Sub-prime Meltdown Hits Thailand With Force

[LaoPo]

Who would have thought this would ever happen in the UK

http://www.telegraph.co.uk/news/main.jhtml...3/wchina113.xml

A run on the bank

What has the Giant new Airport of Beijing to do with the turbulence at Northern Rock ?

LaoPo

[Carmine6]

Who would have thought this would ever happen in the UK

http://www.telegraph.co.uk/news/main.jhtml...3/wchina113.xml

A run on the bank

What has the Giant new Airport of Beijing to do with the turbulence at Northern Rock ?

LaoPo

That's the big secret story for Monday. Short all banks stocks.

[Martin]

'cclub75' said in post #388:

"It's not "subprime" anymore. It's a confidence crisis. And that's probably the worst... for banks and other financials companies.

Next target : mutual funds.

This is why they try to keep the stock markets index afloat. Can you imagine, when millions of soon-to-be-retired americans will realize that their saving... are vanishing ? Sorry : have vanished.

Once, here, we were talking about Sufficiency Economy in Thailand. Someone said that, ultimately Thailand could be more protected from the turmoils of globalization.

It sounded ridiculous.

But I start to change a bit my mind... Better to be unemployed in Thailand (weather, food, easy shelter) than unemployed in the US or Europe... "

It is a confidence crisis in the sense that a funeral is a crisis for the deceased!!

It will be a long, long time before banks regain their former esteem in people's minds. Maybe never.

My family had banked with the Yorkshire Bank for five generations, from when my greatgrandmother used to deposit the takings of their 'Mom and Pop' business in the Yorkshire Penny Bank, as it was called then, to my son who used to put in part of his pocket money.

The past ten years has seen it showing itself as seedier and seedier---pushing its 'products' on me in every letter it sends.

The last straw for me was when I found out that the banks and mortgage makers pay their staff extra money according to what business they bring in. That is what destroys confidence between a person and a business---when you know that the representative of the business can make money out of you.

You are right that there is going to be enormous anger when people realise that their savings in their pension funds are going to bring pensions of much, much less purchasing power than they had been led to believe.

The backlash from it all may be that there'll be a re-adoption of what both my grandmothers said: "Neither a borrower nor a lender be" and deposits dry up. Goodbye to "Financial Services".

As to the ridiculous proponent of Sufficiency and Thailand's future, that was me.

Eighteen months ago, I had to do a scenario of "What my community will look like in 30 years time" and the more that I thought, the more that I felt that Bubble Economics couldn't last thirty years. Somewhere within that period, there'd be a bust. It looks like it's starting sooner rather than later.

That scenario became part of an MA study that I have just finished. If you, or anybody, would like to see the article that I have written about the MA, just send me a PM with an e-mail address.

[somtaamgaiyang]

Who would have thought this would ever happen in the UK

http://www.telegraph.co.uk/news/main.jhtml...3/wchina113.xml

A run on the bank

What has the Giant new Airport of Beijing to do with the turbulence at Northern Rock ?

LaoPo

Wrong Link Apologies

http://www.telegraph.co.uk/money/main.jhtm...5/cnrock115.xml

[highdiver]

more bad news from the uk front.

Northern Rock suitors 'will not get guarantees from Bank'

http://news.independent.co.uk/business/new...icle2970870.ece

this will be marked as the subprime crisis and husing crisis in the UK.

the effects are global as those loans were hedged by others who will now not see the money unless the goverment bails them out.

[LaoPo]

Greenspan calls outlook 'pretty gloomy'

Says biggest long-run problem is 're-emergence of inflation'

WASHINGTON (MarketWatch) -- Former Federal Reserve Board Chairman Alan Greenspan says his outlook for the future of the U.S. economy is "pretty gloomy."

In an interview with correspondent Lesley Stahl of the CBS News program "60 minutes," Greenspan said that over the long run, the biggest problem facing the U.S. economy is "the re-emergence of inflation," and rising interest rates. The interview was scheduled for broadcast on "60 Minutes" Sunday night.

Greenspan said it is not clear yet whether the current turmoil in financial markets will have a deep, lasting effect on the economy.

He said that home prices have further to fall, but that there is an "underlying strength" in the U.S. economy.

"When you look around the world, even with this extraordinary credit problem, the economies seem to be holding up," Greenspan said.

"For the moment, it does not look sufficiently severe that it will spiral into anything deeper," he said.

Greenspan defended his right to speak about the economy since leaving his Fed post 18 months ago.

Greenspan said he does not comment on monetary policy, but sticks to "global things."

Asked if it was proper for him to comment on the likelihood of a recession, Greenspan responded: "But how am I going to pursue my profession without doing precisely that?"

Greenspan now runs a private consulting company.

Greenspan said that being a former Fed chief doesn't mean that he has to "become incarcerated."

Greenspan wouldn't comment on his investments or how much he received as an advance for his new book "The Age of Turbulence: Adventures in a New World." The book, published by Penguin Press, is set for release Monday.

