now what I was talking about. Soon, the average man, who throughout the process of going from industrial to information to post information ages and is left barely able to tie his shoes as a product of the "paper economy" will begin to see not only has he nothing to offer a collapsed post information age economy where nothing physical is produced any longer, but there is no longer any basis for his known world of economy at all.

Where does this take us? Big Brother it seems. Government takeovers of the entire market. I guess it is time for an Orsen Wells for the 21st century to translate what we are experiencing to where we are going...

Cheers,

Patrick

Real Demand vs Hedge Fund Demand

I have had it with the constant jabbering that commodities prices were / are / have been determined by "real demand" by emerging economies etc. It is and has been clear that the bubble in commodities prices was created by artificial demand by hedge fund buying and indirectly by the suckers managing pension funds who were pulled into investing in hedge funds and commodity funds as an "asset class" creating additional "investor" demand for various commodities.

It is finally becoming clear to those who were propagating the idea there was "real demand" in the sector that they were wrong. The demand was artificial and this artificial demand inflated the sector and is now rapidly unraveling. This quote from a Dow Jones News Wire report today highlights this reality.

The economic slowdown is far from the only worry for agriculture stocks: hedge funds are facing requests from clients for redemptions and are forced to sell their holdings. That's affecting commodity prices and the prices of commodity stocks that hedge funds rode up to their peaks in the summer.

This statement solidifies the reality that demand for commodities was artificial, driven by hedge fund buying and is now imploding.

Sorry for the farmers who stockpiled grains anticipating further gains as they have watched the value of their stocks decline by 50% in recent months.

Perhaps some of this is coming to light with this part of the report exposing the suspicions of some in government all along that prices were being manipulated:

The run-up in fertilizer prices earlier this year also drew scrutiny on Capitol Hill. Sen. Byron Dorgan, a Democrat from North Dakota, asked the Federal Trade Commission to investigate pricing practices in the industry. Dorgan had met with farmers in his state concerned about the increases.

Need I say more?

Fannie Freddie Honeymoon over...

Congress should be asking some HARD AND FRANK questions to Paulson about this bulletin. Already the market is asking tremendously higher rates on Fannie and Freddie debt offerings!!!! This is a clear indication that the proposed bail out of the "debt garbage" out there will hammer the ratings of the US National Debt ratings...

Read this from Dow Jones today:

By Prabha Natarajan
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Yields on newly issued Fannie Mae (FNM) and Freddie Mac (FRE) short-term bills skyrocketed Wednesday as investors demanded much higher risk premiums to compensate for sharp swings in short-term credit markets.
Fannie sold $1 billion of three-month bills at a yield of 2.972%, 0.84 percentage point higher than the 2.131% yield it paid last week at an auction of similar bills.
The housing giant sold $1 billion of six-month bills at a yield of 3.459%, 0.82 percentage point over the 2.635% yield Fannie paid last week for bills of this maturity.
"The short-term funding market appears to be in disarray," said Jim Vogel, senior vice president on the FTN Financial.
Freddie, which completed its $2 billion short-term bills auction Monday at more favorable terms than Fannie, felt the impact of the market dislocation Wednesday when it sold the same amount in one-month bills.
Freddie paid a yield of 2.655%, a 37-basis-point increase from last month's yield on similar bills.
Some market participants felt falling Treasury yields have largely contributed to the higher financing costs the mortgage companies had to pay.
"The flight-to-quality bid to Treasurys has sidelined traditional investors in agency paper," said Margaret Kerins, managing director and head of agency strategy at RBS Greenwich in Chicago.
The higher yields agency bills were driven by outsized risk premiums investors demanded. For instance, Fannie's $1 billion in three-month bills sold at 252 basis points over comparative Treasury yields.
This is in stark contrast to the less than 100-basis-points over Treasury yields these bills had priced in recent months.
Similarly, risk premiums on Fannie's six-month bills widened to 188 basis points and Freddie's one-month bills stretched to 248 basis points over comparative Treasury yields that had dipped to 0.17%.
-By Prabha Natarajan, Dow Jones Newswires; 201-938-5071; prabha.natarajan@dowjones.com
Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary: http://www.djnewsplus.com/al?rnd=PJeHmS4lRrSS53ZpCwJJZg%3D%3D. You can use this link on the day this article is published and the following day.

The US Government is Absolutely Insane

Paulson and the Fed have done it again, panicked. Another 300 point drop last week and walla, they are off to save Wall Street.

