OT: dominos continue to topple

A new thread about the economy

Special for Ed and any body else interested.

More major domino just toppled. ========== Carlyle Capital Corporation, which is based in Guernsey, Channel Islands and invests mainly in triple-A rated mortgage securities, missed four of seven margin calls worth a total of $37 million. The firm said it expects to receive at least one more default notice as banks call in loans.

"As the market continues to go down it becomes ever more difficult to meet margin calls," said Joseph Biernat, director of research at fund manager European Credit Management in London. "Even if there is no risk for the securities, no one wants to support high levels of leverage these days."

Peloton Partners, a London-based hedge fund founded by former Goldman Sachs partners, said last week it plans to liquidate its Asset Backed Securities Fund because of losses on mortgage-backed debt, just a year after it won the title of best new fixed-income fund 2007 by EuroHedge magazine. Two hedge funds managed by Bear Stearns collapsed and Sowood Capital Management, run by a former manager of Harvard University's endowment, shut down last year.

The Carlyle fund, which is run by John Stomber, a former executive at investment firm Cerberus, had $21 billion assets under management as of January with 99 percent of those being triple-A rated U.S. agency mortgage securities. The firm raised more than $300 million in an initial public offering on the Amsterdam stock exchange in July last year. The shares dropped 40 percent to $7.21 on Thursday in Amsterdam.

========== Note: (1) These are among the major players. (2) The assets of these firms were not some sort of exotic derivatives but AAA rated paper from government sponsored enterprises [GSE] such as Fannie Mae and Freddie Mac that have the "implied guarantee '' of the U.S. government. Even those bonds have slumped, leading to the failure of premiere hedge funds such as Peloton Partners LLP & Carlyle.

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"Agency paper is about as good as it gets below treasuries and has implicit guarantees of the government. If that paper is worthless we are all worthless."

Unka' George [George McDuffee]

------------------------------------------- He that will not apply new remedies, must expect new evils: for Time is the greatest innovator: and if Time, of course, alter things to the worse, and wisdom and counsel shall not alter them to the better, what shall be the end?

Francis Bacon (1561-1626), English philosopher, essayist, statesman. Essays, "Of Innovations" (1597-1625).

Reply to
F. George McDuffee
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This deleveraging is another aspect of what I call "reality finally prevailing over optimism".

Some myths that are currently unraveling unclude sych myths as:

- Trade deficit does not matter

- Low probability events such as GSE failure are improbable

- It's OK to buy a house that you cannot afford

- It's OK to start a war that you cannot afford

- You can become "trader of the year" by betting against low probability events -- until they actually occur.

- Everyone can participate in a magical financial scheme and become a rich retiree

So, we had a whole worldview, and a system of behaviors, based on unwarranted optimism. That was a self reinforcing system. More optimism, more assets rising in price, less failures as absurdities continued to be financed.

Currently, the world's investors, who were victims of the same faulty optimistic thinking, are smarting up and realize that optimism is a faulty approach and needs to be replaced with realism.

i
Reply to
Ignoramus24341

Oil prices confirm it does.

GSE?

No it isn't. Hell some houses have property taxes that would kill me financially.

All wars are hideously expensive. I am not anti war, I believe in an active defense but, I think the US needs to be a bit more reluctant to cure the worlds problems since Europe which is equally at risk is getting a freeby. Notice how while we were busy how the UN intervened in Darfur.

Your balance sheet always looks good if you push the limits until shit happens. Remember Nasdaq during the Clintion administration? People were mortgaging homes to invest. When the bottom fell out they lost big time.

By the time most people notice the scheme it is on the trailing edge and way too late.

Wes

Reply to
Wes

On Thu, 06 Mar 2008 18:52:03 -0500, with neither quill nor qualm, Wes quickly quoth:

Gasoline prices prove that it's not the Arabs who are screwing us.

-- The best and safest thing is to keep a balance in your life, acknowledge the great powers around us and in us. If you can do that, and live that way, you are really a wise man. -- Euripides

Reply to
Larry Jaques

Its not that wouldn't like to, but they don't like standing in line....

Unka' George [George McDuffee]

------------------------------------------- He that will not apply new remedies, must expect new evils: for Time is the greatest innovator: and if Time, of course, alter things to the worse, and wisdom and counsel shall not alter them to the better, what shall be the end?

Francis Bacon (1561-1626), English philosopher, essayist, statesman. Essays, "Of Innovations" (1597-1625).