Greenspan is scheduled to appear on NBC's "Today" show on Monday morning and with several other media outlets over the next week.

http://www.marketwatch.com/news/story/gree...96F7739E42CA%7D

LaoPo

[A_Traveller]

Given the round of interviews for the book, he's quoted on the BBC site from The Telegraph :-

Alan Greenspan has said the turmoil in credit markets was an "accident waiting to happen", and has also warned of much higher UK inflation in future years. Inflation would rise above 3% on a regular basis, putting pressure on interest rates, and the UK housing boom would soon come to an end, he said. He said it was too early to say if the current financial crisis would be more damaging than that seen in 1998. "This has not fully played out," he told the Daily Telegraph.

Regards

BBC LINK

Telegraph Link

[cclub75]

As to the ridiculous proponent of Sufficiency and Thailand's future, that was me.

Respect.

I hope you were not offensed. My reaction at that time was more on the political side of the Sufficiency Economy (used like a toy by some authorities).

Anyway. Would be interested to read your work.

[summers]

the bigest problem is that many pension funds have invested in those huge hedge funds looking to make a higer yield.

what will happen if those hedge funds go under?

pension funds will lose money.

so cenral banks and goverments will need to bail them out.

Shame on Pension Fund managers for displaying stupidity. And NO...central banks should not bail them out of there errors.

[A_Traveller]

so cenral banks and goverments will need to bail them out.

No, it's called moral hazard.

Regards

[lannarebirth]

Things always go to far. A quick Google of "The Rich Mans Panic of 1907" would be instructive. It ushered in the US Federal Reserve System. I don't know if this current financial "crisis" has gone too far yet, but if it hasn't already, it will. Following will be new commissions and GLOBAL statutes. It will bring nations and markets and currencies together eventually. I have no opinion, yet, on whether or not that''s a good thing or not.

[LaoPo]

I don't know if this current financial "crisis" has gone too far yet, but if it hasn't already, it will.

Banking shares fall across Europe

Banking shares have been falling across Europe as savers continue to withdraw money from the troubled British bank Northern Rock.

Northern Rock's boss told the Independent newspaper that three unnamed Spanish banks had sought help from the European Central Bank (ECB).

Although the ECB denied any Spanish banks had used emergency financing facilities, their shares were hit.

French and Italian banks were also hit on fears of financial woes spreading.

Banks in the eurozone are entitled to use the ECB's routine liquidity facilities, but the ECB stresses that using that does not suggest they are in difficulties.

No other bank matched the falls in Northern Rock shares, which plunged 37% by midday in London.

But Spanish banks fell quite sharply, with Bankinter down 6.2% in early afternoon trading, making it the biggest faller on Madrid's Ibex index.

In early afternoon trading in Paris, BNP Paribas was down 3.6% while Societe Generale had fallen 2.7%.

In Frankfurt, Deutsche Bank shares were down 2.1%.

http://newsvote.bbc.co.uk/2/hi/business/6998620.stm

Note:

I recall a poster who said that he wanted to buy Thai Bank shares, just a week/10 days ago, or so. I said I feared the banking crisis was far from over yet...including Thailand, no matter the low P/E's, at the moment....

Not a very good moment to step into financials....yet. Too many nasty creatures under the rocks, still.

LaoPo

[lannarebirth]

Note:

I recall a poster who said that he wanted to buy Thai Bank shares, just a week/10 days ago, or so. I said I feared the banking crisis was far from over yet...including Thailand, no matter the low P/E's, at the moment....

Not a very good moment to step into financials....yet. Too many nasty creatures under the rocks, still.

LaoPo

Yes, too many people still focusedon "return ON money" rather than "return OF money".

Always good to remember:

"They say that more money has been lost chasing yield than in any other area of investing." Richard Russell

[wilko]

Now a 20% drop in Alliance and Leicester and several other of the ex-building Soc Banks too........

[LaoPo]

The subprime problems in the US are far from over...

Home Foreclosures Doubled in August on Loan Rates

Sept. 18 (Bloomberg) -- The number of Americans who may lose their homes to foreclosure more than doubled in August from a year earlier as subprime borrowers with adjustable-rate mortgages saw their monthly payments rise, RealtyTrac Inc. said.

Lenders sent notices of default or the equivalent to 108,716 homeowners in August, up from 42,144 in August 2006, RealtyTrac said today. It was the highest recorded in a study that goes back to 2005. California led with 41,714 notices and Florida was second with 26,203.

The U.S. economy may stumble as the two-year housing decline worsens amid the surge in foreclosures and the collapse of more than 100 mortgage companies. Federal Reserve policy makers are expected by economists to lower interest rates at a meeting today after last month saying ``tighter'' credit may hurt growth.

``This is just the beginning of a wave of new foreclosures,'' Rick Sharga, executive vice president of marketing for RealtyTrac in Irvine, California, said in an interview. ``There are lots of people who bought homes they could only afford at the teaser rates, and now have very few options.''

Subprime loans, given to borrowers with limited or tarnished credit histories, often have so-called teaser rates that can double at the end of two or three years, he said.

Auctions, Repossessions

The foreclosure process typically begins when a borrower is more than 90 days late on mortgage payments and the lender files a notice of default. If the borrower doesn't pay what's owed, the property goes to auction. If bids don't reach that amount, the lender takes ownership of the house.