I will say this one time: Buying the kind of debt that is on the books of financial institutions is complete madness. We are not talking about buying mortgages here. This is a quote from a Bloomberg article today: Read

``The scope of the government's purchase program is quite significant,'' Merrill Lynch & Co. strategists Akiva Dickstein, Roger Lehman and Kamal Abdullah wrote in a note to clients today. At distressed prices, the Treasury could acquire as much as 10 percent of the outstanding residential and commercial mortgages that aren't already owned or guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae, they said.

This is not the half of it. The article goes on to say:

The U.S. Treasury late yesterday gave Congress revised guidance on its plan, which may allow the government to also buy other devalued assets such as car loans and credit-card debt. Paulson also has proposed as much as $400 billion to guarantee money-market mutual funds.

Am I reading this correctly? The US Government is going to purchase auto loans? Purchase credit card debt? Guarantee money-market mutual funds? (I have a whole nother dissertation about the lunacy of guaranteeing the money-market industry)

These guys are completely nuts. Off their rocker! Find me ONE and I mean ONE sane person with any hint of an economic background and they will tell you, Paulson is nuts! The Federal Government is going insane one 300 point Dow drop at a time.

Let me put something into perspective here. The market has only had a 20% correction since it’s all time high less than one year ago. You heard me correctly, LESS THAN A YEAR AGO!!

With the completely reckless way Wall Street and all other financial firms for that matter lent money to Private Equity, Hedge Funds, Structured Investment Vehicles etc. a 20% correction is peanuts.

After the dot-com crash in 2000 the Nasdaq dropped nearly 80%. We had telecommunications, technology and other bankruptcies of epic proportions. We had billions of dollars evaporate from all of the worthless pipe dream companies launched on a whim with idea of getting rich on the Internet (remember we were mostly dial up then also). The Dow fared well dropping only about 40% and as we sit today it is still above most of the levels of 2006 and all of 2003-2005.

So I ask you, who exactly are we protecting here? If the worthless paper sold as stock of legitimate companies during the tech bubble created an 80% correction in the tech heavy Nasdaq (which still has not managed to maintain ½ it’s highs of 8 years ago), is it not expected that an index like S&P Financial Index should not loose 80% of it’s value after the worthless mathematically engineered garbage pumped onto the balance sheets of nearly every financial institution, pension fund, local government and some individuals collapses? Well as I write this it is down roughly 50%. It touched 70% in July.

Now I am not trying to bore you with this index / history stuff. I am no chart watcher and do not profess to have expertise in this subject, but common sense will tell you, the government did not bail out Worldcom, PSI.net, Enron (well that was a world of it’s own), Global Crossing, Adelphia and Kmart right? Yes, about a Trillion Dollars worth of major bankruptcies (filings over $1 billion) happened over the four years from 2000 to 2003. The government did not bail anyone out, not anyone. So what gives?

I can tell you this for sure. This will not work. This is not the same as the Resolution Trust Corp. bailout. This is dangerous, reckless, stupid and disastrous for the US economy, dollar, interest rates, inflation etc. We will be bringing wheel-barrels of cash to buy groceries if we do this. Trust me. I am not kidding. I am not a doomsayer, conspiracy nut or radical. I have common sense and what Paulson, Bernanke and your government is doing right now is completely crazy.

I am not going to say there are easy solutions here, but when our government is run by to many impotent, bought and paid for weans who will bend over to any idea pushed out there to protect their political future instead of thinking of what is right for the American People, we are in trouble.

Bailing out Bear Sterns, Taking over Fannie and Freddie, and taking a controlling stake in AIG were all wrong. All of these situations could have been dealt with in a fashion that did not involve the government as we did.

Our government is playing chicken with the largest pool of unregulated money on the planet, the hedge fund industry, and until and when they shut this thing down, they will LOOSE.

Peak Energy, This is GOOD!, Message to Senator Obama

I want to encourage Senator Obama to avoid being sucked into the "drill more oil" debate by reading the message below and using this message to completely redefine the debate on energy extraction and use in the world. He is beginning to seem a bit of a reactionary to events around him on this issue instead of creating a leading vision. This message draws the framework for this vision.

The potential that we have reached "peak oil" is the greatest gift the human race could have right now. It means the earth is incapable of producing (humans are incapable of extracting) enough carbon-based energy (oil) to meet the growing demands of 6 billion plus people. Wow, think for a moment and consider the earth as one large complex computer program that includes a kind of formula for energy extraction and use that has human need and technological maturation in it. No matter how hard we try we cannot completely destroy our planet because of the limits of human kind to extract from the planet enough carbon based fuels at a rate which will produce enough pollution to completely destroy our environment; while at the same time human kind has reached the technological capacity to tap into “clean” energy (solar, wind, hydro current, and to some extent nuclear) at economic rates and efficiencies that make the replacement of destructive 19th century power sources we originally tapped into to fuel our insatiable demand for material consumption, practical.

