http://hf-implode.com Tracking as hedge funds learn about risk ... the hard way. en http://hf-implode.com/viewnews/2008-07-24_Debtcapitalismselfdestructs.html http://hf-implode.com 2008-07-24 Quite the thesis by Liu. It is long, but worth reading for it history of the GSEs and many gems of insight. For example: The privatization of Fannie Mae and Freddie Mac was an ideological move. It was financially unnecessary as sovereign credit could have funded the entire low-, moderate- and middle-income housing-mortgage needs with no profit siphoned off to private investors and brokers. These agency debt instruments played a crucial role in developing and sustaining the credit bubble in the US that is now coming home to roost. And it is difficult for even us seasoned Fed-skeptics to trump this statement: The world is now witnessing the slow but steady collapse of the central banking regime that came into being in the US in 1913, which has since failed to fulfill its mandate of managing the monetary system to maintain price stability and full employment. Dysfunctional monetary policies adopted by all central banks, led by the US Federal Reserve, have allowed the market to take capital out of free market capitalism to turn it into a gigantic Ponzi scheme. And: The bailout of Bear Stearns Cos arranged by the Federal Reserve in March signaled to the market that the government would not allow the GSEs to fail or default on their debts. It is clear evidence of the moral hazard effect on the financial market from bailing out one institution. With all the exposure that all banks and non-bank institutions and central banks have to Fannie and Freddie debt default, the ripple effect through the whole financial system would be unbelievable if they were allowed to fail. It was also clear evidence of the "too big to fail" doctrine. Liu does not say it, but as a result of this trend, US sovereign debt will inevitably (soon?) take its lumps. But he does say: But unlike 1933 in the days of the New Deal when deficit financing was an operative option to revive the economy because the government was relatively free of debt, the US in 2008 is already deeply in debt, having operated with deficit financing in a boom time for more than two decades. and: In 1968, then president Lyndon Johnson, as part of his Great Society program, turned Fannie into a shareholder-owned company as part of a national housing policy to make finance capitalism finance the nationalization of housing. It was the beginning of corporate market socialism in the name of populist economic democracy. The public could only benefit if corporate and financial institutional interests could profit first. And the public must pay if market capitalism fails systemically, absolving the losses of wayward corporations and financial institutions. "Corporate market socialism" -- very apropos. We may have to re-use that. Liu continues: Low-income voters were first dazzled by the new homes they were able to acquire with no money down and with monthly payments financed with home equity loans as house prices rose. They acted like Pinocchio in a Pleasure Island - that would soon turn them into jackasses to be sold to work in salt mines. The financial institutions were comforting their pangs of conscience over taking loans off their balance sheets as soon as they made them by excusing themselves with the idea that they were making low-cost mortgage available to millions of homebuyers. Neoliberal economists were celebrating the US miracle of mass capitalism that does not need capital. "Capitalism that does not need capital"! Liu is on a roll. He also states: The GSEs have been financially successful because they combine private sector appetite for profit with access to government-backed credit at below market rates. It was a way to nationalize housing through the free market capitalism. The problem was that financial manipulation cannot replace the need for adequate income growth. The mismatch of income with asset price is the definition of a financial bubble. People were buying homes with cheap credit at prices that their income could not afford. The more home prices rose due to cheap credit, the more homeowners fell into the debt trap. There he brings up the deteriorating real income problem that the vast majority of observers still haven't noticed or fully appreciated -- we cannot support ever-growing debt on ever-shrinking incomes! And we would be remiss to leave out a succinct quote