Adjustable-rate mortgages to subprime borrowers account for 7.3 percent of all home loans and 44 percent of all new foreclosures, according to Mortgage Bankers Association in Washington. The 15 percent of all mortgages that are prime adjustable-rate loans -- granted to borrowers with good credit histories -- represent 15 percent of new foreclosures, the bankers' group said Sept. 6.

The total number of U.S. foreclosure filings, including defaults, scheduled auctions and bank repossessions, rose 115 percent to a record 243,947 in August from a year earlier, RealtyTrac said in its report. The total foreclosure filing number can double- or triple-count homes in default if they have more than one legal filing against them in a month.

Nevada, California

Nevada had the highest U.S. rate, with one foreclosure filing for every 165 homes, three times worse than the national average of one for every 510 properties. California was No. 2 with one filing per 224 households and Florida had the third- highest rate.

New York ranked 28th, with 5,498 filings, or one per 1,428 homes, up 21 percent from a year earlier.

U.S. banks reported owning residential property valued at $4.24 billion in the second quarter, typically houses and condominiums seized in foreclosures, according to the Federal Deposit Insurance Corp. That's up from $2.29 billion a year earlier.

About 14 percent of domestic banks have raised standards for mortgages to their best-rated customers and 56 percent have made it more difficult for subprime borrowers to get loans, according to a Federal Reserve survey of senior loan officers in mid-July.

Defaults on subprime mortgages will continue driving up foreclosures through 2009, Sharga said, citing pending interest hikes on adjustable-rate loans homeowners took out in 2005 and 2006.

``There are probably two more major resets -- one next year, and the other in early 2009,'' Sharga said. ``If lenders raise their standards too high, and people can't refinance out of bad loans, it will only make matters worse.''

http://www.bloomberg.com/apps/news?pid=206...&refer=news

LaoPo

[jetjock]

Sept 18, 2007 11:15 PDT USA

Announcement has just been made:

The Fed Funds rate has just been .50% to 4.75%

The Discount Rate has been cut .50% ti 5.25%

It should be an exciting week for stock market and currency market traders !

[highdiver]

vegasVic is on holidays.....and Ben dont know what to do??? cut intrest or not??

Vegasvic said all will be ok???

now hey cut the rate . the stocks are soaring and a fresh load of cheap cash is on the market...

in the mean time the hosuing crisis is not over and the debt crisis is far from over... it will be a realy interesting week.

Edited September 18, 2007 by highdiver

[lannarebirth]

Sept 18, 2007 11:15 PDT USA

Announcement has just been made:

The Fed Funds rate has just been .50% to 4.75%

The Discount Rate has been cut .50% ti 5.25%

It should be an exciting week for stock market and currency market traders !

Wheeeeeeeeeeeeeeeeeeee!!!!

[Carmine6]

Sept 18, 2007 11:15 PDT USA

Announcement has just been made:

The Fed Funds rate has just been .50% to 4.75%

The Discount Rate has been cut .50% ti 5.25%

It should be an exciting week for stock market and currency market traders !

Wheeeeeeeeeeeeeeeeeeee!!!!

I'll quote what a guest on CNBC said right after the announcement "God bless the greatest central bank in the world."

[LaoPo]

In the meantime Countrywide is BULLISH....sorry, VERY BULLISH...

'Bullish' Countrywide CEO to Double Branch Network

Wed Sep 19, 2007 8:02 AM BST

NEW YORK (Reuters) - Countrywide Financial Corp (CFC.N: Quote, Profile , Research) said on Tuesday it plans to double the number of its branches as the largest U.S. mortgage lender tries to regain investor confidence following an unexpected liquidity shortfall.

Chief Executive Angelo Mozilo said he remains "bullish, very bullish, on our future," even after rising defaults, falling home prices and tighter credit markets made it harder to operate. Countrywide this month unveiled plans to cut up to 12,000 jobs, or 20 percent of its work force, by December.

Speaking at a Bank of America conference in San Francisco, monitored via Webcast, Mozilo said Countrywide operates 112 financial centers, and plans to add about the same number within four to six months.

He also said the company has begun to attract net inflows of retail and commercial deposits, after a short run last month when worried customers lined up at branches to withdraw money.

"We have been successful at mitigating this (and have) turned the corner," Mozilo said.

Countrywide shares closed on Tuesday up 58 cents at $19.85 on the New York Stock Exchange.

They are still down 53.2 percent this year. Investors remain concerned that Countrywide will continue to lose business to large rivals with much easier access to funding, including Wells Fargo & Co (WFC.N: Quote, Profile , Research), Bank of America Corp (BAC.N: Quote, Profile , Research), Citigroup Inc (C.N: Quote, Profile , Research) and JPMorgan Chase & Co (JPM.N: Quote, Profile , Research).

Pressure on lenders was eased on Tuesday when the U.S. Federal Reserve cut a key interest rate to help shield the economy from a housing slump and credit market turbulence.

The move is unlikely to help borrowers who face large increases in their mortgage payments as rates reset higher. Countrywide's 3 percent share price gain lagged a 4.4 percent rise in the KBW Mortgage Finance Index <.MFX>.

Mozilo praised the rate cut, saying it showed the central bank "realized the importance of home financing, and the critical need to return liquidity to the market."

