Banks and the Temple of Mammon

[Fruitcake]

So the rumours running wild yesterday about the major UK Bank HBOS are unfounded, according to the CEO, Andy Hornby. Taking rank alongside him were the FSA (Financial Services Authority) speaking out after it launched an inquiry into potential stock-market abuse, saying traders may have been profiting from spreading false rumours. The FSA warned it would not tolerate traders starting rumours and dealing off the back of them.

In what appeared to be a co- ordinated move, the Bank of England also took the unprecedented step of denying rumours that HBOS had turned to it for emergency funding.

So now we enter the looking glass world, where rumours and scaremongering are enough to send the herds helter skelter one way then another....

In fact the shares of HBOS, having dropped markedly (as much as 17 per cent to a record low of 398p yesterday morning as speculation swept through dealing rooms), did recover some of their poise by close.

Interestingly, the CDS price, having risen 19 basis points to 270, according to CMA Datavision, held steady at the higher price...

Last night, Hornby's reassurance that the bank was fundamentally sound was echoed by City brokers and analysts, though there were still fears that HBOS, which relies heavily on mortgage business, is exposed to the credit crunch. David Williams, banking specialist at broker Fox-Pitt Kelton, said: "What has happened to HBOS's shares is because the market is a very nervous place. (really? well thanks for telling us that David, I would never have guessed that otherwise...jeeze these guys do love stating the obvious)

Keith Bowman, a banking analyst with Hargreaves Lansdowne, said: "You have to be guided by what the company itself says (hmmm, I will keep my own counsel over that statement).. HBOS has come out and denied the rumours. They are obliged (under Stock Exchange rules) to highlight any difficulties that might affect profits. They haven't done."

However, Alex Potter, analyst at stockbroker Collins Stewart, said he believed the share-plunge by HBOS was "on fears surrounding write-downs and liquidity"(well I never). He maintained: "We believe its exposure level of exposures to UK consumers' 'toxic' debt investments, gearing to private-equity gains within revenues and potential impact from rising wholesale funding costs mean the bank will under-perform the UK banks sector on a 12-month view."

The whole show moves on today, after sharp rises after the Fed cut on Monday, the downward trend continued apace in trading yesterday.

The FTSE 100 Index opened down 47.7 points at 5497.9 following another big slide on Wall Street and London yesterday.

Authorities will be desperately hoping for a calmer day on what is normally a quiet trading session before the Easter break....yeah right...dream on

The Bank of England is offering the Banks another £6 billion, on top of the £5 billion already on the table to shore up liquidity.

I know where my money is, and it ain't in financial services stocks, that's for sure!

[khazalid]

would you recommend we learn how to farm and fix an engine; or more that we should stash away some bullions for a rainy day? just curious

[Fruitcake]

would you recommend we learn how to farm and fix an engine; or more that we should stash away some bullions for a rainy day? just curious

I would hope you know how to make land work for you anyway khazalid I have always eschewed bought in fresh produce if I could possibly avoid it, preferring to grow my own...I just follow the seasons so I have a plentiful supply of good wholesome, home grown, organic food, the year round.

This is not the end of the world as we know it (jim) but a sharp and overdue correction in asset prices worldwide. Much of the asset cost/value growth for the last 90 odd years has been due to the growth of credit. This system has brought huge benefits, however, the inherent problems it brings were always sitting like a sore within it. I wont go into real detail, but effectively, asset prices have accelerated as populations have become more educated and more focussed on consumerism, this has brought about a circle, once benign, now vicious.

The Banks and the whole financial system, whom I lay the blame squarely on, went into a complete feeding frenzy this last 20 years. They sacrificed good practice as they pursued ever higher profits and personal incomes and gain. What was considered prudent in yesteryear became obtuse. Once the majority had caught the bug, the rest had to follow suit, after all, the shareholders, (those very consumers) were screaming for more and faster profits.

In short, I would say to anyone, keep your powder dry, wait for the 'system' to adjust and settle, it will. Good ideas do not stop because of stupid people, they will always find a way of surfacing, QED technology, and progress will continue, perhaps at a slightly slower pace for the meantime. The markets will settle at a new, lower level, more conservative thinking will hold sway temporarily, people will have to get used to less, and the 'system' will survive. The collapse of the western way, contrary to some believers, will not happen. In truth, it is just too rich, too vast, and too strong.

Meanwhile, it does provide great spectator sport, watching some real twats get their come uppance!

[Fruitcake]

An extract from a newsletter I receive from the financial markets:

Further cracks have started to appear in financial markets as investors struggle to come to terms with the fallout from the subprime meltdown and global economic slowdown.

Because of recent market volatility and lack of cash in the system, nervous traders have started to jack up the price of margin calls in contracts for difference (CFDs)

Word is the likes of Man Group and Barclays have increased the margin call on liquid blue-chips such as Vodaphone up 0.7p at 149.3p, and HBOS 27½p dearer at 473¾p, by between 5% and 10%.

Less-liquid stocks such as Alliance & Leicester up 36½p at 538p, and Bradford & Bingley, 1¼p cheaper at 191½p, the increase ranges from 10% to 20% while among smaller-capitalised stocks, the call on the margin has risen by as much as 90%.!!