This is kind of like keeping us from drinking too much by limiting how much alcohol we can immediately consume.

If anyone in the Obama camp, including Obama himself, can see this for what it is and take a hold of the idea that "earth" is telling us that if we truly could produce enough energy from carbon based sources to burn all we wanted we would destroy our very existence, i.e.; drink to much and poison ourselves. Instead, we cannot. The formula of energy to consumption has reached "peak" with carbon-based fuels. What better message, gift, could we have than to simply have to face the fact that the time is now to shift to non carbon based energy. It is the "Duh" factor.

Now, if we can spend $1 Trillion on some completely destructive mission half way around the world (in a country with a total population only 3 times that of New York City) and accomplish absolutely NOTHING, they why should the Obama camp not be capable of taking hold of this gift of global balance (peak) in carbon energy extraction and turn it into a powerful "vision" for removing us from its use. This message would resonate with everyone from the “religious” who believe in the wisdom of a supreme power to the science crowd and average Joe who can understand such an idea.

Surly a fraction of the $1 Trillion spent on destruction / reconstruction / destruction in the war (say $300 billion) could allow us to completely transform a large chunk of our energy to solar, wind and other renewables (not corn) over a period of less than 10 years.

The time has come to recognize a Gift Horse when you see one and stop pandering to the PR hype and Think Tanks.

Game of Chicken

Letter to my Senator:

Senator Mikulski,

I beseech you to please make it clear to those that are making these government bail out decisions that they are playing a loosing game against the most powerful unregulated pool of money on the planet, the Hedge Fund Industry.

This industry has over $2 trillion in assets and is completely unregulated, primarily incorporated in island nations where they are completely out of the legal jurisdictions of the nations they operate in, have no allegiance to any nation, and have one primary objective: To make as much money as possible indiscriminately, at all cost and risk.

The time has come to understand, "With 6.2 billion people on the planet and economies all interlinked there is no longer any positive role that can be determined by having $2.5 trillion floating around playing havoc with any asset class it so chooses”.


I cannot make this message any clearer. There is much talk about regulation and cleaning up Wall Street and Washington etc. However no person anywhere is talking about the Golden Cow in the room, the Hedge Fund Industry. Without an immediate set of regulations baring players in this industry from operating in the United States under any context, you will loose, the American People will loose and our government will loose.

I leave you with this thought:

There is a story in the Old Testament about a bunch of people who flee repression only to end up building and worshiping a golden cow. This leads to great moral degradation and a sinful and corrupt people. Does anyone see the golden cow here? Lets call the golden cow "hedge funds" for the lack of a better word.

The golden cow analogy: All of the powers that be, including the chiefs of all the financial firms and government leaders across the globe are playing with the golden cow. So why does the subject of hedge fund influence in Wall Street never come up? Why does everyone talk around the subject, talking about 'regulation' etc. without mentioning the golden cow? The golden cow corrupts deeply and its influence is broad.

Sincerely,

Paulson's 300 Point Panic Trigger

Every time the Dow drops 300 points Treasury Secretary Paulson has to jump. He and his buddy Bernanke at the Fed are two of the most incompetent people to ever be appointed to their respective positions. In one year these guys have dramatically lowered interest rates, pumped hundreds of billions of dollars of "liquidity" into the banking system, opened the Fed to non bank Wall Street investment firms so they could prop up the unregulated hedge fund market and themselves, and now the idiot Paulson takes control of Fannie and Freddie. Paulson still works for Wall Street only he sits in a taxpayer supplied office and has access to the largest checkbook in the world.

I know it has been fashionable for Dick Chaney and Presisent Bush to use the Treasury to write huge checks to their buddies over the past 8 years under the umbrella of the Iraq War, but to put a guy like Paulson in the administration so he could give his Wall Street buddies a gift every time the market goes through a badly needed correction, has been unlike anything Washington has ever experienced.

Back on 20 August when CEO Daniel Mudd himself was on the Diane Rehm Show in Washington, 88.5 FM I sent the following message:

Several years ago wall street ran an intense PR campaign to do away with Fannie Mae and Freddie Mac. They were making billions and wanted to make more in the mortgage business. Their business model making money from retail level to securities to derivatives was so profitable they couldn't wait to destroy Fannie and Freddie and take that business. Today it is no different. Wall Street and its PR
campaign is doing everything they can to destroy these organizations and put them in private hands not unlike the same efforts they made to destroy social security and put it in private hands. I would like a comment from your guests.