On Sept. 13, Countrywide said it had lined up $12 billion of secured financing. That supplemented $11.5 billion it got in August when it unexpectedly drew down a credit line after being unable to sell short-term debt to fund operations.

Also in August, Countrywide received a $2 billion infusion from Bank of America, which could eventually give the second-largest U.S. bank a one-sixth stake in the lender.

Calabasas, California-based Countrywide this summer stopped making home loans that don't meet its banking unit's investment criteria, or which cannot be purchased by government-sponsored enterprises (GSEs) Fannie Mae (FNM.N: Quote, Profile , Research) and Freddie Mac (FRE.N: Quote, Profile , Research).

He called on policymakers to boost the cap on loans that GSEs can buy to $850,000 from $417,000. Such "conforming" loans are considered less profitable to make, and are often too small to fund home purchases in costly areas.

"Loan limits should either be based on a formula relating to the median home price in a particular area of the country, or they should be broadly raised to $850,000 across the board," Mozilo said.

Mozilo also said Countrywide is "out of the subprime business," apart from loans the GSEs will buy. Subprime loans go to people with weaker credit.

Mozilo co-founded Countrywide in 1969, and his employment contract runs through 2009, when he will be 71.

http://investing.reuters.co.uk/news/articl...97040-OISBN.XML

Note: Now I'm off on a 7 to 8 country trip through Europe so, if you miss me (especially our friend VegasVic), what I doubt, you know where I am I hope the economy still exists when I'm back...

LaoPo

[lannarebirth]

Have a nice time Lao Po. Wonderful season to be in Europe.

[lannarebirth]

Sept 18, 2007 11:15 PDT USA

Announcement has just been made:

The Fed Funds rate has just been .50% to 4.75%

The Discount Rate has been cut .50% ti 5.25%

It should be an exciting week for stock market and currency market traders !

Wheeeeeeeeeeeeeeeeeeee!!!!

I'll quote what a guest on CNBC said right after the announcement "God bless the greatest central bank in the world."

It's the Greatest Show On Earth, complete, with it's own carnival barkers.

[Mid]

Greenspan: House prices to drop much lower

Former Fed chief says it's unclear if economy is headed for recession

Updated: 8:11 a.m. ET Sept. 21, 2007

Former Chairman of the Federal Reserve Greenspan is seen speaking in Washington earlier this year. A big overhang of property will bring U.S. house prices down further, but it is too early to say if the economy will plunge into recession, Greenspan said Friday.

Jim Young / REUTERS

VIENNA - A big overhang of property will bring U.S. house prices down further, but it is too early to say if the economy will plunge into recession, former Federal Reserve chief Alan Greenspan was quoted as saying on Friday.

Greenspan said in an interview with Austrian magazine Format that low interest rates in the past 15 years were to blame for the house price bubble, but that central banks were powerless when they tried to bring it under control.

snip

msnbc.msn.com

[highdiver]

well Vegas Vic

any news for us about those wonderfull times in america. USD devaluating, housing prices going down, goverment bails out gamblers.... no they are calling it Morral hazard.... politicly corect name for bailing out the fools who gave out ninja loans.

maybe we should open a thread just for you... Crisis in America.

[samran]

An article from Ross Gittins, a respected economic journalist for the Sydney Morning Herald

Dust starting to settle in global credit markets

Ross Gittins

September 22, 2007

As the global credit crunch continues, our understanding of its causes and effects gets clearer. This week the Reserve Bank governor, Glenn Stevens, offered a good exposition of what it's about. Here's my take on his take.

The first thing to understand is that the problems have little to do with the world's sharemarkets. They're just watching from the sidelines, reacting to what's happening in the wholesale credit markets - markets the media rarely take much interest in.

The next thing is that the crisis isn't just about dodgy American home-buyers defaulting on their "subprime" mortgages. That was just the trigger for something much bigger and more pervasive.

Unsurprisingly, the problems leading to the crisis have been building for some years. For well over a year the world's central bankers have been worrying about the "underpricing of risk", fearing it might lead to the very turbulence we're experiencing.

What worried them was that people were lending to risky borrowers without charging them the higher interest rates - known as "spreads", or premiums - needed to reflect the higher risk that they wouldn't get their money back.

This was true of home-buyers with bad credit histories, but also of riskier business borrowers and developing-country borrowers. The bad risks weren't having to pay rates much higher than the good risks were paying.

What's wrong with that? Well, the higher rates are intended to do two things - discourage weak borrowers from taking on more debt than they should and ending up in trouble, and also cover losses from those borrowers that don't repay in full. If the lender doesn't charge extra he can end up in trouble himself.

How did this dangerous situation develop? It happened because liquidity was plentiful - there was lots of money around to be lent - and because times had been very stable, encouraging people to worry less about the risks of things going wrong.

Financiers had been enjoying strongly growing profits during the economic boom and, though the boom was starting to slow, they wanted to keep the good times rolling. So they dropped their credit standards and kept lending.

Another way to keep profits growing strongly is to "gear up" - borrow more of the money you're using to buy assets. While everything's going up, gearing multiplies gains. But when things turn down it multiplies losses.

