of course, strong dollar bad for markets...and as they fall there will be a flight to cash as we have a credit crunch under way as well....only reason markets are going up is because dollar is going down so our multinationals who sell their goods overseas in strong currencies are making more USD.
this looks like the market top to me very convincing reversal on going here
how's the sohu long treating ya today cuss? not that i'm happy for you that it's going down but buying that stuff with a P/E of 70+ with chinese stock market having run from 1000 to 5900 in two years is very very risky....probably about flat on it now....opened around 42 yesterday and now 41.70
man no end in sight today starting to have a tough time finding a bid....techies finally taking it in the ahole....not many shorts left to hold an underlying bid.....
bulls searching for a reason for selloff...just look at the news that has come out day after day for the past few months...duhhhh
---------------------------------------------------------------------------------------------------------------------------
3:00 pm : At this moment, the stock market is off its lows, but there is still a good deal of volatility.
Reportedly, the decline is due to European inflation warnings made by Axel Weber, a European Central Bank Council (ECB) member. Weber stated that although the ECB has temporarily paused its rate hikes, in his opinion the ECB may need to raise rates to a "restrictive" level.
Four of the ten economic sectors are now in the red. Technology (-0.7%), which saw the steepest sell off, is now the main laggard.DJ30 -32.52 NASDAQ -26.02 SP500 -2.08 NASDAQ Dec/Adv/Vol 1803/1103/1.81 bln NYSE Dec/Adv/Vol 1802/1461/960 mln
---------------------------------------------------------------------------------------------------------------------------
3:00 pm : At this moment, the stock market is off its lows, but there is still a good deal of volatility.
Reportedly, the decline is due to European inflation warnings made by Axel Weber, a European Central Bank Council (ECB) member. Weber stated that although the ECB has temporarily paused its rate hikes, in his opinion the ECB may need to raise rates to a "restrictive" level.
Four of the ten economic sectors are now in the red. Technology (-0.7%), which saw the steepest sell off, is now the main laggard.DJ30 -32.52 NASDAQ -26.02 SP500 -2.08 NASDAQ Dec/Adv/Vol 1803/1103/1.81 bln NYSE Dec/Adv/Vol 1802/1461/960 mln
now sitting at 4.52% something is amiss....well i guess the fed is starting to price in another cut....
<table border="0" cellpadding="0" cellspacing="0" width="390"><tbody><tr><td class="pageTitleLv3">Open Market Operations
</td> </tr> <tr> <td class="spacer10px">
</td> </tr> <tr> <td> The Bank implements monetary policy primarily by conducting temporary and permanent open market operations. By buying and selling government securities, the Bank affects the aggregate level of balances available in the banking system, and thus impacts the federal funds rate. More ››</td></tr></tbody></table>
<table border="0" cellpadding="0" cellspacing="0" width="390"><tbody><tr><td class="pageTitleLv3">Open Market Operations: Key Concepts
</td> </tr> <tr> <td class="spacer10px">
</td> </tr> </tbody></table>
</td> </tr> <tr> <td>
</td></tr></tbody></table>
and just look at all the jostling since the initial downswing in august
<table border="0" cellpadding="0" cellspacing="0" width="390"><tbody><tr><td>Federal Funds: Effective Rate vs. Target Rate</td> </tr> <tr> <td>
</td> </tr> <tr> <td>
</td></tr></tbody></table>
<table border="0" cellpadding="0" cellspacing="0" width="390"><tbody><tr><td class="pageTitleLv3">Open Market Operations
</td> </tr> <tr> <td class="spacer10px">
<table border="0" cellpadding="0" cellspacing="0" width="390"><tbody><tr><td class="pageTitleLv3">Open Market Operations: Key Concepts
</td> </tr> <tr> <td class="spacer10px">
- Temporary open market operations involve repurchase and reverse repurchase agreements that are designed to temporarily add or drain reserves available to the banking system.
- Permanent open market operations involve the buying and selling of securities outright to permanently add or drain reserves available to the banking system.
- The federal funds rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight.
and just look at all the jostling since the initial downswing in august
<table border="0" cellpadding="0" cellspacing="0" width="390"><tbody><tr><td>Federal Funds: Effective Rate vs. Target Rate</td> </tr> <tr> <td>
hno:
For Willie and the other moonbats who believe that the dollar weakness is fantastic for exporters.