What this means is that investors who use CFDs are being forced to stump up more collateral, and sooner. Those who do not have the cash resources have been forced in recent days to wind up their positions which, in turn, has fuelled market volatility.

CFDs are a popular way of investing in shares in that, just like traded options, investors have to lay out only a small premium on their initial investment. Raiders often turn to CFDs when they want to build up a stake in a target company as they also offer anonymity.

Meanwhile, investors were counting the cost of another difficult week on the stock market as they headed towards the Easter break. It is hoped the next few days will provide a cooling-off period for financial markets.

But there was little sign of that today as shares continued to fall in the wake of another sell-off on Wall Street overnight and news that write-offs at Credit Suisse mean it will not make a profit in the first quarter. The FTSE 100 index fell 50.4 to 5495, although Dow Jones held steady, rising a smidge (14 points over 1200 odd) to 12133

My comment:

So another tightening of supply of liquidity…Everything shuts down for a few days, but while we enjoy our break I am certain many senior players in the Financial system will be beavering away, trying to work out what can be done.

As for me. I am relaxing.

[Fruitcake]

The screw tightens

More information has come to light, related to the crunch. This time it is the impact on the private individual in the UK.

Banks increasing nervousness over liquidity about the risks of the UK personal debt mountain of £1.4 trillion is causing an accelerating increase in the number of court orders moving unsecured debts to secured basis.

Figures from the Courts Service indicate the use of charging orders by UK banks has risen by a staggering 580% between 2000 and 2006, the most recent year for which figures are available. The actual figures are: 16,014 applications in 2000 to 92,933 applications in 2006. I am told this tactic has had a marked increased in acceleration since the credit crunch hit last summer.

Charging orders are sought by lenders when a borrower misses payments on loans, credit cards and the like. If the bank can get approval through the court system, the debt then becomes secured on the borrower’s home. The end result being the debt is repaid on sale of home, or in some extreme cases the lender forces the sale of said home.

In the past these instruments have only been used as a last resort, however, it is becoming apparent from information gleaned from legal firms that there has been a surge recently.

Quotes from legal operations are the usual blah blah, “bad debts” “defaults” etc etc.

It seems the majors are involved it seems, HSBC, Alliance and Leicester, Nationwide and Nat West among the quoted.

My own view of this is simple…the Banks and Finance ops ain’t daft…they know the of the huge rise in equity (in properties) over the last few years, so are tapping into this as a source of shoring up their balance sheets rather than letting the debts slide through write offs and ‘Insolvency agreements’.

[greenoaks]

i don't see the point of that tactic. if the customer defaults they clearly have an asset (the home) which should have equity greater than the size of the credit card debt. as the defaulter can't declare bankruptcy without giving up their home it, and would be unlikely to do so, it seems like a waste of time.

[Fruitcake]

i don't see the point of that tactic. if the customer defaults they clearly have an asset (the home) which should have equity greater than the size of the credit card debt. as the defaulter can't declare bankruptcy without giving up their home it, and would be unlikely to do so, it seems like a waste of time.

You have answered your own point.

If you are a Bank with a book full of unsecured loans that are defaulting, this 'asset' (the loans) has to be written off against your balance sheet thus reducing the value of your business (we are talking tens of thousands of loans here, with maybe up to £20,000 of unsecured loans within each 'debt'). The total could be say around £10,000 x 10,000 = £100,000,000!! Now if the Bank then gets this loan book secured against an asset (the house/home) then it does not have to write it off. Once the Bank has gained security against an asset of higher value than the loan, then everything is fine, the loan can be kept on the balance sheet as an asset.

However, what these banks are now concerned about is the slide in the asset cover price (the value of the homes). If they feel the value is getting to a stage where the 'coverage' is not sufficient, they can then force a sale...not what we as private individuals would want, but who ever said the banks had a heart.

The problem, this then produces (like the veritable domino effect) is simple. More and more properties then start hitting the markets at lower values as the Banks are only interested in reclaiming their debt. This then adds to supply, while demand is falling, this, in turn, adds to the downward spiral.

Crazy I know, but that's banks for you.

[Fruitcake]

So the merry go round slowly grinds into action.

After some dullish days with just whispers and the markets relatively calm, Dow Jones started to slide again today.

But let's not focus on this, as a strange case of people power sprung into action yesterday.

With Bear Stearns's beleaguered staff looking on in bemusement yesterday, a crowd of some 200 struggling homeowners burst into the firm's headquarters to protest at the US government's involvement in a rescue takeover! (Damn right too, power to the people I say!)

Chanting "not Wall Street but Main Street" and waving colourful placards, the group shouted objections to the use of Federal Reserve money in guaranteeing JP Morgan Chase's $1.2bn (£600m) buyout, which saved the bank from bankruptcy.
The Neighbourhood Assistance Corporation of America, which organised the demonstration, argues that Bear Stearns contributed to the financial crisis through its leading role in packaging and selling sub-prime mortgages on the debt markets. (Well done you NAC of A, ‘bout time someone started planting the blame where it is due)

"The government should be bailing out homeowners, not the people who caused the crisis," said Stacey Stokes, a single mother of three children from Taunton, near Boston, who is in danger of losing her home because she cannot meet monthly mortgage payments of $2,400. (If you didn’t believe me before, reader, surely this is a classic case of a struggling person, being given too much burden of finance) "They're not helping homeowners, they're helping the companies that brought on the problem of foreclosures." She continued…(Go Stacey go!)