Reply to
F. George McDuffee

On Thu, 06 Mar 2008 21:53:49 -0600, with neither quill nor qualm, F. George McDuffee quickly quoth:

Bwahahahaha! Ain't dat de trufe?

-- The best and safest thing is to keep a balance in your life, acknowledge the great powers around us and in us. If you can do that, and live that way, you are really a wise man. -- Euripides

Reply to
Larry Jaques

It was not the managers' money.

It made perfect financial sense, if not ethical sense, to leverage to the hilt and collect their fees while betting against unlikely events.

They probably were not dumb and realized that investors would lose all money eventually, when an unlikely case finally occurs, but their fees would remain in their pockets.

Betting against unlikely events has a nice advantage that most of the time, the managing bettor would be right and would make money, while collecting fees.

The disadvantage is that in the end, the investors lose everything.

This is not the first time it occurs.

I highly recommend to read the following book, recommended by Charlie Munger.

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Fortune's Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street (Hardcover)

It discusses very many useful things, among which is a p oint that "average return" is a very misleading indicator.

Warren Buffett said once that A long string of impressive returns, multiplied by a zero, is still a zero.

i
Reply to
Ignoramus8691

========== Indeed. Thanks for the reminder of the "heads I win, tails you lose" rule. Now, ==> What were their "investors" smoking???

Reply to
F. George McDuffee

I would respectfully disagree. The reserve agreements were private arrangements. I do not see how any laws were violated. The lenders were dumb. But that's not illegal.

Is that the requirement from your opinion, or statutory?

That's not true.

Let's say that the entire financial world is two people, you and me. You have a cow.

I have $100.

You offer me a cow for $3,000.

I agree, "borrow" $2,900 from you and promise to pay it back. (for example, from proceeds of selling milk to you).

We just created a 29:1 leverage.

Inflation also limits the available options. I was shocked when Bernanke and Bush alked about "stimulation of the economy" with inflation this high.

doubtless.

they need to keep us distracted long enough to steal the remainder of money.

i

Reply to
Ignoramus8691

Larry Jaques wrote in article ...

Gasoline prices only show that the US dollar is tanked.

Were the US dollar worth one Euro, oil prices would be approximately $65/barrel.

Right now, it takes $1.50USD to buy a single Euro.

Reply to
*

Interesting stuff, the current situation being precipated by the downgrading of AAA to BBB- is unpresedented. It's really all about fear and lack of confidence.

The real upside of this for me is there are some smoking hot deals in equities. Just when/what to buy is the question. Check out TMA for example. I think they are going BK all AAA class paper. The vultures will get right on those bones.

A lot the "losses" are paper rightdowns per GAAP ,the mark to market vs mark to makebelieve. There are some giant battles being waged by the hedge funds, with major stock manipulation/fraud ongoing IMO. See Cramer for shilling for the shorts.

There are some finacials that are performing 100% but the price is down 60% over a year ago. Fear and loathing on wall street.

Too much easy money, Greenspans book has some interesting insights.

ED

Reply to
ED

========== As I continue to dig, and yet additional "stuff" floats to the surface, it appears more and more that Greenspan/The Fed were major collaborators/enablers in allowing, indeed even promoting, the major banks and other financial institutions to evade the loan reserve requirements that would have prevented the hyper expansion of credit which is now imploding/de-leveraging.

Not a chance in hell that it will ever happen, but I have written my Congressmen urging the appointment of a special prosecutor to investigate under the theory of an "ongoing criminal conspiracy," and to rigorously apply the RICO Act [racketeering influenced and corrupt organization] provisions. The required three predicate felonies appear to be more than adequately established, and it is black-letter US law that in a conspiracy, the participants do not have to know each other, or be aware of all details of the conspiracy to be fully culpable.

As I noted in my letter, the CEOs and the other participants may indeed have profited in the tens and hundreds of millions of dollars, but the damage they inflicted is orders of magnitude greater, into the trillions. The US taxpayers, because of the "full faith and credit" guarantees of many of the involved organizations such as the PBGC, FDIC, "The Fed" and a host of GSEs [government sponsored enterprises] will have to "make good" on much of these losses.

Unka' George [George McDuffee]

------------------------------------------- He that will not apply new remedies, must expect new evils: for Time is the greatest innovator: and if Time, of course, alter things to the worse, and wisdom and counsel shall not alter them to the better, what shall be the end?

Francis Bacon (1561-1626), English philosopher, essayist, statesman. Essays, "Of Innovations" (1597-1625).

