Beware November 15th - The bloodbath in credit and financial markets will continue and sharply worse

Beware November 15th - The bloodbath in credit and financial markets will continue and sharply worsen

www.rgemonitor.com

It is now clear that the delusional hope that the severe credit and liquidity crunch that hit US and global financial markets would ease has been shattered by the events of the last few weeks. This credit crunch is getting much worse and its financial and real fallout will be severe.

The amount of losses that financial institutions have already recognized - $20 billion – is just the very tip of the iceberg of much larger losses that will end up in the hundreds of billions of dollars. At stake – in subprime alone – is about a trillion of sub-prime related RMBS and hundreds of billions of mortgage related CDOs. But calling this crisis a sub-prime meltdown is ludicrous as by now the contagion has seriously spread to near prime and prime mortgages. And it is spreading to subprime and near prime credit cards and auto loans where deliquencies are rising and will sharply rise further in the year ahead. And it is spreading to every corner of the securitized financial system that is either frozen or on the way to freeze: CDOs issuance is near dead; the LBO market – and the related leveraged loans market – is piling deals that have been postponed, restructured or cancelled; the liquidity squeeze in the interbank market – especially at the one month to three months maturities - is continuing; the losses that banks and investment banks will experience in the next few quarters will erode their Tier 1 capital ratio; the ABCP and related SIV sectors are near dead and unraveling; and since the Super-conduit will flop the only options are those of bringing those SIV assets on balance sheet (with significant capital and liquidity effects) or sell them at a large loss; similar problems and crunches are emerging in the CLO, CMO and CMBS markets; junk bonds spreads are widening and corporate default rates will soon start to rise. Every corner of the securitization world is now under severe stress, including so called highly rated and “safe” (AAA and AA) securities.

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Related News Links:
www.fasb.org
www.cfo.com
www.inmoneytoday.com

First off, I want to say that November 15th is nothing mroe than a date. it is the date where all of the above is to begin. What a lot of people do not realize, from everything I read, the Companies affected by FASB 157 have been instituting this all year and thats why we began seeing write downs as early as June. Mostly to prevent fear and panic of everyone reporting huge write downs on the same date.

I do believe we will see such write downs for months and possibly as long as 2 years, while the markets value and re-value such assets. We will both balance sheet write downs and income statement (expense) write downs. Yes the banks will get hurt along with their investors, but we need to clean the books in companies like this and it could take a while.

My biggeest concern is not the sub-prime stuff, but the below prime stuff and some of the lower end top tier stuff. These are mortgages and invetments that could easily fall out of favor and be reduced to sub prime levels. If that were to happen the blood bath could be bigger than anyone anticipates.

I am not a fan of the whole idea of the SIV that these banks are trying to institute for the purpose of saving the cr*p they have on their books. I think a wash out of the industry needs to take place, and banks or private equity firms need to be allowed to fail. We don't want to see this happen again. I often say that if you don;t know your history, your going to repeat it...and here we are again. Re-living the whole S&L crisis all over again, some 20+ years later.

As of today, all the toxic junk on the balance sheets needs to have an assigned value. Well, that value is nothing more than their opinion. We saw this same problem in the failings of Long Term Capitla Management. They had soo much money they felt it necessary to make all kinds of exotic investments. When thnigs got bad and they needed to sell assets/investemnts to raise money, they had to assign values. These values were not what people were willing to pay and things spiraled out of control and they eventually imploded.

People need to learn lessons from the past. Maybe Goldman did. They were the prime brokers for LTCM and were on the inside when they began to implode. As a big investor in the equity group they got to see their books. All this is hearsay, but Goldman would go out and take the other side of trades while this was imploding and profitted anyway.

Now we hear things like Goldman being the biggest CDO player and holder of sup-prime cr*p, all the while they were out shorting the same markets. Kind of a double dipping scenario. Not illegal, but highly unethical in my book!!!



www.rgemonitor.com
(visit the link for the full news article)

[edit on 15-11-2007 by traderonwallst]

Don't blame goldman for covering their tails. As a result, they aren't getting smoked by the fallout and their stock is climbing while the rest of the banks are taking huge hits.