Many of the protesters wore T-shirts depicting sharks. Their banners had slogans such as: "Chase - my children need a home!"
"I'm disgusted; it's an absolute crime," said Renee Quinn, a paramedic from Connecticut who is in a plan to stave off foreclosure. "That Federal Reserve money is from our taxes. It should be used to help us, not the CEOs of banks." (Oh yes indeed Renee, more of this please)

There were angry confrontations as Bear Stearns's security guards tried unsuccessfully to hold doors shut. The police arrived and blocked the street to traffic. Bear Stearns's bankers eyed the protest from behind security barriers in the lobby. (Bloody cowards)

Some were dismissive. "Bear is the victim here. We made it possible for many of these people to get homes in the first place," said one Bear employee who declined to give his name. (Why am I not surprised that this self serving smug shit would not have the guts to put his name to his statement) "It would have been a much worse situation without the Fed's help - we could have had a bankruptcy, which could have triggered more bank failures elsewhere." (Which would have meant more of your self serving friends with their snouts in the trough would have had to forego their multi million dollar incomes…how ignorant are these people in their ivory towers??)

The Senate finance committee has asked the Fed, the US treasury and the banks involved for detailed memos about Bear Stearns's takeover. The committee's Democratic chairman, Max Baucus, said lawmakers had a responsibility to scrutinise it: "Americans are being asked to back a brand new kind of transaction, to the tune of tens of billions of dollars." (Well that’s one way of putting it I suppose, personally I would have been a tad more robust in my description, but then I suppose that’s why I am not a politician)

The bank's demise could lead to greater government oversight of investment houses. In a speech to business leaders, the US treasury secretary, Henry Paulson, promised a broad look at regulations: "This latest episode has highlighted that the world has changed." (Just realised have you Henry?)

He offered homeowners little consolation, suggesting that prices were likely to fall further. "A correction was inevitable and the sooner we work through it, with a minimum of disorder, (LOL, the tears of laughter run down my cheeks) the sooner we will see home values stabilise, more buyers return to the housing market, and housing will again contribute to economic growth"

Power to the people!

[Fruitcake]

The herd swings back again

So the markets had a surge today. With London rising by 2.64% (150.5 points) and Wall Street by 3.19% (391.47 points).

The main movers were the Financial institutions, HBOS in the UK gaining 8% (44.5pence) (Unsurprising since this stock was one of the worst affected recently) , JPMorgan rose $4.05, or 9.4 percent, to $47; while Bear Stearns was up 36 cents, or 3.4 percent, to $10.85 — slightly above the $10 per share acquisition price.

And the band started playing tra la la, the boys and girls came out into the streets and danced and shouted hurrah! The party was back on...or so it would seem if you read the tripe coming out of the sources from the Financial world...but is it?

Meanwhile, quietly, the CFD (Contracts for Difference, mentioned earlier in this thread) rate remains at high levels, the CDS price (Credit default swaps, also mentioned earlier in this thread) barely moved a nano meter.

So who is this, causing the surge in the prices? Have the problems magically vanished overnight?

let's ask the 'experts' shall we...

“Investors have a difficult time making decisions about the stock market if they don’t have confidence in major financial institutions, so there’s been a lot of sideline cash,” said Richard Cripps, chief market strategist for Stifel Nicolaus. “The extreme conditions that we’ve seen here over the past few months has been missing that confidence ... but that appears to be changing, and we’re seeing the response.” (Great stuff Richard, nice to know you are on the ball and reading the herd so well)

Meanwhile Shawn Tully of from Fortune Magazine thinks differently. I quote

The standard rules of management, a righteous list that includes avoiding excessive debt and shunning excessive pay, didn't apply to Wall Street. So what if investors only dimly understood CDOs, CLOs, and the alphabet soup of arcane instruments that dominated the business, not to mention the super-geek hedging strategies the firm's leaders kept bragging about? Wall Street was the black box on the Hudson that worked its own mysterious magic.

Today the magic is gone, baby, gone. Since last year's historic highs, share prices at the independent securities firms have dropped an average of 42% - and that's excluding the wipeout at Bear Stearns

The truth is that Wall Street's shocking reversal of fortune was inevitable. Its black box is virtually guaranteed to careen from record riches to deep losses and ensure that employees grab a fat share of the booty. "As margins shrank in traditional businesses like underwriting and brokerage, Wall Street looked for new places to make money," says Louis Pizante, a former investment banker at Goldman Sachs and Nomura who runs Mavent, a leading compliance firm that ensures that mortgages bought by Fannie Mae and other institutions comply with federal and state regulations. "In the process the firms took imprudent risks to make big profits."

Put simply, Wall Street firms used towering leverage to make lottery-like loot in a long-running bull market that blatantly underpriced risk. Now that run is over, and the price of risk is rising dramatically. That's driving down the value of everything from junk bonds to mortgage-backed securities, and Wall Street's addiction to leverage is cutting the wrong way. The Bear Stearns story is a primer on the Wall Street curse: When portfolios are built on a mountain of debt, a firm's capital can vanish overnight.