Reply to
F. George McDuffee

(snippage)

IMO there are some players on the street that ripped off the public for a few trillion bucks and are now laughing up their collective sleeves. They were taking the toxic waste paper and slicing it into AAA stuff and sell it off as investment grade and at the same time taking short positions on the same paper........they are well known throughtout the business.

There is so much of this paper being held off the books that if it were subject to GAAP these banks would likely be insolvent.. Japan in the early 90's deja vu

Greenspan warned Bush about his taxcut/spending increase to no avail. The housing boom continued05-06 at the same time the fed increased rates...china was feeding this thing.. ED

Reply to
ED

Imagine if I had a shed full of apples. Many are good, some are average, & a few are plain bad. I want to sell them. So I load them into barrels, with the bad at the bottom, then some average, & the good at the top. I sell all the barrels as "good". I'd be jailed, methinks. How is this "securitisation" different?

Reply to
David R Brooks

Good analogy but understated. It's more like a supermarket with known radioactive fruit and mad cow mixed in with good product. With the S&P's and Moodies AAA rating..

Note that the FBI had opened an investigation into Countrywide yesterday...we'll will have wait and see how that goes. Curious minds want to know what the big banks are holding off their balance sheets...... ED

Reply to
ED

============ We may be finding out quicker than we thought....

Ain't SIVs, SPEs and conduits wonderful? The banks ain't got that kind of loan reserves, and the Fed ain't gen'ed up more than about 1/2 this amount in total since Thanksgiving last (at least from their public statements/press releases).

Don't the "smartest guys in the room" realize they are driving a negative feedback loop, and are simply digging the hole they [and we] are in deeper?

The "circularly collateralized" CDS [credit debt swap] derivatives should kick in any second now.... 5,4,3,2,1...

=================== Banks face "systemic margin call," $325 billion hit: JPM

By Walden Siew Sat Mar 8, 9:24 AM ET

NEW YORK (Reuters) - Wall Street banks are facing a "systemic margin call" that may deplete banks of $325 billion of capital due to deteriorating subprime U.S. mortgages, JPMorgan Chase & Co (JPM.N), said in a report late on Friday.

================= for complete article click on

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Unka' George [George McDuffee]

------------------------------------------- He that will not apply new remedies, must expect new evils: for Time is the greatest innovator: and if Time, of course, alter things to the worse, and wisdom and counsel shall not alter them to the better, what shall be the end?

Francis Bacon (1561-1626), English philosopher, essayist, statesman. Essays, "Of Innovations" (1597-1625).

Reply to
F. George McDuffee

It is well understood in the securities industry (aka Wall Street) that there are bad apples in all barrels, so the standard approach is to figure out the percentage of badness and the cost to deal with the inevitable bad apples. The rating agencies are supposed to grade apple barrels by percentage of bad apples contained, and this is where the problem began. They lost track of the fraction of bad, thus causing/allowing barrels to be sold for far more than they were actually worth. Potential buyers, being unable to tell what those barrels are actually worth, stopped buying. All markets require sellers and buyers in equal measure, so the absence of buyers froze the market, affecting the innocent and guilty alike.

Joe Gwinn

Reply to
Joseph Gwinn

I think that everyone directly involved is working like dogs to keep this situation in hand.

For metal content follow this story for a while:

COMEX silver market structure continues in extreme. Based on the most recent Commitment of Traders Report (COT), for positions held as of March 4, 2008. The concentrated net short position held by the largest eight traders in silver are now net short 79,042 futures contracts, or nearly 395 million ounces. This is 225 days of equivalent world mine production and a record never set before in concentrated short positions. In fact, never has there been a greater concentrated position of any type (long or short) in silver, or in any other commodity. In contras, the Hunt Brothers and their associates were charged with manipulation when they held a position only a quarter the size of what these eight shorts hold today.

What do you think silver will go to on a short squeeze?

And wheat is over $11.00 bucks!!! Makes the $3.80 diesel look cheap..

ED

Reply to
ED

Good. Maybe the FBI will keep them too busy to call me, looking for someone who had my phone number years ago, the sorry bastards.

Reply to
Michael A. Terrell

What's funny is that I remember a few years ago when there were a number or right wing types here that made fun of the Euro. They were saying how worthless they were and never would be worth anything near the US dollar. Boy, have times changed. I'm sure they forgot all about it but it was like when they were saying "freedom fries" instead of french fries, and to boycott French products. Yeah, those Euros are worthless aren't they? Lucky for the guys who said it that nobody remembers who they were. But it was the uber patriotic guys like Gunner.

Hawke

Reply to
Hawke

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