All this is the kind of behaviour you often get in the late stages of a boom. But this episode in the "compression of risk premiums" was bigger than most people have seen before.

This time it seems to have been fed by financial innovation - people inventing fancy new ways of borrowing and lending and of hedging against risks.

One relatively new device is "securitisation". This is where you make loans to people but don't keep those loans as liabilities on your balance sheet. Rather, you bundle up a number of loans and turn them into bonds - "mortgage-backed securities" - which you sell to pension funds or other institutional investors.

It turns out that banks have been engaging in a lot of securitisation - not just of mortgages, but credit-card debt or loans for cars - because they were trying to get their lending off their balance sheets.

Why? To get around the capital adequacy requirements that oblige banks to limit their lending to a certain ratio of their share capital. Lots of banks set up offshoots known as "conduits" to keep a lot of their lending off balance sheet.

The early defaults on subprime mortgages last month caused everyone who'd been playing these games to suddenly realise how crazy they'd been. They realised that risky borrowers should be paying higher rates.

But, as so often happens in financial markets, you don't move smoothly from realising you've been doing something silly to starting to be more sensible - even though the end result of the upheaval is that riskier borrowers will be required to pay higher interest rates than less-risky borrowers. (Central bankers call this process the "re-pricing of risk" and think it's ultimately a healthy, helpful development.)

No, in between being silly and being sensible again you go through a period of confusion, panic and fear - which is the period we're in now. The fear arises not because some financiers are going to make big losses - individual losses are expected to be manageable - but because no one knows who it is that's bearing the losses.

The new financial instruments people are using and the complicated games they've been playing make the situation "opaque" - you can't see what other outfits have been up to and it's even hard to know what some of your own assets are worth.

In this situation there's been a lot of suspicion, in which banks and others have been refusing to lend to each other - partly because you don't know whether the other party will be able to repay you, but also because, since other parties won't lend to you, you decide to hang on to all your own money.

This is "liquidity hoarding", and it means the US market for "commercial paper" - where banks and non-bank institutions get a lot of their short-term funds - seized up. Those conduits and other borrowers just couldn't get any more money.

Now, the banks' conduits and many of those other borrowers have back-up lines of credit from banks that they've had to fall back on. And this means a lot of the debt the banks had moved off their balance sheets is now moving back on.

This is a process called "re-intermediation". It's got further to run and it means the US banks will have to ensure their capital is adequate to balance their increased assets and liabilities.

One worry is that if the short-term funding markets stay dislocated for long, even sound business borrowers won't be able to get the funds they need to expand or stay in business. That would have a dampening effect on America's "real economy". (Similar things are happening in our financial markets, but on a much smaller scale.)

Fortunately, however, there are signs that the Federal Reserve's action this week in cutting the US official interest rate by 0.5 percentage points is acting as a circuit-breaker, giving markets confidence that things will return to normal.

What's more, we'll soon be getting quarterly financial reports from US banks and other major players, which should get their bad news out on the table and reduce the suspicion and uncertainty.

We're not out of the woods yet, but there are signs the crisis is easing.

Ross Gittins is the Herald's Economics Editor.

http://www.smh.com.au/news/business/dust-s...ge#contentSwap1

[Carmine6]

An article from Ross Gittins, a respected economic journalist for the Sydney Morning Herald

Dust starting to settle in global credit markets

Ross Gittins

September 22, 2007

As the global credit crunch continues, our understanding of its causes and effects gets clearer. This week the Reserve Bank governor, Glenn Stevens, offered a good exposition of what it's about. Here's my take on his take.

The first thing to understand is that the problems have little to do with the world's sharemarkets. They're just watching from the sidelines, reacting to what's happening in the wholesale credit markets - markets the media rarely take much interest in.

The next thing is that the crisis isn't just about dodgy American home-buyers defaulting on their "subprime" mortgages. That was just the trigger for something much bigger and more pervasive.

Unsurprisingly, the problems leading to the crisis have been building for some years. For well over a year the world's central bankers have been worrying about the "underpricing of risk", fearing it might lead to the very turbulence we're experiencing.

What worried them was that people were lending to risky borrowers without charging them the higher interest rates - known as "spreads", or premiums - needed to reflect the higher risk that they wouldn't get their money back.

This was true of home-buyers with bad credit histories, but also of riskier business borrowers and developing-country borrowers. The bad risks weren't having to pay rates much higher than the good risks were paying.

What's wrong with that? Well, the higher rates are intended to do two things - discourage weak borrowers from taking on more debt than they should and ending up in trouble, and also cover losses from those borrowers that don't repay in full. If the lender doesn't charge extra he can end up in trouble himself.

How did this dangerous situation develop? It happened because liquidity was plentiful - there was lots of money around to be lent - and because times had been very stable, encouraging people to worry less about the risks of things going wrong.

Financiers had been enjoying strongly growing profits during the economic boom and, though the boom was starting to slow, they wanted to keep the good times rolling. So they dropped their credit standards and kept lending.

Another way to keep profits growing strongly is to "gear up" - borrow more of the money you're using to buy assets. While everything's going up, gearing multiplies gains. But when things turn down it multiplies losses.