I did not get the kind of response I expected but for the following week after Mudd's "appearance" on the show Fannie's stock rose from $4.5 to $7.5 per share. It was clear from Mudd's comments that Fannie was sound at least till the end of the year and that Paulson needed not meddle in their affairs.

But watch out when the market falls 300 points in a day!!! The idiot Paulson will spring into action.

Paulson has said he is leaving his post on 20 January 2009. What he has just done is his big gift to his pals on Wall Street. Once the Government takes over Fannie and Freddie, any idiot can see that the companies will NEVER be floated back on the market as they once existed. They will be broken down piece meal and sold to Wall Street and be no more, just like those guys want it. They hated having the competition, even though they proved their total incompetence in the mortgage business, and they can not wait to get their hands on the cash cow business that Fannie and Freddie ran until some really bad management allowed them to play around with the garbage Wall Street was selling as "securities" during the height of the "mortgage rip off scam" that Wall Street Firms were running and put their government sanctioned, taxpayer backed capital at risk.

I am pissed and I cannot wait until Paulson and Bernanke are gone and someone with the concern of the American Citizen is in their respective posts (not to mention the White House) who also have some inkling of economic principals and doing what is "right" and not what will "benefit their buddies on Wall Street".

The Fed is Wrong and Paulson has Panicked

As I read each day how the Fed has subjugated it’s own rules to extend more and more “liquidity” to the failed credit markets, I get more furious that the Fed, SEC, Treasury and Congress continue to ignore the elephant in the room. Hedge Funds, unregulated financial institutions that control around $1.5 Trillion in liquid assets and over $30 Trillion indirectly through leverage, no longer have a role to play or a legitimate right to exist on Earth. These organizations sued the SEC to stay out of their books. The Fed and Treasury were recently saying to “regulated” banking institutions in the US, “I am going to lend you billions of short term money and I want you to extend this credit to non bank financial instructions, read unregulated Hedge Funds and Wall Street investment banks.” Now they are saying “I am going to lend directly to unregulated Wall Street investment banking institutions with the understanding they will extend credit to their unregulated clients, read “Hedge Funds” again.

Lets look at what the Fed has been doing with collateral. First they dumb down the collateral to allow AAA mortgage assets from banks, now they are allowing these same assets from unregulated investment banks. Where are they going next? Read, “The Fed is going to buy mortgage bonds directly!” So the Fed is going to take an industry that went awry and created worthless paper and worthless loans to keep their stream of easy money and profits going for approximately 30 months after the housing industry priced itself completely outside of the realm of sustainability and buy their junk? Commercial paper has not collapsed yet but the Fed will join in this party directly. I read this. “Yesterday, the Fed expanded collateral eligible for its auction of Treasuries to include bundled mortgage debt and securities linked to commercial-property loans.” According to Bloomberg, Fed by 21 March the Fed had lent $28 billion to securities firms and made $30 billion available for the Bear Sterns (read Bull Sh--) bail out by JP Morgan Chase.

I am furious to say the least. This line of thinking is crazy. We will bankrupt the Fed with this logic. Bush Jr. has already piled on $3.5 Trillion additional debt in his 7 destructive years raiding the Treasury under the noses of an impotent Legislative Body of Government. With $7 Trillion in debt on the books and a Baby Boomer generation about to retire and eat into the nations cash flow with unsustainable medical costs, (not to mention soon asking the Fed to bail out their 401k’s along with their imploding real estate as their depleted social security accounts prove worthless in an inflationary world with a weak dollar) this is not the time to think about buying worthless paper off the books of unregulated financial institutions.

I will repeat, “The Unregulated Hedge Fund Industry no longer has a constructive role to play in the world of finance or a legitimate right to exist on Earth”. With over 6 billion people and the technology in place to move trillions of “dollars” around daily, the global population has no need for a bunch of Ivy League 72 degree preppies banging away at computer programs trying to squeeze 30% annual returns out of any piece of paper, commodity or security they can manipulate using ever more exotic and esoteric products that are indecipherable beyond mathematicians with no respect for the underlying economic viability of their models nor for the destructive capacity of their speculation.

There is simply too much money in the unregulated financial world and this industry needs to be completely shut down and brought under the world of regulated finance.

Who enjoyed all this debt?

I start with this quote from Dow Jones News Wire:

JPMorgan later said first-quarter charge-offs in its home equity portfolio may nearly double to $450 million compared with the fourth quarter. The firm's charge-offs on its $95 billion home equity portfolio had been rising steeply all year, reaching $564 million by the end of 2007, compared with $143 million in 2006.

The increase in charge-offs from home equity loans is "appears to have been driven by a higher incidence of no-equity walkaways given declining prices in geographies such as California and Florida," Bear said.

