ExSanguination Spreads To Global Credit Markets
The Nattering One waxes nostalgic... Dorothy, whats that loud whoosing and sucking sound???
Wizard Bennie & the Feds sez "Pay no heed child, click your heels 3 times and repeat the Hanky Skanky Mantra:
There's no spillover from homes, there's no spillover from homes... not into Alt-A, Prime, Financial, Banking or the Economy." Right got it, thank Hank.
It's a 1920-1930's deja vu with the equities and banking systems all over again...
Remember, this liquidity cufuffle all started as two Bear Stearns hedge funds revealed that their porridge was not right...
Many formerly highly rated credit products could not be easily sold in the market at the values that had been assigned to them using questionable financial models.
"Clueful" hedge fund managers may have realized that they were facing significant losses in their credit portfolios.
These funds sought to scale back their leverage, except there's a small problem...
selling an "illiquid" synthetic credit asset might risk even deeper losses as the positions "marked to market" rather than what the bogus modeling pre-supposed.
Thus the fund managers decided to de-lever by selling a liquid asset with known or marked to market value... stocks, bonds, commodities, futures & options.
The Sky is Falling?? And here's where it gets really interesting, the "illiquid" synthetic debt instruments (derivatives) started "misbehaving".
Inexplicably, put (short) assets ran up, call (long) assets ran down and everything started acting like the Madhatter from Alice in the Looking Glass at a tea party.
And its not just the inadequacy of the modeling, as no one could have predicted these reactions.
The "misbehavior" is exacerbated due to the very nature of the market participants unpredictable action or inaction.
I.E. not being able to ascertain a true value and initially selling an alternative asset caused the market to react differently than expected.
We now return you to your regular programming... Last night, Euro & Asian markets trounced.
Today, the credit crunch continues with Central Banks around the world trying to stem the tide of a massive credit & liquidity collapse....
Fed funds opened at 6% vs 5.25 benchmark... they will be forced to lower in Oct, so the Fed injected $19B in reanimation early, then another $16B for $35B total.
Euro rates rose to 4.27 vs benchmark 4%, ECB injecting another $83B; BOJ pumped with $8B as carry trade unwind drove the Yen to 117 vs $.
Down under even... Australia's Central Bank injecting $4.2B... FYI, the FED accepted $19B in mortgage backed debt as collateral for the repo money....
Yes, they do this on a regular basis MBS for repo money. The Nattering One waxes ironic: fraudulent debt instruments for counterfeit monopoly money, cute.
Goldilocks on the beach....a silver lining??? Hedge funds are liquidating their commodities positions.
Since Aug 1st, futures on crude -9%. Various commodities have been unwinding the last few days, dropping the price of the underlying goods. Jason Schenker, economist at Wachovia Corp:
"If liquidity dries up, or slows down (in credit markets) and speculative interest that has supported energy markets dissipates, there is real downside risk for crude."
Meanwhile, Pirates of the Caribbean...
Bear Stearns Cos.' two bankrupt hedge funds won temporary protection from US lawsuits as they seek to have that status made permanent while they liquidate in the Cayman Islands.
Can't you smell that smell?... Black Mesa Capital, a hedge fund firm that uses computer models to track down investment ideas, said that at least one large arbitrage hedge fund or investment bank is liquidating "massive" trading portfolios.
Deutsche Bank AG's DWS unit, Germany's biggest mutual fund company, said the assets in one of its investment funds have fallen by 30% since the end of July ($3B to $2.1B Euro).
So far this month, Tykhe, a quantitative hedge firm that manages about $1.8B, has suffered losses of 20% in its largest hedge fund, and is moving quickly to trim its investment positions.
Denial is not a river... Goldman Sachs sez "business as usual" and denies forced liquidation of its $9B Global Alpha Hedge Fund, down 16% this year, 8% in July...
Goldman’s North American Equity Opportunities fund fell 12% in July and another 12% in the the first few days of this month.
Black Mesa redux: So far in August, many other market neutral hedge funds have lost 5 to 15%. Black Mesa said it started reducing its leverage and selling positions to raise cash on Monday.
As of Aug. 8, the firm said it had between 50% and 100% of its portfolio in cash and had brought leverage down to 0.5 to 0 times its assets.
Dominoes anyone?? Countrywide sez "unprecedented disruptions" in the mortgage market pose a threat to its financial condition. More on Countrywide later today as we examine their 10Q in detail, its not pretty.
WaMu's announced its ability to raise liquidity through the sale of mortgage loans in the secondary market will be "adversely affected".
Said liquidity crunch, could cause a cessation of operations by an inability to access the capital markets or by unforeseen demands on cash.