[FoRK] A Generalized Meltdown of Financial Institution

[Sat N]

Very interesting - I keep hearing about this "housing crash" in
California, but my friends in bay area aren't really seeing it....Has
any of you in bay area seen a housing crash in your neighborhood -
have the prices really went down 12% ?

On Nov 25, 2007 7:47 AM, Eugen Leitl <eugen at leitl.org> wrote:
>
> http://www.informationclearinghouse.info/article18777.htm
>
> "A Generalized Meltdown of Financial Institutions"
>
> Take a Look at Professor Roubini's Crystal Ball
>
> By Mike Whitney
>
> 11/24/07 "ICH" -- - Reality has finally caught up to the stock market. The
> American consumer is underwater, the banks are buried in dept, and the
> housing market is in terminal distress. The Dow is now below its 200-Day
> Moving Average -- the first big "sell" signal. Anything below 12,500 could
> trigger program-trading and crash the market. The increased volatility
> suggests that we are watching a "real time" meltdown.
>
> International Business editor for the UK Telegraph, Ambrose Evans Pritchard,
> summed up yesterday's action in the Asian markets:
>
>     "The global credit crisis has hit Asia with a vengeance for the first
> time, triggering a massive flight to safety as investors across the region
> pull out of risky assets. Yields on three-month deposits in China and Korea
> have plummeted to near 1pc in a spectacular fall over recent days, caused by
> panic withdrawals from money market funds and credit derivatives.
>
>     "'This' is a severe warning sign,' said Hans Redeker, currency chief at
> BNP Paribas. 'Asia ignored the credit crunch in August but now we're seeing
> the poison beginning to paralyze the whole global economy.'" (Credit 'Heart
> attack' engulfs China and Korea" Ambrose Evans Pritchard,UK Telegraph,)
>
> The credit storm that began in the United States with subprime mortgages has
> spread to markets across the globe. In fact, the train has already crashed.
> What we're seeing now is the boxcars piling up on top of each other.
>
> On Tuesday Chinese government officials ordered a complete halt to bank
> lending to slow the speculative frenzy that has created an enormous equity
> bubble in the stock market. According to the Wall Street Journal:
>
>     "Chinese authorities are slamming the brakes on bank lending, in their
> latest attempt to curb the runaway investment threatening to overheat what is
> soon to be the world's third-largest economy. In recent weeks, regulators
> have quietly ordered China's commercial banks to freeze lending through the
> end of the year, according to bankers in several cities. The bankers say that
> to comply, they are canceling loans and credit lines with businesses and
> individuals." ("China freezes lending to Curb Investing Frenzy" Wall Street
> Journal)
>
> The move illustrates how concerned the Chinese are that a slowdown in US
> consumer spending will trigger a crash on the Shanghai stock market. It also
> shows that the Chinese are having difficulty dealing with the inflation
> generated by the hundreds of billions of US dollars absorbed via the trade
> imbalance with the US. China is awash in USDs and that surplus is causing a
> steady rise in food and energy costs. This could be mitigated by allowing
> their currency to "float" freely. But a sudden, steep increase in the Chinese
> yuan's value could also send the world headlong into a global recession. For
> now, the lending freeze and price fixing appear to be the way out.
>
> Another sign that the markets have reached a "tipping point" appeared in a
> Reuters article on Wednesday; "Interbank Covered Bond Trading Halted on
> Volatility":
>
>     "Renewed credit turmoil and volatility led the European Covered Bond
> Council (ECBC) on Wednesday to suspend inter-bank market-making in covered
> bonds until Monday, Nov. 26.
>
>     The move is a sign of the stress in the covered bond market, which is
> dominated by German institutions that have almost a trillion euros of covered
> bonds outstanding.
>
>     Covered bonds -- backed by pools of assets that remain on the borrower's
> balance sheet -- are usually highly liquid and typically rated triple-A by
> ratings agencies. The ECBC's recommendation is aimed at relieving the
> pressure on market makers who are forced to quote prices at a fixed bid-offer
> spread.
>
>     "In light of the current market situation and in order to avoid undue
> over-acceleration in the widening of spreads, the 8-to-8 Market-Makers &
> Issuers Committee recommends that inter-bank market-making be suspended," the
> ECBC said in a release."
>
> Note: This isn't mortgage-backed junk that's being sold, but highly liquid
> bonds that are usually easy to cash in. The ECBC's action is a sign of pure
> desperation and indicates that credit paralysis has infected the entire euro
> banking system.
>
> Reuters: "Due to general market conditions and the specific mechanics of the
> inter-dealer market making it even seems possible that inter-dealer market
> making will not be resumed this year."
>
> That's bad. The mechanism for converting covered bonds into cash has broken
> down.
>
> The dollar took another pasting on Wednesday, sliding to $1.49 on the euro;
> another new record. Gold shot up to $814 per ounce. Oil continues to flirt
> with the $100 per barrel mark, and the yen rose to 107 per dollar forcing a
> sell-off of hedge fund assets levered through the carry trade.
>
> Jon Basile, economist at Credit Suisse, summed it up like this: "There's a
> heck of a lot of bad news out there." Indeed.
>
> In California Governor Arnold Schwarzenegger has joined with four mortgage
> lenders to freeze adjustable interest rates (ARMs) for some of the state's
> highest-risk borrowers; another unprecedented move. The Governor hopes to
> avoid a collapse of the California real estate market which has gone into a
> tailspin. Home sales have plummeted more than 40 per cent for the last two
> months. Prices have dropped sharply---roughly 12 per cent statewide. New