Redemption won't be easy. The firms' three big weaknesses are deeply embedded in Wall Street culture. The first is that they depend far too heavily on risky trading as opposed to solid, reliable fee businesses favored by commercial banks. Second, Wall Street embraces leverage levels so dangerous that its vaunted risk-management systems can't prevent a collapse. Third, an outsized share of the gains goes out the door to executives and traders when times are good - or rather, when the firms get lucky - leaving shareholders with far less wealth when markets go sour.

So, do we believe the harbingers of doom, or do we join the dancers in the street?

I, for one, will be keeping quiet, watching the revelries from afar.

There is still a shed load of garbage in the system…watch this space.

[Fruitcake]

Just when you thought it was safe to go back in the water

Just when banks thought it was safe to start looking at the state of their share prices again, along comes Goldman Sachs acting as the party pooper.

After nervy signs of recovery this week, the banks were back on the cresta run downhill today, with a Goldman note fingered by brokers as one of the culprits. The note was far from overwhelming, but let's face it, these days it doesn't take much to send these Gladiators of puff to head for the hills.

First they downgraded LloydsTSB to a sell, and UBS joined the scaremongering, saying Lloyds is the 'least preferred' of the UK banks. The shares tumbled 20.5p to 462.75p. So UBS is a great forecaster isn't it...or not perhaps...having said that Barclays was a better proposition, the shares promptly went into a quick nosedive shedding 17p at 487p.(So we all know what to do...the exact opposite of what UBS tells us)

The biggest victim of sentiment, not for the first time, was Alliance and Leicester, where bid hopes have risen and faded for the fiftieth time in the past 100 days. A&L was one of the biggest FTSE fallers, off 21½p at 536½p. (I note with a certain amount of schadenfreude that this meant the share price was now LOWER than the options the greedy executives had granted themselves recently. Serves them right!)

The FTSE 100 index fought to stay in positive territory early on but was tonight down 24.6 points to 5891.3.

An amusing footnote comes my way:
The holding music currently being played at an Royal Bank of Scotland Mortgage Centre is REM's 'Everybody Hurts'! How very apt

Across the pond, Wall Street was in a state of semi topor it seems, with little of note going on, except another amusing little anecdote I hear:
The sense of humour of the Bear Sterns staff seems to remain intact, despite their ongoing trials and tribulations. I have it on good authority that staff in the US are now going around referring to their employer as 'the firm formerly known as Bear Stearns'!
(Betcha they might not be so upbeat once the number crunchers really get to grips with that dogs breakfast!)

So all quiet on the western front it seems...but is that the sound of rumbling thunder I hear over the hills, or is it my stomach telling me it is time to feed myself? I certainly wont be asking any Financial Institutions for their advice on the matter, that's for sure!

[PLAYER57832]

i don't see the point of that tactic. if the customer defaults they clearly have an asset (the home) which should have equity greater than the size of the credit card debt. as the defaulter can't declare bankruptcy without giving up their home it, and would be unlikely to do so, it seems like a waste of time.

You got it wrong ... at least in much of the US. In much of the US, you declare bankruptcy precisely so you can keep your house. .. though not in this state.

But you hinted at the real problem. My husband works in a factory as a skilled laborer, has for over 25 years. We have 2 kids at home (2 grown) and yet up until he got $1 increase last month, we qualified for WIC -- that is, all kinds of state "goodies", like food, reduced lunches, etc.


NOTE, we own 25% of our home, and my husband makes considerably more than minimum wage. I don't work right now -- why? because in this small town, jobs are limited and I would have to pay someone more to watch my kids than I would earn. That is even without gas, etc. Most women who work, in this area, are getting subsidized childcare & healthcare (at least for the kis) .. or have family to watch the kids &/or husbands with insurance.

There are 2 points here.

1. ALL economy is based on production. Make nothing, you have nothing to sell, and ultimately, nothing from wich to originate all these dollars.

2. you have to PAY people enough to buy those things or the economy will fail.

If you hire someone without providing them healthcare, enough to pay for a house, buy decent food and reasonable clothing, for themself and at least 1 child, then the real truth is you are expecting society/ the government to buy those things .. yet, I am willing to bet you will be the first to raise cry about "entitlements" and "undeserving poor".

3. Right now, these things are largely NOT happening in the US.



SUMMARY: The real truth is that you MUST "pay the piper". I am amzed at the number of executives, business owners folks who blithely complain about all the "high costs" everything, yet expect their employees to get by on less than a quarter of what they make. Ask for more and it is "increasing the cost of business". Guess what? if you cannot afford to PAY your employees, you cannot afford to DO business.

Anything else is a paper tiger. It is "fluff" without real substance. That companies were allowed to offer such poor loans to individuals is merely one symptom of a system that is entirely broken. The REAL truth is that while the government can create money, REAL WEALTH only comes from products. And, that means you have to be willing to actually pay those people who make and service those products a true living wage.

[Fruitcake]

The trough is replaced by a bloodbath

So the bloody work of shedding the poor staff in the City of London starts.

UBS announced it would cut 900 staff at its Liverpool Street headquarters by June and Merrill Lynch said it would shed 4,000 jobs worldwide. Sources said that up to 400 of its 4,500 London staff would go.