Who had fun in all this, the people walking from the houses? I should say, only the salespeople on Wall Street and at the mortgage companies and real estate companies who made millions selling overprices homes, worthless mortgages and worthless mortgage based paper did.

Those people and those responsible for lending money on inflated property values made millions. Now employees of these firms are told they will not have to “pay” for their reckless lending. In fact, they keep all the money they made from the reckless lending AND their bonus structure this year will also strip out all of the losses associated with that reckless lending their companies and shareholders are taking a beating for and instead pay them bonuses on other areas of business!

Storey in WSJ and Seattle Times on Washington Mutual, one of the largest mortgage lenders in the US:

Among the changes WaMu's board approved for 2008 is abolishing earnings per share as one of the four weighted factors used in calculating bonuses. In last year's bonus plan, earnings per share represented 40 percent of the potential bonus.

The 2008 bonuses will be based on these criteria:

--Net operating profit, 30 percent -- with loan losses and expenses related to foreclosed real estate excluded.

--Noninterest expense, 25 percent -- again, excluding expenses related to business restructuring and foreclosed real estate.

--Fees from retail banking -- a new factor, weighted at 25 percent. Many banks including WaMu have been increasing fees for services such as ATM withdrawals by noncustomers to compensate for losses in other areas.

--Customer-loyalty performance, 20 percent -- an increase from 10 percent in the 2007 bonus plan.

Bank statement

In a prepared statement, WaMu said, "The success with which credit costs are managed will unequivocally continue to be a major part of the board's final deliberations."

Further information on the company's compensation philosophy and the board's annual compensation-review process will be included in the company's proxy statement scheduled for release later this month, the statement said.

Spokeswoman Libby Hutchinson said the bonus plan covers almost 3,000 people in WaMu management, many of whom are not directly involved in lending.

Consultant's question

But Fred Whittlesey, a Bainbridge Island compensation consultant, questioned why awards for Killinger and the three other top executives named in the plan aren't tied directly to earnings.

"If (they) are not responsible for bank profitability, who is? There's no reason they should be insulated from expenses they created," he said.

The bank has said bonuses, long-term stock awards and other parts of its compensation plan are important to retaining executives.

In January, WaMu said Killinger would receive 3.2 million stock options to vest in coming years, providing him "a strong incentive to restore shareholder value."

But Cannon said WaMu's highest executives shouldn't require such incentives.

"We are somewhat surprised that top management needs extra compensation in order to be retained," he wrote.

"While for lower-level executives ensuring retention is certainly important, for the top four executives named in the 8K (regulatory filing), including CEO Kerry Killinger, we would think that restoring the value of their existing stake in Washington Mutual, as well as the reputation of themselves and the firm, following the downturn in performance in this period would be incentive enough to stay with the firm."

WaMu shares closed Wednesday at $12.80, down 59 cents or 4.43 percent. The stock is down 69 percent in the past 12 months.

So back to the original question: Who had fun in all this borrowing? If you are one of those who’s life was a party borrowing on your inflated house price at next to nothing rates, God bless you. I hope you managed a couple of opulent vacation trips, spent plenty of time and money in fine eating and drinking establishments, had plenty of sex and fun. If you are now walking away from you’re now rapidly descending in value house and ballooning unable to meet mortgage payments, at least you had fun.

For those who were sold a dream give cheap credit and rapidly lived a nightmare and you are also walking away from your home, I feel for you. You were scammed in the greatest American Ponzi scheme ever created. I thought this could only happen in Albania. Nope, it all happened here in the world’s greatest capitalist playground, The US of A.

Now the Carlyle story:

I cannot feel for these guys. The massive amount of money borrowed short term by hundreds if not thousands of “investment” funds and “invested” in long dated mortgage products was nothing more than a “investor” funded Ponzi scheme designed to leverage as much as possible with as little money as possible to rake cash out of an industry that paid high returns in what historically was a secure investment area, mortgages, and put that cash in their pockets and the pockets of those who financed them. They all deserve exactly what they are getting, the idiots who lent the money, and the idiots who set up the firms and the idiots who run them.

Look at this statement about Carlyle published by the Dow Jones Newswire today:

Carlyle Capital as recently as Monday had reassured investors on its funding lines, saying it had $2.4 billion in undrawn repo lines and that it had increased a credit facility provided by the Carlyle Group by 50%, to $150 million.

Its lenders as of Dec. 31 were: Bank of America (BAC), Bear Stearns (BSC), BNP Paribas (13110.FR), Calyon (4507.FR), Citigroup (C), Credit Suisse (CS), Deutsche Bank (DB), ING (ING), JPMorgan (JPM), Lehman Brothers (LEH), Merrill Lynch (MER) and UBS (UBS).