A cheaper dollar helps domestic manufacturers because it makes local costs, such as wages and rents, decline in relation to the costs borne by international competitors. While this is true, it also means that American workers and landlords see a corresponding decline in the real values of their pay and rent. Given that such declines negatively impact living standards, such developments hardly seem worth celebrating.
Too often overlooked however is how the weakening dollar also works to increase costs for domestic manufacturers. A falling dollar raises the costs of raw materials, such as oil and metals, while simultaneously decreasing the relative costs that foreign competitors pay for the same supplies.
But it is not just raw materials prices that rise. Perhaps even more important will be the prices of foreign-made components that are used in American factories. In fact, many American "manufacturers" are really nothing more than assemblers of imported components. For example, take a domestic golf club company that supposedly manufactures clubs in the good old U.S.A. Such a company might import the heads from China, the shafts from Indonesia, and the grips from Mexico. The only thing the American company actually does is put the pieces together. So as the dollar loses value, the costs of importing all of the components will rise, making the finished product more expensive for Americans.
Another often overlooked cost of a weakening dollar is higher interest rates. Because a falling dollar diminishes the global appeal of dollar denominated debt, U.S. interest rates will inevitably rise, resulting in increasing capital costs for domestic manufacturers. Similarly, strengthening foreign currencies increases the appeal of non-dollar debt, reducing the capital costs paid by our foreign competitors.
Furthermore, as a weaker dollar forces up domestic consumer prices, American workers, suffering from declining real incomes, will ultimately press their employers for more generous pay raises. Rising nominal wages will eventually undermine the competitive gains associated with lower real wages that initially resulted from the falling dollar. Similarly, landlords will look to raise rents to make up for the falling purchasing power of their rental income.
Lastly, as rising interest rates and consumer prices combine to exacerbate the severity of the coming recession, federal tax receipts will inevitably decline causing the budget deficit to swell anew. A populist Congress will likely seek to impose even higher taxes on those businesses profiting during the hard times. So any advantages U.S. manufacturers might get from cheaper dollars may be lost to higher taxes.
The bottom line is that true competitiveness comes from sound money, high savings, low taxes, minimal government regulation, hard work, and the entrepreneurial spirit. Laying the hopes of America's industrial salvation on currency devaluation will only backfire, leaving American manufacturers even less competitive in the future than they are today.
For a more in depth analysis of the tenuous position of the American economy, the housing and mortgage markets, and U.S. dollar denominated investments, read my new book "Crash Proof: How to Profit from the Coming Economic Collapse." Click here to order a copy today.
Why A Weak Dollar Hurts U.S. Manufacturers
Peter Schiff
The vast majority of economists are currently hailing the freefall of the dollar as a windfall for American business. While some domestic manufacturers may enjoy some initial benefits from a weaker dollar, they will ultimately suffer many adverse consequences as well. More importantly, the dollar's demise is a disaster for American consumers.
Peter Schiff
A cheaper dollar helps domestic manufacturers because it makes local costs, such as wages and rents, decline in relation to the costs borne by international competitors. While this is true, it also means that American workers and landlords see a corresponding decline in the real values of their pay and rent. Given that such declines negatively impact living standards, such developments hardly seem worth celebrating.
Too often overlooked however is how the weakening dollar also works to increase costs for domestic manufacturers. A falling dollar raises the costs of raw materials, such as oil and metals, while simultaneously decreasing the relative costs that foreign competitors pay for the same supplies.
But it is not just raw materials prices that rise. Perhaps even more important will be the prices of foreign-made components that are used in American factories. In fact, many American "manufacturers" are really nothing more than assemblers of imported components. For example, take a domestic golf club company that supposedly manufactures clubs in the good old U.S.A. Such a company might import the heads from China, the shafts from Indonesia, and the grips from Mexico. The only thing the American company actually does is put the pieces together. So as the dollar loses value, the costs of importing all of the components will rise, making the finished product more expensive for Americans.
Another often overlooked cost of a weakening dollar is higher interest rates. Because a falling dollar diminishes the global appeal of dollar denominated debt, U.S. interest rates will inevitably rise, resulting in increasing capital costs for domestic manufacturers. Similarly, strengthening foreign currencies increases the appeal of non-dollar debt, reducing the capital costs paid by our foreign competitors.