Employees of Citigroup, the world's biggest bank, are now preparing for the axe as sources said it was likely to lay off 1,000 London staff when its first quarter results are published tomorrow.

The cuts are the first confirmation of the scale of the job losses facing the City, estimated this week at 40,000 by JP Morgan - more than one in 10 of all workers.

It will fuel mounting fears of a recession, led by a City downturn. David Buik of BGC Partners said: "The job cuts were inevitable and more banks will follow suit, starting with Citigroup tomorrow." (Nice to see the seers and sages are still way ahead of the rest of us mere mortals)

Our Prime Minister, in America at the moment, had this to say:
"the world is in quite a big economic downturn". (Phew, for a moment there Gordo, I actually thought you were going to make a revelation of a statement)

He said people were "automatically blaming governments for the economic problems but vowed to ensure Britain pulled through the financial difficulties." (Once again showing his patronising attitiude to the greater public, assuming they do not see the banks as the core of the problem...why am I not surprised)

He told American National Public Radio: "People's automatic reaction to that, as you see in America, as you see in Europe, is to blame the government of the day for not getting things right." (Just in case we didn't understand your pearls of wisdom the first time round eh Gordo...)

Mr Brown also insisted that the position in Britain was very different from that in the US. (Well, yes, their Senior man in the Treasury has not raped the pension system, caused untold damage to the fabric of the economy, and destroyed the financial legacy left to them by the previous incumbents)

"We are certainly an economy that is continuing to grow" he said, adding: "We have relatively low inflation, we have relatively low interest rates and relatively low debt." (That's the idea...keep that pecker head stuck firmly in the sand, best place for it)

Meanwhile, Chancellor Alistair Darling was today finalising details of a package aimed at averting the threat of a downturn by unblocking the money markets. (Err, sorry to prod this particular point Darling, but the downturn is not a threat, but a reality....jeeze)

So the Government of the UK, those intellectual heavy weights, so renowned for their prudence and fiscal cleverness think they can move markets, staunch the flow of blood, and generally keep the ship on it's 'course'. Perhaps it is time someone reminded them of the last occasion the Governement tried to go against the flow...and promptly lost 3.4 billion, some 15 years ago when the UK exited the ERM (Back then 3.4 billion was real money, not the average city bonus it is today...)

Where will we end up? I am now starting to fear the worst as Governments start thinking they can actually do something about it all...

I give it 6 months before this plan is seen for what it is, a bad plan, badly patched together and badly thought out with no real thought for the long term. But then we are now in that strange looking glass world where all the usual rules are thrown out of the window in the pursuit of a fiscal model that will only, ultimately, bring yet more woe.

[PLAYER57832]

Learn Chinese and move to China

[got tonkaed]

Fruitcake, i was curious, do you think govs. should strictly stay out of financials? Judging by your sentiments in the last post it would seem the answer is more yes than no, but im not sure if thats out of a principled understanding of the topic or more so just a general distrust of the competency of the people involved in this case.

This is probably more simplistic than its worth.

[Fruitcake]

Fruitcake, i was curious, do you think govs. should strictly stay out of financials? Judging by your sentiments in the last post it would seem the answer is more yes than no, but im not sure if thats out of a principled understanding of the topic or more so just a general distrust of the competency of the people involved in this case.

This is probably more simplistic than its worth.

Good question tonkaed.

The answer is complicated, however, in essence, I am always of the belief that Govts should set macro policy, but leave the market forces to resolve issues within, unless it becomes obvious, laws are being twisted to suit a few to the detriment of the many, such as has happened over the past few years.

Govts will always have different objectives. They need to see the financial picture within the greater painting. They, after all, have many other areas that need to be addressed. A Bank is not so concerned about social policy, for instance, but about the shareholders.

What now concerns me, is when Govts start believing they can stay market forces. These forces were unleashed in their full way after the second world war, when the new age of the common man really became established. Education, in the West, for the first time in history, ensured resources (humans) were able to start fulfilling their potential. This was added to by the release of women into a fair and level(ish) playing field (please guys, I don't want to go into that particular minefield). The net result has been that 'the public' are now more sophisticated and able to draw conclusions that ever before...and damn right too I say!...in turn, this has meant that Govts have had to adjust their ways of doing things. No longer will Mr working class (blue collar) tug his forelock in gratitude to the Employer. This worker now undertsands that profits do have to be made, but he will, rightly, try to ensure his efforts and contributions are rewarded correctly. He is also has the facility to begotiate his own deals, on his terms. I recall putting on a suit and tie to see my Bank Manager as a young man, not any more!!

Govts are often some way behind the times. I was not surprised to hear my PMs words while he visited the USA, it just confirmed what I thought...that he was out of touch with reality.

Regarding the people involved, yes I do distrust them all. Simply because the coin has been debased badly over the last 20/30 years. I know of 23 year olds making decisions on whether a business man/woman can get a loan...this has to be crazy. What do they know?

I am also distrustful of those who pretend to be clever when they are not. This is rife within both Govts and Financial circles these days.