All this is the kind of behaviour you often get in the late stages of a boom. But this episode in the "compression of risk premiums" was bigger than most people have seen before.

This time it seems to have been fed by financial innovation - people inventing fancy new ways of borrowing and lending and of hedging against risks.

One relatively new device is "securitisation". This is where you make loans to people but don't keep those loans as liabilities on your balance sheet. Rather, you bundle up a number of loans and turn them into bonds - "mortgage-backed securities" - which you sell to pension funds or other institutional investors.

It turns out that banks have been engaging in a lot of securitisation - not just of mortgages, but credit-card debt or loans for cars - because they were trying to get their lending off their balance sheets.

Why? To get around the capital adequacy requirements that oblige banks to limit their lending to a certain ratio of their share capital. Lots of banks set up offshoots known as "conduits" to keep a lot of their lending off balance sheet.

The early defaults on subprime mortgages last month caused everyone who'd been playing these games to suddenly realise how crazy they'd been. They realised that risky borrowers should be paying higher rates.

But, as so often happens in financial markets, you don't move smoothly from realising you've been doing something silly to starting to be more sensible - even though the end result of the upheaval is that riskier borrowers will be required to pay higher interest rates than less-risky borrowers. (Central bankers call this process the "re-pricing of risk" and think it's ultimately a healthy, helpful development.)

No, in between being silly and being sensible again you go through a period of confusion, panic and fear - which is the period we're in now. The fear arises not because some financiers are going to make big losses - individual losses are expected to be manageable - but because no one knows who it is that's bearing the losses.

The new financial instruments people are using and the complicated games they've been playing make the situation "opaque" - you can't see what other outfits have been up to and it's even hard to know what some of your own assets are worth.

In this situation there's been a lot of suspicion, in which banks and others have been refusing to lend to each other - partly because you don't know whether the other party will be able to repay you, but also because, since other parties won't lend to you, you decide to hang on to all your own money.

This is "liquidity hoarding", and it means the US market for "commercial paper" - where banks and non-bank institutions get a lot of their short-term funds - seized up. Those conduits and other borrowers just couldn't get any more money.

Now, the banks' conduits and many of those other borrowers have back-up lines of credit from banks that they've had to fall back on. And this means a lot of the debt the banks had moved off their balance sheets is now moving back on.

This is a process called "re-intermediation". It's got further to run and it means the US banks will have to ensure their capital is adequate to balance their increased assets and liabilities.

One worry is that if the short-term funding markets stay dislocated for long, even sound business borrowers won't be able to get the funds they need to expand or stay in business. That would have a dampening effect on America's "real economy". (Similar things are happening in our financial markets, but on a much smaller scale.)

Fortunately, however, there are signs that the Federal Reserve's action this week in cutting the US official interest rate by 0.5 percentage points is acting as a circuit-breaker, giving markets confidence that things will return to normal.

What's more, we'll soon be getting quarterly financial reports from US banks and other major players, which should get their bad news out on the table and reduce the suspicion and uncertainty.

We're not out of the woods yet, but there are signs the crisis is easing.

Ross Gittins is the Herald's Economics Editor.

http://www.smh.com.au/news/business/dust-s...ge#contentSwap1

Very good summary of the situation. Unlike a huge percentage of journalists, this guy understands what's happened. One not so hidden sign that the bankers are less skittish is that LIBOR has declined since last week meaning that they're starting to play a little nicer in the sandbox. US LIBOR would of course be expected to drop, but Sterling LIBOR dropped as well.

LIBOR This Week Compared to Last

Sterling Libor rates fixed lower

[Naam]

One not so hidden sign that the bankers are less skittish is that LIBOR has declined since last week meaning that they're starting to play a little nicer in the sandbox.

the heat is still on Carmine. take a look at the interbank bid/ask spreads in the "real world". i don't remember having ever seen spreads like these (although they have also narrowed during the last week).

example: USD LIBOR 3MTH 5.20%, bid 4.464% ask 5.705%

[Carmine6]

One not so hidden sign that the bankers are less skittish is that LIBOR has declined since last week meaning that they're starting to play a little nicer in the sandbox.

the heat is still on Carmine. take a look at the interbank bid/ask spreads in the "real world". i don't remember having ever seen spreads like these (although they have also narrowed during the last week).

example: USD LIBOR 3MTH 5.20%, bid 4.464% ask 5.705%

All we can ask is that things get better from where they are now. I haven't heard anyone say things are normal. It will take a long time for that to happen.

[palm]

well Vegas Vic

any news for us about those wonderfull times in america. USD devaluating, housing prices going down, goverment bails out gamblers.... no they are calling it Morral hazard.... politicly corect name for bailing out the fools who gave out ninja loans.

maybe we should open a thread just for you... Crisis in America.

Great idea.

Maybe there's just been a power cut at his trailer park, and he'll be back shortly. Lets hope so.

[highdiver]

for those who are really intrested in whats going

here are a few articles of different apsects that will have world wide affects.

northern rock is just the tip of the iceberg.

if you read all the articles a very sad picture of how the banks and central banks are selling us junk just to continue the party.

the crisis is far from over and the dust is no where near to coming down.

