It's Deja Vu, All Over Again
Snipets from MSN & Bloomberg with a large sprinkle of Nattering love, cuz we care...
Crashing fund... Goldman Sachs Group Inc.'s Global Alpha hedge fund fell 22.5% in August, and down 44% from its Mar 06 peak.
Investors last month notified Goldman, they plan to withdraw $1.6 billion, or 20% of the fund's assets.
Goldman blamed its losses on too many quantitative funds making the same trades, and said in mid-August it would have to develop new strategies.
The Nattering One warned before 05/07 on group think (monkey see, monkey do behaviour) and risk management.
For more "group think" and a chart of the REAL CRASH, refer to yesterday's comments from Creditsight's regarding the pickle in SIV's and Minyanvilles chart of the ABCP market meltdown.
Artificial Buoyancy... While the stock market indices (which are market cap weighted) have been artifically buoyed by a flight to safety in ultra large cap issues (DJIA, SP500, NDX, NAZ)...
One look at the transports DJTA, utilities DJUA, mid cap MID, small cap RUT, retailers RTH, finance XLF and homebuilders HGX; shows a different story.
The Real Crash... Short-term debt maturing in 270 days or less fell to a seasonally adjusted $1.92 trillion in the period ended yesterday, including a $21.6 billion decline in asset-backed commercial paper.
Commercial paper outstanding has fallen $306.4 billion in five weeks. Asset-backed paper, declined $237.8 billion, or 21%, in the past five weeks.
The amount of commercial paper coming due this week revised up almost 50% to $503 billion from $265 billion...
indicating an increase in the amount of short-term debt sold last week that matures in less than 7 days. From yesterday: "a train wreck in the making."
Good money after Bad?... Last month Countrywide borrowed $11.5 billion from bank credit lines and accelerated a plan to fund mortgages through its thrift unit.
Today, Countrywide arranged for $12 billion in additional secured borrowing capacity through new or existing credit facilities.
LBO Ball & Chain... KKR's eight underwriters have been saddled with all of the 9 billion pounds of debt financing Europe's biggest leveraged buyout after investors rejected high-risk, high-yield loans.
Banks in the U.S. are attempting to raise $16 billion of loans for KKR's acquisition of First Data Corp.
A group of banks led by Citigroup Inc. sold $1 billion of loans for Allison Transmission.
The banks are still holding $3.2 billion of Allison related bonds and loans they had planned to sell in July.
Today, Deutsche Bank and JPMorgan Chase have found suckers, er, buyers for the highest yielding loans financing KKR Kohlberg Kravis Roberts & Co.'s purchase of U.K. pharmacist Alliance Boots.
At what price? The debt pays annual interest at 6.5% over the London interbank offered rate. That compares with a 2.75% margin offered on the senior Boots loans on July 5. Ouch!
Yeah, it sure is "different" this time......
Instead of being fueled by rising wages, rising housing prices were fueled by low interest rates (cheap money) and risky lending (originate to sold, rather than hold).
As a result, homeowners have faced a growing gap between their incomes and the price of their homes.
Wages barely kept pace with inflation in this artificial (dot con) economy which took housing prices and housing stagflation to unsustainable levels.
California leads the way with 51.8% of gross income being used for housing loan costs. The US average housing debt ratio is now 36.9% of total income.
In another lifetime as an underwriter, the maximum PITI that we would write was 33% over; total debt 38%; of gross income with 20% down on a fixed 30 year owner occ loan.
Non owner occ, ARM's and 90% LTV were much stricter at 25% over 30%, interest only, no down & stated income loans DID NOT EXIST.
And we lent using sound principles (finanical products, LTV ratios & docs) on solid properties with the intent to hold and service the loans.
We always had to mitigate the risk to the savings association. At worst, we would portfolio the "conforming" brokered loans and pass them to FNMA, FHLMC, FHA or VA.
It's Deja Vu all over again..., hat tip to Mark Gilbert at Bloomberg.
From a book describing how the collapse of a U.K. mortgage lender called Cedar Holdings triggered a crisis of confidence in the banking system, requiring a Bank of England bailout:
"A further important cause for alarm was the danger that the troubles, if not solved, would be transmitted through a domino effect to the many other secondary banks which...
with much vulnerable short-term borrowing and many assets tied up in the increasingly troubled property industry, were themselves showing signs of being at risk in the harsher new economic environment."
No, this book was not just published, "The Secondary Banking Crisis, 1973-75" by Margaret Reid was published in 1982.
Unlike Bennie & the Feds... In the current crisis the BOE Bank of England, by contrast, has been adamant that it won't rescue the money markets by accepting low grade collateral (ABCP), or by offering three-month cash.
The Fed and the ECB were rebuked yesterday, albeit obliquely, by U.K. central bank Governor Mervyn King for bailing out commercial banks.
"The provision of such liquidity support undermines the efficient pricing of risk by providing ex post insurance for risky behavior.
That encourages excessive risk-taking, and sows the seeds of a future financial crisis."
Victoria Mortgage Funding was placed into administration earlier this week, the U.K. equivalent of Chapter 11. Victoria couldn't secure enough funding to stay in business.
As King put it, that's what should befall financial institutions that ignore the risk of a funding deficit and "have borrowed short to lend long."
The U.K. central-bank chief said helping commercial banks salvage their "risky or reckless lending" is especially dangerous because it
"encourages the view that as long as a bank takes the same sort of risks that other banks are taking then it is more likely that their liquidity problems will be insured ex post by the central bank."
The correct number of banks to fail when a credit bubble bursts is not zero.
If the best way to avoid the mispricing of risk in future is to sacrifice some of the less-prudent lenders on the altar of liquidity, then let the culling commence.