I am also distrustful of 'tellers of untruths'. An example we should all try to understand, being this latest piece of news:

There seems to be no end to the games that financial firms play to try and convince greater fools investors to buy their shares. In fact, the latest trick, as detailed below by Barrons' Andrew Bary in "Wall Street's Latest Illusion Turning Losses into Paper Profits," is to show how a bursting credit bubble benefits the bottom lines of overextended and poorly-run companies. What I'd really like to know is if the accounting methodology that these operators are using to puff up their profits is the same one being used to value their inventory of dodgy securities. We shall see, I guess.

Although Wall Street profits are under pressure by a host of forces, the tough times also have provided a little-known financial benefit: Some Wall Street titans have been able to book gains from the declining value of their own debt.

These non-cash gains bolstered the bottom lines of Morgan Stanley (ticker: MS), Goldman Sachs (GS) and Lehman Brothers (LEH) in their first fiscal quarters, ended Feb. 29, helping them beat consensus earnings estimates. They had reported the same type of gains in 2007, mostly in the fourth quarter, as credit markets worsened.

Investors, however, should take little comfort from these accounting gains, for two reasons. They provide no cash benefit and, more important, merely reflect investors' growing concerns about the companies' financial health.

Here's how the accounting works: When a company's credit weakens and the yield on its debt rises relative to risk-free Treasuries, the debt becomes worth less to the holder. The financial company, which is the debt issuer, then takes a gain, because theoretically it could buy back its debt below face value.

Once again, Wall Street has found a way to turn dross into (sort of) gold.
"It does sound counterintuitive, but this is a natural consequence of fair-value accounting," says Robert Willens, a tax and accounting expert who heads the New York consulting firm that bears his name. He points out that financial companies that elect to use fair-value accounting under rules established by the rule-making Financial Accounting Standards Board must reflect the fair values of both their assets and their liabilities.

In their fiscal first quarters, Morgan Stanley reported a $848 million gain related to the widening of its credit spreads, while Lehman booked a $600 million benefit and Goldman Sachs recorded $300 million in profits. Merrill Lynch (MER), JPMorgan Chase (JPM) and other financial companies haven't yet reported results for the first quarter. During 2007, JPMorgan had a $1.3 billion gain resulting from wider debt spreads.

Bear Stearns (BSC), which reached a deal to be purchased by JPMorgan, hasn't reported its first-quarter results, but it likely had a sizable liability-related gain as investors shunned its debt. If Bear Stearns had hurtled toward bankruptcy, it might have generated a multi-billion-dollar accounting gain because its debt prices would have tumbled. Obviously, those non-cash gains would have been a mere accounting illusion and useless to the firm and its equity holders.

Brad Hintz, the brokerage analyst at Sanford Bernstein, has written that investors should be wary of accounting gains resulting from declining debt values. "We do not believe that the marks taken on outstanding long-term debt represent high-quality revenues," Hintz wrote in a recent note on Morgan Stanley, a company that he rates Outperform.

Hintz noted that virtually all long-term debt matures at par, meaning that "mark-to-market gains generated during the life of any issue of long-term debt reverse over time. We are sceptical that earnings generated in this way justify any P/E multiple." Hintz's view is that investors shouldn't seek to capitalize, or assign a price/earnings multiple, to what may be the lowest-quality source of income for a financial company.

Lehman, for instance, reported earnings in its most recent quarter of 81 cents a share, above the consensus estimate of 70 cents. However, the $600 million gain from the reduced value of its liabilities essentially added about $400 million, or about 70 cents a share after taxes. Excluding that gain, Lehman's profits would have been way below the consensus.

Morgan Stanley reported $1.45 a share in first-quarter net, versus a consensus estimate near $1 -- what indeed it would have made without liability-related gains.

The Bottom Line:

The debt-related gains have allowed some firms to top analysts' earnings estimates. But investors should ignore the gains, which simply reflect the firms' deteriorating finances.During 2007, Lehman reported $900 million of these gains; Morgan Stanley, $845 million; Goldman Sachs, $216 million; and Merrill Lynch, $1.9 billion.

When Merrill Lynch and some other major banks report results in the coming weeks, investors should carefully examine them and strip out any liability-related gains, because they merely reflect a worsening in bond investors' perceptions of the firms.

With the stock prices of securities firms rallying last week on news of Lehman Brothers' successful convertible-preferred sale and hopes that the worst may be over for the financial-services industry, debt spreads have tightened. That news is being welcomed on the Street -- even if it means a reversal of debt-related accounting gains of recent quarters.


Now if you read this, you must surely be concerned as to what is going to happen next. In this looking glass world, Banks are booking profits BECAUSE they are losing money on those debts....this just has to be crazy, but they are getting away with it!!!!

We live in a situation where Banks prop up their balance sheets while investors lose their shirts, while Govts support Banks in this, by exchanging Govt Bonds for secondary debt notes from the banks.

None of them are to be trusted any more, and I am of the belief, this will damage the long term health of the west.

This will have to end, and the ultimate loser will be the common man, that is to say, you reader, and I.

[PLAYER57832]

With all this, I think you are still forgetting one basic fact.

All economies are based on the production of products which are sold. Yes, you can make lots of money by moving money around in various ways.

But, the bottom line is that if you are not makng products you don't have money generated. And, at some point, you have to give folks enough money to buy the things they produce.

