The next threat
Whoops.
Yesterday's decision by to downgrade the credit rating of one specialised bond insurer, place four others on "negative outlook" and one more on a downgrade review, is bleak news.
These insurers underpin the prices of trillions of dollars of bonds, both plain vanilla municipal bonds and the concocted CDO variety.
They insure the bonds so that they are classed as AAA rated and more or less of the same quality as the best sovereign debt.
This allows the most risk-averse investment institutions – certain pension funds, banks and other collective investment funds – to buy them.
So if the bond-insurers’ own respective ratings were downgraded, there would be a knock-on to the rating of the bonds.
That would have two painful consequences.
It would lead to sharp falls in the prices of those bonds – forcing huge losses on their holders.
And it could also lead to forced sales of those bonds by institutions which for regulatory or contractual reasons are simply not allowed to hold lower quality bonds – precipitating a further downward spiral in bond prices.
The consequence would be a further serious erosion of banks’ capital and losses for those of us dependent on pension schemes and insurers for future retirement income.
Or to put it more starkly, the weakness of these specialised insurers – known as monolines – is a potential threat to the soundness of the global financial system, at a time when the confidence of banks and financial institutions is already at a low ebb.
The weaker insurers are trying to raise new capital to prop up their credit ratings.
And it’s in the interest of banks and funds to supply this capital – since the cost to them of not doing so, in the form of a bond-market crash, would be devastating.
Reason dictates that a commercial solution will be found.
Bankers tell me they are confident the worst can be avoided.
But if the monolines can’t be recapitalised by the private sector, batten down the hatches and pray that the US Government will fill the breach.
I'm 
°ä´Ç³¾³¾±ð²Ô³Ù²õÌýÌý Post your comment
Any chance of something positive appearing in at least one of your articles this year Robert?
To call this news `bleak' is your usual understatement.
The last few years of easy credit and boom have now imploded. The problem is that nobody seems to have noticed and like Wiley Coyote in the pursuit of the Road-Runner we have yet to look down.
Keep on saying `beep-beep', Robert, some us out here in the real economy appreciate your efforts even though those who have got us into this mess spend their time trying to blame the messenger.
"Reason dictates that a commercial solution will be found"
I doubt that the US Government would be in a position to put up a Trillion Dollars to prop up the monolines, any more than the banks who are currently borrowing Fed/Central Bank money could at present.
"Bankers tell me they are confident the worst can be avoided."
They would, wouldnt they!!
What amazes me is the fact that any risk assesment of the monolines would accept that the likes of MBIA could write nearly $600 Billion in risk on a capital base of £2.6 Billion.
The other not very surprising fact is that with the honorable exception of yourself and a few others (Calculated Risk blog) the market is keeping very quiet about the monoline problem . I presume this is in order to get to the year end without the ship sinking!!
The truth is that the crew got off the sinking ship a while back, clutching their presumably final bonus cheques, leaving the passengers (the rest of us) sailing into harms way.
"Reason dictates that a commercial solution will be found".
Monolines operate on slim capital bases and since they have insured many structured products that contain sub-prime mortgages at risk of running into arrears, their own credit ratings are under threat.
hence, whatever reason remains in the minds of investors will ensure that they avoid attempting to top-up insurance companies who have over-extended themselves and are probably bankrupt!
why exactly should individual banks and funds choose to bail out the monoline insurers? why not ask all the pensioners in Britain to donate £5 each to a charitable monoline rescue fund?
the point is that monolines are massively leveraged, outstanding guarantees amount to 150 times capital. In recent years, much of their growth has come in structured products, such as asset-backed bonds and the now infamous collateralised debt obligations (CDOs). The total outstanding amount of paper insured by monolines reached $3.3 trillion last year.
Just because S & P have woken up in the middle of a financial meltdown and decided that perhaps their securities are about as safe as a wooden shack in bush fire.
so failing a rational market solution you anticipate another government bail out
sooner or late the question will arise as to who is going to bail out the Fed?
"Reason dictates that a commercial solution will be found.
Bankers tell me they are confident the worst can be avoided."
Oh, that's all right then - bankers have an excellent record of late.