The repurchase agreements outstanding at that date had an average maturity of 20 days. Carlyle Capital's longest-dated repo line is for three months.

The company leverages its $670 million equity 32 times to finance a $21.7 billion portfolio of residential mortgage-backed securities issued by U.S. housing agencies Freddie Mac and Fannie Mae. All of the securities are rated Triple-A and are considered to be implicitly guaranteed by the U.S. government.

Carlyle Capital said Thursday that it has been subject to margin calls and additional collateral requirements totaling more than $60 million over the past week, and had met all calls up until March 5.

Chief Executive John Stomber said that recent margin prices aren't representative of the underlying recoverable value of these securities.

"Unfortunately, this disconnect has created instability and variability in our repo financing arrangements. Management is actively working with the company's repo counterparties to develop more stable financing terms," Stomber said.

Last week, the group said it "can and will do better" after losing 30% of net asset value between listing on the Euronext Amsterdam exchange in July and Dec. 31. Within weeks of the listing, Carlyle Capital was forced to sell a portfolio of leveraged loans to meet margin calls and borrowed $200 million in emergency funding from Carlyle Group. To preserve capital, it has yet to pay a dividend.

On a call with investors Monday, Carlyle Capital Chairman Jim Hance said margin requirements were changing by "tens of millions of dollars" on a weekly basis, and that daily changes as counterparties repriced the securities were "sizable."

"The last thing we want is for them to sell out the collateral," he said, calling it a "daily cash fight."

Would any sane person take money financed on an average of 20 DAYS, leverage it 32 TIMES and use the cash to purchase securities with average maturities of 30 years? These guys are taking down the financial system. There is no government capable of bailing out this “industry”. The Fed and Treasury were asleep at the wheel and have no idea how to sort out this mess.

You tell me. I don’t care how careful or sophisticated their “models” were for how to make money under these terms. These people are greedy fools.

Muni Crisis

We have a G** D*** crisis in the debt markets. Nothing short. If local and state governments cannot raise money and or refinance existing debt you better watch out. This is a serious mess that has the potential to make the mortgage "crisis" look like child's play. Just read this blurb on FT.com at this link.

Jeffrey Rosenberg, head of credit strategy at Banc of America Securities said: ”Failures in the auction rate securities market accelerated – on Wednesday – with an estimated 80 per cent of all auctions failing.”

He said: “With a total size of $330bn and roughly half of that held by individuals, a significant, albeit likely short lived liquidity crunch is again emanating out of the credit markets.”

”This is not a credit issue, but one of liquidity,” said Alex Roever, fixed income strategist at JPMorgan. ”Dealers hold more paper than they wish and there is a limit to how much they can hold. The investor base has backed away and in the absence of that support these auctions can not clear.”

”The auction rate securities market is unwinding and most of the market will enter a failed state. The lack of confidence is the contributing factor and there is a risk this type of structure will go away.”

The Skinny on Credit Default Swaps

I have been following this issue for some time and found a good summary in the FT for those of you interested in seeing what the hell I have been talking about:

The article is here:

Insight: CDS market may create added risks

By Satayjit Das

Published: February 5 2008 15:31 | Last updated: February 5 2008 15:31

In May 2006, Alan Greenspan, the former Federal Reserve chairman, noted: “The credit default swap is probably the most important instrument in finance. … What CDS did is lay-off all the risk of highly leveraged institutions – and that’s what banks are, highly leveraged – on stable American and international institutions.”

The reality may prove different.

The CDS is economically similar to credit insurance. The buyer of protection (typically a bank) transfers the risk of default of a borrower (the reference entity) to a protection seller who for a fee indemnifies the protection buyer against credit losses. Current debate has focused on the size of the market. But the key problem is that a combination of documentation and counterparty risks means that the market may not function as participants and regulators hope if actual defaults occur.

CDS documentation, which is highly standardised, generally does not exactly match the terms of the underlying risk being hedged. CDS contracts are also technically complex in relation to the identity of the entity being hedged, the events that are covered and how the CDS contract is to be settled. This means that the hedge may not provide the protection sought.

In case of default, the protection buyer in CDS must deliver a defaulted bond or loan – the deliverable obligation – to the protection seller in return for receiving the face value of the delivered item (known as physical settlement). When Delphi defaulted, for example, the volume of CDS outstanding was $28bn against $5.2bn of bonds and loans. On actively traded names CDS volumes are substantially greater than outstanding debt making it difficult to settle contracts.