Furthermore, as a weaker dollar forces up domestic consumer prices, American workers, suffering from declining real incomes, will ultimately press their employers for more generous pay raises. Rising nominal wages will eventually undermine the competitive gains associated with lower real wages that initially resulted from the falling dollar. Similarly, landlords will look to raise rents to make up for the falling purchasing power of their rental income.
Lastly, as rising interest rates and consumer prices combine to exacerbate the severity of the coming recession, federal tax receipts will inevitably decline causing the budget deficit to swell anew. A populist Congress will likely seek to impose even higher taxes on those businesses profiting during the hard times. So any advantages U.S. manufacturers might get from cheaper dollars may be lost to higher taxes.
The bottom line is that true competitiveness comes from sound money, high savings, low taxes, minimal government regulation, hard work, and the entrepreneurial spirit. Laying the hopes of America's industrial salvation on currency devaluation will only backfire, leaving American manufacturers even less competitive in the future than they are today.
For a more in depth analysis of the tenuous position of the American economy, the housing and mortgage markets, and U.S. dollar denominated investments, read my new book "Crash Proof: How to Profit from the Coming Economic Collapse." Click here to order a copy today.
Credit markets just fine....nothing to see here....:wink:
----------------------------------------------------------
Banks Set Plan to Revive Credit Market
Monday October 15, 11:10 am ET
By Joe Bel Bruno, AP Business Writer
Bank Consortium Unveils Fund to Buy Distressed Securities, Prop Up Credit Market
NEW YORK (AP) -- The nation's three largest banks said Monday they will team up to buy tens of billions of dollars in investments that lost value after global credit markets seized up.
The plan is designed to inject more confidence into the market, and increase investor appetite for the short-term debt known as commercial paper. The market for commercial paper, which is crucial for companies to fund short-term borrowing needs, locked up this summer.
That followed a crisis in the mortgage industry, as people defaulted on their home loans at a skyrocketing rate. It caused a widespread aversion to risk and led the Federal Reserve to pump money into the financial system, though the latest plan relies more heavily on the banks themselves.
The Treasury Department introduced the idea of a bailout in recent talks with Citigroup Inc., Bank of America Corp., JPMorgan Chase & Co and others. It was not known how much money would be put into the fund, but there have been reports it could be between $80 billion to $100 billion.
"This proposal will complement other solutions investors and asset managers may utilize in committing and deploying capital to support more efficient markets," the Treasury Dept. said in a statement Monday
The government's role in coming up with a private-sector solution to the nation's credit problems is similar to the bailout of hedge fund Long-Term Capital Management in 1998. The Fed approached Wall Street's biggest banks to rescue LTCM before its wrong-way financial bets set off a financial shockwave.
This time around, the banks hope to not only prevent credit problems from spreading -- but also are bailing themselves out. They operate structured investment vehicles, known as SIVs, that reportedly have as much as $400 billion worth of assets. Those could plunge in value unless the credit markets are stabilized.
The SIVs used short-term commercial paper, sold at low interest rates, to buy longer-term mortgage-backed securities and other instruments with higher rates of return. With the seizure of the credit markets, many SIVs had trouble selling new commercial paper to replace upcoming obligations on older paper.
The new fund -- called the Master Liquidity Enhancement Conduit or M-LEC -- would launch in the next 90 days and be used to buy distressed securities from SIVs. That would in turn give them the capital to pay off their commercial paper obligations, and ultimately extricate themselves from what otherwise might have been substantial losses.
By buying SIVs' distressed investments, the new fund would inject enough liquidity into the market to make investors more confident in buying commercial paper.
The funds' backers said they will shy away from risky instruments and buy only highly rated, asset-backed debt -- a market that is already beginning to show signs of life.
----------------------------------------------------------
Banks Set Plan to Revive Credit Market
Monday October 15, 11:10 am ET
By Joe Bel Bruno, AP Business Writer
Bank Consortium Unveils Fund to Buy Distressed Securities, Prop Up Credit Market
NEW YORK (AP) -- The nation's three largest banks said Monday they will team up to buy tens of billions of dollars in investments that lost value after global credit markets seized up.