> construction has slowed to a crawl. Layoffs are steadily rising. Jumbo loans
> (mortgages over $417,000) have been put on the "Endangered Species" list.
> Even qualified borrowers can't get mortgages. Nothing is selling. California
> housing is "off the cliff".
>
> Schwarzenegger's plan to keep over-extended subprime mortgage-holders in
> their homes faces an uncertain future. What incentive is there for homeowners
> to continue paying exorbitant monthly rates when their payments are not
> applied to the principle? The homeowners would be better off bailing out,
> accepting foreclosure, and starting over with a clean slate.
>
> It's unrealistic to thinks that Schwarzenegger can stop the tidal wave of
> foreclosures that are sweeping across the state. An estimated 3 million
> homeowners will lose their homes nationwide.
>
> If you want to blame someone; blame Alan Greenspan. He's the one who created
> this mess. According to the economist Mike Shedlock:
>
>     "The Fed caused the credit crunch by slashing interest rates to 1 per
> cent to bail out its banking buddies in the wake of a dotcom bubble collapse.
> All the Fed did was create a bigger bubble. This bubble is so big in fact
> that it cannot even be bailed out. It's the end of the line for a serially
> bubble blowing Fed.
>
>     "So not only was this the biggest credit bubble in history, this was also
> the biggest transfer of wealth from the poor and middle class to the already
> enormously wealthy. That is the real travesty of justice regardless of
> whether or not the price tag is $1 trillion, $2 trillion, or $10 trillion."
> (Mike Shedlock, "Mish's Global Economic Trend Analysis")
>
> The problem has gotten so serious that even Secretary of the Treasury, Henry
> Paulson, is putting up red flags. Last week, Paulson ignited a sell-off on
> Wall Street when he made this statement:
>
>     "The nature of the problem will be significantly bigger next year because
> 2006 [mortgages] had lower underwriting standards, no amortization, and no
> down payments....We're never going to be able to process the number of
> workouts and modifications (to mortgages) that are going to be necessary
> doing it just sort of one-off. I've talked to enough people now to know that
> there's no way that's going to work."
>
> The desperation is palpable. Like Schwarzenegger, Paulson is trying to get
> mortgage-lenders to provide a safety net for struggling borrowers who are
> defaulting on their loans.
>
> Paulson is calling for emergency legislation that will allow the Federal
> Housing Administration to play a greater role in the relief effort. The FHA
> has already expanded its traditional role by taking on hundreds of billions
> in extra debt just to keep a few "private" mortgage lenders and banks from
> going bankrupt. Of course, when Paulson's plan goes kaput and the debts pile
> up; it'll be the taxpayer that foots the bill.
>
>     "Paulson also called the Senate's failure to pass legislation overhauling
> mortgage giants Fannie Mae and Freddie Mac frustrating," saying that the two
> government-sponsored entities need to be playing a bigger role in the housing
> market.
>
>     "If we ever need them it's during times like today, and they're most
> valuable when there is distress in the mortgage market," he said. "I'd like
> to see them playing an even bigger role."(Wall Street Journal)
>
> Fannie and Freddie, have already posted enormous quarterly losses and don't
> have the capital reserves to put millions of subprime mortgage-holders under
> their "government-sponsored" umbrella. Paulson is just grabbing at straws.
>
> Similar troubles are brewing in the broader market where late-payments and
> defaults have spread to credit card debt and new car loans. Every area of
> "securitized" debt has suddenly veered off the road and into the ditch. Last
> week the Fed injected more credit into the teetering banking system than
> anytime since 9-11.
>
> No one has predicted the downward-spiral in the market more accurately than
> Nouriel Roubini. Roubini is a Professor at the Stern School of Business at
> New York University. His analysis appears regularly on his blogsite, Global
> EconoMonitor. Last week's prediction was particularly dire and is worth
> reprinting here:
>
>     "It is increasingly clear by now that a severe U.S. recession is
> inevitable in next few months...I now see the risk of a severe and worsening
> liquidity and credit crunch leading to a generalized meltdown of the
> financial system of a severity and magnitude like we have never observed
> before. In this extreme scenario whose likelihood is increasing we could see
> a generalized run on some banks; and runs on a couple of weaker (non-bank)
> broker dealers that may go bankrupt with severe and systemic ripple effects
> on a mass of highly leveraged derivative instruments that will lead to a
> seizure of the derivatives markets... massive losses on money market funds
> with a run on both those sponsored by banks and those not sponsored by banks;
> ..ever growing defaults and losses ($500 billion plus) in subprime, near
> prime and prime mortgages with severe knock-on effect on the RMBS and CDOs
> market; massive losses in consumer credit (auto loans, credit cards); severe
> problems and losses in commercial real estate...; the drying up of liquidity
> and credit in a variety of asset backed securities putting the entire model
> of securitization at risk; runs on hedge funds and other financial
> institutions that do not have access to the Fed's lender of last resort
> support; a sharp increase in corporate defaults and credit spreads; and a
> massive process of re-intermediation into the banking system of activities
> that were until now altogether securitized." (Nouriel Roubini's Global
> EconoMonitor)
>
> "A generalized meltdown of the financial system".
>
> Looks like Chicken Little might have gotten it right this time; "The sky IS
> falling."
>
> Mike Whitney lives in Washington state. He can be reached at:
> fergiewhitney at msn.com
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