LOLOLOL
Make no mistake, not only dodgy SIVs but many municipalities, insurers, pension funds et al are exposed to a frightening extent, to all the toxic debt products that have been palmed-off onto them over the last few years. The Central Banks, Treasury, Regulators better get this one right or we are all in for serious trouble over the next few years!
It seems absolutely farcical that companies with assets of 6 Billion 2 to 3 in cash find themselves with exposure of several hundred Billions. it would not take many defaults to eat through that cash capital therefore leaving institutions who believe they are insured against default completely exposed.
The rating agencies were utterly corrupted during the credit bubble, coming to attach the gold standard "AAA" rating to unstable, untested and dangerous derivatives such as CDOs. Investors who were seduced by this seal of approval - and how were they to know better? - have now lost up to 70% of their money. Now the same "independent" bodies continue to insist that the US bond insurers Ambac, MBIA and their like, which are almost certainly insolvent, as they have underwritten loss-making bond issues that swamp their capital bases - are worth the highest ratings. Meanwhile the credit default swap market - the traders' own means of pricing risk - implies a high probability of default, placing them in the junk category, and showing the offical ratings to be worthless.
The ratings agencies have been "discouraged" from downgrading these issuers after massive behind-the-scenes pressure from the US government and the Wall Street banks whose reckless behaviour caused the mess in the first place.
Attempting to cover up and spin the credit bubble fallout will only prolong the market illiquidity that we are currently seeing and turn a sharp recession (the necessary antidote to the reckless lending we've seen) into a depression, with consequences that will be much more unpleasant for all of us. Allowing insolvent companies such as Northern Rock, MBIA and Ambac to default is precisely what the financial system needs - not cover-ups, rewriting mortgage contracts, the rescue of failed banks and inflationary injections of liquidity, which is the path all our governments are currently following.
Make no mistake, not only dodgy SIVs but many municipalities, insurers, pension funds et al are exposed to a frightening extent, to all the toxic debt products that have been palmed-off onto them over the last few years. The Central Banks, Treasury, Regulators better get this one right or we are all in for serious trouble over the next few years!
Insurers, Cities, Pension Funds, et al, are all stuffed with worthless debt-related 'investments' palmed-off onto them over the last few years. Continuing to pretend that these 'products' are OK is simply delaying the inevitable. Some firms, notably Citibank and S&P, have now realised their credibility is at stake if they continue in denial. Others will discover the same. Some much needed integrity and confidence is required to weather this storm.
"And it’s in the interest of banks and funds to supply this capital – since the cost to them of not doing so, in the form of a bond-market crash, would be devastating."
This is a fundamental misunderstanding. You can not protect your lending to an entity by supplying this entity with (even riskier) equity capital. All you are doing is moving risk from one line of your balance sheet to another. Why would this look any better to the regulator?
This could kick-off a real domino effect. The bonds that are insured by these companies are allowed to 'inherit' the insurance company's own credit rating.
This is one of the methods by which financial alchemy is acheived. Turning 'base' bonds from normal risky firms and authorities into A-rated 'gold'.
However now the same thing is true, all of those bonds insured by ACA (for example) will be rated as 'CCC' this morning - and pension funds will need to sell them PDQ - as they often cannot hold anything below 'A'.
This will cause a glut in the market of people who MUST sell, and no-one really that interested in buying (hoarding cash - remember..). Prices will go down, and so values of other similar funds will go down too...
What on earth will happen if more that a few of these funds then fail - well the system will implode. It is estimated that some of these monolines are leveraged at about 1:50 (ie only holding enough money for 2% of their 'bets' to go wrong.)
This could be bigger than "The Rock"..
Paul Amery echoes an article I read in the NYT a few months back.
The sleigh-of-hand practised by the ratings agencies is eerily reminiscent of the 'dot.com' boom-and-bust.
If only I'd taken up that offer of the allotment a while back, I've got a feeling it will be needed soon.
To all those who say it won't get too bad, I'd just point you at the example of the Romans: solid civil governance, world wide trade, indoor plumbing, central heating. It only took 1900 years to get it all back.
Time for gold, guns and tinned food...
That is much better Robert. The bigger story really has to be told.