The dude who had the foresight to protect the bank will be rewarded handsomely come bonus time.

reply to post by Crakeur


the question must be asked

...is this behaviour conducive to resolving the credit problem?

i believe everyone has to be honest with their finances and only then can it be deduced just how bad the problem is,and how it can be dealt with it.

sure theyre watching their own back for the short term,but are they considering the long term financial stability of the world markets?.

[edit on 15-11-2007 by welivefortheson]

reply to post by welivefortheson


I think they were looking into the long term when they started hedging their bets with the sub prime markets.

reply to post by Crakeur


Yeah, but my problem is how they went about doing it. From what I have been told, and yes its second hand information, they would sell an investable instrument, whether a CDO, a jumbo mortgage or an outrigth stock in a company. They would talk up the investment to a prospective buyer.....THEN they would go out an borrow the same security so they could short it. Yes they are hedging themselves, but rather dubious business practices if you ask me. Years ago this would have never been allowed. (trust me on that one).

This is very reminiscent of what Henry Blodget was doing i the late 90's and throughout 2000. He kept buy ratings on internet stocks because of banking arrangements with his firm and the company. Despite e-mails and phone calls where he called them dogs, but cash cows for the firm. It all worked fine and dandy until the market caved. They would not take those buy ratings off, but firms would take out short positions to hedge themselves. I worked down there in the 1990's through 2002, so I know this was going on. I was not at the same level as these people, but everyone was aware of how the money was being made.

Enron was a perfect example of this. Enron had on it a giant PUT option. As the stock went up, everyone was happy. Once it started to slide, they were so levereged that it was inevitable they would enter what we called a "death spiral". Every few dollars down for the stock, they themselves had margin calls to meet. Either pony up $ to pay debt, sell stock to pay debt, OR the covenants in the loans would kick in and technically they would be in default. Traders knew what had to be done. They had to sell stock, as thier assets were from trading energy and were not real. They had to value these assets and they were over valued. They could not sell such assets in a marked to market situation, as they would lose on every sale. So selling stock to raise money was the only way. This however is dilutive to earnings......So we knew more selling would take place and the stock price would go lower. Again, another trade level would be clicked.....new options to be made. Enron never had to a choice to make...They had to sell stock to raise money to meet margins. This contniued for weeks and the death sprial spun out of control...eventually bankrupting the company. Traders on wall street profitted from Enron on the way up, but the money made on the way down??? Completely ridiculous!!!! The stock became unshortable..... Everyone in the know was short that stock. Options could not be written fast enough. Traders know that when a death spiral begins.......there is no stopping it. Although, I have to give credit to Country Wide Financial. This company was identified recently by a trader I know as a death spiral waiting to happen. Not saying it still won't, but they owe alot to the backing of Bank of America.

Companies kept buy ratings on Enron from the high $80's to the low $30's. By that time no one was long Enron anymore on wall street and they went from Buys to sell. Not holds or reduce, but straight to sell.

This is one of the reasons that made me leave down there. I argued a lot with people at my company about the ratings. Evens told them we should have had the balls to be the first to slap the sell rating on the stock. The selling needed to be slow for everyone to profit. And profit they did!

I don't like what Goldman is doing, because a lot of people went to the mat for LTCM when they were in trouble, including the FED. Goldman went in and only did one thing. Covered their A$$. Now, they seem to be doing it again.

From what I have read, goldman is largest holder of level III mortgages. I am very interested in where these will be valued as to where they valued them for resale.

Something else about Enron...They were a victim in 2 ways. First, victim of their own greed. Secondly and more interesting I find, they were a victim of their own success. Do you know what is some of the most profitable division of the major trading houses? The energy trading divisions. Know where all their talent came from????? ENRON! They were the leaders in energy contract trading. No one had ever taken it to thier level before. No one knew how to account for theings when they got soo big, so everything wasa kind of made up as they went.