The plan is designed to inject more confidence into the market, and increase investor appetite for the short-term debt known as commercial paper. The market for commercial paper, which is crucial for companies to fund short-term borrowing needs, locked up this summer.
That followed a crisis in the mortgage industry, as people defaulted on their home loans at a skyrocketing rate. It caused a widespread aversion to risk and led the Federal Reserve to pump money into the financial system, though the latest plan relies more heavily on the banks themselves.
The Treasury Department introduced the idea of a bailout in recent talks with Citigroup Inc., Bank of America Corp., JPMorgan Chase & Co and others. It was not known how much money would be put into the fund, but there have been reports it could be between $80 billion to $100 billion.
"This proposal will complement other solutions investors and asset managers may utilize in committing and deploying capital to support more efficient markets," the Treasury Dept. said in a statement Monday
The government's role in coming up with a private-sector solution to the nation's credit problems is similar to the bailout of hedge fund Long-Term Capital Management in 1998. The Fed approached Wall Street's biggest banks to rescue LTCM before its wrong-way financial bets set off a financial shockwave.
This time around, the banks hope to not only prevent credit problems from spreading -- but also are bailing themselves out. They operate structured investment vehicles, known as SIVs, that reportedly have as much as $400 billion worth of assets. Those could plunge in value unless the credit markets are stabilized.
The SIVs used short-term commercial paper, sold at low interest rates, to buy longer-term mortgage-backed securities and other instruments with higher rates of return. With the seizure of the credit markets, many SIVs had trouble selling new commercial paper to replace upcoming obligations on older paper.
The new fund -- called the Master Liquidity Enhancement Conduit or M-LEC -- would launch in the next 90 days and be used to buy distressed securities from SIVs. That would in turn give them the capital to pay off their commercial paper obligations, and ultimately extricate themselves from what otherwise might have been substantial losses.
By buying SIVs' distressed investments, the new fund would inject enough liquidity into the market to make investors more confident in buying commercial paper.
The funds' backers said they will shy away from risky instruments and buy only highly rated, asset-backed debt -- a market that is already beginning to show signs of life.
Citigroup Posts 57 Percent Drop in 3Q
Monday October 15, 11:28 am ET
By Madlen Read, AP Business Writer
Citigroup Suffers 57 Percent Profit Drop in Third Quarter; Fourth Quarter Looks Far From Rosy
NEW YORK (AP) -- Citigroup Inc. said Monday its third-quarter profit dropped 57 percent after the biggest U.S. bank took a hit of more than $3 billion in mortgage-backed security losses, leveraged debt write-downs, and fixed-income trading losses.
The bank also boosted loan-loss provisions by $2.24 billion -- a higher amount than it estimated a week ago -- in anticipation of more deterioration in consumer credit.
Though Citigroup's Chairman and CEO Charles Prince said last week that he foresaw a more "normal" profit environment in the fourth quarter, Monday's report and accompanying statements did not offer such an optimistic outlook.
Chief Financial Officer Gary Crittenden said in a conference call with analysts that parts of its fixed-income holdings have weakened: "We are not optimistic they will regain a foothold in the market," Crittenden said. He also pointed to an acceleration in mortgage delinquencies in September, and said consumer credit will keep deteriorating in the fourth quarter.
Citigroup's net income fell to $2.38 billion, or 47 cents per share, in the July to September period. That's down from $5.51 billion, or $1.10 a share, in the same period a year earlier. Revenue in the quarter rose 6 percent to $22.66 billion from $21.42 billion a year earlier.
The results included a $729 million pretax gain due to the sale of shares of Redecard SA, a company that signs up merchants in Brazil for MasterCard Inc.
Excluding the Redecard gain and acquisitions, Citigroup's revenue fell 3 percent to approximately $20.8 billion. That's below the revenue forecast by Thomson Financial analysts, who predicted earnings of 44 cents a share and revenue of $21.76 billion. Analyst forecasts don't typically include one-time gains.
On Oct. 1, Citigroup Inc. estimated its third-quarter profit would fall by about 60 percent.
Citigroup's shares fell $1.25, or 2.6 percent, to $46.62 by late morning Monday. Shares have fallen more than 6 percent since the start of July, and are down more than 12 percent year-to-date.