Now, don't you think that it seems mildly counter- intuitive for a bank to prop up a bond insurer with capital so that it doesn't have to down grade the bonds on its books?
They are effectively self-insuring, which means there is no insurance against default at all.
I understand that the total bank capital in the US is £1.1 trillion. Latest estimates range to $500bn of capital to be wiped out by borrower default....that is just for sub prime and just for America. If it extends to other groups of borrowers or jurisdictions that could easily double to $ 1 trillion.
Under Basel II rules reducing cpital by $1 trillion would reduce lending capacity by $25 trillion. To put that in context, the total value of UK housing equity is $5.5 trillion and the total value of UK debt is about $3 trillion.
That is hugely deflationary and will affect house prices.
The problems:
- Banks have not been setting aside capital to cover their incredible credit expansion.
- Bond insurers have insufficient reserves.
- Credit derivative traders have little cover if anything goes wrong and represent huge counter party risk.
Robert,
You are a bit slow of the mark on this. The Economist report this back in July
But Thanks for bringing it to the attention of the masses.
The stock market is a big Casino.
Welcome to the most sophisticated financial markets the world has to offer. Forget about those old fashioned annual returns of 6-8%. We can deliver 15-20% pa - year in year out - and at no risk to you!
How do we do it, you say?
It's simple. We employ cretins who are allowed to run amok playing fast and loose with other peoples money. And if the unexpected occurs, well then we'll just finesse it - or push it into the long grass and hope that it will go away. Its worked for years, and the funny thing is - no one has noticed!
Oh yes, we're at the top of our game to be sure.
Don't you think that if the losses were (relatively) small, or even moderately significant, that the banks and rating agencies would admit the fact, take their losses, these products would trade at lower values and liquidity would return. That assumes the liquidity crisis was merely due to people not wanting to admit a marginal reduction in prices. That's what the central banks were hoping. The fact that having admitted some losses - minor in comparison to the sums involved - that liquidity has not returned points at a far greater danger.
Namely, that the true value of losses in the investment community is enormous. If the underlying "assets" were truly marked to market, they would wipe out many institutions overnight. Its a solvency issue. Sure, they would be tradeable at much lower valuations, but by then liquidity would have disappeared - not through risk aversion (as now), but through massive capital annihilation. They hope that by clinging on, some can exit the market with less devastating losses whenever a slight improvement in liquidity arises (thanks to central banks for making the funds available.) An even worse scenario sees central banks allowing inflation to devalue money to spread the losses through the economy, moral hazard of the worst kind.
Funny you should get on to this - I did some freelance writing for a global insurance broker about two years ago and had reason to talk to a monoline issuer for them.
At the time, I confessed my ignorance of how one company could insure so many bonds from other issuers ("turning lead into gold" they called it) and asked what would happen if too many people claimed on the insurance at once. I was confidently told that this would never happen (something to do with risk models, probability curves etc).
I said that this reminded me of a conversation I had had with a split-cap investment trust provider about seven years ago - who confidently told me everyone was a winner with split-caps and that my lack of understanding only went to show how clever the issuers really were.
I went on to say that this reminded me of a guaranteed equity product I had worked on in the mid-90's that would protect capital no matter what - but then didn't when the markets did what they apparently never would do -(something about volatility indices going from the Cotswolds to the Alps in an afternoon).
I did not understand these things then - and I don't now - but something tells me that if a clever product is so complicated that a reasonably intelligent writer with some financial markets' experience can't write a clear explanation for target investors then it is probably too good to be true.
Oddly enough I have recently been writing commentaries on hedge funds - in particular those that run so called "market neutral" absolute return strategies that apparently make money NO MATTER WHAT the markets do. - - Only problem is, quite a few of them apparently lost large amounts of money in the last couple of months because the markets were "unreal"!
Wow, well I guess Westpac is going to have a shock in 2008. I hope their SIV isn't as leveraged as Bear Stearns' funds were.
Worse still, I hope many Antipodean municipal councils have not been using moneymarket funds to pay daily costs.
How times change!
Only a couple of hours ago I asked in 3 how any risk assesment would allow MBIA to write nearly $700 BILLION in insurance risk with £2.6bn in capital available to pay claims.