from page 4 that really wraps up the current governmental actions taking place: Regulatory reform while necessary cannot be backdated. Liu closes with this prescription: The argument for Third World debt forgiveness contains large measures of lender liability and predatory lending. Debt securitization allows predatory bankers to pass the risk to global credit markets, socializing the potential damage after skimming off the privatized profits. The housing bubble has been created largely by predatory lending without any lender liability. The argument for forgiving Third World debt is applicable to low- and moderate-income home mortgage borrowers in the US as well. Let's hear some proactive commitments from the presumptive candidates of both political parties instead of empty populist campaign rhetoric. However there is a slight problem there: the powers-that-be are identical with the financial interests that would benefit from perpetual indebtedness of the American nation. Just look at who we've got to pick from: A member of the Keating Five S&L scandal set, and a man who is protecting a veritable subprime predatory pioneer (complete with lucrative government bailout). Even if it would be better for all of us to start with a clean slate (preferably involving disgorgement of the predators and sound money), why would these entrenched interests relinquish control and allow everyone else to enjoy the fruits of true free markets, where real competition could arise? We'll have to take it from them... and it probably won't be achievable through elections. —apk http://hf-implode.com/viewnews/2008-07-24_PaulsonWantsaSayinHedgeFundBreakdowns.html http://hf-implode.com 2008-07-24 Treasury Secretary Henry Paulson outlined a plan yesterday that may give some power to the U.S. government when hedge funds come to the end of the road. Paulson said that in the event of trouble, he wanted “"additional powers to manage the resolution, or wind-down, of large non-depository financial institutions, such as larger hedge funds, so as to limit the impact of a failure on the broader financial system." http://hf-implode.com/viewnews/2008-07-24_PaulsonCoPlansFundtoProvideCapitaltoBanks.html http://hf-implode.com 2008-07-24 Paulson plans to open a hedge fund by December that will provide capital to the world's biggest banks and brokers as they add to the $345 billion they've raised in the past year, according to two people with knowledge of the matter. His Paulson & Co., which oversees $33 billion, hasn't set a size target for the fund, said the people, who declined to be identified because the plans aren't final. http://hf-implode.com/viewnews/2008-07-24_FitchUpdatesRatingsModelProjectsSteepHousingPriceDeclines.html http://hf-implode.com 2008-07-24 "Fitch Ratings said Thursday that it had enhanced its U.S. residential mortgage loss model, called ResiLogic, a key component of the agency’s overall approach to assessing U.S. RMBS new-issue ratings. While the new-issue market has been essentially dead for all of 2008, Fitch’s revisions suggest that the agency is preparing for where the market might be headed next: seasoned mortgage issuance." http://hf-implode.com/viewnews/2008-07-24_WaMuSlumpsasGimmeCreditCitesLiquidityConcern.html http://hf-implode.com 2008-07-24 Washington Mutual Inc. tumbled more than 20 percent for a second day as Gimme Credit LLC said unsecured creditors were ``pulling funds'' from the biggest U.S. savings and loan. Also see WaMu May Need to Hit the ATM Again. http://hf-implode.com/viewnews/2008-07-24_SenateduetobackhousingbillGSEsharesslide.html http://hf-implode.com 2008-07-24 "The U.S. Senate is due to vote finally on Saturday to approve a major housing market rescue bill, including federal financial assistance for Fannie Mae and Freddie Mac, the mortgage titans whose shares fell again in early Thursday trading." http://hf-implode.com/viewnews/2008-07-24_SECChairmanCoxWantsMoreRegulatoryAuthorityOverInvestmentBanks.html http://hf-implode.com 2008-07-24 "Testifying before the House Financial Services Committee, SEC Chairman Christopher Cox said he needs more authority to have mandatory supervision of investment banks." Said the fox to the hens http://hf-implode.com/viewnews/2008-07-24_TimeforBankstoRaiseEquityCapitalGoGoGoQuickly.html http://hf-implode.com 2008-07-24 "Literally overnight everyone is bullish on the banks despite their underlying problems not getting any better. Only a week ago, the stock prices of banks