Shortage of deliverable items and practical restrictions on settling CDS contracts have forced the use of “protocols” – where any two counterparties, by mutual consent, substitute cash settlement (based on the market price of defaulted bonds) for physical delivery. In Delphi, the protocol resulted in a settlement price of 63.38 per cent (the market estimate of recovery by the lender). The protection buyer received 36.62 per cent (100 per cent - 63.38 per cent) or $3.662m per $10m CDS contract. Fitch Ratings assigned a recovery rating to Delphi’s senior unsecured obligation equating to a 0-10 per cent recovery band - far below the price established through the protocol. The buyer of protection may have potentially received a payment on its hedge below its actual losses – effectively it would not have been fully hedged.

CDS contracts substitute the risk of the protection seller for the risk of the loan or bond being hedged. Some 60-70 per cent of ultimate CDS protection sellers are financial guarantors (monoline insurers) and hedge funds. Concerns about the credit standing of monolines are well documented. Recently, Merrill Lynch took a charge of $3.1bn against counterparty risk on hedges with financial guarantors.

In the case of hedge funds, the CDS is marked to market daily. Any gain or loss is covered by collateral (cash or high quality securities) to minimise performance risk. If there is a failure to meet a margin call then the position must be closed out and the collateral applied against the loss. As the case of ACA highlighted, banks may not be willing or able to close out positions where collateral isn’t posted. Collateral models also use historical volatility and correlation that may underestimate the risk.

Then there are operational risks – mark to market of the CDS and control of collateral.

If the CDS contracts fail then “hedged” banks are exposed to losses on the underlying credit risk. The CDS market entails complex chains of risk – similar to the re-insurance chains that proved so problematic in the case of Lloyd’s of London. A default may quickly cause the financial system to become gridlocked as uncertainty about counterparty risks restricts trading.

As the credit crisis deepens, the risk of actual defaults becomes real. The CDS market will be tested and may be found wanting.

CDS contracts may not actually improve the overall stability and security of the financial system but actually create additional risks.

The writer is a risk consultant and author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives

Copyright The Financial Times Limited 2008

Re-regulate NOW!

I don't see anyone looking at history here. Through Greenspan's term he tacitly allowed Wall Street Investment Banks dip into all aspects of finance. By 1999 Congress finished by overturning most of the regulations passed in 1934 to separate various forms of finance and avoid another 1929 style collapse.

JP Morgan, now has its hands in:
Retail banking, Mortgage Business, Home equity loans, Mortgage banking business, Corporate banking business, Private Equity investments, Asset management, Treasury and security services, Credit card business, Investment banking.

This is the SAME house of Morgan that vowed to return to it's former glory come hail or high water, through as many generations it takes.

Well it took less than a decade for them and every other Wall Street firm to totally greed themselves into a mess, this time with technology and products not dreamed of in the 1920's but with the same old formula, "sell junk debt and debt instruments to any idiot who will buy them and take a cut on every deal". I find it fascinating "smart" investors and "professionals" running hedge funds were stupid enough to be duped by these simple-minded 19th century egg heads.

Of course if you want to see how deep these firms are in debt markets tied to mortgages read this quote from Bloomberg:

“Merrill is at risk of losses from sub prime defaults because it participates as an investor, lender, counter party and guarantor in markets tied to mortgages. They include CDO underwriting, other structured credit products and leveraged finance, the firm said in the filing"

Unless Congress has the stomach to re-regulate these "pigs" for better lack of a word, we will not see the end of what we are seeing now until we have another "depression".

The "unregulated" world of finance controls more cash then the value of the stock market so don't be fooled into whether this thing goes up or down. The Stock market and many stocks in it are but puppets of this market now.

Unregulated Markets Risk

I have often discussed how the massive size of the unregulated financial markets pose multiple risks to the regulated financial markets. Today in the FT an article based on a recent study by a couple of academics, Henry Hu and Bernard Black, sheds some light.
See article here.

Soros does a nice summary...

The worst market crisis in 60 years

By George Soros --- Published: January 23 2008

The current financial crisis was precipitated by a bubble in the US housing market. In some ways it resembles other crises that have occurred since the end of the second world war at intervals ranging from four to 10 years.

However, there is a profound difference: the current crisis marks the end of an era of credit expansion based on the dollar as the international reserve currency. The periodic crises were part of a larger boom-bust process. The current crisis is the culmination of a super-boom that has lasted for more than 60 years.

Boom-bust processes usually revolve around credit and always involve a bias or misconception. This is usually a failure to recognise a reflexive, circular connection between the willingness to lend and the value of the collateral. Ease of credit generates demand that pushes up the value of property, which in turn increases the amount of credit available. A bubble starts when people buy houses in the expectation that they can refinance their mortgages at a profit. The recent US housing boom is a case in point. The 60-year super-boom is a more complicated case.