The risk gets worse by the hour as MBIA has now revealed that it has a £30bn exposure to CDO toxic waste, of which over $8bn is in CDO Squared products. Those are CDO's made up of CDO's, or in laymans terms, super toxic sh_t and basically worthless.
As MBIA had (as at yesterday) $2.6bn in reserves to pay claims, and as the $8bn just in worthless CDO Squared risk is now having to be written off, the end result is inevitable. The insurer is worthless.
This $8bn is a "real" loss in that the banks holding the insurance cover for their now worthless CDO SQ paper would like to be paid the full face value of the paper because that is what MBIC trousered the premiums to cover.
The only problem is that $8bn into $2.6bn don't go and that leaves the other $58bn in MBIA insured risk with no money in the pot to pay claims from.
Frankly, I cannot see anyone ever accepting a credit rating from S&P, Moodys or any other rating agency again.
AAA to bust in one easy move!
quote/ bleak news.. painful consequences..sharp falls.. huge losses.. forced sales.. downward spiral.. serious erosion.. starkly.. threat to the soundness of the global financial system.. batten down the hatches.. /unquote
Come on Mr Peston, don't sugar the pill, just tell us we're going to hell in a handcart.
Outside the doors of which institution would you like us to start panicking next?
Robert, I'm back again to argue for reform. We can see momentum for review mounting in the US at present regarding the Iron Triangle, with the House Oversight and Government Reform Committee stating, "We need to restore transparency, efficiency and accountability ... we are seeing so much money involved, the oversight has been discouraged and accountability undermined." You can bet it is going to spread. Europe, including the UK, needs urgently to apply a leaf from the US book. As I have argued many times in the past, banks are required to be issued with a bank licence by the regulator in order to carry on business as a bank, and the regulator supervises licenced banks for compliance with the requirements and responds to breaches of the requirements through obtaining undertakings, giving directions, imposing penalties or revoking the bank's licence. In a manner of speaking, the oversight must be redressed. Now what about a Peston Pick on this?
IMO, this is LTCM MK2.
Which means somebody higher up the food chain will ask the banks, or somebody else, to politely bail out the monolines. Last time it was Greenspan and the wall street banks. This time, who knows?
The consequences of not doing so, now, as then, are simply too dangerous & damaging to contemplate.
Some of you are missing a fundamental point about how the monoline insurers work - yes eventually they are on the hook for the whole amount insured, but they only pay up the shortfall on the interest in the meanwhile.
As the Accrued Interest blog explains better than me:
"So for example, say AMBAC insured a senior, AAA-rated subprime RMBS tranche. Let's say that losses in the pool are such that the junior tranches get wiped out, but the senior tranche only suffers a 20bps/year interest shortfall. AMBAC would only be responsible for paying that 20bps. And those payments would occur over time. This is in contrast to typical CDS contracts, where the seller of protection must buy the reference item from the buyer of protection upon default.
This allows an insurer to absorb credit losses over time. Even if, say, a $1 billion ABS tranche were to suffer a 100% interest shortfall, AMBAC would only pay out annually the interest that went unpaid, probably something like 6%, or $60 million."
This is how they can insure $600bn on only a $2.5bn capital base.
They're still incredibly risky and well leveraged, but it's not quite the apocalyptic scenario painted...
Your FT pedigree all to the good as usual Robert. Perhaps your next piece could be on what this means for equities. A rout in the bond market will inevitably play out in the equity market if the bond equity yeild gap suddenly goes twang. Next year's outlook suggests that it will be Christmas every day for the bears. Even the super sanquine Evan D has looked at the newly released balance of trade figures and concluded similar. Man the life boats!
Robert, what is your view of the likelihood of a commercial solution by banks, when as one commentator says: "Any talk of a bailout of ACA is fantasy. Banks are so capital impaired that a bailout is not possible."
[ ]
Please look at the following link
Now look at the WestPac deal contained therein. This is very serious. This deal relies on cashflows from the synthetic CDOs and they are based on corporate
CDS, most of which are likely to be in trouble. So tell me, the buyers of slices of this particular hydrogen bomb are in for an interesting next 6 months, no? I mean I think one
only needs to see a small portion of a CDO equity tranche default before carnage ensues higher up, right?
