Florida State Fund Bankrupt?
Today's theme: Ye shall reap what ye sow...Now, close your eyes,
click your heels three times, do the Hanky Skanky (to Dude Looks Like A Lady by Aerosmith) and repeat the mantra:
"There is no spillover or bleed into the general economy, stock market, financial or banking sector."
Does it make up for... the 3.5% less spent per person on Black Friday? Online sales this past Monday, otherwise known as Cyber Monday, rose 21% to a record $733M.
Scrambling Freddie... Freddie Mac said last night that it cut its Q4 dividend by 50%, as it had previously warned, and that it is planning to sell $6 billion in preferred stock to raise necessary capital to stay solvent.
Confession by Federal Reserve Vice Chairman Donald Kohn:
"The degree of deterioration (in credit markets) that has happened over the last couple of weeks is not something that I personally anticipated.
There's further to go in revealing losses (write downs on bad debt).
Heightened concerns about larger losses at financial institutions now reflected in various markets have depressed equity prices...
and could induce more intermediaries to adopt a more defensive posture in granting credit, not only for house purchases, but for other uses as well.
The housing sector has continued to decline and to erode at a very, very rapid rate.
On the other side, the spending data have been maybe a little on the soft side. There has been a noticeable slowing in the growth of consumption."
Nice observations, but a little late in the game. The word slow or phrase mentally challenged comes to mind.
Log rolling in a Gator pool...famous last words from the Florida State Board of Administration:
"no local government had ever lost money in the Florida pool since its creation in 1982."
November 14th we noted: "The Florida State Board of Administration manages about $50 billion of short term investments for the state, school districts and local governments.
$2.2 billion or 4% of that debt has recently been downgraded to junk, or below investment grade. Some $3.6 billion, or 7.3%, of additional securities may be downgraded by credit rating companies."
New estimates... The State Board of Administration manages about $42 billion of short term investments, including the pool, as well as the state's $137 billion pension fund.
Almost 6%, or $2.4 billion, of its short term investments consist of ABCP or asset backed commercial paper that has defaulted. Since the report was issued...
Florida local governments and school districts pulled $8 billion out of the investment pool, or 30% of its assets, after learning that the money market fund contained more than $700 million of defaulted debt.
Since the withdrawals, the defaulted debt has since skyrocketed to $900 million of defaulted asset backed commercial paper, which now amounts to almost 5% of its current holdings.
Should the withdrawals continue, Florida's pool may have to consider filing for bankruptcy protection. John Coffee, a securities law professor at Columbia Law School:
"I'd expect the pool is going to sue the people who sold them the commercial paper, saying the risks were hidden." Lehman Brothers sold Florida most of its now default-rated ABCP asset backed commercial paper.
More good luck for the pool: the pool owns $650 million of certificates of deposit from Countrywide Bank, a unit of Countrywide Financial, that now amounts to more than 3% of the pool's assets.
Joseph Mason, professor of finance at Drexel University: "While the state of Florida has a moral duty to cover any losses suffered by the pool participants, its own shaky finances will make that difficult.
The state appears to have breached the trust of the investors by putting money in new kinds of debt its managers didn't fully understand, in their search for higher yields."
Does this yield chasing misallocation of capital sound familiar? Ye shall reap what ye sow.
Commercial Real Estate Bubble... According to Moody's Investors Service, the 7 year rally in offices and retail properties ended in September when prices fell an average of 1.2%.
More losses are likely because banks are holding $54 billion of commercial mortgages they can't sell. The Bloomberg REIT Index measuring the stocks of 126 publicly traded property companies dropped 30% from its peak in February.
The cost of derivatives protecting investors from defaults on the highest rated bonds backed by properties more than doubled in the past month.
The benchmark CMBX-NA-AAA index of derivatives tied to the safest commercial mortgage securities rose to 102 basis points from 44 a month ago.
It costs $102,000 a year to protect $10 million of bonds backed by property loans against default, up from $44,000 a month ago. Sales of debt secured by commercial mortgages tumbled 80% to $3.9 billion in October from a year earlier.
James Ortega at Saenz Hofmann Fund Advisory: "The commercial real estate market is imploding." Christian Stracke at CreditSights: "Commercial real estate is a full-blown bubble that feels very much at a bursting point."
Bondholders helped feed demand for loans by purchasing a record $273 billion of securities backed by commercial mortgages this year, up from $95 billion in 2004.
But, demand has dried up since July. Banks also have about $283 billion of debt they provided to help finance LBO or leveraged buyouts in the U.S. and Europe that hasn't been sold.
The Nattering One muses... in his best Capt. James T. Kirk, Why? Spock?
According to Moody's: Banks provided loans that allowed borrowers to pay only interest, not principal, and lenders offered financing that exceeded property values.
The average LTV ratio reached a record high of 117.5% in Q3 for mortgages that were turned into bonds, from 90% in 2003.
Does this yield chasing misallocation of capital sound familiar? In the Florida Fund, Commericial & Residential Real Estate markets, the root cause is the same.
Greedy people trying to make something, from nothing. As a nation we have become the masters of transparency and vapor.
Junk bonds, leveraged buy outs, a myriad of leveraged financial instruments and their accounting chicanery, outsourcing to labor at the margin.
Instead of investing in a durable domestic economic future, we strive to make a quick buck out of thin air, resulting in a gross misallocation of capital.