Crashing fund... Goldman Sachs Group Inc.'s Global Alpha hedge fund fell 22.5% in August, and down 44% from its Mar 06 peak.
Investors last month notified Goldman, they plan to withdraw $1.6 billion, or 20% of the fund's assets.
Goldman blamed its losses on too many quantitative funds making the same trades, and said in mid-August it would have to develop new strategies.
The Nattering One warned before 05/07 on group think (monkey see, monkey do behaviour) and risk management.
For more "group think" and a chart of the REAL CRASH, refer to yesterday's comments from Creditsight's regarding the pickle in SIV's and Minyanvilles chart of the ABCP market meltdown.
Artificial Buoyancy... While the stock market indices (which are market cap weighted) have been artifically buoyed by a flight to safety in ultra large cap issues (DJIA, SP500, NDX, NAZ)...
One look at the transports DJTA, utilities DJUA, mid cap MID, small cap RUT, retailers RTH, finance XLF and homebuilders HGX; shows a different story.
The Real Crash... Short-term debt maturing in 270 days or less fell to a seasonally adjusted $1.92 trillion in the period ended yesterday, including a $21.6 billion decline in asset-backed commercial paper.
Commercial paper outstanding has fallen $306.4 billion in five weeks. Asset-backed paper, declined $237.8 billion, or 21%, in the past five weeks.
The amount of commercial paper coming due this week revised up almost 50% to $503 billion from $265 billion...
indicating an increase in the amount of short-term debt sold last week that matures in less than 7 days. From yesterday: "a train wreck in the making."
Good money after Bad?... Last month Countrywide borrowed $11.5 billion from bank credit lines and accelerated a plan to fund mortgages through its thrift unit.
Today, Countrywide arranged for $12 billion in additional secured borrowing capacity through new or existing credit facilities.
LBO Ball & Chain... KKR's eight underwriters have been saddled with all of the 9 billion pounds of debt financing Europe's biggest leveraged buyout after investors rejected high-risk, high-yield loans.
Banks in the U.S. are attempting to raise $16 billion of loans for KKR's acquisition of First Data Corp.
A group of banks led by Citigroup Inc. sold $1 billion of loans for Allison Transmission.
The banks are still holding $3.2 billion of Allison related bonds and loans they had planned to sell in July.
Today, Deutsche Bank and JPMorgan Chase have found suckers, er, buyers for the highest yielding loans financing KKR Kohlberg Kravis Roberts & Co.'s purchase of U.K. pharmacist Alliance Boots.
At what price? The debt pays annual interest at 6.5% over the London interbank offered rate. That compares with a 2.75% margin offered on the senior Boots loans on July 5. Ouch!
Yeah, it sure is "different" this time......
Instead of being fueled by rising wages, rising housing prices were fueled by low interest rates (cheap money) and risky lending (originate to sold, rather than hold).
As a result, homeowners have faced a growing gap between their incomes and the price of their homes.
Wages barely kept pace with inflation in this artificial (dot con) economy which took housing prices and housing stagflation to unsustainable levels.
California leads the way with 51.8% of gross income being used for housing loan costs. The US average housing debt ratio is now 36.9% of total income.
In another lifetime as an underwriter, the maximum PITI that we would write was 33% over; total debt 38%; of gross income with 20% down on a fixed 30 year owner occ loan.
Non owner occ, ARM's and 90% LTV were much stricter at 25% over 30%, interest only, no down & stated income loans DID NOT EXIST.
And we lent using sound principles (finanical products, LTV ratios & docs) on solid properties with the intent to hold and service the loans.
We always had to mitigate the risk to the savings association. At worst, we would portfolio the "conforming" brokered loans and pass them to FNMA, FHLMC, FHA or VA.
It's Deja Vu all over again..., hat tip to Mark Gilbert at Bloomberg.
From a book describing how the collapse of a U.K. mortgage lender called Cedar Holdings triggered a crisis of confidence in the banking system, requiring a Bank of England bailout:
"A further important cause for alarm was the danger that the troubles, if not solved, would be transmitted through a domino effect to the many other secondary banks which...
with much vulnerable short-term borrowing and many assets tied up in the increasingly troubled property industry, were themselves showing signs of being at risk in the harsher new economic environment."
No, this book was not just published, "The Secondary Banking Crisis, 1973-75" by Margaret Reid was published in 1982.
Unlike Bennie & the Feds... In the current crisis the BOE Bank of England, by contrast, has been adamant that it won't rescue the money markets by accepting low grade collateral (ABCP), or by offering three-month cash.
The Fed and the ECB were rebuked yesterday, albeit obliquely, by U.K. central bank Governor Mervyn King for bailing out commercial banks.
"The provision of such liquidity support undermines the efficient pricing of risk by providing ex post insurance for risky behavior.
That encourages excessive risk-taking, and sows the seeds of a future financial crisis."
Victoria Mortgage Funding was placed into administration earlier this week, the U.K. equivalent of Chapter 11. Victoria couldn't secure enough funding to stay in business.
As King put it, that's what should befall financial institutions that ignore the risk of a funding deficit and "have borrowed short to lend long."
The U.K. central-bank chief said helping commercial banks salvage their "risky or reckless lending" is especially dangerous because it
"encourages the view that as long as a bank takes the same sort of risks that other banks are taking then it is more likely that their liquidity problems will be insured ex post by the central bank."
The correct number of banks to fail when a credit bubble bursts is not zero.
If the best way to avoid the mispricing of risk in future is to sacrifice some of the less-prudent lenders on the altar of liquidity, then let the culling commence.
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