Secured on ABS (mortgage bonds most likely) and CDS - oh dear.
Accrued Interest wrote:
I believe most synthetic CDOs are "funded" which means that the CDO is holding cash against the CDS. Some are "unfunded" which means its very similar to a naked option. Now
I can't swear what percentage are funded vs. unfunded.
I think the answer to your question is me. If I sold you protection against a sub-prime pool and it defaults, I have to pay you par for your sub-prime pool. I better have
that cash or else I think the counterparty winds up having to step in, which could spell big problems for the dealers!
On 10/6/07, I wrote:
Selling CDS is effectively like selling a call. The question is, are the calls naked or covered.
If I sold you a product which effectively gave you income because you are unwittingly insuring subprime loans, who has to pay up when those loans default? You or me?
Ultimately, without a hegde on the CDS sold, will this not leave the buyer of the synthetic CDO with a huge downside risk?
Accrued Interest wrote:
Actually when they do a synthetic CDO (which is a CDO of CDS contracts) they basically put the whole thing together in an afternoon. So the dealers aren't sitting on
that stuff.
Is that what you mean or are we using divergent terminology?
On 10/5/07, I wrote:
Effectively then selling a synthetic CDO = selling wings.
The premia earned from the CDS contracts is small change compared to what will happen if the underlying loans default. How are these closed out / hedged? Are
they hedged?
Does the broker who sold the synth CDO end up on the hook, or is it the client?
Accrued Interest wrote:
Yeah, I think a lot of what's being reported is CDO deals they can't sell anymore so they're liquidating them. I'm trying to read more about it, but I think
that's a big part of it.
On 10/3/07, I wrote:
Hello AccruedInterest,
So, the brokers like Morgan Stanley, Lehman and many others are sitting on potentially hundreds of billions of losses since the defaults that their CDS
reference entities are tracking have multiplied?
Accrued Interest wrote:
[Hi]:
On the NYSE, there is a "specialist" who sets the price based on where s/he can match buyers and sellers. I think there is some discussion of this on
the NYSE's website. On the NASDAQ, anyone can try to be a market maker. This means that you make a constant bid or offer for the stock your're making a market. Then the market
maker adjusts his bid/ask based on where demand is.
On 9/28/07, I wrote:
Hello AccruedInterest,
Thanks for your other answers. I am preparing a "contagion map" of just what firms ( e.g. Bear, Morgan, Tradition, Cantor etc)are at risk
following the inevitable calls on the issued insurance in the trillion or so dollars of synthetic CDOs.
This whole problem may have been avoided if there had been more exchanges and thus better "peersight" (as opposed to the feudal idea of
"Oversight").
I need to know something else though: On a stock exchange, how does the price of a stock get set? Is it some formula related to the difference in
volumes between buyers and sellers? When the # of buyers is greater than the sellers, how quickly does the price increase? Is this set by the exchange, e.g. $0.01 per second?
Accrued Interest wrote:
1. That's called counter-party risk. Normally the broker who sold you the protection stands in the middle and assumes counter-party risk.
2. There are a few exchange-traded corporate bonds. Its just not used very much. I think there are too many bond issues for exchanges to
handle.
3. There is no official market maker, like there is on the NYSE or even NASDAQ. The big Wall Street brokers serve as market maker when they
feel like it. However, the contracts are all generic, so you can buy protection from Bear Stearns, then close it out with Lehman Brothers later if Lehman is a better bid. So
price discovery is through competition.
4. Yes and no. CDS with the same credit rating can vary substantially in spread. Goldman Sachs is far wider than Abbot Labs, for example, but
both are AA-rated. And ratings news rarely moves the market, at least not much.
5. Yes. I know there are CDS contracts on Freddie Mac and Fannie Mae. Dunno who's buying them, but they are out there. There are actively
traded CDS on MBIA's AAA-sub as well.
Hope this answers your questions.
On 9/15/07, I wrote:
TDDG,
1. Say if a bank is a CDS Seller, but that bank itself runs into credit problems,
how is a buyer of CDS able to make sure (s)he is still protected?