Bank of England , Federal Reserve Liquidity Pumping Shows Problem Far Bigger Than Northern Rock

Increase Decrease September 18, 2007 (LPAC)--The Bank of England took emergency measures Sept. 17, injecting into the British banking system a total of 4.4 billion pounds in short-term inter-bank funds, and 2.85 billion pounds in slightly longer term funds, for a total of 7.25 billion pounds ($14.5 billion); the BOE indicated it would make available another 4.4 billion pounds on Sept. 24, if required.

But the bids (requests by banks) made for the 4.4 billion pounds that the BOE injected Sept. 17, were six times larger than the actual amount that the BOE injected. This underlines the severe liquidity shortgage of the British banking system, as banks have been scrambling to acquire funds for several weeks. The interest rate on borrowing on Britain's overnight market was still at 6.5% on Sept. 17, three-quarters of a percentage point above the BOE's official lending rate, as banks tried to borrow funds, but could not get them except at a higher rate.

The problem at Northern Rock, Britain's fifth largest mortgage lender, is still very much alive. Thus far, over the past four business days, frightened depositors have withdrawn approximately 3 billion pounds—or 12.5%-- of Northern Rock's deposit base of 24 billion pounds. Last week, the BOE gave Northern Rock a special unlimited emergency credit line; on Monday Sept. 17, as part of its broad emergency package, the BOE stated that it would insure all deposits at Northern Rock.

But the liquidity problems in Britain, as the above indicates, are severe and go far beyond Northern Rock. Other U.K. mortgage lenders—Alliance & Leicester and Bradford & Bingley— have had their stocks fall significantly. Beyond that, London is the world's center for derivatives trading, the center for Europe's leveraged buy-out operations, and the headquarters for world speculation. It is this center that is shaking.

On Sept. 17, U.S. Treasury Henry Paulson made an emergency stop-over in London to meet Bank of England Governor Mervyn King, and British Chancellor of the Exchequer Alistair Darling, in which it appears that Paulson told King that due to the liquidity shortage in London, which would affect the whole world's banking system, King must start openly injecting liquidity rather than the more backroom injections that King had made heretofore. Shortly after the meeting, King announced his liquidity injections package. On the same Sept. 17, as what appears to be a coordinated action, the U.S. Federal Reserve injected $16.75 billion into the U.S. banking system, some of which funds could be made available to British bank branches operating in New York.

This BOE and Federal Reserve heavy dose of liquidity pumping solves nothing, but instead stokes a hyperinflationary process far more ravaging than that of 1923 Weimar Germany.

Only six weeks ago, Bank of England governor Mervyn King had insisted that the BoE's making of a loan to a failing bank could "sow the seeds of a future financial crisis." And three weeks ago, when Barclay's Bank begged for a cash infusion from the BoE, King asserted that loans would only be given to borrowing institutions that could present "risk-free assets" as collateral. With that said, what is the significance of Mervyn King's recent $80 billion loan to a failing bank, the disaster known as "Northern Rock"? This policy-decision must be viewed from the standpoint of the collapse of the entire global financial system--a Weimar-stlye hyperinflationary reality King is surely well aware of.

Furthermore, King has already set-up liquidity channels of $20 billion to the commercial banks, through three-month loans. In this case, once again, all the banks have to provide to receive these loans are their worthless holdings of (certainly not 'risk-free') mortgage-paper. King also guaranteed future loans would follow, at weekly intervals! Don't forget the 7.25 billion-pound interbank lending from Sept. 17, either, for those of you who are counting!

More Insanity: Northern Rock to Use MBS Junk as Collateral

Increase DecreaseSeptember 19, 2007 (LPAC)--Despite a "unlimited credit line" from the Bank of England, the share price of the British Northern Rock Mortage bank plunged another 20% today. Meanwhile Northern Rock is being seen as about to draw on the extraordinary unlimited credit facility extended to them by the Bank of England (BoE) last week. One of the bank's funding vehicles, a "conduit" called Granite 07-3, holds 5 billion pounds in residential mortgage backed securities (MBS), which Northern Rock claims it can use as collateral for drawing on the BoE credit facility: "The Granite 07-3 issue was repurchased by Northern Rock. If required, these notes can be utilized as eligible repo collateral for the purchase of drawing on the Bank of England facility," a statement by Northern Rock stated.

The move follows the fact that as much as 4 billion pounds of Northern Rock's 24 billion pounds worth of deposits have been withdrawn in the run on the bank which began last Friday.

Following the BoE announcement that it would guarantee deposits, panic withdrawals have somewhat subsided, but Ambrose Evans Pritchard of the Daily Telegraph reports that the European Union might challenge the bailout as a breach of EU laws. A spokesman for Neelie Kroes, competition commissioner and well known Thatcherite, said that they are "monitoring the situation" because it might violate competition laws.

NR announced that they plan to go ahead with a 60 million pound dividend to investors, despite the collapse. Liberal Democratic Party Treasury spokesman, Vince Cable said it was "outrageous" that the government's guarantee for savers was also extended to shareholders and directors who had "run the risk of collapse. He called for the NR's CEO, Adam Applegarth to be sacked.

One city source is quoted in today's Guardian as saying that shareholders will be asking for the heads of a few of the bank's directors.