that have yet to raise capital or in desperate need of capital were at levels that were prohibitive to do so." http://hf-implode.com/viewnews/2008-07-24_ShortSellersinBanksMovetoOptionsMarket.html http://hf-implode.com 2008-07-24 "The Securities and Exchange Commission’s move to curb “naked” short selling may have blunted some of the selling pressure on financial stocks. Or, it may have just driven that business into the options market." http://hf-implode.com/viewnews/2008-07-24_NewJerseyCommits400MToPrivateEquityFunds.html http://hf-implode.com 2008-07-24 "The New Jersey State Investment Council this month committed $400 million to a trio of private equity funds." http://hf-implode.com/viewnews/2008-07-23_PossibleRoleofSemGroupBankruptcyinOilPriceDrop.html http://hf-implode.com 2008-07-23 Traders sold oil futures as news emerged that tropical storm Dolly was set to miss oil and natural gas installations in the US Gulf of Mexico. Oil traders said SemGroup could have exacerbated the spike in oil prices this month, when the market experienced unprecedented swings of more than $10 a barrel, as the company was buying back some previous bets on lower prices. http://hf-implode.com/viewnews/2008-07-23_RadioFreeWallStreet7232008.html http://hf-implode.com 2008-07-23 "Lee Adler, Russ Winter and Aaron Krowne analyze the impact of key financial events on the financial markets and economy and tell what to look for in the weeks and months ahead. What are the next opportunities for profit? Not a subscriber? Click here for a free extended preview of this podcast." http://hf-implode.com/viewnews/2008-07-23_CARLOANCALLEDASSETSEIZUREBYBANKINSPITEOFPERFECTPAYMENTRECORD.html http://hf-implode.com 2008-07-23 "I warned you... I warned you that the banks would resort to seizing assets of people even with perfect payment records." http://hf-implode.com/viewnews/2008-07-23_ANewSheriffinTown.html http://hf-implode.com 2008-07-23 "The powerful rally in financials illustrates an important point. A bear raid where many stocks are shorted by 15, 20, even 25% combined with the July 14-15 capitulation was a set up for a ferocious short covering move. When I suggested such at the time, some suggested I was trying to catch a falling dagger. But in reality this set-up was more akin to catching the dagger, throwing it back at the thrower, and embedding it in his jugular." http://hf-implode.com/viewnews/2008-07-23_Bunningcriticizessupportformortgagegiants.html http://hf-implode.com 2008-07-23 "U.S. Sen. Jim Bunning again condemned a support package for troubled mortgage giants Fannie Mae and Freddie Mac, saying the plan backed by the Bush administration "smacks of socialism."" http://hf-implode.com/viewnews/2008-07-23_FannieFreddieRaceBanksToBottom.html http://hf-implode.com 2008-07-23 "Fannie Mae and Freddie Mac may be unintentionally driving down prices in already depressed markets to the detriment of commercial lenders such as Bank of America (BAC), JPMorgan Chase , Wells Fargo and Wachovia " http://hf-implode.com/viewnews/2008-07-23_FDICDontworryaboutbankfailures.html http://hf-implode.com 2008-07-23 "The housing bust will put more banks out of business, but all but a handful of institutions will weather the crisis, one of the nation's top financial regulators said Tuesday." We know which one they are, the 19 chosen. http://hf-implode.com/viewnews/2008-07-23_FannieMaeUnsold5BillionHomesBringPeriltoShareholders.html http://hf-implode.com 2008-07-23 "-- Fannie Mae, the largest U.S. mortgage finance company, couldn't find a buyer who would pay $6,900 for the three-bedroom house at 1916 Prospect St. in Flint, Michigan. So broker Raymond Megie, who is handling the foreclosure sale, advised cutting the price to $5,000. Megie still couldn't sell it. ``There's oversupply,'' he said. The home sold in 2005 for $110,000." http://hf-implode.com/viewnews/2008-07-23_FreddieFannieShouldSplitNotGetAidFaberSays.html http://hf-implode.com 2008-07-23 "Freddie Mac and Fannie Mae should close down their business or split into private companies and not get government aid, investor Marc Faber said." http://hf-implode.com/viewnews/2008-07-23_WallStreetGotDrunk.html http://hf-implode.com 2008-07-23 "Of course, if your entire world view is predicated on the belief that tax cuts cure all ills, and that any sort of regulatory supervision -- even of FDIC insured banks by the Federal Reserve -- is an evil to be avoided, well, then, it might look like drunkenness to you."