2. Why is there no credit exchange?
3. How are the CDS bid-asks calculated - is there a market maker, or is it all OTC and thus subject to arbitrary price making?
4. Do CDS sellers care what the 3 biggest credit reference agencies say?
5. By definition, would a company ever buy protection on a AAA+ rated bond? Thanks
Me
"They insure the bonds so that they are classed as AAA rated and more or less of the same quality as the best sovereign debt."
People class these bonds as AAA because they are insured? By an insurer who aren't backed by the ability to run printing presses? What kind of moron made that decision? Even Japan or Italy government bonds don't get AAA.
LOL. Yeah of course you should trust these monkeys with your money. You couldn't make it up...
Course... It begins to sound a bit like fraud. There's only so much incompetence you can see before it starts to look like malice.
Robert, what I cannot understand is that with the thundering herd of economic negatives shaking the financial ground the stock market remains so resilient. Have I missed something or does the stock market operate in mysterious ways disconnected from the physical world? Is there some mightier power than logic and reason behind this resilience and if so what is it ?
why don't you find a bond insurer with some issues and release a story about them to the 10 o'clock news afther the markets and all their business partners have gone home and see if you can't bring them down too ?
Where is this leading? The position appears to necessitate a bail-out, but there is no one in a strong enough position to provide a bail-out. I don't believe that liquidity can be returned without an honest appraisal and declaration of losses. The only problem is that this would probably collapse the financial system!
This is inevitably leading to money being withdrawn from the system and recession. But its the political implications that are beginning to pre-occupy me. There's a certain inevitability about a recession once it starts, but there isn't about the consequences of that downturn.
At the moment we are focused on US sub-prime housing market, but as noted by the ³ÉÈËÂÛ̳ recently there is a sub-prime car market, credit card market, sofa market, store card market etc. And then there are the British versions. There's a real possibility of something deeper than anything written about in the mainstream media.
The only answer is a few years of inflation. Horrible though it may be it will correct the housing market and solve the pension problem.It may even make stockmarkets be worth somewhere near there assets eventually.The bank of england may want to keep interest rates low but you cannot plug the dam with the finger forever
So finally the sheeple are waking up to the impending disaster. Some of us have been discussing a credit crunch almost identical to what we're seeing now for over two years.
Batten down the hatches, 2008 is going to make 2007 look like a picnic.
Robert of course cannot be either a pessimist or an optimist - 2008 ain't here yet. Essentially, "Peter" lends to Paul, who lends to Steve, who loans to Jill, and is insured by Dick, etc, etc. If Peter wants to cash in - err implosion, I think we all know that. However, does Peter have a motive and an endgame, or is Peter actually a hedger and thrives on an accumulating hedge, or has other motives. Macro economics is up for a change in 2008, for sure.
How can there be any credible bonus pool in any institution that is anywhere near the action across the credit crunch ?
If public money is being used to shore up the systemic result of their years clowning with OPM(other people's money) then not only should there not be a cent of bonus this year but individuals should hand back the last 5 years' worth.
'Some is in shares'- that's still diluting non-insiders' equity, however little is left.
Given the taxpayers' support, this haircut must be applied now to restore any cred in the system.
I say this because I LIKE the capitalist system - We're getting a reminder of what regulators can do for us.
Subprimes, monolines, collapse in debt-fueled consumer demand, credit card / unsecured consumer loan crisis, world economic leader U.S. in recession with no substitutes.
Whew.
Instead of bankers trying to 'talk up the market' (so they can sell out, into strength) perhaps it is FINALLY time to acknowledge this full financial crisis for what it is: the most severe global economic downturn since the mid-70s. Denial only adds to the delays in working a way out of this mess.
It would be interesting to find out the method used to pressure ratings agencies to AAA rate all these junk CDOs etc. Just who precisely did the arm twisting and to what extent were the agencies themselves complicit. Anybody out there know?
First let me wish you Robert and all other readers/contributers a Merry Christmas and I hope A Happy New Year
Robert yours and other financial experts continuing articles on what is happening in the global money markets simply confirms what most sane people, not working in this industry, have long believed is that the whole money market has now become nothing more than a sham.