Right now, within the US, healthcare is so expensive that large numbers of individuals cannot really and truly do that. And, this distorts all incentives. Why bother worrying about whether you can really aford that big house, that new car, those new clothes. All it takes is some bad luck and "poof" your entire life savings will be gone.

I say again, it doesn't matter how much money you make, how you do it ... if you are not paying each and EVERY person in the "chain" -- down to the meanest mail clerk and production assistant, to the clerk who sells you coffee at the gas station ... if they are not ALL making enough money to buy food, clothes and housing at LEAST for themselves, then you are either saying they have no right to those basics OR you are asking the rest of use to subsidize your lifestyle.

THAT is the reality that is too often missing from the economics discussions.

[Fruitcake]

With all this, I think you are still forgetting one basic fact.

All economies are based on the production of products which are sold. Yes, you can make lots of money by moving money around in various ways.

But, the bottom line is that if you are not makng products you don't have money generated. And, at some point, you have to give folks enough money to buy the things they produce.

Right now, within the US, healthcare is so expensive that large numbers of individuals cannot really and truly do that. And, this distorts all incentives. Why bother worrying about whether you can really aford that big house, that new car, those new clothes. All it takes is some bad luck and "poof" your entire life savings will be gone.

I say again, it doesn't matter how much money you make, how you do it ... if you are not paying each and EVERY person in the "chain" -- down to the meanest mail clerk and production assistant, to the clerk who sells you coffee at the gas station ... if they are not ALL making enough money to buy food, clothes and housing at LEAST for themselves, then you are either saying they have no right to those basics OR you are asking the rest of use to subsidize your lifestyle.

THAT is the reality that is too often missing from the economics discussions.

Please understand 57832, I agree with you, QED my argument that these tricksters are destroying the very fabric of our economies. My argument also agrees with you in that I am saying the Govts are allowing this to happen and not dealing with it correctly.

[PLAYER57832]

Please understand 57832, I agree with you, QED my argument that these tricksters are destroying the very fabric of our economies. My argument also agrees with you in that I am saying the Govts are allowing this to happen and not dealing with it correctly.

I apologize if I did not read all your posts as thoroughly as I ought. Also, to some extent, I am reflecting some basic differences between US and the UK.

You already have subsidized health care in England. And, though I know it has issues, folks don't get their life savings wiped out and have the interest rates on all their credit cards (etc.) , because they were so negligent as to allow their child or spouse to get cancer. This basic difference has a HUGE impact on the average person.

Your relationship with immigrants is also quite different (also a mixed bag).

But thank you for acknowledging the realities I mentioned. And thank you for illuminating many things at least from the UK perspective.

[Fruitcake]

The next wave cometh

I last posted on this thread back on April 19th.

During those few rough stormy days in early Spring, I forecast there was more rubbish to come out of the system yet. I hope those of you who may have had the resources to exit the marlets and Financial Institutions via Equities and Bonds did so.

I said then:

I give it 6 months before this plan is seen for what it is, a bad plan, badly patched together and badly thought out with no real thought for the long term. But then we are now in that strange looking glass world where all the usual rules are thrown out of the window in the pursuit of a fiscal model that will only, ultimately, bring yet more woe.

and I also said:

So, do we believe the harbingers of doom, or do we join the dancers in the street?

I, for one, will be keeping quiet, watching the revelries from afar.

There is still a shed load of garbage in the system…watch this space.

Since then what has happened:

Well the markets started heading up and many soothsayers got in touch with me (outside of this site) telling me I was a scaremonger, and I was stupid for ensuring my worth was not wrapped up in any way with any Financial Institutions worth. For a time it seemed to many that I, and many like me, had got it all wrong....oh dear.....

The markets have been in effective freefall since a mini recovery soon after my last post. The FTSE now stands at 5261.6
and is now down almost 20% since its peak at 6730.7 last autumn. and Dow Jones dipped below 11,000 today for the first time in 2 years.

Fannie May and Freddie Mac are both in the shitter dear reader...fact.

They will be in even further difficulties as the acceleration continues. Investors are pretty unimpressed by a statement from the US Treasury Secretary Henry Paulson, who said the government’s focus is ensuring that Fannie Mae and Freddie Mac keep operating in their current form (Now where have I heard that before?????) — countering reports that the government would announce plans to take over one or both of the companies.

The government-chartered companies have fallen sharply in recent days on concerns about their stability. Wall Street is worried that a collapse of the two financiers would cause further shock to the financial system, this, in turn would trigger more losses to banks as the bond packages and mortgage-backed securities go belly up.

For those of you that do not know, Freddie Mac and Fannie Mae underpin US home-ownership by guaranteeing tens of millions of mortgages, but their finances have been ravaged by the credit crunch.

The well-being of these two operations is crucial because they hold or guarantee about $5 trillion worth of mortgages. Their troubles are just the latest in a year-old credit crisis that shows no sign of abating.

Meanwhile, Citigroup Inc., also struggling with the consequences of failed mortgages, has announced it will sell its German retail banking operation to France’s Credit Mutuel for $7.7 billion. (You've just got to hand it to them Frenchies...they'll always buy a German asset even if it does prove massively overvalued within the foreseeable future)

Global banks and brokerages have scrambled to sell assets and raise capital in an effort to offset nearly $300 billion of write-downs linked to the credit crisis.