Run on Northern Rock Bank – Now in Denmark Too

September 19, 2007 (LPAC) - The troubled British bank Northern Rock has in the recent period had an aggressive campaign in Denmark to get Danish customers to deposit money in their bank. With interest rates of 5% for a normal bank account, which can be accessed from day-to-day, Northern Rock has gotten 10,000 Danish costumers, with a balance 3 billion pounds. The Danish daily Jyllands-Posten reported yesterday in a front page article, "Worst banking crises in 30 years," that nervous Danish costumers were trying to get their money out of the bank, as in the UK.

The headline was accompanied a picture of people in Britain making a run on the bank to get their money, reminding many of the history books pictures of the run on the bank in the 1930s, only this time in color.

Top Investment Banks' Bonds Trading at Junk

Increase DecreaseSeptember 10, 2007 (LPAC) - The creditworthiness of the top investment banks, including Bear Stearns, Morgan Stanley, Merrill Lynch, Lehman Brothers and Goldman Sachs, is now at or near the level of junk, reports Bloomberg. Despite the rapidly falling interest rates on the bond market (due to investors rushing to the safety of government bonds), nonetheless these bankers can only sell their bonds by offering between 20 and 90 basis points above their cover yield. The worst at this point is Bear Stearns, whose 10 year bonds are trading at a discount even to the national bonds of Colombia (the latter's rating is between BBB and junk), offering 6.448% on a ten year note yielding 5.55%. These are the same companies that are desperate to fund $75 billion of loans for leveraged buyouts but can't find buyers.

Banks which funded Private Public Partnerships (PPPs)to invest in desperately needed infrastructure in the U.S. may be left holding the bag for $34 billion of financing related to such private infrastructure deals, according to Standard and Poor estimates reported in the {Financial Times} today. Banks are also struggling to off-load some big buyout loans now. The cheap, easy financing that fuelled these deals in the past no longer exists.

September 20, 2007 (LPAC)--In the wake of the Bank of England's support operation for the British bank Northern Rock, which raised money in international markets using mortgage-backed securities and other financial instruments, three more European entities have announced they're selling off large volumes of mortgage-backed "assets." Bloomberg.com reported today that "TCW Asset Management, the money manager owned by France's Societe Generale SA, is selling $3.2 billion of mortgage securities backing collateralized debt obligations after the value of the bonds fell." Bloomberg's article also reports, citing S&P, that Geneva-based Avendis Financial Services and London-based Solent Capital Partners LLP unloaded mortgage securities because of difficulty refinancing asset-backed commercial paper.

* The U.S. is about to be hit with a new wave of business failures as the credit crunch forces weak, junk-rated companies to default on some $35 billion of debt, Standard and Poor's warned yesterday. Some 75 companies, mostly in the media, healthcare, and consumer products sectors, are at a high risk of default over the next 15 months.

* Absolute Capital Management Holdings (winner of the "Best Hedge Fund Group 2006" award, yesterday barred its investors from withdrawing any money for eight hedge funds that managed $2.1 billion, after Florian Homm, a co-founder, abruptly quit on Tuesday. Absolute Capital told investors to expect no money for a year. Shares in the company, which has its main office in Majorca, Spain, fell 84% in two days, the {Financial Times} reported.

Sept. 21 (LPAC)--Bernd Ziesemer, chief editor of the German economic daily Handelsblatt, posted a short article with that headline today in his blog on the Handelsblatt web page. He writes: "Sometime in the future, the big dollar collapse is coming. Many authoritative economists have forecast it for a long time." People should not be deceived by the fact that the U.S. currency, so far, has "slowly, undramatically depreciated," Ziesemer writes: "If a dollar disaster occurs, the current subprime crisis will be peanuts in comparison

September 21, 2007 (LPAC)--Former Italian Finance Minister Giulio Tremonti, in a letter to Corriere della Sera, reiterates the current world financial crises, as he did in his recent interview with Raiuno Television channel. This time he gave a bigger kick though.

"“We can call it as we want: crisis, turbulence, tempest, collapse, storm, turmoil, distress, crunch. We can-–or we cannot-- compare it to the 1929 crisis. We can call it or see it as we want, but it is sure that, starting from “August 2007, from the mysterious depths of financial capitalism, very strong shocks came to the surface," Tremonti writes. "Above all, it is not at all granted that the shocks are ending and not, instead, beginning," Tremonti writes, warning of the possibility of the “perfect storm" being unleashed in the world. A cure is necessary, he says, but “you don’t find the cure of a sickness, if you do not understand the origins first".

Tremonti then points at the transformation of banking into a gambling operation, typified by the role of the hedge funds. "Hedge funds are a source of risk. They are nothing else than irregular banks. Banks undergo a state jurisdiction, rules, standards, limitations and prudential criteria for action. Hedge funds are the opposite: Their rule is, in fact, having no rules. They are the opposite of their real name."

At the end, bankers do not trust bankers any longer," said Tremonti. "The first effect has been the crossover crisis between long-term financing and short-term deposits. This has been the unleasher of the banking panic in England." If every entity in the financial system should open their books and say the truth on what they have; that is the starting point for a solution." he concluded.