The way in which the money markets are managed and operate is designed to ensure that spives, theives and gamblers who lack any moral or financial discipline are allowed to prosper. Unfortuntely these people are aided and abetted by city editors such as you, who feed off their ill-gotten wealth, who managed to convince ordinary people that money does actually grow on trees. Recent and similar past events simply confirms that something not quite right has been happening in these markets over many years and the sub-prime mortgage problem that precipitated the current paranoia that is now affecting these (money) markets. As we are now finding out the sub-prime problem is only the tip of the iceberg and it seems to me that the efforts by the Central Banks to apply more liquidity to these markets is akin to applying a sticking plaster to the titanic after it was holed.
Now there can be little doubting that the business/economic model that drove these markets ever onwards and upwards is basically flawed and many of the overpaid finacial gurus running these organisations are equally flawed or are just simply incompetent at managing them properly. There is now a culture of irrational behaviour and reckless lending that has become institutionalised within the Investment baking fraternity and there is a direct correlation between this behaviour and the huge rewards given to individuals who carefully use dubious accounting practices and disregard some of the more basic management control proceedures. More worrying is the fact that this behaviour emanates from the top down.
Maybe it's just me but it all seems like the bankers, insurers and investment managers who have created this situation should be held accountable.
They have taken their big bonuses and when it all falls over it is everyone else who suffers.
Surely gambling with someone elses money is tantermount to theft.
This will hopefully help reinstate a sense of equality in this country.
I like the comments made so far but the real culprits are none other than those that make the monetary policy themselves, and for the UK that is not the Bank of England but the Chancellor who sets the methodology for the discredited CPI.
True inflation has been running at a much higher rate than the CPI represents and indeed the wider measures of the money supply do indicate this.
Now the Bank of England must step in with Government money to rescue the banks that have expanded their assets imprudently. Who allowed them to do this, well none other than the FSA who did not regulate them strictly enough, although to restrict the business plan of the likes of Northern Rock would have been seen as interfering in the free market which of course we all believe in. When it works that is!
The truth is the Government has benefited from the lower cost of debt servicing and greater tax revenues in this hot house economy and allowed the free market to keep stoking the flames. So why should it not meet the costs via the Bank of England!!
I am sorry for the Bank Governor, Mr King who has been put in this unenviable position.
"The Company believes that mark-to-market losses are not predictive of future claims, and that in the absence of claims, the cumulative marks will net to zero over the remaining life of the bonds insured. The Company has not paid losses on any of the marked transactions. The mark-to-market also does not affect rating agency evaluations of the Company's capital adequacy."
This is a quote from MBIA's recent press release. You might take it with more than a pinch of salt were it not accompanied by an announcement of a $1bn investment by Warburg Pincus, one of the brightest and most sophisticated private equity investors around. (Not that they can't make mistakes). As an outsider neither I, nor you, nor any of the other doom-mongers on this blog have any way of knowing whether the sub-prime crisis is just the tip of the iceberg or not, but I personally would wager (hedged, of course) that there will be some pretty spectacular profits posted over the coming years as many of the losses (which are mainly only book losses at this point) are reversed and the market for such securities returns, if not to its previous insane levels.
well a lot of you so called pundits and experst have forgotten that debt is an asset and ultimately debts have to be paid, even if it takes for years to do it. And debts make profits for the lender. Debtors can be chased these days until they die so just hang on in there and they will be paid and someone will make a profit out of it.If there were no debts we would all get very lazy and stop working ha.
Uneducated Responses.
A bit strange to hear people commenting about SIV's and monolines when in fact they don't have the faintest idea of what they actually are. So amazing to see how people now brand ABS as 'toxic', when only 6 months ago it was still darling of the financial community.
Everyone is losing sight of the real cause of the problem here. Its not structured credit - this was simply a sound evolution of finance. What was wrong was the fraudulent practices of mortgage brokers and applicants in the US, noting more, nothing less.
I am also astonished at how many people out there want companies such as SIV's, banks and other finance firms to fail. They all seem to think that such failure would only be bad for fat cat bankers. WRONG! Its YOUR pension funds that have invested in these assets, so it will YOU who suffer.