Many financial companies are reporting results next week....I think you know what my feelings are as to how those will pan out. There are some 'Canutes' who still hope for the best...if you want my opinion....head for the hills, financially speaking.

I will state this....again...there is yet more woe to come reader, a lot more. In my opinion there are many more Financial Institutions in the depths, the only thing being many don't yet know who they are.

[PLAYER57832]

Far worse is yet to come ... and though I am not in the financial arena right now, I cannot understand why so many supposedly brilliant individuals have so thoroughly failed to see the realities ... except that they have their heads in their bankbooks and not much else.

It is really just the modern version of "let them eat cake" ... saying "let them work", "let them earn it" ... earn it? from whom? "

I am afraid, though that WE, the workers and not they, the excecutives (instead of nobles) will be the ones to pay this time...

[tzor]

I tend to look at this in a very neutral manner. Corporate wise, the average man pays no matter what happens. If the economy is good, as it was in the past, corporate heads collect revenues, take over other companies and produce massive layoffs as the companies combine. If the economy is bad, corporate heads produce massive layoffs. It's a loose loose situation. This happened decades ago in the oil industry and that's why most major oil companies don't explore for new sources of oil, they fired them decades ago and those who remain are in consulting companies and cost an arm and a leg.

Corporate leaders are a whole lot like lemmings, they will follow each other off clifs to their own destruction for no reason whatsoever than everyone else is doing it and they saw it on a trade journal someplace so it must be right. The bullshit they played with loans is one example of lack of long vision when they damn knew that they weren't going to retire the next day.

I think the difference is that we have such a strong economic system that when the dust settles what remains will be stronger. The funny thing is we should be dead by now. (Economically speaking that is.)

[PLAYER57832]

I tend to look at this in a very neutral manner. Corporate wise, the average man pays no matter what happens. If the economy is good, as it was in the past, corporate heads collect revenues, take over other companies and produce massive layoffs as the companies combine. If the economy is bad, corporate heads produce massive layoffs. It's a loose loose situation. This happened decades ago in the oil industry and that's why most major oil companies don't explore for new sources of oil, they fired them decades ago and those who remain are in consulting companies and cost an arm and a leg.

Corporate leaders are a whole lot like lemmings, they will follow each other off clifs to their own destruction for no reason whatsoever than everyone else is doing it and they saw it on a trade journal someplace so it must be right. The bullshit they played with loans is one example of lack of long vision when they damn knew that they weren't going to retire the next day.

I think the difference is that we have such a strong economic system that when the dust settles what remains will be stronger. The funny thing is we should be dead by now. (Economically speaking that is.)

The difference is that they now have greater ability than even 400 years ago to destroy the ver foundations. They were "saved" then by the new world. Saved in this past century by oil ... but where is the next fountain?

[Fruitcake]

Far worse is yet to come ... and though I am not in the financial arena right now, I cannot understand why so many supposedly brilliant individuals have so thoroughly failed to see the realities ... except that they have their heads in their bankbooks and not much else.

It is really just the modern version of "let them eat cake" ... saying "let them work", "let them earn it" ... earn it? from whom? "

I am afraid, though that WE, the workers and not they, the excecutives (instead of nobles) will be the ones to pay this time...

The reason the supposedly brilliant individuals have so thoroughly failed to see the realities so far is simply that.

They are supposedly brilliant and not actually brilliant. I mix with a lot of these people and quite frankly I would not trust many of them to feed my dogs their dinners. As I have said earlier in this thread, the coin of knowledge has been debased so badly over the last 25 years it was always going to come to this. The constant pursuit of the easy profit gradually eroded the requirement for prudence and for adapatability.

It is not the end of the system as we know it, but we are seeing the cracks open further as the months go by.

[suggs]

Yeah there will probably be a a two year recession starting at the end of the year, followed by the USA's usual strong recovery for about 10 years.

[tzor]

The difference is that they now have greater ability than even 400 years ago to destroy the ver foundations. They were "saved" then by the new world. Saved in this past century by oil ... but where is the next fountain?

I tend to have a different viewpoint than you might have. Most of the economy is really an illusion, it's a structure placed on the top because we expect the system to look like a pyramid. It's the base of the pyramid that supports the top, and as long as there is a base someone is going to build a top.

The base of the pyramid is always that which takes the raw materials and the raw energy and makes finished products. The new world was a stop gap measure, not a means to an end until after the revolutionary war. Then with the new United States' ability to go into manufacturing the resources combined with a plethora of power sources (literally every waterfall became an industrial center overnight) allowed the engine to start and attract the intellectual manpower to harness the technology.

We went from water, to coal, to oil, but energy is all around us. The sun pours out more than we will ever need, at least for the next few centuries. We have the technology and the intellectual ability. It is not a question of whether, but who and when, for someone will do it; that is the nature of man.

No, economics is, in the end, all about seizing the moment. The old companies will pass away, and a new company will arise from the ashes. Just as the small mamals rose from the ashes of the dinosaurs. Just as that small company came out of the great depression to seize the moment some decades later ... yes that little company called I.B.M.