"The company continues to face pressure to improve financial performance and despite recent changes to its structure, management will have to deliver better results over the next few quarters to restore investor confidence, though 2007 may wind up being the second consecutive year with negative operating leverage," Goldman Sachs analysts wrote in a note.
Last week, the bank combined its investment banking and alternative investments units into one business led by former Morgan Stanley executive Vikram Pandit, who has run Citigroup's alternative investments unit for several months. Tom Maheras, co-CEO of the investment banking unit, and Randy Barker, a co-head of fixed-income trading, left the company.
Prince -- under scrutiny by many shareholders who feel he has not been effective enough over the past few years -- called it a "disappointing" quarter.
"We're working very hard on the areas that need improvement," Prince said during the call with analysts.
As in previous quarters, the bank's international businesses -- with the exception of its lagging Japan consumer finance unit -- performed better than its stateside operations.
Global consumer revenue rose 14 percent, fueled by a 35 percent rise in international consumer revenue, including the Redecard share sale.
U.S. consumer revenue was flat, after a 2 percent decline in U.S. cards; a 7 percent rise in retail operations; a 5 percent increase in consumer lending; and a decline in commercial business.
U.S. markets and banking revenues fell 87 percent, while international revenues rose 7 percent.
Overall, markets and banking revenue fell 24 percent. This is the segment that suffered a $1.35 billion write-down on highly leveraged debt tied to corporate deals; $1.56 billion in losses related to subprime mortgage-backed securities; and $636 million in losses in fixed income credit trading.
In the third quarter, the credit markets froze up as a fear of taking on risky debt swept the globe. The Federal Reserve has lowered interest rates and helped loosen up the markets again, but they are nowhere near as liquid as they were earlier in the year.
According to published reports, Citigroup other big banks are planning support the market for mortgage-backed securities and other investments by jointly creating a fund to buy as much as $100 billion of the debt. An official announcement is expected Monday.
Global wealth management rose 41 percent, fueled largely by a 42 percent increase in international revenues and a 24 percent jump to record revenues at Smith Barney.
Alternative investments fell 63 percent.
Operating expenses rose 22 percent.
Credit costs rose $2.98 billion, after a $780 million increase in credit losses and a charge of $2.24 billion to pad loan loss reserves.
Monday October 15, 11:28 am ET
By Madlen Read, AP Business Writer
Citigroup Suffers 57 Percent Profit Drop in Third Quarter; Fourth Quarter Looks Far From Rosy
NEW YORK (AP) -- Citigroup Inc. said Monday its third-quarter profit dropped 57 percent after the biggest U.S. bank took a hit of more than $3 billion in mortgage-backed security losses, leveraged debt write-downs, and fixed-income trading losses.
The bank also boosted loan-loss provisions by $2.24 billion -- a higher amount than it estimated a week ago -- in anticipation of more deterioration in consumer credit.
Though Citigroup's Chairman and CEO Charles Prince said last week that he foresaw a more "normal" profit environment in the fourth quarter, Monday's report and accompanying statements did not offer such an optimistic outlook.
Chief Financial Officer Gary Crittenden said in a conference call with analysts that parts of its fixed-income holdings have weakened: "We are not optimistic they will regain a foothold in the market," Crittenden said. He also pointed to an acceleration in mortgage delinquencies in September, and said consumer credit will keep deteriorating in the fourth quarter.
Citigroup's net income fell to $2.38 billion, or 47 cents per share, in the July to September period. That's down from $5.51 billion, or $1.10 a share, in the same period a year earlier. Revenue in the quarter rose 6 percent to $22.66 billion from $21.42 billion a year earlier.
The results included a $729 million pretax gain due to the sale of shares of Redecard SA, a company that signs up merchants in Brazil for MasterCard Inc.
Excluding the Redecard gain and acquisitions, Citigroup's revenue fell 3 percent to approximately $20.8 billion. That's below the revenue forecast by Thomson Financial analysts, who predicted earnings of 44 cents a share and revenue of $21.76 billion. Analyst forecasts don't typically include one-time gains.
On Oct. 1, Citigroup Inc. estimated its third-quarter profit would fall by about 60 percent.
Citigroup's shares fell $1.25, or 2.6 percent, to $46.62 by late morning Monday. Shares have fallen more than 6 percent since the start of July, and are down more than 12 percent year-to-date.