Want to know a dirty little secret about the PRICE OF OIL??? Fundamentally it should be in the low $70's. Supply and demand price it just above that. Why is it soo high?? Traders want $100 a barrel (and the weak dollar). It has been one of the most consistant and profiatble trade over the last 4 yeas. Think the OIL TRADERS want it to stop? Hell no. They are profiting on the oil trade and WANT $100 a barrel. They also know the inverse relationship oil has with the US$, so they are all short the $. Well, I feel this trade is about to end. I have seen a lot of trades coming off both plays, although this could simply be end of the year window dressing (keep your profits). If they change their positions on oil and the stock falls back to fundamental parity, this could bring added strength to the US$, which would bring further selling pressure to the price of oil....and so on and so forth. Thus bringing the OIL/US$ trade to an end.

I know I speak alot about cycles when I talk about Global Warming, but...cycles are everywhere. The most predictable cycles are those in the business world. What comes around goes around......prices rise, prices fall.

If FNM and FRE dip any further there could be bad things happening. Keep an eye on this, as if they fall...the entire banking system of the US would be in shambles. Seriously...not a good thing...

Originally posted by Crakeur
reply to post by welivefortheson

 

I think they were looking into the long term when they started hedging their bets with the sub prime markets.

is it a hedge if you know it is going to go down and you can make money on both? it may be i am just asking

They skimmed money off the processing and money managing fee's on the front side ( the more leveraged credit offered the better) and then they shorted the markets (not just to hedge) but to make it closer to a WIN-WIN . A lot different.But i guess if you can tell which way things will be headed than, make the best of it. Plus they know the fed will do their best to bail them out at the expense of the public (inflation) and dollar (decline)

the credit insurance companies are now going to be insolvent soon

and then the death spiral? roll those pant's up there will be a flood of money and rate cuts IMO



[edit on 15-11-2007 by cpdaman]

Originally posted by cpdaman

the credit insurance companies are now going to be insolvent soon

[edit on 15-11-2007 by cpdaman]

Mortgage insurers are almost there. PMI, MTG, RDN. I hate to say it but I profited nicely from those trades.

Other big winners have been the BOND INSURERS, they insure the the CDO's. ABK and MBI. lots of money made there too.

Now I have 2 new targets. Credit cards and re-insurers. people have not been talking about re-nsurers being in troublw, so not sure if those are going to work. Please do not get angry at me for making money off the losses of others, its just what traders do. (I still trade on my own, just not for anyone else). I have been short COF since $66 and got some Master Card (MA) short at $196.

The re-insures I have no plays in yet, still researching who might have exposure. But remember, insurance companies don;t insure anything with being insured themselves. So someone was insuring the mortgage and bond insurers.

Anyone notice the strengthening of the US$, the falling price of gold and the falling price of Oil? All are related, but not yet sure if this is the beginning of a trend or just profit taking. I still feel the US$ correction does not take place until the begiing of the new year.

Originally posted by traderonwallst
Anyone notice the strengthening of the US$, the falling price of gold and the falling price of Oil? All are related, but not yet sure if this is the beginning of a trend or just profit taking. I still feel the US$ correction does not take place until the begiing of the new year.

you answered your own question.............

they are profit taking on their limited/hedged holdings in gold ~while it is high~ to have enough capital to still play the game (that they are solvent)

the CDOs & SIVs you cite, still have no accepted 'value'.......
their exaggerated vales and ratings were subject to the infernal practice of the numberous Svengali centered Bond Rating enterprises...
who were busy milking the system -
with the approval and consent of the lower tiers of predators,,,,,
such as your mortgage bank, fund managers, brokers, even Sally-Mae
& such were taken by the 'mutual fleecing'.

the article you did in the OP is only a capsulization of the info presented by many others...some on a daily basis
...throughout this Economic (('slap-in-the-face', 'wake-up-&-smell-the-coffee'))...Ephiphany !

the benefit of this wake up slap in the face B.S is that the RON PAUL wagon has been getting filled up by the "hard money" crowd.

like Jim rogers, Peter schiff, Richard russell, and more

www.freemarketnews.com...

Alternative, hard-money investment manager Peter Schiff recently asked everyone on his 60,000 email list to support small-government, hard-money candidate Ron Paul with maximum donations.

to support ron paul this gentlemen is taking out the following

Lawrence Lepard, is purchasing a $100,000-plus ad in USA Today on November 21st or Nov 22, as reported by FMNN yesterday

this movement is gaining RESPECT NOW, the money masters may have to orchestrate something that suspends the constitution or the election's. jk....actually i wish i was.