The whole problem in markets right now is lack of confidence and liquidity - being talked down by the likes of Mr Peston. Fear sells newspapers, so all you doom-mongers, Rupert Murdoch thanks you all, and your own retirment pensions don't.
CNN reported that 2 million households would be repossessed in 2008! Without US Government lame duck intervention, this would have been more. And this Is just the first tranch. Can anyone tell me where 2 million families are going to live? I suggest invest NOW in trailer / caravan manufacture. Seriously (as if I wasnt) what will this mean to the fabric of society. Go on have a guess my financial gurus. America has the space for thousands of new trailer parks, but the UK?? Think we need to be building a few more prisons to accommodate some of our financial sector friends that have led us to this, and the regulators who have been wholly negligent in their duty.
Seasons greetings and good will to all men, women and children, isn't that how it goes?
Rod Holland mused:
"well a lot of you so called pundits and experst have forgotten that debt is an asset and ultimately debts have to be paid"
Not if you are declared bankrupt and not if your home is repossessed. The latter being especially bad if the housing market has taken a swan dive and the amount loaned is not repaid by the sale value of the property....
This is my second attempt to leave a comment on this article. The previous Post was wiped when I went from "Preview to Post".
This subject is of course, the tragedy of the moment. And the one thing that is being avoided is the unemployment figures. Not the numbers for today, but 2008.
There are at least three stages to be examined. First. How is it possible, with an independent Bank of England, for these "Get Rich Quick" schemes to operate? And then there is the FSA. Were they counting their Pension Pot again? Instead of the watching the Market? And again, we now come to the Villains of the piece, the Treasury, with Mr. Brown and Mr. Darling. Plus all the other Malevolent characters who, one way or another, are responsible. For this and the outrageous demands for ever more Taxation. Have done with the lot of them This URL might be worth a visit -:
www.bbc.co.uk/dna/actionnetwork/A22101832 And
www.bbc.co.uk/dna/actionnetwork/G2287
And in my opinion, the only answer to a total meltdown, is for the working TaxPayer to Legally, take control of Taxation and abandon the absolute shambles our economy has now become.
Looking back, I put the start of this debacle in the region of LTCM and Enron. As you probably know, some of those people involved, are now employed by you, the poor bloody TaxPayer. Well at least you pay their wages and provide for their Pension.
Enough for now, and I Wish you a Merry Christmas, and Pray that we can rescue the New Year making it come good. Regards, ATFlynn.
So one day JP Morgan say they are hiring Tony Blair
The next they get $2billion of N.Rock assets.
Selling of assets in what is basically a Nationalised Bank stripping it like that makes it less inviting to purchasers.
Call me cynical but who did Tony phone on the Old Boy Network to put this deal through which sees us UK taxpayers being screwed over again, right at this time those are our assets and should not be sold of peicemeal.
this is just another example of how it's one law for them and anotherfor us.
your board - properties crunched is not accepting new posts - here is mine
Evidence:
in my recent excursions I noticed that in Essex in an estate agent's window about 20% of properties were showing 'price reduction'
I am buying in Surrey - so I visited some estate agents - none are advertising 'price reduction' yet. some indicate that they are reducing prices on the internet or on noticeboards but without advertising that fact. I know this happens as last Autumn I spotted one house which was £1.1m one week then £1.2m then back at £1.1m. Furthermore there is one house at £1.4m which agents agree is over-values by c £500k. You just wonder in awe at the tricks the agents use to get dumb buyers from outside an area to decide on 'good value' for that area.
But more interestingly was the response when, as a cash buyer I enquired about 'price flexibility' suddenly eyes sparkle and potential reductions of up to 10% appear from no-where!
Basically agents work for sellers - and their fees are linked to prices achieved.
Currently we have house prices inflated by a combination of over-borrowing and high city bonuses - the source of both is drying up.
but more importantly we have full employment - and with the share price plunge of the last few months as well as the huge banking losses - jobs must go. As London is a major centre many will go in London.
If that does happen, as appears very likely, the current covert managed 'softness' will crystalise into an overt house price crash