"The company continues to face pressure to improve financial performance and despite recent changes to its structure, management will have to deliver better results over the next few quarters to restore investor confidence, though 2007 may wind up being the second consecutive year with negative operating leverage," Goldman Sachs analysts wrote in a note.
Last week, the bank combined its investment banking and alternative investments units into one business led by former Morgan Stanley executive Vikram Pandit, who has run Citigroup's alternative investments unit for several months. Tom Maheras, co-CEO of the investment banking unit, and Randy Barker, a co-head of fixed-income trading, left the company.
Prince -- under scrutiny by many shareholders who feel he has not been effective enough over the past few years -- called it a "disappointing" quarter.
"We're working very hard on the areas that need improvement," Prince said during the call with analysts.
As in previous quarters, the bank's international businesses -- with the exception of its lagging Japan consumer finance unit -- performed better than its stateside operations.
Global consumer revenue rose 14 percent, fueled by a 35 percent rise in international consumer revenue, including the Redecard share sale.
U.S. consumer revenue was flat, after a 2 percent decline in U.S. cards; a 7 percent rise in retail operations; a 5 percent increase in consumer lending; and a decline in commercial business.
U.S. markets and banking revenues fell 87 percent, while international revenues rose 7 percent.
Overall, markets and banking revenue fell 24 percent. This is the segment that suffered a $1.35 billion write-down on highly leveraged debt tied to corporate deals; $1.56 billion in losses related to subprime mortgage-backed securities; and $636 million in losses in fixed income credit trading.
In the third quarter, the credit markets froze up as a fear of taking on risky debt swept the globe. The Federal Reserve has lowered interest rates and helped loosen up the markets again, but they are nowhere near as liquid as they were earlier in the year.
According to published reports, Citigroup other big banks are planning support the market for mortgage-backed securities and other investments by jointly creating a fund to buy as much as $100 billion of the debt. An official announcement is expected Monday.
Global wealth management rose 41 percent, fueled largely by a 42 percent increase in international revenues and a 24 percent jump to record revenues at Smith Barney.
Alternative investments fell 63 percent.
Operating expenses rose 22 percent.
Credit costs rose $2.98 billion, after a $780 million increase in credit losses and a charge of $2.24 billion to pad loan loss reserves.
just how bad has October been historically?
Well if you invested $1000 in the year 1900 you would have only $1008 today. (if you only invested in October) over 100years a $8 return
I knew it was a bad month but didn't realize it was that bad.
http://www.insidefutures.com/articl...ear and Loathing in the Month of October.html
Well if you invested $1000 in the year 1900 you would have only $1008 today. (if you only invested in October) over 100years a $8 return
I knew it was a bad month but didn't realize it was that bad.
http://www.insidefutures.com/articl...ear and Loathing in the Month of October.html
Paulson and Bernanke: Subprime is (not) contained
Posted Oct 16th 2007 10:09AM by Peter Cohan
Filed under: Market matters, Goldman Sachs Group (GS), Economic data, Housing
Hank Paulson and Ben Bernanke are finally getting around to admitting that the subprime problem is not "contained." Regrettably, their grudging admission of reality also comes with a price -- they are unwilling to offer a solution to a problem whose magnitude they cannot even count.
This is the scariest part. According to the New York Times, at a speech in New York last night Bernanke said, "I'd like to know what those damn things are worth. Until investors are confident in their evaluations, they are not going to be willing to fund these vehicles."
This spring, Paulson and Bernanke were singing the same hymn: "subprime is contained." The reasons? The administration's trademark combination of religion -- the desire to avoid a "moral hazard" -- coupled with incompetence -- a lack of awareness of the magnitude of the problem or how to solve it. Moral hazard is a concept I happen to agree with -- investors should get the benefits and pay the costs of their risky bets rather than asking the government to bail them out of their mistakes.
The incompetence is what I find most annoying. As The Goldman Sachs Group's (NYSE: GS) chief economist said in the New York Times, the Super SIV announced yesterday is "a PR move." The reason is that if the securities backing the Commercial Paper (CP) are truly undervalued, then the banks should be able to buy them cheaply and profit when the market realizes its mistake.