The tortoise and the hare come to mind. The lessons to be learned the hard way are: Greed is not good, have patience, and Ye shall reap what ye sow. Hattip to Bloomberg.
click your heels three times, do the Hanky Skanky (to Dude Looks Like A Lady by Aerosmith) and repeat the mantra:
"There is no spillover or bleed into the general economy, stock market, financial or banking sector."
Does it make up for... the 3.5% less spent per person on Black Friday? Online sales this past Monday, otherwise known as Cyber Monday, rose 21% to a record $733M.
Scrambling Freddie... Freddie Mac said last night that it cut its Q4 dividend by 50%, as it had previously warned, and that it is planning to sell $6 billion in preferred stock to raise necessary capital to stay solvent.
Confession by Federal Reserve Vice Chairman Donald Kohn:
"The degree of deterioration (in credit markets) that has happened over the last couple of weeks is not something that I personally anticipated.
There's further to go in revealing losses (write downs on bad debt).
Heightened concerns about larger losses at financial institutions now reflected in various markets have depressed equity prices...
and could induce more intermediaries to adopt a more defensive posture in granting credit, not only for house purchases, but for other uses as well.
The housing sector has continued to decline and to erode at a very, very rapid rate.
On the other side, the spending data have been maybe a little on the soft side. There has been a noticeable slowing in the growth of consumption."
Nice observations, but a little late in the game. The word slow or phrase mentally challenged comes to mind.
Log rolling in a Gator pool...famous last words from the Florida State Board of Administration:
"no local government had ever lost money in the Florida pool since its creation in 1982."
November 14th we noted: "The Florida State Board of Administration manages about $50 billion of short term investments for the state, school districts and local governments.
$2.2 billion or 4% of that debt has recently been downgraded to junk, or below investment grade. Some $3.6 billion, or 7.3%, of additional securities may be downgraded by credit rating companies."
New estimates... The State Board of Administration manages about $42 billion of short term investments, including the pool, as well as the state's $137 billion pension fund.
Almost 6%, or $2.4 billion, of its short term investments consist of ABCP or asset backed commercial paper that has defaulted. Since the report was issued...
Florida local governments and school districts pulled $8 billion out of the investment pool, or 30% of its assets, after learning that the money market fund contained more than $700 million of defaulted debt.
Since the withdrawals, the defaulted debt has since skyrocketed to $900 million of defaulted asset backed commercial paper, which now amounts to almost 5% of its current holdings.
Should the withdrawals continue, Florida's pool may have to consider filing for bankruptcy protection. John Coffee, a securities law professor at Columbia Law School:
"I'd expect the pool is going to sue the people who sold them the commercial paper, saying the risks were hidden." Lehman Brothers sold Florida most of its now default-rated ABCP asset backed commercial paper.
More good luck for the pool: the pool owns $650 million of certificates of deposit from Countrywide Bank, a unit of Countrywide Financial, that now amounts to more than 3% of the pool's assets.
Joseph Mason, professor of finance at Drexel University: "While the state of Florida has a moral duty to cover any losses suffered by the pool participants, its own shaky finances will make that difficult.
The state appears to have breached the trust of the investors by putting money in new kinds of debt its managers didn't fully understand, in their search for higher yields."
Does this yield chasing misallocation of capital sound familiar? Ye shall reap what ye sow.
Commercial Real Estate Bubble... According to Moody's Investors Service, the 7 year rally in offices and retail properties ended in September when prices fell an average of 1.2%.
More losses are likely because banks are holding $54 billion of commercial mortgages they can't sell. The Bloomberg REIT Index measuring the stocks of 126 publicly traded property companies dropped 30% from its peak in February.
The cost of derivatives protecting investors from defaults on the highest rated bonds backed by properties more than doubled in the past month.
The benchmark CMBX-NA-AAA index of derivatives tied to the safest commercial mortgage securities rose to 102 basis points from 44 a month ago.
It costs $102,000 a year to protect $10 million of bonds backed by property loans against default, up from $44,000 a month ago. Sales of debt secured by commercial mortgages tumbled 80% to $3.9 billion in October from a year earlier.
James Ortega at Saenz Hofmann Fund Advisory: "The commercial real estate market is imploding." Christian Stracke at CreditSights: "Commercial real estate is a full-blown bubble that feels very much at a bursting point."
Bondholders helped feed demand for loans by purchasing a record $273 billion of securities backed by commercial mortgages this year, up from $95 billion in 2004.
But, demand has dried up since July. Banks also have about $283 billion of debt they provided to help finance LBO or leveraged buyouts in the U.S. and Europe that hasn't been sold.
The Nattering One muses... in his best Capt. James T. Kirk, Why? Spock?
According to Moody's: Banks provided loans that allowed borrowers to pay only interest, not principal, and lenders offered financing that exceeded property values.
The average LTV ratio reached a record high of 117.5% in Q3 for mortgages that were turned into bonds, from 90% in 2003.
Does this yield chasing misallocation of capital sound familiar? In the Florida Fund, Commericial & Residential Real Estate markets, the root cause is the same.
Greedy people trying to make something, from nothing. As a nation we have become the masters of transparency and vapor.
Junk bonds, leveraged buy outs, a myriad of leveraged financial instruments and their accounting chicanery, outsourcing to labor at the margin.
Instead of investing in a durable domestic economic future, we strive to make a quick buck out of thin air, resulting in a gross misallocation of capital.
The tortoise and the hare come to mind. The lessons to be learned the hard way are: Greed is not good, have patience, and Ye shall reap what ye sow. Hattip to Bloomberg.
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