Every time the credit expansion ran into trouble the financial authorities intervened, injecting liquidity and finding other ways to stimulate the economy. That created a system of asymmetric incentives also known as moral hazard, which encouraged ever greater credit expansion. The system was so successful that people came to believe in what former US president Ronald Reagan called the magic of the marketplace and I call market fundamentalism. Fundamentalists believe that markets tend towards equilibrium and the common interest is best served by allowing participants to pursue their self-interest. It is an obvious misconception, because it was the intervention of the authorities that prevented financial markets from breaking down, not the markets themselves. Nevertheless, market fundamentalism emerged as the dominant ideology in the 1980s, when financial markets started to become globalised and the US started to run a current account deficit.

Globalisation allowed the US to suck up the savings of the rest of the world and consume more than it produced. The US current account deficit reached 6.2 per cent of gross national product in 2006. The financial markets encouraged consumers to borrow by introducing ever more sophisticated instruments and more generous terms. The authorities aided and abetted the process by intervening whenever the global financial system was at risk. Since 1980, regulations have been progressively relaxed until they have practically disappeared.

The super-boom got out of hand when the new products became so complicated that the authorities could no longer calculate the risks and started relying on the risk management methods of the banks themselves. Similarly, the rating agencies relied on the information provided by the originators of synthetic products. It was a shocking abdication of responsibility.

Everything that could go wrong did. What started with subprime mortgages spread to all collateralised debt obligations, endangered municipal and mortgage insurance and reinsurance companies and threatened to unravel the multi-trillion-dollar credit default swap market. Investment banks' commitments to leveraged buyouts became liabilities. Market-neutral hedge funds turned out not to be market-neutral and had to be unwound. The asset-backed commercial paper market came to a standstill and the special investment vehicles set up by banks to get mortgages off their balance sheets could no longer get outside financing. The final blow came when interbank lending, which is at the heart of the financial system, was disrupted because banks had to husband their resources and could not trust their counterparties. The central banks had to inject an unprecedented amount of money and extend credit on an unprecedented range of securities to a broader range of institutions than ever before. That made the crisis more severe than any since the second world war.

Credit expansion must now be followed by a period of contraction, because some of the new credit instruments and practices are unsound and unsustainable. The ability of the financial authorities to stimulate the economy is constrained by the unwillingness of the rest of the world to accumulate additional dollar reserves. Until recently, investors were hoping that the US Federal Reserve would do whatever it takes to avoid a recession, because that is what it did on previous occasions. Now they will have to realise that the Fed may no longer be in a position to do so. With oil, food and other commodities firm, and the renminbi appreciating somewhat faster, the Fed also has to worry about inflation. If federal funds were lowered beyond a certain point, the dollar would come under renewed pressure and long-term bonds would actually go up in yield. Where that point is, is impossible to determine. When it is reached, the ability of the Fed to stimulate the economy comes to an end.

Although a recession in the developed world is now more or less inevitable, China, India and some of the oil-producing countries are in a very strong countertrend. So, the current financial crisis is less likely to cause a global recession than a radical realignment of the global economy, with a relative decline of the US and the rise of China and other countries in the developing world.

The danger is that the resulting political tensions, including US protectionism, may disrupt the global economy and plunge the world into recession or worse.

The writer is chairman of Soros Fund Management

FT Article

Personal Note on Fed / Markets

Well Fed bailed us out again. Only this story has not worked in past few months so there is much to be seen. I think there has been some real pain over the past 2 weeks that may take longer to heal. My bad days were over a week ago. I had several puts expire worthless or I sold them Monday and Tuesday last week only to see them triple or more in value in the 3 following days... Timing is everything and I have been trying to short this market for months only to have the Fed bail it out over and over. Needless to say, I have had marginal success since September. It seems they are looking at my cards. All was great until the big fall bounce which came out of nowhere and should have never happened. Still trying to figure it out.

Anyway, If we really do get another .50 cut in a week the Fed will have made a really big mistake, bigger then the radical rise for 18 months (from 2004-06) and subsequent market bail out moves since. The US overturned the banking laws enacted in the 1930's here in 1999. It only took a few years for Wall Street to make a mess of finance again. I cannot believe the rest of the world, especially Europe, fell for the same thing they fell for nearly a hundred years ago, buying garbage debt and debt products from New York money centers (I cannot bring myself to call these organizations "banks". It would be an insult to the term.).

They all deserve to take their losses big and the Fed is making a big mistake flooding the markets with liquidity and dropping rates in big moves.

Having said all this, I learned a long time ago (although many time tested strategies have been destroyed lately), you cannot fight the interest rate move.