That's where Bernanke's exclamation comes into play. Nobody knows what those subprime mortgage backed securities (MBSs) are really worth. As I've posted before, they were sold on the basis of AAA credit ratings but now that the default rates on the mortgages are rising, it seems that none of the investors who bought the securities can estimate their future cash flows. And without that ability to value them -- one of the most fundamental concepts of finance -- the securities are essentially worthless.
So what is the solution? I think it's time for MBS owners to remove the golden wrapping paper and make an honest reckoning of the financial toxic waste on their books. This will cause massive capital write downs and a global credit crunch. After that, it will be time to fix the system that regulates these markets -- which I think should be guided by two principles:
*
Transparency. I would appoint an independent group -- e.g., one not paid by the people who create the securities as we do now -- to assess the value of the future cash flows of asset-backed securities. If those cash flows cannot be assessed, then the securities cannot be traded. If they can be assessed, then the values and the underlying assumptions must be made public in real time. This principle will slash the size of the market but keep honest the portion that remains.
*
Equitable compensation. Participants in the system that originates, packages, sells, lends to and invests in asset backed securities can keep getting their big bonuses. The only change I would make is to put those bonuses in an escrow account for 10 years. If the securities maintained their worth over the 10 years, market participants would be able to take their money out of the escrow account. If the securities became worthless, the escrow account would be used to pay off the buyers of the securities. This would make market participants think twice before they extend credit to people who can't pay back their loans.
Do I think any of this will happen? Not in this administration, which will try to boot the problem into 2009, but perhaps in the next.
Posted Oct 16th 2007 10:09AM by Peter Cohan
Filed under: Market matters, Goldman Sachs Group (GS), Economic data, Housing
Hank Paulson and Ben Bernanke are finally getting around to admitting that the subprime problem is not "contained." Regrettably, their grudging admission of reality also comes with a price -- they are unwilling to offer a solution to a problem whose magnitude they cannot even count.
This is the scariest part. According to the New York Times, at a speech in New York last night Bernanke said, "I'd like to know what those damn things are worth. Until investors are confident in their evaluations, they are not going to be willing to fund these vehicles."
This spring, Paulson and Bernanke were singing the same hymn: "subprime is contained." The reasons? The administration's trademark combination of religion -- the desire to avoid a "moral hazard" -- coupled with incompetence -- a lack of awareness of the magnitude of the problem or how to solve it. Moral hazard is a concept I happen to agree with -- investors should get the benefits and pay the costs of their risky bets rather than asking the government to bail them out of their mistakes.
The incompetence is what I find most annoying. As The Goldman Sachs Group's (NYSE: GS) chief economist said in the New York Times, the Super SIV announced yesterday is "a PR move." The reason is that if the securities backing the Commercial Paper (CP) are truly undervalued, then the banks should be able to buy them cheaply and profit when the market realizes its mistake.
That's where Bernanke's exclamation comes into play. Nobody knows what those subprime mortgage backed securities (MBSs) are really worth. As I've posted before, they were sold on the basis of AAA credit ratings but now that the default rates on the mortgages are rising, it seems that none of the investors who bought the securities can estimate their future cash flows. And without that ability to value them -- one of the most fundamental concepts of finance -- the securities are essentially worthless.
So what is the solution? I think it's time for MBS owners to remove the golden wrapping paper and make an honest reckoning of the financial toxic waste on their books. This will cause massive capital write downs and a global credit crunch. After that, it will be time to fix the system that regulates these markets -- which I think should be guided by two principles:
*
Transparency. I would appoint an independent group -- e.g., one not paid by the people who create the securities as we do now -- to assess the value of the future cash flows of asset-backed securities. If those cash flows cannot be assessed, then the securities cannot be traded. If they can be assessed, then the values and the underlying assumptions must be made public in real time. This principle will slash the size of the market but keep honest the portion that remains.
*
Equitable compensation. Participants in the system that originates, packages, sells, lends to and invests in asset backed securities can keep getting their big bonuses. The only change I would make is to put those bonuses in an escrow account for 10 years. If the securities maintained their worth over the 10 years, market participants would be able to take their money out of the escrow account. If the securities became worthless, the escrow account would be used to pay off the buyers of the securities. This would make market participants think twice before they extend credit to people who can't pay back their loans.
Do I think any of this will happen? Not in this administration, which will try to boot the problem into 2009, but perhaps in the next.
